ECON 4337 Comparative Economic Systems

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ECON 4337 Comparative Economic Systems

• Lecture 11
• April 16, 2009

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Economic System in the Peoples Republic of China
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Economic System in the Peoples Republic of China

• World's largest population
• One of most rapidly growing economies
• Ruled by a Communist Party moving toward market
  capitalism

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Economic System in the Peoples Republic of China

• Religion and Culture
• Three religions
• 1. Taoism
• Tao (The Way)
• Seek harmony with nature and immortality
• Laissez-faire nature No action
• ............ I engage in no activity and the
  people of themselves become prosperous

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Economic System in the Peoples Republic of China

• Religion and Culture
• Three religions
• 2. Confucianism
• Emperor should rule benevolently and is owed
  loyal obedience in return
• A light touch by the ruler
• Later opposed international trade,
  industrialization and favored self-sufficiency
• 3. Buddhism

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Economic System in the Peoples Republic of China

• Maoist Economic Policies
• Mao Zedong leader of the Chinese Communist Party
  (CCP) proclaims Peoples Republic in 1949
• Emphasized land distribution and a mass peasant
  base

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Economic System in the Peoples Republic of China

• Maoist Economic Policies
• Differed from Stalinism in its
• Emphasis of development of the rural economic
  base
• Egalitarianism and moral incentives
• Anti-bureaucratic attitude
• Greater opposition to traditional culture
• Regional decentralization of economic control

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Economic System in the Peoples Republic of China

• Maoist Economic Policies
• 1949-1957 Implanting Socialism
• Redistributed land to all peasants individually
• Established localized mutual aid teams in 1950
• In 1955, teams replaced by village-based brigade
  cooperatives
• In 1958, town-level communes began to be formed
• No purely private industry by 1956

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Economic System in the Peoples Republic of China

• Maoist Economic Policies
• 1953-1957 The First Five-Year Plan
• Stalinist in nature
• Heavy industrial buildup (steel, iron, cement)
• Aggregate investment 20-25 of national product
• 85 industrial investment goes to heavy industry
• 8 goes to agriculture
• Soviet aid, Soviet advisers

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Economic System in the Peoples Republic of China

• Maoist Economic Policies
• 1958-1961 The Great Leap Forward (GLF)
• Rural-based industrialization using decentralized
  communes
• Traditional market towns established ?
  communalization
• 1960, back to village-level brigades
• Initially rural industry developed but the
  quality was poor in 1961 output declined due to
  catastrophe
• Worst famine in China's recorded history 15-30
  million deaths during 1959 to 1961

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Economic System in the Peoples Republic of China

• Maoist Economic Policies
• 1962-1965 The Period of Adjustment
• Central planning reinstituted
• From heavy industry to light industry and
  agriculture
• Both agriculture and industry grew
• Famine disappeared

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Economic System in the Peoples Republic of China

• Maoist Economic Policies
• 1966-1978 The Great Proletarian Cultural
  Revolution (GPCR)
• National and regional self-reliance
• Decline in foreign trade
• Decline in agricultural output by 1 and in
  industrial output by 20
• Then steady growth period started
• Decentralization to local government in planning
• Local areas built input supply systems for
  industrial production
• Planning flexibility helped high growth

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Economic System in the Peoples Republic of China

• Dengism and the Move to a Market Economy
• 1979-Present
• 1977, Deng Xiaoping became the leader
• Gradualist market-oriented reforms
• Two decades of stability
• Two decades of stellar growth
• Steady decentralization

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Economic System in the Peoples Republic of China

• Dengism and the Move to a Market Economy
• 1979-Present
• 1977, Deng Xiaoping became the leader
• Two phases
• 1978-1984
• Liberalization of agriculture
• Creation of town and village enterprises (TVEs)
• Spontaneous privatization of service sector
• 1984 Process applied to industry

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Economic System in the Peoples Republic of China

• Dengism and the Move to a Market Economy
• 1979-Present
• Reforms in Agriculture
• In 1978
• Recognition of property rights and principle of
  to each according to his work
• Restoration of the right to private plots
• Allowance of free-market rural bazaars
• Increases in state purchases of agricultural
  commodities at higher prices

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Economic System in the Peoples Republic of China

• Dengism and the Move to a Market Economy
• 1979-Present
• Reforms in Agriculture
• In 1979 Household Responsibility System
• Elimination of communes
• Introduction of a two-tier price system
• Greater interregional trade by relaxation of
  self-reliance doctrine
• Shift to material incentives
• Dramatic increase in output between 1978-1984,
  then slowed down

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Economic System in the Peoples Republic of China
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Economic System in the Peoples Republic of China

• Dengism and the Move to a Market Economy
• 1979-Present
• Reforms in Agriculture
• After 1984
• Growth decelerated
• Small size of farms
• Increasing population
• Unfavorable terms of trade
• Long-term decline in the amount of cultivated land

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Economic System in the Peoples Republic of China

• Dengism and the Move to a Market Economy
• 1979-Present
• Enterprise Reforms
• In 1984 Responsibility Contracts
• Firms can retain and freely dispose of any
  surplus beyond a generally small contracted
  production and financial obligation
• Dual price system extended to most of the economy

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Economic System in the Peoples Republic of China

• Dengism and the Move to a Market Economy
• 1979-Present
• Enterprise Reforms
• Chinese Town and Village Enterprises (TVEs)
• Rural collectives owned by town or village
  governments
• Face hard budget constraints and operate in
  competitive markets
• Their share in production is increasing
• Earnings go to wages, reinvestment and local
  public services
• More flexible than SOEs
• Engage in light industry
• Have lower tax rates

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Economic System in the Peoples Republic of China

• Dengism and the Move to a Market Economy
• 1979-Present
• Special Economic Zones (SEZs)
• In 1980
• Established selected ports as SEZs with relaxed
  rules where foreigners are allowed to operate
• Foreign investment in these areas encouraged
• Foreign investment, exports and growth boomed
• 1989 61.6 of cumulative FDI was from Hong Kong,
  11.2 from the U.S., 8.7 from Japan
• Share of exports from foreign invested
  enterprises went from zero to nearly 1/3 from
  1978 to 1990
• Why SEZs?

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Economic System in the Peoples Republic of China

• Dengism and the Move to a Market Economy
• 1979-Present
• Distribution of Income
• Under Mao, one of the most equal income
  distributions
• Income inequality increased after 1978
• In 1990s, inequality increased sharply in almost
  all categories
• Between coast and interior
• Between rural and urban areas
• In urban areas (0.23 in 1988 to 0.28 in 1995)
• In rural areas (0.301 in 1988 to 0.340 in 1995)
• Overall (0.338 in 1998 to 0.429 in 1995)

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Economic System in the Peoples Republic of China

• Dengism and the Move to a Market Economy
• 1979-Present
• Energy and Environmental Issues
• Endowed with coal, oil, hydropower reserves
• Deforestation
• Declining urban water supplies
• Rising electricity demand caused reliance on
  massive coal reserves ? Air pollution

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Economic System in the Peoples Republic of China
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Economic System in the Peoples Republic of China

• Sources of growth
• In 1978, most labor (71) was agricultural
• Movement of labor from low-productivity labor
  into higher productivity TVEs is the major source
  of growth
• Different from USSR where most labor was in SOEs
• Integration into global economy
• Modern technology could be imported
• FDI was thus encouraged
• High saving rate
• Around 23 of disposable income in 2000
• Centralized control discredited
• Huge investment from Hong Kong and Taiwan

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Hong Kong

• Small and highly urbanized
• May have the world's most laissez-faire market
  economy
• Succeeded as a leading Newly Industrializing
  Country (NIC) achieved a per capita income of
  23,520 in 1999

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Hong Kong

• Absolute free trade
• No regulation of capital flows or labor markets
• Few regulations on enterprise formation or
  activity
• No government ownership of business
• 15 flat tax rate
• Government involvement in infrastructure
  building, maintenance, some provision of social
  services, housing and real estate

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Hong Kong

• One country, two systems
• Hong Kong has autonomy over local politics and
  its economic system
• Defense and foreign policy controlled by PRC
• China's major trading partner and source of
  foreign capital investment
• China's share of exports to Hong Kong rose from
  1.4 to 27
• A role model of China liberalization policies
  are affected by its success

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Taiwan

• Largely market capitalist with considerable
  indicative planning and government ownership of
  enterprises
• Per capita income of 13,235 in 1999

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Taiwan

• Land reform policy
• Egalitarian in nature
• Rent reductions
• Sale of public lands seized from Japanese owners
• 1953 Land-to-the-Tiller Program
• All landlords were forced to sell their land to
  tenants in exchange for government bonds
• Upto 1958, indicative plans emphasized import
  substitution
• 1966, Export Processing Zones (EPZs) established
  ? huge export success
• Foreign investment was encouraged

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PRC, Hong Kong, Taiwan Compared