The Command Economy of China (1949-1978)

1. The Command Economy of China (1949-1978) Junhui Qian 2013 September

2. Remember a few names… Zhou Enlai, 1955, in Bandung of Indonesia. Mao Zedong, in cultural revolution Deng Xiaoping (left) and Liu Shaoqi (right) Zhou Enlai, the Premier, 1976

3. Outline • The Command Economic System in China • Big-Push Industrialization • Policy Instability

4. The Command Economic System • Ownership • The government owned all large factories and transportation and communication enterprises. In the countryside, agricultural collectives took over ownership of the land and management of the farm economy. • Resource Allocation and the Role of Price • Planners issued commands that assigned production targets to firms and directly allocated resources and goods among different producers. Prices lost their significance as the primary signal that directed resource allocation in the economy. Finances were used to audit and monitor performance, not to drive investment decisions. • While the government neglected the microeconomic allocation role of prices, it nevertheless controlled the price system and set relative prices to channel resources into government hands and into Big Push industrialization. • Labor • The government and Communist Party reinforced their control of the economy through a hierarchical personnel system, in which the Communist Party controlled managerial career paths.

5. The Price Distortions • Factory products were expensive, while farm products were cheap. • Compulsory procurement of grain from farmers (since 1953). • Consumer goods were expensive, while wages were low, albeit higher than the return from farming. • Restriction on labor mobility from the farm to the city. • Implications: • The state-owned enterprises were extremely profitable, despite the inefficiency. • A modern tax system was not necessary, since the government could raise more than 25% of GDP as budgetary revenues.

6. Big-Push Industrialization • Investment share was high • Most (more than 80%) of investment went to heavy industry • Industry’s share of GDP climbed from 18% in 1952 to 44% in 1978, while agricultural share declined from 51% to 28%.

7. Why China Chose Big-Push Industrialization? • Emulation of the Soviet Union • “Dependence Theory” of Economic Development • There are core (developed) countries and periphery countries. Developed countries produce industrial products and export them to developing countries, which export primary goods. According to the theory, periphery countries are dependent on the core countries and are exploited. • Preparation for War

8. Why Heavy-Industrialization Was Difficult in China • Construction period was long • Key technology and equipment had to be imported • Initial capital outlay was high

10. Compare with Industrialization in Hong Kong and Taiwan

11. Assessing the Big-Push Industrialization • Misallocation of resources • Absence of incentives • In terms of aggregate output, China achieved at best mediocre growth. • In terms of output per cap, the achievement was even less applaudable. • The living standard of Chinese people was even lower than the number suggests.

13. Policy Instability • Economic recovery 1949-1952 • The twin-peaks of the first five-year plan 1953 and 1956 • Retrenchment: The “Hundred Flowers” of 1956-1957 • The Great Leap Forward 1958-1960 • Retrenchment: Crisis and Readjustment 1961-1963 • Launch of the “Third Front” 1964-1966 • Retrenchment: The Cultural Revolution 1967-1969 • Preparation for war 1970 • Retrenchment: Consolidation and drift 1972-1976 • The leap outward and the end of Maoism 1977-1978 • A final turning point: The Third Plenum of 11th CCP Central Committee, Dec 1978

15. During the recovery (1949-1952), CCP was even able to help private enterprises Source: RenminHuabao (People’s Graphic Paper) 1951/5

16. Some 6,000 Soviet advisor came to China, and more than 10,000 Chinese students studied in USSR. The Completion Ceremony of Three Major Investment Projects of Anshan Steel Company. Source: RenminHuabao 1954/1

17. High-Tide of Socialism (1955-1956) In the countryside: collectivization In the city: private enterprises were turned into cooperatives or joint public-private enterprises

18. “Hundred Flowers”: Short-Lived Moderation

19. The Great Leap Forward “Steel Mills” in the countryside Grains from “harvests” were hauled away.

20. Great Famine (1959-1961)

21. The Third Front Construction: Preparing for War (1964-1966)

22. Cultural Revolution (1966-1976)

23. Legacies of the First Three Decades of PRC • The economy stagnated at an extremely low level. • Almost everybody was a loser by the end of the Cultural Revolution. • On one hand, there was a deep willingness to experiment and reform. • On the other, political stability was treasured.