Command Economy in China

1
Chapter 1

• Command Economy in China
• 1949-1976

2
Main Themes

• A command economy in the pre-reform period
• Characteristics of Soviet-style command economy
• Common difficulties in the transitions from a
  command economy to market economy
• Chinas unique differences in its command
  structure
• Prospective of the Chinese economy

3
Basic Characteristics of Soviet Style Command
Economy

• Resources allocation decisions are made in
  response to commands, instead of market prices.
• Planners control a large volume of resources to
  assume command of the economy as a whole
• Investment policy is the central feature of any
  economic strategy.

4
Characteristics of Soviet-type Development
Strategy

• High rate of investment, over 25 of GNP
• Priority to heavy industry and military
• Priority to investment in goods-producing
  capital, neglect of service
• Investment in basic needs health and education
• Preference of autarky limited importance of
  foreign trade

5
Characteristics of Soviet-type Economic System

• Public ownership
• State ownership of large-scale industry and
  wholesaling
• Collective ownership of agriculture
• Material balance planning
• Quantitative output commands
• Allocation of commodities to match sources and
  uses
• Nomenklatura system controlled by Communist Party
• Monobank extends credit passively to
  accommodate plan
• Material incentive and hard budget constraints
  for households

6
Macroeconomic Characteristics of Command Economy

• Household income is modest share of national
  income
• Household saving is small
• State carries out most investment, financed by
  transferring state enterprise revenue to the
  budget
• Bank lending restricted to short-term finance of
  trade and inventories
• Persistent shortages of goods

7
Problems for A Command Economy in Transition to
Market Economy

• Industrial reform complex and contentious
• Lack of a taxation system
• Corruption
• Distribution of national income.
• Lack of human skills

8
   The Pre-reform Economic System in China 

• China was a much poorer country than Soviet Union
• Some characteristics (large size and diversity)
  that tend to lead to decentralization

9
The Pre-reform Economy in China was still under
Central Control

• Ideologically exerted controls over development
  strategy
• Tight control over labor mobility and
  remuneration
• Central control over commerce and agricultural
  procurement

10
Main Problems with Chinas Command Economy

• Inability to get economy to respond to planners
  directions
• This was reflected by large volume of
  underutilized resources
• Instability of the economy

11
Nevertheless, China had Other Advantages

• Age (relatively young) structure was relatively
  favorable for rapid growth
• China is adjacent to East Asian Economic region,
  the fastest growing economic region in the world
• The Chinese economy appears to have strong growth
  potential, regardless of the system

12
Question/Answer!!