CHINA

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CHINA

• The Great Awakening

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Historical Background

• The Peoples Republic of China developed from
• The Soviet central-planning system

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with its information, incentive, and
inflexibility problems.
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Historical Background

• The Peoples Republic of China developed from
• 2. Cultural confusion and economic disaster
  stemming from Mao Zedong

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China Under Communism 1949-1978

• The Great Leap Forward, 1958-1960
• Maos version of Soviet Style Central Planning
• Forced industrialization
• A steel mill in every back yard
• Disappearing tools and famine

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China Under Communism 1949-1978

• The Cultural Revolution
• Deng chief of the capitalist roaders
• Red Guards and permanent revolution
• Movement to the countryside

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Enter Deng Xiaoping, (Three Times Altogether)
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The Reforms of Deng Xiaoping

• Phase 1 Reform the Countryside, 1974-1978
• Private plots and state farms in agriculture
• Higher state procurement prices
• Quota at state prices, excess for market prices
• Sale of surplus for cash

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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.

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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!

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SEZs located in

• Guangdong Province
• Fujian Province
• Hainan Province
• Hunchun
• Pudong Development Zone (Shanghai)

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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

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Policies in the SEZs

• Domestic decentralization, no planning or
  regulation from center
• Tax incentives to foreign investors

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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

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The Result an Example

• Per capita GDP was 7 times the nations
  average
• Foreign investment and exports have been the
  primary engines of economic growth

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Shenzhen The Early 1970s
Shenzhen Today
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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

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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.

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• SOEs and their Reform

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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

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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.

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Effects Growing Maturity and the Asian Crisis
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The Old Guard Passing from the Scene?
Jiang Zemin, Dengs heir to power
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The Party Today
Hu Jintao, Elected General Secretary of the CPC
and President of the Peoples Republic of
China, March 15, 2003.
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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

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The Current Scene

• The global economy puts tremendous pressures on
  Chinas 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.

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The Bureaucracy

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

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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.

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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.

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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.

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Political Environment Since Deng

• Purges no longer occur
• The National Peoples 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.

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Political Environment Since Deng

• With the passage of time, stronger market and
  international forces will press the party for
  further human rights progress.
• The worlds focus on the Olympic Games of 2008
  will encourage progress.

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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.

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What is Chinas Future?What is the Future of
Chinas Market?

• Proposition
• The planning system constrains market development
  and growth.
• Chinas bureaucracy, colossal even before
  central planning was adopted, continues to
  function (or hinder functioning).

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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.

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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.

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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.

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Jiang ZeMin Reforms
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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

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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.

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Chinese Communist Party StatementJuly 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
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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.

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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.

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The SOEs and Unemployment

• The SOEs are supposed to provide unemployment
  help, but many are unable to.
• Millions became itinerant wanderers when they
  couldnt find private sector employment

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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Another Chinese advantageAn Open Economy

• Dengs 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.

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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 143rd member.

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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

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The WTO

• Main purposes
• Serve as an international forum for further trade
  negotiations
• Handle trade disputes among nations

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Membership Benefits to Chinas Economy

• China obtains stable access to foreign markets
• Foreign investors will continue to be active in
  China

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Benefits to Chinas Economy

• Long-Term benefits
• Reward efficient firms which become competitive
• Weed out weak firms, using their resources more
  effectively elsewhere

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