Economic Reforms (1978 - )

People’s Republic of China

• 1949-10-01, PRC, Beijing

• Chairman: Mao Zedong

• 5-Star Red Flag

• Republic of China government retreated to Taiwan

Mao’s Legacies

• Industrial development in 1950s– Modeled after the Soviet Union– Produced enlarged proletariat– Workers overwhelmingly concentrated in

cities

• Promotion of rural industrialization– Employees in rural factories not strictly

``workers”

Industrialization in 1950s

Mao Zedong Died in 1976

• Turning point in China’s postwar era

• The 3rd Plenum of the 11th CCP Central Committee in 1978– Deng Xiaoping’s ascendancy– economic modernization became focus

• US-PRC established diplomatic relationship in 1979

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

Maoist Growth Unsustainable

• Central control over resource allocation

• Prevented flow of information & factors of production

• Prevented market-determined prices and competition

• Prevented China from utilizing cheap labor in the international economy

Strategic Vision

• Short-term growth– Utilization of relatively cheap labor force

• Long-term growth– Technological change and dynamism

Structural Imperative

• Decentralization of economic decision making– incentive of local officials

• Demographic pressure and employment problems– net population growth (108 from 1978-1985)– massive migration into cities– aging population

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 (1979 - )– state-owned enterprises (early 1980s

- )– “socialist market economy” (1993 - )– fiscal reforms (1994 - )– privatization and private sector (1997 - )– accession into the WTO (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

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

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)

From 1999 to 2011

• Private enterprises [siying]– increased from 1.5 million to 9.7 million– investors increased from 3.2 million to 20

million– employees increased from 20 million to 104

million

• Since 1992 siying GDP grows at 60% a year and tax grows at 80% a year

Decline of Workers’ Status

• Explosive growth of new (or revived) types of factories in which workers are compensated and treated quite poorly

• Erosion of the privileged treatment of workers in state firms

• Rising complaints, petitions, slow-downs, strikes, sabotage, physical violence, etc.

• Labor Law was passed in 1994

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