Variants of Transition among Former Socialist Economies

1. Variants of Transition among Former Socialist Economies Chapter XV China’s Socialist Market Economy: The Sleeping Giant Wakes

2. Chinese Economy • World’s Largest Population • One of the world’s rapidly growing economies • Continues to be ruled by an authoritarian Communist Party → An important case of economic transformation

3. Chinese Economy • What is China’s secret? • China occupies a central position geographically, historically and culturally in East Asia, where many countries that have followed the model of Japan, have experienced rapid industrial growth • While China was behind many industrialized countries for a long time, starting in 1970s, China has awakened and emerged as a regional leader • Given its military power, China might become a full international superpower

4. Chinese Economy • Under Chairman Mao Zedong, China pursued egalitarianism and regional self-sufficiency • The country side was organized into large communes corresponding to former town and village clusters • Great Proletarian Cultural Revolution (1966-69)

5. Chinese Economy • Town and village enterprises (TVE) and rural industrial enterprises owned by local units of government • These entities are free from central planning and operate in a competitive market context, many exporting goods abroad through laissez-faire Hong Kong or via specific foreign capitalist firms • Export sector outperforming • The strictly privately owned sector in Special Enterprise Zones • This dynamic TVE form is the unique innovation of China’s self-proclaimed socialist market economy

6. Chinese Economy • Confucianism emphasizing loyalty within families and toward state authorities, hard work and morality • Familism and groupism→ common characteristics shared by the rapidly growing East Asian economies • The post-Mao renewed emphasis on family units led to the household responsibility system in agriculture after 1978

7. Historical and Cultural Background:Culture and Religion • Three major religions have coexisted • Taoism and • Confucianism are Chinese in origin • Buddhism came originally from India

8. Historical and Cultural Background:Culture and Religion Taoism • Taoist conception of universal harmony→ followers of the TAO, “the way” to seek harmony with nature and immortality • The key to this search is wu-wei, “no action” a Chinese term used to describe nirvana when Buddhism came to China • Tao is famous for paradoxical formulations such as “Do nothing and all will be done.” • It has been associated with a laissez-faire orientation and was used at the beginning of the Han dynasty (206 BC)

9. Historical and Cultural Background:Culture and Religion • Taoism was declared the state religion in the 5th century • Taoism and Buddhism were popular together but were suppressed by Confucianism • By the time of the Communist Revolution in 1949, Taoism had mostly disappeared as an organized religion

10. Historical and Cultural Background:Culture and Religion Confucianism • If Taoism, with its harmony and immortality is the yin (female) of Chinese culture, then Confucianism is the yang (male), given its moralistic scholar-mandarin-bureaucrats administering the empire with doctrine of the scholar in power • Chinese Confucianism centers on ren, usually translated as “benevolence” or “humaneness” • Emperor is the “son of heaven” who should rule benevolently and in return should be obeyed loyally

11. Historical and Cultural Background:Culture and Religion • Loyal obedience extends to family relations: Son obeys the father and the wife obeys the husband • Although Confucianism later developed into an authoritarian state-centered doctrine in later dynasties, it advocates ruler with almost Taoist, laissez-faire • An older Chinese philosophy, that is truly authoritarian, legalism which requires absolute power of the state was incorporated into the neo-Confucianism synthesis of the 12th century

12. Historical and Cultural Background:Culture and Religion • In the 9th century, Confucianism became the official Chinese state religion • Official Confucianism opposed commerce, industrialization and relations with the outside world and supported the ideal of China as the self-sufficient kingdom

13. Historical and Cultural Background:Social Structure and Land Tenure in Traditional China • Confucius supported equal division of land among patriarchal families • Family land ownership with division among all male heirs predominated • The basic social pattern emerged of a town with a group of villages functioning as an essentially self-sufficient unit

14. Historical and Cultural Background:Social Structure and Land Tenure in Traditional China • The Confucian ruling class was the scholar-gentry • Civil service examinations for the state bureaucracy • The lower levels of the bureaucratic elite ruled the countryside in the small towns as the emperor’s agents • Class mobility was reduced

15. Historical and Cultural Background:The Dynasty Cycle • Han (206 to 220 BC) • Tang (618-906 BC) • Song (960 to 1275) • Yuan (1276 to 1367) • Ming (1368 to 1644) • Qing (1645-1911)

16. Historical and Cultural Background:The Dynasty Cycle Recurring pattern of all dynasties • Initially attacks corruption • Builds up the economy • Follows Confucian virtues • Strengthens the country • Gradually corruption increases • Imperial attention to government decreases • Taxation levels, famines, rebellions, and local warlord activity increase until the dynasty falls

17. Historical and Cultural Background:The Dynasty Cycle • This dynasty cycle proved that China was an unchanging society • Marx explained the Chinese lag by the Asiatic mode of production, an economic system that existed outside of his historical materialist categories • Marx saw state bureaucracy suppressing capitalism and class struggle dynamics, thus leading to the stagnant economy and society that characterized much of Asia

18. Historical and Cultural Background:From Empire’s End to Communism’s Victory • Opium Wars (1839-1842) took place between Britain and China • This dispute was around the Opium trade which was seen from two different sides • Chinese Emperor had banned opium in China due to its negative effects on the population • British, however, saw opium as an ideal good to trade, as it would help to balance the huge trade deficit with China • After the Opium Wars, China experienced one defeat after another—France, Germany, Russia, US, and Japan • Britain established treaty ports where their national merchants operated free of Chinese jurisdiction

19. Historical and Cultural Background:From Empire’s End to Communism’s Victory • Anti-foreign, anti-imperialist movements and Westernizing upheavals against the Qing dynasty erupted • In 1911 Qing dynasty was overthrown • A period of warlordism ended when Chiang led the nationalist Guomindang to power in 1928 • He received Soviet and Communist support, but later turned down the Communists • Communist in return followed Mao Zedong in 1935-1936 and they fought a peasant-based guerilla war

20. Historical and Cultural Background:From Empire’s End to Communism’s Victory • After WW II, Chiang did not carry out land reform • Chiang’s nationalist forces were defeated by Mao’s Communist forces in Manchuria and swept down out of the northeast • In October 1949, Chiang’s forces retreated to Taiwan where they ruled until 2000 • While Mao’s Communists established the People’s Republic in Beijing

21. Maoist Economic Policies:The Ideology of Maoism • Maoism was the main Communist rival to the Soviet style model during the 20th century • Origin of Maoism was the May Fourth Movement of 1919, which protested turning Chinese territory over to Japan in the Versailles Treaty • Chinese Communist Party was founded in 1921 under the leadership of Mao • Mao formulated his doctrine of relying on a mass peasant base, which differed from Stalin’s position

22. Maoist Economic Policies:The Ideology of Maoism Differences between Maoism and Stalinism • Its emphasis on developing the rural economic base and maintaining population in the countryside • Its emphasis on egalitarianism and use of moral incentives rather than material incentives • Its anti-bureaucratic attitude that peaked during the Great Proletarian Cultural Revolution when Red Guards denounced bureaucrats • Its greater opposition to traditional culture • Mao wanted to extirpate the past by campaigning against the four olds (old customs, old habits, old culture, and old thinking) • Its emphasis on regional decentralization of economic control

23. Maoist Economic Policies:Implanting Socialism and the Stalinist Model, 1949-1957 • Inherited a devastated economy • Rely on support from centralist and liberal groups • Communist regime moved slowly, emphasizing ending hyperinflation and redistributing land to individual peasants • Collectivization of agriculture • Nationalization of industry and trade

24. Maoist Economic Policies:Implanting Socialism and the Stalinist Model, 1949-1957 • Granted land to all peasants • Established localized aid teams in 1950 • Towns became the communes • Villages became brigades • Subvillage or smaller village groups became production teams • Individual households were at the bottom of this economic division • Fully nationalized industrial enterprises

25. Maoist Economic Policies:Implanting Socialism and the Stalinist Model, 1949-1957 • First Five Year Plan (1953-1957) following Stalinist line→ reliance on Soviet economic advisers • Command central planning → heavy industrial buildup, especially in northeastern Manchuria • Steel, iron, cement production increased

26. Maoist Economic Policies:Great Leap Forward (1958-1961) • A cutoff of Soviet aid and a poor harvest in 1957 triggered the Great Leap Forward in 1958 • Goal is to develop rural-based industrialization using traditional technology to produce inputs and mechanization for agricultural production in decentralized communes, a policy labeled “walking on two legs” • Industrialization by making use of the massive supply of cheap labor and avoid having to import heavy machinery

27. Maoist Economic Policies:Great Leap Forward (1958-1961) • To achieve this, Mao tried to merge the existing collectives into huge People's communes → 25,000 communes had been set-up at the level of the traditional market towns, each with an average of 5,000 households • Communes were relatively self sufficient co-operatives where wages and money were replaced by work points • Mao saw grain and steel production as the two key pillars of economic development • Encouraged the establishment of small backyard steel furnaces in every commune • However, high quality steel could only be produced in large scale factories using reliable fuel such as coal • Mao did not consult expert opinion

28. Maoist Economic Policies:Great Leap Forward (1958-1961) • Poorly planned capital construction projects, such as irrigation works often built without input from trained engineers • Wrong methods were followed in agriculture • For example, deep plowing (up to 2m deep) was encouraged on the mistaken belief that this would yield plants with extra large root systems • Agriculture went bad → leading to famine, 30 million people died of starvation • Steel production went bad • The plan did not achieve the intended results, led to widespread economic dislocation, and is widely regarded both in and out of China as a policy disaster

29. Maoist Economic Policies:Period of Adjustment (1962-1965) • In 1962 Mao accepted the blame for the GLF under the pressure from Party General Secretary Deng Xiaoping and reinstituted the central planning • The accounting unit for income distribution and distribution was lowered from the communes to the production team • Development priority reversed from heavy industry to agriculture with a light industry • Both agriculture and industry grew solidly • Famine disappeared • Deng was a crucial figure in this policy shift

30. Maoist Economic Policies:Great Proletarian Cultural Revolution (1966-1978) • In 1966, Mao threw the country into turmoil again by initiating an upsurge by Chinese students and workers against the bureaucrats of the Chinese Communist Party (CCP) • Intellectuals and bureaucrats were sent to the countryside or prison for reeducation • On August 8, 1966, the Central Committee of the CCP passed its "Decision Concerning the Great Proletarian Cultural Revolution" • Between 1966 and 1968, Mao encouraged Red Guards and rebels to take power from the Chinese Communist Party authorities of the state and to form revolutionary committees

31. Maoist Economic Policies:Great Proletarian Cultural Revolution (1966-1978) • Mao died in 1976 and in 1977 Deng reentered the leadership • Deng emphasized market economy • Deng implemented four modernizations: • agriculture, • industry, • science and technology • military • The strategy for achieving these aims of becoming a modern, industrial nation was the socialist market economy

32. Maoist Economic Policies:Great Proletarian Cultural Revolution (1966-1978) • Substantial decentralization to local government units of planning administration • Fear of a soviet invasion led to the Third Front policy, emphasizing major industrial expansion in southwestern provinces • Local areas built input supply systems for industrial production, building on foundations laid out during the GLF and later used for TVE development

33. Dengism and Move to a Market Economy, 1979 to the Present: The Reform Process • Gradualist market-oriented reforms • Initial changes affected agriculture and laid the foundation for establishment of Special Enterprise Zones, which opened China to outside economic influences • In 1981 CCP committed itself to eliminating corruption and reforming itself • In 1984 came major enterprise reforms • In 1985 many military hardliners were removed from the party • In 1986 student pro-democracy demonstrations

34. Dengism and Move to a Market Economy, 1979 to the Present: The Reform Process • The Tiananmen Square protests of 1989 started from the middle of April 1989, triggered by the death of Hu Yaobang, the stepped down party general secretary • Officially, Deng got retired in 1989 and left the political scene in 1992 • China, however, was still in the era of Deng • He continued to be widely regarded as the "paramount leader" of the country, believed to have backroom control • Deng was recognized officially as "The architect of China's economic reforms and China's socialist modernization"

35. Dengism and Move to a Market Economy, 1979 to the Present: Reforms in Agriculture • Agricultural reforms introduced in 1978 included • Recognition of property rights • Restoration of the right to private plots and respect for household boundaries • Allowance of free market rural bazaars • Loosened restrictions on crop specialization • Increase in state purchases of agricultural commodities along with price increases for these commodities • A full shift to material rather than moral incentives

36. Dengism and Move to a Market Economy, 1979 to the Present: Reforms in Agriculture • In 1979 came household responsibility system→ households became the principal unit of account • Elimination of the communes • Introduction of two-tier price system → households could freely sell anything they produced above their quota • This system allows households to lease equipment from higher units and to engage in long-term transferable leases for the right to use land

37. Dengism and Move to a Market Economy, 1979 to the Present: Reforms in Agriculture • Response to increased incentives • provided by changed pricing policies, loosened restrictions on crop specialization, greater interregional trade caused by relaxation of the self-reliance doctrine was a dramatic increase in output • China’s agricultural improvements were substantial • Food consumption patterns now resemble those of middle-income countries more than those of poor countries • Ending famine in the world’s most populous nation is an important step

38. Dengism and Move to a Market Economy, 1979 to the Present: Reforms in Agriculture • However, there are limits of Chinese agriculture • The small size of farms • Disinvestment in infrastructure • Unfavorable terms of trade as prices were freed in other sectors • A long-term decline in amount of cultivated land

39. Dengism and Move to a Market Economy, 1979 to the Present: Enterprise Reforms • Major enterprise reforms came in 1984 that allowed firms to replace plan targets with responsibility contracts that enabled them to dispose of any surplus beyond a small contracted production and financial obligation • The dual price system created a market economy beyond the contracted portion with a declining share in central state owned enterprises • Communes have been disbanded, a remnant of them persists as town and village enterprises (TVEs), technically known as rural collectives • These TVEs are rural industrial enterprises owned by local units of government

40. Dengism and Move to a Market Economy, 1979 to the Present: Enterprise Reforms • TVEs managers are appointed by the next higher unit of government • Many of these entities existed in Mao era as commune enterprises • They face hard budget constraints and operate in competitive markets • The earnings of TVEs go not only to enterprise wage but also to local public service

41. Dengism and Move to a Market Economy, 1979 to the Present: Enterprise Reforms • Compared to State-owned enterprises TVEs have greater flexibility and freedom from central control • TVEs have advantage over private firms because of their lower tax rates • Many TVEs operate as subcontractors for foreign private firms • Other TVEs are direct extensions of former suppliers of regionally self-sufficient Maoist rural industrial complexes

42. Dengism and Move to a Market Economy, 1979 to the Present: Enterprise Reforms • TVEs are free from central planning and operate in a competitive market context • TVEs export goods abroad through laissez-faire Hong Kong or via specific foreign capital firms • This dynamic TVE form is the unique innovation of China’s self-proclaimed socialist market economy • TVEs were hit by a wave of privatization after 1993

43. Dengism and Move to a Market Economy, 1979 to the Present: Special Economic Zones and Foreign Trade • In the days of the emperors, foreign traders were restricted to specific ports→ paid tribute to the emperor and remained separate from Chinese society • Now the ports that are established for SEZs follow relaxed rules as long as their operation fits with traditional Chinese approach • A law establishing ground rules for joint ventures was passed in 1979 • In 1980 four cities and in 1984 fourteen more were selected ports as SEZs and allowed to have Economic and Technological Development Zones • Restrictive rules on economic activities were relaxed • Foreign investment in these areas were encouraged

44. Dengism and Move to a Market Economy, 1979 to the Present: Special Economic Zones and Foreign Trade • SEZs became engines of growth and expansion • Foreign investment has poured in and exports have poured out • SEZs cities have boomed and total Chinese trade rose • China joined WTO in 2001, after 15 years of negotiations • Agreed to lower tariffs and abolish market impediments after it joins the world trading body • Chinese and foreign businessmen gained the right to import and export on their own - and to sell their products without going through a government middleman • The agreement also opens new opportunities for U.S. providers of services like banking, insurance, and telecommunications

45. Dengism and Move to a Market Economy, 1979 to the Present: The Distribution of Income and the Standard of Living • Under Mao China had one of the most equal income distributions in the world • With the Dengist marketization came greater inequality from late 1970s on • Great class equality within local units in both villages and urban areas • Offsetting this local class equality were urban-rural and broader coastal-interior regional inequalities

46. Dengism and Move to a Market Economy, 1979 to the Present: The Distribution of Income and the Standard of Living • Income inequality increased in 1990s due to • Relative decline of more egalitarian state-owned sector • Inflation • Impacts of foreign trade • Regressive rural fiscal transfer policies • Commercialization of urban housing • Increases in rent-seeking activities • Increases in monopoly power and corruption • Reduction of urban subsidies • Transfers of benefits to private property

47. Dengism and Move to a Market Economy, 1979 to the Present: The Present Despite recent economic success China faces severe economic and political problems • Income Inequalities • Threat of major energy/environmental crisis • Threat of extreme oscillations between inflation and deflation • Dealing with accumulating bad debts in the state-owned banks • Problem of managing laissez-faire Hong Kong since its absorption by China in 1997 • Threat of separatism in poor western provinces populated by minorities • Continuing political conflict over democratization → Tiananment Square • Absorbing increasing number of migrants

48. Hong Kong, Taiwan and Mainland China:Hong Kong • Former British colony of Hong Kong is one of the world’s most laissez-faire market capitalist economies • Succeeded as a leading newly industrializing country • Absolute free trade • No regulation of capital flows or labor markets • Few regulations on enterprise formation or activity • No government ownership of business • Low flat income tax rate

49. Hong Kong, Taiwan and Mainland China:Hong Kong • Hong Kong has been serving as an international trade entrepot between China and the rest of the world, and British-owned banks and trading houses dominated its economy • Four vital functions for Chinese economy: • Major trading partner, financier, middleman, facilitator and its major source of foreign investment

50. Hong Kong, Taiwan and Mainland China:Hong Kong • For 50 years Hong Kong is to have practical autonomy over local politics and its economic system, but defense and foreign policy are to be controlled by China • Its role as a facilitator is important for introducing market capitalist practices and advanced technologies into China