China’s Gradualist Economic Reforms. Great Leap Forward.

China’s Gradualist Economic Reforms

Great Leap Forward

Great Leap Forward

• Start with the history and the 1950s through the 1970s– This is the period when Mao (1893-1976) was

head of the government– This was a period of one chaotic scheme to

another chaotic scheme– Great Leap to the Cultural Revolution• These policies produced stagnation, widespread

poverty, and even starvation at times

Great Leap Forward

• Starting in the 1950s, Mao pushed his Great Leap Forward

GLF• Official Chinese stats report this period with

glowing growth– For example, ag output doubled in 1958

– The movement from ag to industry was often with very harsh and nonsensical methods

The Social Changes Were Killing The Farmers

• Literally• These changes produced widespread famine

• One good change was in saving—China had been a low saving country at the beginning of the century

Split Between Soviets and Chinese

• The Soviet Union had been supplying much of the technology to China in the early communist period

• There was a political fallout in 1960 and China no longer received the support from the Soviets

• It took years for China to train its people to do what the Soviets had been doing

Cultural Revolution• This is mob rule by the Red Army of high

schoolers

Early and Mid-1970s

• After all of that chaos, the economy settle from its craziness in the early to mid-1970s

• This was the time of the “Three Nothing Enterprises”– No administration– No management– No regulations

Trying To Cobble Stats

• Recently, some economists have been trying to piece together some stats for the 50s, 60s, and 70s.

• Still a huge amount of work needed

1978

• In 1978, China starts a huge number of economic reforms that truly are the seeds of today’s growth

• China’s economy has been growing at 8%-9% per year– This is just staggering– At a growth rate of 9%, the economy will double in

8 years• Their per capital from 1978 to today is like us from Civil

War until today

Largest Economy

• China will likely become the world’s largest economy in the next couple decades– The IMF has said that based on PPP, China is

already ahead of the US

How Can They Be So Large

• Remember that China has over 1.3 billion people compared to the US with just over 300 million– More than 4 time the population of the US– World Bank estimates in 2008, was that the

standard of living in China is about 10% the US level– When China reaches a standard of living that is 25%

- 30% of the US level, the overall size of China’s economy will be larger than that of the US

Substantial Gains

• China’s rapid economic growth has produced substantial gains for the standard of living for its citizens

• Back in 1980, China had about 60% of its population (600 million) living in poverty– Less than $1 per day—this is the definition of

global poverty as used by the World Bank– $1 is roughly the cost of basic subsistence

This level declined rapidly

World Bank Estimates That Poverty In China Declined To:

• 64% in 1981• 33% in 1990• 10% in 2004

• Enormous gain in human welfare—the is the largest and fastest movement out of mass poverty that has EVER occurred

What China’s Growth BringsNecessities 1985 2003

Household Refrigerator 1 per 100 households 46 per 100 households

Color Television Sets 4 per 100 households 94 per 100 households

Washing Machines 1 per 100 households 59 per 100 households

Students in Higher Education

3 million 11 million

Fixed or Mobile Telephone 63 million 533 million

Length of Paved Roads 38.000 kilometers 208.000 kilometers

Length of Sewer Pipelines 32.000 kilometers 199,000 kilometers

Public Transport Vehicles 45,000 264,000

How Did China’s Economic Reforms Unfold

• Starting in the late 1970s, after the death of Mao, China took a new approach

• China had a gradualist approach to growth• The simplistic view would be– China gave up Communist central planning and

turned to the free market– True, but fails to capture what China distinctive

about the changes

Economic Reforms

• What is surprising is how meek and gradual the changes were

• In some ways a might be good to think about what they have not done (compared to Russia)– The Communist economy of Russia was stagnant– But it was stagnant at a much higher level of

industrial and higher level of human capital– Russia also experienced the overthrow of the

political system

Economic Reform– Russia had reasonably free elections in the 1990s– Russia’s movement away from Communism promoted

privatization, freeing up of prices, and a mass movement to markets

– China did not have the same industrial level– China did not privatize– It did not immediately eliminate central planning– Some prices were freed up, but many were still under

government control– China’s communists were still in control

Russia v. China

• Russia was a big bang with lots of activity in a small period of time

• China’s movement was talk, but the movement was not so fast– Four Modernizations

• Agricultural, industrial, science and technology, defense• This was talk—the actual changes were much smaller• Just 3 changes at first

– Freeing up agricultural– Shifting workers to township and village enterprises– Opening up to foreign trade

Turning the Farmers Loose

Farmers

• Starting in the 1970 the farmers started to bribe their way out of the system

• By 1978, the Chinese government endorsed the household responsibility system

Examples of Growth in Agriculture

• In 1978, less than 10% of agricultural commodities were sold markets

• By 1990, the number was 80%

• Agricultural was 30% of GDP in 1980• By 1995, it was down to 21% of GDP

What Happened?

Examples of Growth in Ag

• Agriculture had been growing less than 3% a year in the 1970s

• The growth rate zoomed to more than 6% a year immediately after the new policy

• It did, however, slow down in the mid-80s

Where Did The Farmers Go

• The share of population in the cities went from 18% in 1978 to 29% by the mid-1990s. Many of these farmers went to township and village enterprises

• These enterprises were often owned by the township and sometimes individual—they produced consumer goods—pots, pans, plates, simple appliances– Huge potential for these goods because they had been

neglected in the economy

Enterprises

• Township and village enterprises’ share of GDP went from 13% in 1985 to more than 1/3 by the mid-1990s– They were making about 40% of China’s industrial

output– And growing at about 25% per year

Transition From State to Private

• Starting in the mid-90s there was a greater movement toward privately owned companies– Some were even foreign owners

• State firms made 78% of China’s output in 1978

• By the mid-1990s, state-owned firms were making only 33% of output

Openness to Trade

Trade Zones

• The policies starting in the 1970s set up these trade zones– This allowed 1000s of companies to export and

import through the government company

Opened the Airlock

• Exports: 6-7% of GDP in 1980• 20% of GDP in 1995

• How did this work so well?– Foreign investors are behind only about 2% of

China’s total manu goods, but they were behind about 30% of its manu exported goods—the foreign investors were providing a link to the final markets

Hong Kong and Taiwan

• Who better to help China—they know the Chinese way and they already had links to the outside world

• Helped to expand trade and investment very rapidly

Not a Japan or East Asia Approach

• China’s early surge was not the result of an increase in education– Education had been decimated in the Cultural

Revolution

• Was not a result of higher levels of investment– Investment level were high in China since the

1950s

• No targeting of particular industries

Early Reforms• These early reforms were basically just

stepping aside– Letting the markets act on their own

Chinese are not Entrepreneurial

• Many said that after decades of Communism, that we should not expect the Chinese to be entrepreneurial

Slowdown

• By the late 1980s/early 1990s these gradualist approaches had reached some natural limits

• Time for a second wave of economic reforms

Second Wave

• Price control were gradually phased out of China’s economy– Started early, but really did not pick up speed until

the late 1980s

Share of Transactions at Market Prices in Different Parts of China’s economy

1978 1985 1991 1995 1999 2003

Producer Goods 0 13 46 78 86 87.3

Retail Sales 3 34 69 89 95 96.1

Farm Commodities 6 40 58 79 83 96.5

Price Have Been Freed Up

• By 2003, most prices have been freed up

Price Controls

• In spite of my lack of trust of the Chinese government, there is no doubt that the economy is vastly more determined by market prices than before

• From an econ perspective, I cannot emphasize enough how important this is

Prices

• Prices are messengers in the economy• They reveal what people want to pay for goods• They reveal what it costs to make goods• They provide incentives to use less of what is

expensive and more of what is cheap• They give incentives to firms to provide what

the people want• Move toward efficiency and innovation

State-owned Enterprises

• At the end of the day, China could not let itself sell them

• Started a process of state-owned in 2 markets

What Happened?

• The state owned enterprises were required to buy a certain amount of inputs from state firms at the government price

• And required to sell a certain amount of output at the government price

• But they were also allowed to buy additional inputs at the market price and allowed to sell additional output at the market price—and keep an increasing share of the profits

Safety Net• You can think about this process as giving the

state-owned firms a safety net– They had some inputs and outputs that would

guarantee them a certain level of profit– But they were still oriented toward the external

market

– Interesting stratagem--avoids the outright collapse of these firms (which would have happened without subsidies) and avoids all the unemployment

Government Monopolies

• This was also a period of eliminating government monopolies– If they wanted to sell in the market they needed to

compete with other companies

• In the early 2000s there were still a few industries that were still owned by the government– Energy—oil , gas, & coal– Utilities—tap water and electrical power– Cars & tobacco

The Happened

• By the early 2000s, private sector firms accounted for about 60% of China’s economy– And that share was steadily rising

• Some state-owned firms had started to issue shares of stocks that were traded– But the total of the shares only accounted for 1/3 of

the value of the firm• Remember that many of the state-owned firms were still

heavily subsidized—2/3 of the investment was in the state-owned– Even as late as 2003, ½ of the investment was in the state

State-Owned

• Many of these loans were from state-owned banks to state owned firms– They were sucking up loans from the state-owned

banks and had no chance of repaying

• How to deal with this?– Don’t—let the other companies outgrow them—no

need to reform if you are just letting them slowly die– The privates will take over, but it is tough since the

others get subsidies—kind of a mixed message

Does China Offer General Lessons for Economic Reform

• Is this gradualist approach good?

• Good idea, but China has some distinct issues– It has neighbors that are very hard to copy

– Relatively limited control by the government

– Entrenched political class

– Ardent political support for the reform

World Bank’s China 2020: Development Challenges in the

New Century• China’s economy could be described as a dry

prairie, parched by years of planning, awaiting the first sprinklings of market reform

Others• When other claim they want to follow the Chinese

approach, I will wait and see– Do the want to allow farmers to own the land and to free up

prices– Willing to let small enterprises flourish– Welcome companies to buy foreign equipment– Allow foreign ownership– Selling on international markets– Let large companies keep most of their profits– Phase out price controls– Move state owned companies into the stock market