The Chinese Economy: Transitions

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In 1949, the communist forces swept across China and established control over a war ravished country where discontent ran deep and the civil war had destroyed any existing system. Due to China’s malaise, the revolutionary forces were successful in gaining support and mobilizing the population towards changing the existing patterns with the help of the communist ideology. In 1949, Mao Zedong proclaimed the founding of the People’s Republic of China with the resolve to eliminate the country’s weaknesses and earn respect in the modern world.

Mao Zedong with the help of the communist party sought to bring about revolutionary change and set up strong national organizations which would allow them to consolidate power. This was a paradox: revolutionary change in itself is unsettling which would be incompatible with a central governing apparatus.

Mao believed that china’s malaise was directly attributable to the imperialistic forces that had exploited the country and deprived the people of any sense of national unity. Mao abhorred the Confucian notion that rulers know what to do because their masses are poorly educated and must simply obey the orders. He believed that it was one of the reasons that China had produced such a passive population plagued with the incapacity to control their destiny. He portrayed himself as a populist leader who wanted to galvanize the population and help bring about a change.

He designed strategies and formulated campaigns to allow the leadership to stay in touch with the popular sentiment. Mao was unable to resolve his personal conflict between the need for a revolutionary change and the economic need for stability and predictability. Mao and his ideology had a huge impact in shaping the people’s Republic of China form its early days of inception till 1976. Mao used his power to bring about a rapid industrial revolution based on the soviet model but its costs on the Chinese population were staggering. He did so in a fashion that produced massive human tragedies and left the economy in shambles. He launched the Great Leap Forward and then the Great Proletarian Cultural Revolution aimed at bringing about a social, political and economic transformation. These utopian efforts had devastating effects on the country and its population for decades.

Mao’s legacies include the lack of a coherent and continuous strategy aimed at resolving the problems faced by the country. Indeed what it constituted were periods of reforms aimed at producing a rapid industrial revolution. Each strategy or reform would utilize new tactics and try to deal with the problems engendered by the previous strategy rather than creating an environment that is conducive to gradual development and steady improvement which builds on the achievements of the past.

Some of these measures include the Land reform Campaign of 1950-52 in which the Chinese youth orchestrated the transformation of the countryside and resulted in the deaths of at least eight hundred thousand landlords. Another set of policy initiatives were launched in 1958 called the Great Leap Forward.  The idea was the China could leap over the normal stages of economic development as a result of concerted efforts of the society for a concentrated period of time. Within this, was an initiative called for the mobilization of peasants to provide for them without having to draw resources from the urban economy. Rural population was organized in communes to facilitate economic production. Initially it seemed to be working for the Chinese economy with increase in production and substantial growth in the targeted industries. But that was a façade and it dawned on the Chinese leadership that they had made a mistake of catastrophic proportions.

The Cultural Revolution of the 1960’s inflicted enormous violence on the urban population and left the people confused and skeptical of the leadership. It left the economy stagnated and the youth uneducated with the state apparatus paralyzed. These disruptions caused the People’s Liberation army to take over the administration of economic, governmental and social units.

Mao had set up massive institutions like the party, government and army to run China but severely undermined the credibility of these institutions by implementing strategies that would set them against each other. By 1976, China was suffering from an acute shortage of intellectual capital as a result of attacks on intellectuals. The country was exhausted by social conflict and entrenched in factionalism and mistrust that had become endemic.

Mao Zedong was an extraordinarily powerful man who left legacies that had a profound impact on China and its people. He had failed to live up to the expectations of his people who had remained in abject poverty with no hope for an economic recovery. His successor, Deng, realized that the Communist Party’s survival was predicated on its ability to raise the standard of living of its people by opening the country to the rest of the world. This would entail dismantling Mao’s egalitarianism and collectivism and allowing major reforms within the party to reorient China towards the market.

In the beginning, Deng did not have an elaborate plan for reforming the economy but what was clear was the need to become an economically efficient society with the capacity for technological change. This guided his reform efforts and facilitated in developing a unified approach towards change. Deng recognized that china had performed poorly in generating new technology and bridging the gap between research and development and actual production. This was based primarily on the fact that China had failed to acquire capital, technology and managerial know how which comes from participating in the global economy. South Korea, Taiwan and Singapore stood out as examples of recent successes. Deng further recognized that the Chinese economy was poorly structured and in no way able to enter the global arena without massive reforms. He believed that bureaucracy had stifled efficiency and it had become imperative to allow at least a part of the Chinese economy to develop outside the state controlled sector. He held authoritarian views about ruling China and an ardent supporter of the communist party; he wanted these reforms to impart legitimacy to the communist party. In the international arena he wanted to employ diplomacy to achieve peaceful relations with its neighbors.

There was a shift from ideology towards pragmatism and the resulting policy initiatives marked a dramatic departure from china’s past ideological orthodoxy. In 1977, moving from a ban on foreign investment China took steps to facilitate and encourage foreign investment from abroad. They emphasized the need to modernize education, agriculture, science and technology and defense. Teachers and student were permitted to go abroad and acquire knowledge and advanced training in various fields.

However, these reforms created rifts within the communist party. There were radical reformers who called for reorganization of the economy along market lines. On the other hand, moderate reformers wanted state control to guide economic outcomes. Throughout the 80’s there was lack of consensus regarding the direction of these initiatives. The government loosened control of the economy, tried to implement measure that would lead to decommunization of agriculture and called for long lasting peace with its neighbors.

These reforms had a profound effect on the agriculture sector. Commune system was dismantled and families were allowed to lease land and this lead to a surge in agricultural output initially. The overall trend has been towards family ownership and limited commercialization of land. But as more incentives were given to the peasants; there was a sharp decline in the peasant population cultivating the land. People started moving to cities to work in factories.

Deng Xiaoping started China‘s economic reforms at the end of 1970’s because he understood that China was falling far behind the growth rates achieved elsewhere in south east Asia and a result was depriving its populace of an opportunity to improve their standard of living. He also saw the need to provide material incentives to a bitterly disillusioned population. However, these reforms were guided by a strategic vision at the top which linked China’s stability, security and global influence with the performance achieved by its economy. This shows that the success of the economy would be reflected in stable domestic and foreign policy.

The formal political system in China has remained constant in its structure but changed significantly in its approach since the start of reforms in the way it works and what it tries to accomplish. In many ways china has developed a more efficient and dynamic political system. The fundamental change in approach is derived from the government’s recognition that people act primarily to further their own interests. Therefore it is essential to understand those interests and to try to provide incentives that help them in accomplishing their goals and further bring about rapid growth.

The fiscal system in china has seen significant improvement ever since the reforms began. In 1989, Beijing adopted on a national level an approach that would allow the provinces to retain a substantial part of their tax generated. This provided them with the impetus to collect taxes and use it for opportunities for local growth. Beijing also created a two tier tax collection system: a state system for collecting taxes specifically for the central government and a separate provincial tax to be used solely for the provinces.  It allows provinces flexibility in spending tax revenue in their locales and provides Beijing a larger role in determining where public funds are allocated. Although today China has a more regularized system but tax evasions are abundant among individuals, enterprises and governments. Corruption further reduces the effectiveness of these initiatives.

There has been a progressive change in the way foreign investment is handled in china. Initially they focused on mobilizing the expatriate Chinese community in Hong Kong to invest in China and also for providing technical know how. This was a direct consequence of the residual mistrust of the outside created by the Maoist period. At first foreign direct investment could occur as a joint venture in special economic zones created alongside the southeast coast. These FDI restrictions have gradually eased and additional sectors have opened up to investment. The government has started providing incentives and attractive deals to foreigners seeking to invest in China. Now with China’s WTO accession foreigner can wholly own ventures in many sectors of the economy. China’s foreign trade in constant dollars has increased at an average rate of 15% per year since 1979.

China has done a remarkably effective job of meeting the goals of the reform movement: maintaining political stability while moving form a planned towards a market system, with all related changes in institutions and regulations, and in the process greatly increasing economic output, foreign trade and foreign direct investment. The results produced by the reforms that started in the 1980’s have produced real improvements in the standard of living of its population. China’s  overall economic growth averaged about 9% per year for the past two decades making the people’s republic of China the fastest growing major industrial economy in the world.

Despite all these changes that have been made, there is still a lot that needs to be done. China is not a fully market driven economy yet. Although mandatory planning is dead, official interference in economic activities is pervasive. The decisions made by officials play a significant role in shaping economic outcomes. Corruption is systemic and local officials try to adopt protectionist measures to nurture the local industry. Such protectionist measures have had the effect of creating trade barriers for China. Weak judicial system has failed to protect physical and intellectual property rights. Producers often find that there products and technologies are often stolen by pirates.  Despite strong laws about intellectual property rights, courts have failed to put an end to this. Private savings are used by banks to fund worst performing sectors of the economy while depriving the dynamic sectors for credit.

China has undergone massive changes and achieved remarkable results in its quest for market economy. But it still remains in a transitive state between planned and market economy. The private sector has performed outstandingly but the government still insists on retaining the capacity to interfere in all aspects of economic activity. This interference prevents China from reaping the benefits of a market economy that encourages competition and efficiency. Thus China has failed to develop manufacturing and service sectors that can compete internationally on any basis other than cheap labor. Reformers agree that China will not be able to compete effectively unless they made additional changes to create a full market driven economy.