CHINA The Great Awakening

Historical Background The People’s Republic of China developed from: The Soviet central-planning system…

…with its information, incentive, and inflexibility problems.

Historical Background The People’s Republic of China developed from: 2. Cultural confusion and economic disaster stemming from Mao Zedong

China Under Communism: The Great Leap Forward, Mao’s version of Soviet Style Central Planning Forced industrialization A steel mill in every back yard Disappearing tools and famine

China Under Communism: The Cultural Revolution Deng chief of the “capitalist roaders” Red Guards and permanent revolution Movement to the countryside

Enter Deng Xiaoping, (Three Times Altogether)

The Reforms of Deng Xiaoping Phase 1: Reform the Countryside, Private plots and state farms in agriculture Higher state procurement prices Quota at state prices, excess for market prices Sale of surplus for cash

The Reforms of Deng Xiaoping Phase 2: Financial and Enterprise Reform 1983, SOEs must meet negotiated targets, but can then sell in markets. Managers set wages, make investments, retain profits.

The Reforms of Deng Xiaoping An “open door policy” announced 1979 –Four “Special Economic Zones” were created with Tax incentives Foreign exchange provisions Lack of regulations Markets function!

SEZs located in: Guangdong Province Fujian Province Hainan Province Hunchun Pudong Development Zone (Shanghai)

The Purposes of SEZs As a laboratory to provide experience for inland regions’ economic reform and development. Promote Inflows of foreign investment, technology, and managerial techniques

Policies in the SEZs Domestic decentralization, no planning or regulation from center Tax incentives to foreign investors

The Result: an Example Shenzhen, a small border town, changed into a modern city In the early years, the average annual growth rate was over 80 percent

The Result: an Example Per capita GDP was 7 times the nation’s average Foreign investment and exports have been the primary engines of economic growth

Shenzhen: The Early 1970s Shenzhen: Today

The Reforms of Deng Xiaoping Phase 2: Financial and Enterprise Reform The economic boom continued, but… There was political rebellion (Tiananmen Square, 1989) and subsequent retrenchment

But Communistic Legacies Remain The State-owned enterprises remain a part of contemporary China, and they need reforms. The Communist Party of China remains and needs reforms. Authoritarian methods and bureaucratic traditions likewise remain.

SOEs and their Reform

What Causes The Problems? Central economic planning rather than market economics State Owned Enterprises (SOEs) need shutting down: they serve a social (employment) function rather than an economic function

Where is China at Today? The Asian Crisis after the mid-1990s slowed the economy down Incredible growth rates become more difficult to sustain with growing maturity.

Effects: Growing Maturity and the Asian Crisis

The Old Guard: Passing from the Scene? Jiang Zemin, Deng’s heir to power

The Party Today Hu Jintao, Elected General Secretary of the CPC and President of the People’s Republic of China, March 15, 2003.

The Current Scene China has retained an open economy There has been a long period of sustained, rapid economic growth The huge market is a magnet for investments and trade

The Current Scene The global economy puts tremendous pressures on China’s political system. Change is gradual, since the party wishes to perpetuate its own power, but change does go on. Reforms are tentative, the party is not moving quickly toward price liberalization, currency convertibility, or reduction of subsidies.

The Bureaucracy Although bureaucracy constrains the devolution of power, the decline of the party’s power was made possible through the person of the general secretary. Since Deng, we have not seen dramatic individual leadership, but plodding, collective leadership.

Political Leadership Since Deng The current regime feels fairly secure in having demonstrated peremptorily at Tiananmen Square a willingness to assume a “comply or die” stance.

Leadership Since Deng As a result, the party has probably guaranteed that those favoring political liberalization will never again give support freely. It is not highly probable that the CPC will be a part of a peaceful evolution all the way to democratic government.

Political Environment Since Deng The process of democratization began at the same time as the economic reforms, and modest progress has been made since. –Officials falling out of favor are retired rather than executed. –Retirement permits promotion of younger officials resulting in more harmonious government.

Political Environment Since Deng –Purges no longer occur –The National People’s Congress has been strengthened –The legal system has been reformed to prevent any further cultural revolutions. Individual acts of selective repression by the party continue, but mass repression has been absent since the Tiananmen Square debacle.

Political Environment Since Deng With the passage of time, stronger market and international forces will press the party for further human rights progress. The world’s focus on the Olympic Games of 2008 will encourage progress.

Unpremeditated Devolution Greater independence of the Special Economic Zones made the retention of central control more difficult for Beijing. In 1993, Beijing attempted to enforce economic austerity, but the policy failed mostly because of the resistance of the more prosperous provinces that were earlier the SEZs.

What is China’s Future? What is the Future of China’s Market? Proposition: The planning system constrains market development and growth. China’s bureaucracy, “colossal even before central planning was adopted,” continues to function (or hinder functioning).

Authoritarian Controls still needed? The Party believes that the process of economic development will require authoritarian leadership for some time to come. Dissent will have to be managed while painful reforms are administered to the SOEs and their hundreds of millions of employees, millions of which will likely have to be sent into unemployment.

Building Markets Over Time But the state now controls less than half the economy and owns less than a quarter of it. The abrupt elimination of plan and party in the Soviet Union left no time for market institutions to be developed. The Chinese have been developing markets and market competence gradually.

Building Markets Over Time Functioning markets require much management: banking and finance institutions, labor legislation, regulation of industry, environmental regulation, regulation of competitive activities, and of international trade.

Jiang ZeMin Reforms

Economic Reforms Effort to reduce labor hoarding Substitution of a contract system for life- time employment guarantees Development of a wider wage distribution as an incentive for labor

Economic Reforms Reforms have also attempted to: Allow management greater decision- making prerogatives Impose greater accountability for the bottom line on enterprise management Promote greater labor discipline on the shop floor.

Chinese Communist Party Statement July 1, 2001 “Most people in the private sector are engaged in honest labor and work, obey the law, and contribute to society. Henceforth, the best of them will be allowed to join the party.” i.e., Capitalists can join the party! - Jiang Zemin, Party General Secretary

Market or Market Planning? The market continues to coexist with the plan. The SOEs continue to exist at great cost. Planners make managerial decisions without information available at the enterprise level.

The SOEs and Unemployment By 1998, nearly 1/3 of the labor force was unemployed or underemployed. Millions of SOE employees were laid off in the late 1990s.

The SOEs and Unemployment The SOEs are supposed to provide unemployment help, but many are unable to. Millions became itinerant wanderers when they couldn’t find private sector employment

Market or Market Planning? Central planning destroys incentives, isolates the planned economy from world markets, produces technological stagnation, brings mining and manufacturing to the brink of ecological disaster, and taints the economic future with destructive legacies.

Market or Market Planning? The Soviets dropped planning to rebuild from nothing, corruption filled the vacuum. In China, we wait for the other shoe to drop. When will central planning be dropped from the core economy. The last party congress promised it would be, but offered no published time plan.

Market or Market Planning? Will China simply gravitate toward a typically statist planning similar to other major countries in Asia, e.g., Japan and Korea? Those systems have been struggling since the Japanese depression and the Asian Crisis broke out.

Market Regulation Learning to design and implement regulatory measures may be as difficult for China as it is currently to control corruption or collect taxes. Such implementation requires a complex set of administrative agencies and policy enforcement mechanisms. Nor is keeping regulation at reasonable levels a simple task.

Can market and plan be combined? Overall economic direction includes protection of inefficient industries, fixing the value of the yuan, and statist planning at the regional level. Picking industries, subsidizing, and protecting them has been common. There has been a tendency to pick identical industries and generate excess capacity.

Can market and plan be combined? But Chinese gradualism may prove less painful than the Soviet transition. It can begin to learn how to promote, manage, and regulate markets even before the planning sector disappears.

Schumpeter and Social Groups The roles played by particular groups, such as managerial and academic leaders, was addressed by Josef Schumpeter. Social leaders, the professional and technical classes, will articulate the demand for material, educational, and other improvements.

Schumpeter and Social Groups Surveyed Chinese managers have expressed their preference for the development of market structures and democratic initiatives as the country modernizes. They seek more –personal freedom, –individualism, –autonomy and –self-responsibility

Another Chinese advantage: An Open Economy Deng’s early desire to link to the global economy was much more far-sighted than the autarky that crippled the Soviets over their entire existence. As early as 1980, China renewed its membership with the IMF and the World Bank.

China and the WTO After more than a decade attempting to gain admission to the WTO, China officially joined on December 11, 2001 China became the 143 rd member.

The WTO The WTO was created in 1995 from the former GATT, General Agreement on Tariffs and Trade. Main purposes: Develop rules of trade with minimal negative side effects

The WTO Main purposes: Serve as an international forum for further trade negotiations Handle trade disputes among nations

Membership Benefits to China’s Economy China obtains stable access to foreign markets Foreign investors will continue to be active in China

Benefits to China’s Economy Long-Term benefits Reward efficient firms which become competitive Weed out weak firms, using their resources more effectively elsewhere

“Let China sleep, for when it wakes, it will shake the world.” -Napoleon