China’s pretty weird

I have two more exams in between me and summer! I’m feeling pretty good about both of them, just because I’ve been living in the library for the past week. I really only have to go over China for my Comparative Economic Systems class, and then study the whole entire culture of India for my India class.

Alright, so China’s economy.

China is like that really awkward looking kid you used to make fun of in middle school, that surprised everyone in high school by getting really strong and hot. 

It’s true. China was doing awesome in the 1800’s. Their world output peaked in 1820, and they were thought to be this really awesome country that would someday rule the world economy and technology, and output. Nope. Something went wrong, and by the 1900’s, China was a backwards agrarian society. Ouch.

First of all, I should mention that China has never used democracy to rule the country. Weird huh? They’re all about socialism and communism. China was ruled by dynasties until 1911. After the Opium Wars (1839-1842), China basically just got run over by most other countries, including France, Germany, Russia, the US, Britain, and Japan. How embarrassing.  Because so many other countries were occupying the country, war broke out. Mao Zedong led followers on the Long March in 1935 – 1936.

The Long March was a 6,000 mile march from the South to the North of China by leading Communist Chinese activists at the low point of their power. Mao Zedong then became the party leader, and veterans of this march became top government officials.

From 1949 to 1978, Mao implemented a planned economy. This planned economy did not work, mostly because Mao tried to adopt the Soviet Model. China could not really do the whole Soviet thing, because the main focus is on heavy industries. In the 1950’s, China was a very poor agrarian country. There was no real use for banks for the majority of society, since farmers lived in such sparse areas. Farmers saved money, just not in banks. Because 90% of the population was comprised of farmers, there was also a very small surplus of capital. Plus, exports from China at this point were basically non-existant, so any foreign exchange was very expensive. To have an economy focus on heavy industry, you need lots of capital, the ability to import capital, and lots of savings to turn into investment. China had none of that.

Mao tried to control the country even more, to create this heavy industry focus against all odds. He took over light industries, so that people would not invest in lighter industries that would not give them more of a profit. During this period, Mao promised a golden age for national capitalists where investments would be protected from foreign competition. To do this, he controlled most industries, and ever controlled all managers, so that the government made all decisions, to help industries on top of the agenda succeed at any cost.

The traditional economy in this case would be defined as distorted prices of factors and products, highly centralized and planned allocation of resources, and powerless managers. Because of this control, output of certain industries skyrocketed. Even though China was poor and income was unequal, the standard of living and output of the country was rising, and fast.

By 1958, Mao cooked up another scheme: The Great Leap Forward. This failed. Miserably. The Great Leap Forward was implemented in an attempt to create self-sufficient communes of farmers – on average a collection of 10,000 farmers for each commune. The commune became the production unit, so that it could go after larger irrigation and agricultural projects.

This led to the biggest famine China has ever seen. The distribution of food was based on need and not on performance, and the incentive to produce more individually disappeared. By 1962, the people’s commune remained, but the production team was reduced to 20 to 30 households instead of 200.

Mao took the blame for this catastrophe, but then decided to throw China into turmoil again in 1966, with the Great Proletarian Cultural Revolution. He wanted ultimate communism. This threw China into anarchy in 1967. Mao wanted China to rely on itself, and no other country. Foreign trade dipped, and output in general decreased as well.


By the time of Mao’s death, there was some major issues in China. Even though investment was rising, growth was sluggish. The standard of living was still low, and there was a population boom. Technology was also lagging.

Deng Xiaoping took over after Mao’s death, and he reformed (thank god). He committed to a gradual change over to a market-oriented economy, instead making a grand leap to capitalism. Taking a look at the agricultural system, Deng noticed a few things: low prices made farmers apathetic to efficiency, communes were inefficient because of the lack of specialization, and most villages were self-sufficient after the removal of farmer’s markets. So, Deng took care of business and opened up markets, raised prices, and scaled down production.

In 1979, the household responsibility system was created by the people at first, then backed by the government, which eliminated communes, made households the primary unit of account, and allowed for free sale by households of products above quota. Quota sales would be under market price, and above quota sales would be made at free market prices.

SOEs were given more freedoms, and were allowed to keep more of their profits or losses, instead of having them be absorbed by the state. This allowed visibility as to who was efficient, and who was slacking. However, since SOEs were given more freedom, there was more room for them to cook the books, and not report all of their gains or losses.This forced the state to create contracts with each manage of a SOE, but this also provided room for rent-seeking behavior.

TVEs were also very important to industry reforms. TVEs, or Town and Village Enterprises, were outside of the planned economy, and had no social expenditure obligations. These TVEs were beneficial to local government, and employed about 20% of the country.

Special Enterprise Zones and Economic and Technological Developmental Zones were developed as well to boost trading. SEZs are areas in which foreign investors are allowed to operate freely. These primarily coastal cities were operating in a market capitalist system, within the broader socialist country. ETDZs were similar coastal cities, but focused more on open trade, and were not as free as SEZs were.

Deng also made a change in the labor market. He switched the credentials for higher wage, and allowed for good publicity for efficient companies, and bad publicity for inefficient companies. Wages were then based on qualifications and productivity.

All in all, these reforms have done wonders for the country, and China continually is shifting more and more towards a market economy. Unfortunately, because of the gradual transition to market from planned, corruption is out of sight. The dual track of planning in some markets, and laissez-fair in others is causing a lot of rent-seeking behavior. So why not end planning altogether? SOEs are just too big to fail. Sounds familiar America, doesn’t it? Really, the only way out is to privatize, get rid of corruption, add competition to the choosing of managers, and let capitalism do it’s thing.

The labor market in China was nonexistent before the reformed period, not optimal for mobility within occupations, and businesses did not hold the right to hire or fire. By the 1980’s, firms gained some independent rights, and mobility is steadily increasing.The state rearranged the safety net in 1997. Mostly everyone works in China now a days, and most jobs are in farming. Minimum wage was introduced in 1993, but is not effectively introduced.

So basically – China started out with dynasties, had a communist fanboy rule the country who tried to control the country’s economy, which was mostly farming, which caused a famine. He tried again to control everything, and failed. He died, and a new guy took over, who’s a little smarter about how free markets help an economy, and is trying to fix what Mao did. It’s turning out to be like, really hard. So thanks Mao.

Nowadays, there are other problems to solve, as if China doesn’t already have things to worry about. First of all, there’s a threat of security, especially against the United States. Theorists are speculating that as China is becoming the 2nd largest economy, imperialist attitudes will spark again, and China will try to start something. While communications day to day are fine between the US and China, the conversation between the two countries generally are getting more stiff, and an attitude of general mistrust is taking hold worldwide. Well, crap.

China does have a reason to be cocky though; it’s become the largest manufacturer in the world, and might just take out the US for the largest economy. There’s still room for worry though. Some analysts believe that China is becoming like Japan, and will soon experience an export boom with lots of investment, only to be followed by a bout of stagflation. China is so hellbent on creating more consumption and fostering growth, they’ve been heavily relying on new investment. This could cause a huge problem in the future, with many loans not performing, creating a buildup of bad debt.

Peasants in China also seem to be getting abused. Officials are forcing farmers to give up their land and move to more compact housing, so that their arable land can be sold off to development projects. To make more of an incentive for country side dwellers to move to cities, one reform was stated as letting these citizens move, allow them to keep their land, and allow them to enjoy city welfare benefits. This was abandoned, because it would be hella expensive. Local governments don’t really have the means to be very convincing in moving peasants away from their land.

SOE reform is turning the state sector bigger and badder recently as well. Many SOEs have been disbanded, but the ones left are huge. The government has a hand in every single sector that can make a profit, and privately owned companies are understandably having a hard time keeping up. China is planning on working on innovation, pouring money into 7 industries it feels will be on the verge of technology.

China’s getting old, too. Their aging population, and a shrinking labor force will change things quite a bit. Still, there is a battle of ideologies going on, one side fighting for democratic change, and the other fighting for the preservation of authoritarianism. Match that with China’s new attitude that it should be the most powerful, and we’ve got a problem. They think the West (us) are going to anything we can to stifle their growth, which means hostility toward the US.

China also abuses their environmental resources, and is putting democratic goals on hold, to focus on the goal of making their people happier, shifting away from GDP goals. Seems silly, as a lot of their future depends on what industries will grow, and how.

Still have two or three, r six more hours of studying to go. Who really knows. Wish me luck!


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