China's Economic Development

Dennis Yang, J. Brada, P. Wachtel, Kenneth A. Loparo, J. Brada, P. Wachtel, Peter Buitenhuis

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137469960
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

This collection of papers is from Palgrave's journal Comparative Economic Studies, carefully selected by a team of expert editors, this volumes collates the most sophisticated works to provide the readers with an essential guide to the economic development of China.

1

Introduction

Josef C. Brada¹, Paul Wachtel², and Dennis Tao Yang³

¹ Arizona State University, USA; ² Leonard N. Stern School of Business, New York University, USA; and ³ Darden School of Business, University of Virginia, USA

Over the past three and half decades, since the inception of economic reforms in the late 1970s, the Chinese economy has experienced great success, both in terms of its rate of economic progress as measured by the growth of per capita income and in terms of China’s ability to introduce extensive changes to its economic system in a way that has supported its development. The chapters in this book are compiled from Comparative Economic Studies, a leading journal dealing with economic systems and their evolution. The chapters, written by noted experts in the field of China studies, document and analyze the key aspects of China’s institutional development and the strategies and policies that have been used to move the economy from rigid central planning toward an economy that is a unique blend of market and planned economy institutions and mechanisms that have delivered unprecedented economic growth and that continue to evolve over time.

Chapter 2 in this book, perhaps paradoxically, examines the nadir of China’s economic fortunes, the famine of 1959–1961, one of the greatest catastrophes in human history. As Dennis Yang shows in his survey of the famine’s causes, a great deal, though not all, the blame could be placed on bad economic policy and failures in planning. Nevertheless, the famine had some important lessons for the leadership. One was to exercise greater caution in formulating policies for China’s economic development and the other was to focus greater attention on the agricultural sector.

One outcome of the greater emphasis on agriculture was the development and spread of the household responsibility system, which created more rational incentives to improve productivity in agriculture. Another outcome was the decision to harness surplus rural labor into increasing industrial output through township-village enterprises (TVEs), small firms located in the countryside, rather than through massive state investment programs. As Chapter 3 shows, TVEs were small and used relatively simple technologies but they were able to supply a wide range of consumer goods. The authors, Enrico C. Perotti, Laixiang Sun, and Liang Zou, also show that some of the seeming greater efficiency of TVEs relative to large state-owned enterprises (SOEs) was due to the fact that the latter provided a wide range of social services and economic benefits to their employees, benefits often referred to as the “iron rice bowl,” which ensured the well-being of the urban work force. They also note that the further progress of TVEs would require grassroots democratization and the liberalization of the central planning system because the TVEs brought about local control over productive resources and, given their numbers and small size, their inclusion in the central planning process was infeasible, necessitating a greater reliance on price signals to guide their decisions. Thus, the process of structural change may be seen as having started with the responses to the famine caused by Mao’s Great Leap Forward.

Perhaps the most daring of the Chinese reforms was the introduction of the dual-price system, whereby SOEs fulfilled planners’ output targets based on state-set prices but could sell above-plan production at market-determined prices. Critics of the system argued that these market prices would reflect the shortages and surpluses that occurred in the production of planned goods rather than the costs and value of the above-plan output and thus would do little to improve the allocation of resources. In Chapter 4, Anthony Koo and Norman Obst argue that the dual-pricing scheme did in fact allow China’s SOEs to move toward a market economy, and they construct a simple model that shows why the scheme worked to improve efficiency in the state-owned sector. Putting the SOEs on a more market-oriented basis also meant that the job security of workers in SOEs had to be abridged in order to allow firms to adjust staffing to their needs. In Chapter 5, Margaret Maurer-Fazio describes the care with which labor market reforms were executed to avoid unrest among urban workers who now had to face a labor market that did not guarantee them the security they had enjoyed under central planning.

Chapters 6 and 7 summarize the effects of these reforms on the performance of China’s industry. Alberto Gabriele argues that, despite the proliferation of TVEs, SOEs continued to be the lynchpin of Chinese industrial development, in part due to their ability to improve performance by taking advantage of the reforms enacted in the 1990s. The proliferation of new types of firms and the entry of foreign investors into China has provided extensive data on the effects of the reforms and the relationships between corporate structure and firm performance. In Chapter 7, Weiye Li and Louis Putterman review the extensive literature on the effects of the reforms on the performance of SOEs and other types of firms. The studies they review conclude that the reforms did improve productivity and that they also reduced productivity differences between SOEs, TVEs, and foreign-owned firms.

Gains in the autonomy of SOEs and the growing role of TVEs required changes not only in the price system to allow for a greater role for the market but also in the China’s monetary system. In Chapter 8, Carsten Holz explains that the monetary system that existed under central planning was designed to use monetary flows as a means of verifying SOEs’ adherence to the plan and to balance household incomes and expenditures. Thus the role of money was entirely passive; deposit balances were accounting entries determined by the plan. Firms with deposit balances could not purchase industrial goods unless the plan called for such purchases. When SOEs gained the right to buy and sell above-plan output, the role of money had to change to one where the willingness of SOEs to spend, rather than the dictates of central planning, initiated transactions between firms. Holz explains the emerging role of banks in promoting financial intermediation to finance investment and to maintain a balance between household incomes and the availability of consumer goods. Of course, with money, and, therefore, bank credits, now driving the effective demand of firms for investment goods and of households for consumer goods, the role of China’s central bank, the People’s Bank of China, became central to controlling the volume of investment and maintaining price stability. Given China’s rapid growth and the growing demand for money due to financial deepening, meaning the broader use of financial instruments, the central bank faced a difficult task. In Chapter 9, Aaron Mehrotra and José R Sánchez-Fung show how the bank used information about the inflation and output gaps to steer monetary policy during the reform period.

China’s opening to the global economy has had major, and often controversial, impact on the pattern of international trade. Less well understood is the impact of China’s opening to the world economy on the Chinese economy. In Chapter 10, Aimin Chen examines the likely effects of China’s joining the World Trade Organization (WTO) in 2001 on the Chinese economy. Because China will gradually have to open its economy to foreign competition, Chen sees two likely effects. The first is a systemic one, where the entry of foreign competitors will shrink the size of the SOE sector, especially in industry, and will thus promote the growth of the non-state sector. The second is that greater trade openness will promote the reallocation of productive resources within China. The agrarian sector as well as services such as banking and finance are facing growing competition from foreign suppliers.

A major source of labor for China’s emerging industries, mainly located in coastal cities, is the millions of migrant workers from rural inland areas who, despite various institutional barriers, provide much of the labor supply for the growth of the economy. At the same time, this leaves many rural areas populated by older people who have to take care of the children of the migrants. A major concern in the migration literature is that the educational performance of the children of migrants suffers from the absence of parental involvement. Research by Xinxin Chen, Qiuqiong Huang, Scott Rozelle, Yaojiang Shi, and Linxiu Zhang in Chapter 11 suggests that this does not seem to be the case; children of migrant families do not perform worse in their schooling outcomes than do children in households where the parents do not migrate; in fact in some cases they perform better. This means that policies that limit workers’ ability to establish residency in cities may not be as costly in terms of the future skills of the labor force as is often thought.

In Chapter 12, Garry Jefferson reviews the entire Chinese experience with economic reform and growth from the perspective of modern economic theory. He notes that China did not always follow either the policy recommendations of international organizations such as the Indian Monetary Fund (IMF) or the emphasis of the modern growth literature on the need for strong institutions that support the rule of law and provide clear property rights. Nevertheless, China’s exemplary growth performance does confirm conventional wisdom regarding the sources of economic growth, the intersection of politics and economics and the role of incentives, themes that are developed in the other contributions to this volume. This wide-ranging essay is worth reading for those beginning their study of the Chinese economy and, for those who have studied the Chinese economy extensively, reading this chapter will help them to put China’s experience into a broader perspective.

2

China’s Agricultural Crisis and Famine of 1959–1961: A Survey and Comparison to Soviet Famines

Dennis Tao Yang

Darden School of Business, University of Virginia, USA

China’s Great Leap Forward (GLF) of 1958–1961 ended as a catastrophe as widespread famine claimed millions of human lives. This paper reviews the literature on this historical crisis. The collapse of grain production was primarily attributable to failures in central planning that diverted agricultural resources to industry and to malnutrition among peasants, which lowered their productivity. The resulting decline in grain availability and the urban bias in China’s food distribution system were the main causes of the famine. This paper also compares China’s experience with the Soviet famines of 1931–1933 and 1947.

Introduction

The Great Leap Forward (GLF) campaign of 1958–1961, which aimed at quickly transforming China into a powerful industrial state, involved dramatic turns of events, but ended as a national catastrophe. In the 1958 New Year’s editorial of the People’s Daily, the Chinese Communist Party proclaimed the GLF goal of surpassing the United Kingdom in industrial production in 15 years and the United States in 20–30 years. The nation was soon elevated to a state of euphoria, as news of exaggerated production miracles spread throughout the country like wildfire. However, dreadful reality quickly set in. In 1959, China’s grain output suddenly declined by 15%, and in the following 2 years, food supply plunged further, to 70% of the 1958 level. During the same period, a widespread famine raged across China. Years later, based on population census and fertility survey data, demographers were able to estimate that the total excess mortality during the GLF crisis ranged from 16.5 (Coale, 1981) to 30 million people (Banister, 1987). This monumental scale of the famine makes it arguably the largest in recorded history.

Reprinted with permission from Association of Comparative Economic Studies. All rights reserved. Comparative Economic Studies (2008) 50, 1–29.

However, during the two decades after the famine ended, there was no public recognition of its existence outside of China. Even within China, despite awareness of severe hardship during the crisis years, the magnitude of the famine was largely unknown because the Chinese government prohibited scholarly inquiries into the subject. The public in China and the West began to realise the full severity of the Chinese famine only in 1980, when demographers and Sinologists released systematic research findings.¹ Since the publication of a complete time series of crude mortality rates in the 1983 Statistical Yearbook of China, and the subsequent release of population census and fertility surveys, this catastrophe has received increasing attention among social scientists. Initially, academic research was focused on reliable estimation of excess deaths and delayed births associated with the famine. Then, following the seminal work of Lin (1990) on agricultural collectivisation and performance in China, economists intensified research effort on the causation of the collapse in production as well as the concurrent famine. Research findings include a 1993 special issue of the Journal of Comparative Economics and a 1998 symposium issue of China Economic Review. Thanks to recent progress made possible by retrospective surveys and the collection of archived data, researchers are able to conduct rigorous econometric studies assessing the joint significance of various factors contributing to the GLF crisis. Much has been learned about what caused the precipitous decline in grain output, why mortality climbed to the colossal scale, and why the catastrophe lingered so long.

This article offers an overview of the growing literature on the economic analysis of China’s GLF.² To establish a reliable factual basis for subsequent discussion, the next section documents the estimates of existing studies on the scale of excess mortality and the magnitude of decline in grain production during the crisis. Relying on Sen’s entitlement approach to famine (Sen, 1981), we clarify several conceptual issues that are important for the analysis of China’s GLF, particularly with regard to the role of central planning and the relationship between aggregate food supply and the causation of famine. The subsequent section examines the determinants of the decline in output, while the penultimate section analyses the determinants of extra mortality. In each section, brief expositions of economic hypotheses are followed by discussions about data issues and econometric strategies for estimation. We also report up-to-date empirical findings.

Subject to qualifications, the existing research supports the hypothesis that a sequence of failures in central planning was mainly responsible for the sharp declines in China’s grain output between 1959 and 1961. At the inception of the GLF, wishfully hoping for a jump in agricultural productivity from collectivisation, the Chinese government implemented an infeasible industrialisation timetable. The diversion of massive amounts of agricultural resources to industry and excessive grain procurements from the peasants, which led to malnutrition and decimation of labour productivity, were both responsible for the collapse of grain supply. The time lag between heavy grain procurement in 1 year and the nutritional deficiency in rural workers in the subsequent year contributed in part to the prolonged decline in production. Bad weather also exacerbated the mistakes of economic planning. The associated famine has multiple determinants. In addition to grain availability decline, during normal years as well as periods of national food emergency, China’s food distribution system under planning gave only urban residents legally protected rights for acquiring a certain amount of food. The lack of food entitlement to the rural population due to the urban-biased allocation rule, together with political radicalism and grain exports during the crisis, contributed to the enormous death toll.

Agricultural crisis and famines have long occupied the attention of scholars. The traditional approach to famine analysis, which dates back to the writings of Adam Smith and Thomas Malthus, proposes that famines are primarily caused by a sudden decline in food availability (FAD). From the late 1970s onward, a new literature on famines emerged. The intellectual foundation of this new literature is Sen’s entitlement approach, which goes beyond FAD explanations and emphasises a broader set of causal factors that influence hunger and welfare, in...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures and Tables
• Notes on Editors
• 1 Introduction
• 2 China’s Agricultural Crisis and Famine of 1959–1961: A Survey and Comparison to Soviet Famines
• 3 State-Owned versus Township and Village Enterprises in China
• 4 Dual-Track and Mandatory Quota in China’s Price Reform
• 5 Labor Reform in China: Crossing the River by Feeling the Stones
• 6 The Role of the State in China’s Industrial Development: A Reassessment
• 7 Reforming China’s SOEs: An Overview
• 8 The Changing Role of Money in China and Its Implications
• 9 China’s Monetary Policy and the Exchange Rate
• 10 The Structure of Chinese Industry and the Impact from China’s WTO Entry
• 11 Effect of Migration on Children’s Educational Performance in Rural China
• 12 How Has China’s Economic Emergence Contributed to the Field of Economics?
• Index