China

Socialist Market Economy/Culturally Regulated

Market Economy

https://www.youtube.com/watch?
v=LjRZIW_hRlM
 2,000 Years of Economic
History

Source: https://www.visualcapitalist.com/2000-years-economic-history-one-chart/
Where do all these people
live?
Rural-urban migration has dramatically reshaped China:
•Urban growth was slow rising between the 1953 and 1982
censuses, the urban population as a percentage of total
population increased from 13.3 in the 1953 census to 20.6
percent in the 1982 census.
•From 1982 to 1986, the urban population increased
dramatically to 37 percent of the total population as rural
agricultural workers left the land in the largest rural urban-
migration in human history.
•By 2000 this had risen to 50% of the total population (650
million)
•Between 2010 and 2025 an additional 300 million people are
expected to leave the countryside and move to the cities taking
the urban population to 75%.

Rural urban migration has caused the rise of super-

megalopolises
•Guangzhou: ≈ 41 million
•Beijing-Tianjin : ≈ 30 million
•Shanghai: ≈ 25 million
 China’s Market Opportunities: Chinese Consumers

China’s Growing Consumer Class

(millions)

Source: InterChina Consulting, cited in US-China Business Council “China and the U.S. Economy: Advancing a Winning Agenda,”
January 2013
What do all these people want?
• Middle class lifestyle:
▫ Car (already world’s largest automobile
market)
▫ TV, Internet, Music, Movies, Mobile phones
▫ Consumer goods
 Global brands are coveted
▫ Status recreational activities
▫ Quality Education in the Arts and Science
▫ Home ownership
Two questions:
1.Can China’s growth rate still be among the highest in
the world even if it slows from its current pace?
2.Can it maintain this rapid growth with little disruption to
the world, the environment, and the fabric of its own
society?

The World Bank report answers both questions in the

affirmative, i.e., by 2030, China has the potential to be a
modern, harmonious, and creative high-income society.

Achievable but neither certain nor easy.

The Chinese Economic Miracle
Q: What preceded the Chinese Economic Miracle?
•1949-58: Mao consolidates power and encourages
families to have more children. Introduces China’s first
five year plan, adopting the Soviet model in which large
state monopoly firms pursued heavy industrial
development.
•1958-61: The second five year plan abandoned the
soviet industrial model by focusing on rural
development. Under “The Great Leap Forward” small
rural agricultural collectives were merged into large,
rural “People’s Communes” in order to better exploit
the gains from the division of labor. The peoples
communes were tasked with:
▫ Banning all private holdings/gardens
▫ Introducing new farming techniques that would turn
China into a grain exporter
▫ Accelerating the construction of state infrastructure,
▫ Increasing steel production by using backyard furnaces.
The Chinese Economic Miracle
Q: What preceded the Chinese Economic
Miracle?
•1962: The result was the “Great Chinese
Famine”. Estimates of up to 45 million died of
starvation, while 200 million suffered from
serious malnutrition. During this time China
exported grain. Mao is forced by the party to
abandon change direction and Deng Xiaoping
and others take over economic planning.
•1966: Mao introduces the Cultural
Revolution and uses it to purge Deng Xiaoping
and other leaders of the CPC who had earlier
opposed him.
The Chinese Economic Miracle
Q: What started the Chinese Economic
Miracle?
•Mao dies in 1976, Gang of Four arrested
•Deng Xiaoping seizes power from Mao's
anointed successor Hua Guofeng
•In 1978 Deng introduces significant
economic reforms aimed at introducing
market socialism
The Chinese Economic Miracle
Stage 1 (1978-84)
•De-collectivization of agriculture, and the
introduction of the “household responsibility
system”. Farmers are granted long term
leases and allowed to privately farm and sell
their produce in new private markets.
•Special Economic Zones were created that
permitted foreign investment and encouraged
local entrepreneurs to start up businesses.
•But: most industry remained state-owned.
The Chinese Economic Miracle
Stage 2 (late 1980’s to 2010)
•the privatization and contracting out of much
state-owned industry
•lifting of price controls, protectionist policies,
and regulations,
•But: state monopolies in sectors such as
banking and petroleum remained.
•But: The conservative Hu Jintao
Administration more heavily regulated and
controlled the economy after 2005, reversing
some reforms.
The Chinese Economic Miracle
Impact of 1978 Economic Reforms
•Agricultural output growth dramatically
accelerated to 8.2% a year, agricultural prices fell,
meat and vegetable production rose dramatically.
•Overall the reforms unleashed economic growth
that is unprecedented in human history
▫ GDP Growth rate of 9.5% a year
▫ China's economy became the second largest after
the United States.
▫ More than 500 million people lifted out of poverty
▫ Now the world’s largest exporter and manufacturer
▫ In transition from middle-income to high-income
status.
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
 The dual-track system of prices introduced in the mid-1980s to facilitate the transition of
China from a centrally planned to a socialist market economy has essentially been phased out,
reducing to a single-track, market-based system, with the following exceptions:
In 2001/07, the remaining planned prices are to be abolished with the exception of: the
prices of natural gas, oil, edible oils, grains, tobacco, water, salt, and products related to
national security

Phasing Out the Dual-Track

(percent of output value, selected years)

1978 1985 1988 1991 1993 1995 1998 1999 2001

Plan
price 94.4 37.0 24.0 22.2 10.4 17.0 9.1 6.7 2.7
Guide
price 0.0 23.0 19.0 20.0 2.1 4.4 7.1 2.9 3.4
Market
price 5.6 40.0 57.0 57.8 87.5 78.6 83.8 90.4 93.9
Source: Price Yearbook of China (various years)
"Guide prices" are government-administered prices, but with reference to market supply and demand
State Owned Enterprises

• SOEs now account for less than one-third

of GDP, against almost all of it in the early
1980s.
• But that still leaves nearly 140,000 of
them, employing 40m people.
• The state sector still accounts for more
than half of all industrial assets, only ten
percentage points down on 1998.
• More than one-third of these SOEs are
making no return on their investment and
need to be closed down or sold off.
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)
The success of the Chinese
economy
 In January 2010 the World Bank‘ announced that
the People's Republic of China will surpass Japan
as the second largest economy in the world, and
is set to become the world's largest in 2030.

 This striking success has been attributed to:

 the retention of state ownership of the means of
production,
 to liberalization,
 wise Communist party macroeconomic
management,
 and massive capital and technology transfers by
the overseas Chinese.
The main characteristics of China’s
economy
 The economic system is a "culturally regulated''
market economy, founded on:
 restricted individual utility seeking,
 state ownership of the means of production,
 and negotiated prices including wages.
 The foreign exchange rate is fixed by the state.
 The government is authoritarian, with Soviet style
Leninist "democracy,'' controlled by the Communist
party.
 The regime officially classifies itself as a "socialist
society”.
 ''The Communist party is the supreme authority, and it
uses the state to influence the economy through its
ownership, executive, legislative, and judicial powers.
Supply and demand
 The sovereignty of the Communist party has not
repealed the basic laws of negotiated utility­and profit­
seeking. But it has modified some fundamental
aspects.
DEMAND:

 Chinese consumers form preferences.

 Their demand is an inverse function of price, given their budget
constraints.
 The assortments they buy depend on relative prices.
 Their preferences are usually consistent, and they try to avoid
overpaying.
 But their choices are restricted by prohibitions on goods and assets,
preferential market access, state production, and import controls.
 Similarly, workers and peasants are compelled to overexert themselves
(under­consume leisure) at prevailing wage rates by draconian
administrative discipline including protracted penal forced labor.
 These curtailments of economic liberty are amplified by quotas placed
on things consumers clearly desire, like domestic automobiles.
Supply and demand
SUPPLY
 Individuals and managers know that they can
improve their welfare by trading with others,
working, starting entrepreneurial ventures,
hiring factors, economizing costs, innovating
improving technology, borrowing and lending,
advertising, and marketing their goods.
 They understand the virtues of efficient
administration and planning.
 But their discretion is restricted by the
Communist party.
 Labor supply is only a weak function of wages,
and a stronger function of state discipline.
 Managerial supply curves depend on
compensation, but are distorted by anti­
productive insider self­seeking, frequently causing
Where does China headed?
 Opinions about the merit of China's Communist party
managed state laissez-faire strategy are sharply divided.
 Some interpret the system as a device for mobilizing competitive
profit driven effort, with the assistance of overseas Chinese
venturers, to achieve rapid economic development, while
protecting the population from the worst abuses of private
coercion and criminal exploitation.
 Some see it as a transitory phase in China's march to an
unrestricted self-regulating multi­party democratic, market
economy with universal private ownership of the means of
production-
 Others foresee the possibility of more destructive outcomes,
where growth succumbs to the intrinsic inefficiency of
Communist party controlled authoritarian laissez faire, or
degenerates into some variant of Russian market kleptocracy.
 These issues are further complicated by China's low stage of
economic development. It can be argued that '' socialist''
laissez faire suits China's needs today, but will be
detrimental tomorrow.
Where is China headed?

 The communist laissez faire is comprehensively

inefficient. But China's market is paradise
compared with Russia's, because "business agent''
energy has been channeled into revenue­
maximizing by the state's refusal to radically
privatize, and by the massive inflow of foreign know­
how, technology and capital.
 As long as the Chinese Communist party keeps a lid
on labor costs, and retains state ownership, GDP
may continue to grow rapidly, but the strategy also
may come unglued if labor becomes restive, or the
government throws the doors open to insider
individual privatization, precipitating a spate of
asset grabbing of the sort destroying Russia.
Transition: China vs. CEE
• China’s market transition is incomplete but in some sense successful up until
now
• Gradualism continues to guide experiments in advancing reforms
• Chinese reforms differ in form and consequences from the approach taken in the
CEE. China avoided the sharp contraction of output, surging inflation and
elevated unemployment that characterized transition in all CEE.
• Chinese growth accelerated with the reform. Employment grew. Agriculture in
China was dominant, while the CEE were industrial economies.
• The main point of difference is the relative pace of political and econ reform.
• In CEE political occurred rapidly and ran ahead of econ reform. In China the
reverse—econ reform evolved much more rapidly than political reform