The Political Economy of Economic Reform In China

Transcription

1 The Political Economy of Economic Reform In China

2 Main Points Illustrate Theories of Development Good Government is a Key to Economic Development Markets do some things very well, too

3 Ancient China Domesticated Rice and Millet (ca. 8,000 BC) Pioneered Irrigation, Animal Fertilizers, Crop Rotation Invented Cast Iron Moldboard Plow Invented Printing and Paper Invented Compass, Gunpowder Invented Stern Post Rudder

4 7 th 14 th Century Dominant Civilization of East Asia Culture spread to Japan, Korea, Tibet, Vietnam Standard of Living >= to Europe

5 Zheng He s Treasure Ship

6 15 th to 18 th Centuries BUT: No Enlightenment No Scientific Revolution => No Industrialization No Democratic Principles of Government China Closed Itself Off from Western Ideas and Technology Autarky not just of Goods and Services, but also Thinking!

7 Corrupt, Ineffective, Feudal Regime Domestic Insurrections Dominated by Technologically Superior Western Powers 19 th Century

8 20 th Century: First Half Last Emperor Falls 1911 Civil War: Nationalists v. Communists Occupation by Japan : Communists Win; Nationalists Flee to Taiwan

9 Initial Communist Policy Land Redistribution Literacy Campaign Barefoot Doctors

10 Survival to Age 5

11 Heavy Industry State Owned Enterprises (SOEs) Result: Rapid Expansion Collective Farms Central Planning

12 Central Planning (2) State Assigned People to Jobs State Fixed Wages and Prices Consumption of Food, Clothing, etc. Rationed State Owned all Housing => Few Economic Choices

13 Central Planning (3) Rewards Based on Meeting (Exceeding) Production Quotas Little Reward for Innovation or Quality Improvement

14 The 100 Flowers Campaign Mao Feared that Communist Party Members were Losing Revolutionary Fervor Mao Encouraged Criticism of Party Mao Purged his Critics Few Criticized Mao Again

15 Great Leap Forward (1958) "Take steel as the key link, leap forward in all fields". Millions of Peasants and City Workers Made Steel in Backyard Furnaces Results Steel Production > England Massive Economic Dislocation Denude Hillsides of Trees, Burn Furniture, Doors for Fuel Melt Down (Steel) Cooking Pots & Ag Implements to Make (Steel) Quota

16 People s Communes All Land & Equipment Owned by Collectives Massive Planting of Grains 1958: Huge Wheat Crop Waste: Unharvested (No Labor) No Storage/Transport Report to Mao: Everything is Going Well

17 Famine: Adverse Weather Government Required Communes to Provide Grain to the Cities 30 Million People Starved to Death in Rural Areas China Continued to Export Grain, as Mao Sought to Maintain Face

18 Amartya Sen Nobel Laureate in Economics no substantial famine has ever occurred in any independent and democratic country with a relatively free press it is precisely this lack of challenge that allowed the deeply defective policies to continue even though they were killing millions each year. Democracy as a Universal Value, J. of Democracy, 1999

19 The Great Proletarian Cultural Revolution: "Shatter the old world / Establish a new world." Red art from the early Cultural Revolution. A worker (or Red Guard) crushes the crucifix, Buddha and classical Chinese texts with his hammer; 1967

20 Cultural Revolution Mao s Power Threatened by the Great Leap Backward Closed Schools; Sent Teachers to Countryside to Learn from Peasants Unleashed Youth: Red Brigades Social Chaos: 500,000 Died Near Economic Collapse

21 End of An Era Mao Dies: 1976 Gang of Four Tried for Crimes Deng Xiaoping New Leader Visits Poor Taiwan, HK Reform and Opening

22 Growth Rates GDP/Capita China: ; Others: China Germany Japan UK US

23 China s Growth Since 1977 Income/Capita Increased 11 Fold World s 2 nd Largest Economy (PPP) World s Largest Goods Trader (2013) Largest Recipient of FDI in the Developing World Never Before in History Have So Many Millions of People Been Lifted Out of Poverty in Such a Short Time

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25 Explaining China s Growth What did China do to Grow so Fast? Answer: Relied more (but not Totally) on Markets

26 Household Responsibility System Farmers allocated individual plots of land to work (but not ownership) Farmers decide what, how to plant Sell quota to state; keep/sell the rest => Incentives to increase output and reduce costs Output and Rural incomes increased Generated surplus (> subsistence) to finance Investment

27 Township & Village Enterprises Local Governments/Cooperatives Produce for Market (not Quota) Local Decision-Making Local Finance Keep (Most of) the Profits Before: State Takes All Profits After: State Taxes Profits

28 Special Economic Zones Encourage Foreign Investment Capital Inflows Technology Knowledge of Rest of World (Chinese Diaspora) Encourage Production for Export Contrast with Autarky

29 State Owned Enterprises Are A Declining Share Of Business Continue To Play A Major Role

30 China s Growth and Theory 1. High Saving and Investment (Harrod-Domar Model) China s saving rate 40% of income US saving rate <= 20% of income But China had mobilized saving during the 1950s, without achieving dramatic growth: Inefficient Invest

31 China s Growth and Theory 2. Structural Change (Lewis Model) Massive migration to cities, development of manufacturing, while traditional ag still exists in rural areas

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33 China s Growth and Theory 3. International Dependence? - Dominated by US/Europe in 19 th Cent - Occupied by Japan from But China s Independent Experience in 1950s-1960s illustrates failure of SOEs, central planning, and autarky

34 China s Growth and Theory 4. Free Markets? Sort of, but definitely not exactly SOEs have not been privatized and continue to play a major role In 1997 China received a grade of F for Economic (un)freedom, but was growing and has continued to grow VERY rapidly

35 Lessons Saving, Investment, and Technology are Important: Harrod-Domar Economic Institutions Create Incentives (or Disincentives) for: Savings, Investment, and Innovation Work, Output, Productivity Efficient Resource Utilization

36 Lessons - II China s Development is Founded on: Gov t Policy to Increase Health and Literacy Market Institutions (Incentives) Stable Political & Legal Framework Various Public-Private Combinations Deng: Black Cat White Cat

37 Communist Party: It s Glorious to be Rich

38 Is China an Economic Threat to the US? Is Germany a Threat? Most of the Benefits and Costs of Development Are Domestic Increases in Chinese Productivity Mainly Benefit China Increases in Chinese Productivity do NOT Make US any Less Productive

39 China is Still a Developing Country Lower K/L than West Lower Education than West => China has Comparative Advantage in Products that Intensively Utilize Low-Skill Labor (e.g. Textiles, Plastic Cups, Assembly of Cell Phones, Computers, etc.)

40 China s Growth Will Slow as Western Income Levels are Approached Currently Catching Up in Capital, Technology, Education Grown so Fast because: So Poor to Begin With Policies were so Bad To China s Credit: Many still Stagnate

41 Secondary Impacts Chinese Export Inexpensive Goods Benefit US Consumers Harm US Competitors Net Benefit to US Chinese Compete for Raw Materials Chinese Supply Credit to US Chinese Develop New Technology?