Economic Reforms ( )

Incentives for High Growth International strategic vision at the top –links China’s security and global influence to its economy –growth must proceed at least at the overall speed of that of the East Asian neighbors

Strategic Vision Short-term growth –Utilization of relatively cheap labor force Long-term growth –Technological change and dynamism

Maoist Growth Unsustainable Central control over resource allocation Prevented flow of information and factors of production Prevented market-determined prices and competition Prevented China from utilizing cheap labor in the international economy

Structural Imperative Decentralization of economic decision making –incentive of local officials Demographic pressure and employment problems –net population increase (377 mil. since 1978) –massive migration into cities –substantial increase in senior people

Transition Strategy From central planning to indicative planning From indicative planning to market allocation of goods and services ``Grow out of the plan” instead of ``shock therapy” Transition and growth at the same time

Economic Reform Measures Sequence –agricultural production(late 1970s - ) –international trade and investment( ) –state-owned enterprises(early 1980s - ) –“socialist market economy”( ) –fiscal reforms( ) –privatization and private sector( ) –accession into the WTO(2001)

Fiscal Reforms Replacement of appropriating profits with taxing profits –1983 – 1984 Fiscal contracting with the provinces –mid-1980s Division of the tax-collection system –two-tier tax collection system –1994: re-centralization of revenues

Central government expenditures Central government revenues

Banking System Reforms The People’s Bank of China –nominally the central bank –part of the central bureaucratic hierarchy –at the rank of province/ministry “policy” banks and commercial banks reduction of provincial leaders’ influence over bank decisions loans to state-owned enterprises

Foreign Trade & Investment Encourage investment, export, and import –preferential treatment for overseas capital Gradual opening of the domestic market Accession to the WTO (December 2001)

Outcomes of Reforms in 1980s Reforms began smoothly Economic growth accelerated Nobody was made obviously worse Opponents were bought off Complex interdependence between state- owned enterprises and non-state sector Government revenues eroded

Challenges Ahead Separation of party-state and the economy –pervasive corruption World Trade Organization –internationally competitive corporations social welfare programs –support of senior and unemployed citizens widening gap between rich and poor –regional divide