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Topic Economics 2 - Geography and History
Professor David Roland-Holst
Department of Agricultural and Resource Economics
Tuesday and Thursday, 3:30-5AM, 10 Evans Hall
The Economy of China
Geography
Why economists think geography is important to economic development:
Traditional subsistence economy: climate, land, water, other resources, ecology, etc. Modern economy: trade, coastal lines, ports, roads, other logistics and infrastructure
Jared Diamond, Guns, Germs, and Steel: The Fates of Human Societies, Norton, 1997
A fascinating book about how geography has shaped human societies
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Geography
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Geography
Complexity of the influence of geography Resources: the role of fate Geography and technology transport technology telecommunication air conditioning Geography and institutions Cultural and social evolution (identity, language, family and higher organizations) Conflict and defense
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China
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Arable Land is Scarce...
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Annual rainfall is limited...
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Global Water Availability
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River Systems
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United States
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India
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Comparisons
Land and population (1980s)
China and India similar, U.S. is different (abundant land) Pop (M) China India U.S. 1,300 1,200 310 farmland(Mh) 150 153 170 hectares/capita 0.12 0.13 0.57
Climate and latitude
China and US similar, India is different (south to the tropic of cancer)
Coast lines
India and US similar, China is different (semi land-locked)
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Population Trends
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Chronology
Basic facts and major events To 1840 (pre-modern period) 1840-1911 (pre-Republic period) 1911-1949 (Republic period) 1949-1978 (People's Republic, pre-reform) 1979-present (People's Republic, post-reform)
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Historical Perspective of China's Economic Position in the World
1000 A.D. (Song Dynasty): China among the richest nations in the world 1820 A.D. (Qing Daynasty): China's total GDP still the largest in the world 1950 A.D. (at the inception of the People's Republic): China's total real GDP smallest in history 1978 A.D. (at the inception of the reform): China's per capita GDP very low
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Pre-Modern (-1840)
During Song Dynasty (northern 960-1126; southern 1127-1279) China had the highest per capita production and income in the world, but declined since. A big puzzle. "Anyone who looked at the world, say a thousand years ago, would never have predicted great things for this protrusion at the western end of the Eurasian landmass that we call the continent of Europe. ... the probability at that point of European global dominance was somewhere around zero. Five hundred years later, it was getting close to one." (David Landes, The Wealth and Poverty of Nations, 1998) China's total GDP was still the largest in the world until the middle of the 19th century.
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Early Globalization: The Silk Road
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Pre-Republic (1840-1911)
China's modern history began with "integration into the world" as a negative experience
The problem from the British: balance of payments deficit with China (tea, silk, porcelain) A special commodity to trade: opium
The Opium War of 1840, with China's defeat
Treaty of Nanking: conceded Hong Kong, opened ports, allowed extraterritorial rights in Chinese territories (foreign exemption from domestic laws) Many other unequal treaties ensued with Germany, France, Japan, etc.
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Lessons from History
History matters:
Complex Chinese feelings that combine pride and humiliation can be traced back to its history The national humiliation is closely associated with trade opening and engagement with the West
Compare to the American war with the British
Also began with trade: Tea tax (1767), Boston Tea Party (1773) American won the independence war (1776) Followed by 200+ years of prolonged peace (with brief interruption of the Civil War)
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Republic Period (1911-1949)
1911: Ending of Qing Dynasty and beginning of the Republic of China 1911-27: Warlords divided China 1927-37: Ten years of peace 1937-45: Sino-Japanese war 1945-49: Civil war
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Two patterns of industrialization
South of the Great Wall
Concentrated in a few treaty ports (Shanghai, Tianjin, Qingdao) Textile, food products for domestic markets Firms started by foreigners but native Chinese capitalists soon became a major force
Northeast
Japanese government-sponsored industrialization Heavy industry and railroads to exploit coal and iron ore for the Japanese market
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Pre-Reform Period (1949-78)
Initial economic conditions in 1952 Heavy industry base in Northeast China inherited from the Japanese Light industry in a few port cities On average a very poor peasant economy Major industrialization indicators were even lower than India
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Comparisons: Pre-industrial China vs. India
China 1952
GDP per capita ($) 50 Population (million) 573 Industrial output per capita Coal (kg) 96 Steel (kg) 2 Electricity (kw) 0.01 Cotton spindles 0.01 Railroads (km, 1936) 20,746
India 1950
60 358 97 4 0.04 0.03 72,000
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Time Line (1949-78)
1949-52: Economic recovery to the 1937 level 1953-57: Copy of the Soviet model 1958-59: Mao's model: Great Leap Forward 1960-62: Worst famine in human history 1962-65: Economic recovery 1966-76: Mao's model again: Cultural Revolution (domestic chaos) 1977-78: Transitional period Less than 10 years of sustained growth and development
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Basic Development Strategy
Socialist heavy industry priority development strategy a la the Soviet Union
High investment rate (investment/GDP): > 30% Most in heavy industry (producer goods): > 80% Rapid industrial growth rate: > 10%/yr
Result: Rapid structural change (% of 1952 Agriculture 51% Industry+construction 18%+2% Service 29%
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GDP) 1978 28% 44%+4% 24%
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Problems I
Slow individual consumption growth Per capita growth by 2.3% per year Urban faster (3%) and rural slower (1.8%) Between 1952 and 1978, rural per capita consumption only 58% higher Shortage of consumer goods Ration coupons for basic goods such as grain and cotton cloth Caution: "Social consumption" not included, such as school education and medical service
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Problems II
Slow employment creation
Heavy industry capital intensive, not labor intensive Labor force growth much slower than output (5.4% vs. 11%) in industry sector Employment in non-agriculture sectors grew from 34 million in 1952 to 105 million (net increase of 71 million) But: total labor force grew from 207 million to 398 million (net increase of 191 million) Bottom line: employment creation only absorbed 37% of the increase in labor force Agriculture labor force as 70% larger in 1978 than in 1952, while cultivated land remained constant
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Comparisons
Taiwan
Strategic Growth Sectors Industrial Focus Demand Investment Savings Households Coordination Heavy Industry
Hong Kong
Light industry Consumer goods industries Domestic/export markets Private and government Private and government Income growth moderate Market
Upstream industries Domestic industries Government Government Income growth slow Plan
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Debates on Development Strategy
"Balanced development theory"
All sectors should be developed simultaneously Rosenstein-Rodan (1943), Nurske (1953), Scitovsky (1954)
"Leading sector development theory"
Limited resources in a few key leading sectors first, to pull up other sectors later Hirschman (1958), The Strategy of Economic Development
"Import substitution" vs. "export promotion"
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Fundamentals of the Socialist System
Three fundamental features
Communist Party in power, guaranteed by the Constitution Dominant public ownership Central planning as the main mechanism of resource allocation
The three features are common in all centrally planned economies
Eastern Europe, the Soviet Union, China, Vietnam, North Korea, Cuba, etc.
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1. The Party-State
Monopoly on political power
Controls every aspect of the society Controls everyone in the society
The Party's jurisdictions
Personnel (appointment, promotion, dismissal) Ideology and propaganda Mass organization (union, students, women, etc.) Major decisions of the government (five year plan, etc.)
The Government's jurisdictions
Formulating plans Implementing plans Control over property, finance, prices, taxes, trade, etc.
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2. Public Ownership
Property Rights
Rights to the income generated by the use of property Rights of use of the property Rights of transfer of the property
Distinction between types two of property
Means of production: for producing products or services Personal property: for personal use
Distinction between two types of ownership
Public vs. private State vs. non-state
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2. Public Ownership
State ownership
Highest form of public ownership Nominally, ownership belongs to the "whole people" The government exercises all the rights
Incomes go to the state budget Government bureaucrats decide how to use property Government bureaucrats decide how to transfer property
Collective and cooperative ownership
Lower form of public ownership Nominally ownership belongs to a group of people In reality, government control and intervention
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3. Central Planning I Resource Allocation
Government control over investment
Five year plan and annual plan determine investment priorities Also decide on specific investment projects (large investment projects approved by Politburo) All the necessary resources are allocated to the "key projects" such as funds, labor, foreign exchange, etc. A politicized process, not just for economic objectives "Resource mobilization economy," like a "war economy"
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3. Central Planning II - Prices
Price determination
Prices set by government, not to equate supply and demand Basic principle: prices reflect the social necessary costs (excluding land and capital) and prices should be stable Price policy serves the purposes of channeling funds to/from the government income redistribution
Price distortion patterns (implicit taxation)
Low prices for consumer basic needs (food, rent, health care etc.) and raw materials High prices for manufactured goods and luxury goods Low factor prices (wages, interest rates, exchange rates)
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3. Central Planning III - Consistency
Production plan: material balance
An output target for each producer A supply plan that transfers resources between producers A schedule of usage coefficients linking inputs and outputs
The input-output problem
How to disaggregate the plan The problem of information A huge number of bureaucrats involved Feasible plan may be possible, but not efficient
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3. Central Planning IV - Agency
Management incentives under central planning
If plan target is "the total number of nails," tiny nails will be produced to maximize the number If plan target is "the total weight of nails," one huge nail will be produced to maximize the weight Managers also bargain with the planner to lower output quotas and to raise input supplies
Similarity and differences between managers under central planning and in public corporations
They all have "incentive problems": conflict interests Solutions are different. How?
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China's Differences I
Initial conditions Policy orientation (Maoism) Regional decentralization Large urban-rural divide Political dominance and instability
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Initial Conditions
Different initial conditions
A huge number of peasants Scarce land, labor intensive agricultural technology Resource poor Lower stage of development
Income
China: low income 1978: low-income level at $600 (2002 PPP$) 2002: lower-middle income level at $4,580 Central and Eastern Europe: upper-middle income level 1989: $7,000-$8,000 and above
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Policy Orientation
Mao's different ideas: Won the war by ignoring Soviet strategic advice Hated Soviet model of planning--too bureaucratic Had no understanding of modern economy (plan or market) Believed in political mobilization above all else
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Regional Decentralization I
Mao's criticism of the Soviet model: "Our territory is so vast, our population is so large and the conditions are so complex that it is far better to have the initiatives come from both the central and the local authorities than from one source alone. We must not follow the example of the Soviet Union in concentrating everything in the hands of the central authorities, shackling the local authorities and denying them the right to independent action" (Mao, 1956).
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Regional Decentralization II
1958 decentralization
Delegation of SOEs to local governments The central government controlled enterprises: 9,300 in 1957 and 1,200 in 1958 Planning (material balancing) at local level Investment decisions by local governments Local government budgets Rural Commune
Followed by economic disasters Recentralization in 1962-65
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Regional Decentralization III
1970 decentralization
Perceived Soviet invasion: moved industry to inland Rely on provincial government to set up independent industrial bases to diverse risks from war Most SOEs delegated to local governments Investment decisions by local governments: > 50% of investment in steel and iron made by local governments Rural small industry to support "agricultural mechanization"
Recentralization in 1975, but not complete
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Regional Decentralization IV
Distribution of State-Owned Industrial Enterprises by Administrative Levels (1985)
Central Province/City County
Number Output Share
3,825 20%
31,254 45%
35,263 9%
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Planning targets
Comparison between Soviet Union and China in the number of planned commodities
Soviet Union
1928: 1940: 1951: 1970: 0 500 1,600 60,000
China
1953: 0 1957: 500 1978: 800
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Industrial Structure
Soviet Union large factories dominate
Total of 40,000 state-run factories in 1970 Factories over 1,000 workers accounted for of total industrial output
China smaller factories/enterprises dominate
Total of 83,000 state-run factories in 1978, plus 100,000 urban collectives and 700,000 rural collectives Factories over 500 workers accounted for 40% of industrial output
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Industrial Structure
Comparison of Size of Enterprises (1988) (Employees/Enterprise) Czechoslovakia The Soviet Union Hungary Yugoslavia ManufacturingFood Products 2,930 1,609 806 460 311 290 925 243 Apparel 6,600 402 307 402
China
Italy United Kingdom
145 75 96
35
80 71
67
71 25
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Comparisons with the Soviet model
China's central planning had special features that represent a radical departure from the standard Soviet model These peculiarities could not be attributed solely to China's state of economic development. It was the decentralization that produced the systematic difference Decentralization within the Chinese state sector entailed regional governments having some recognized property rights Nonexistent in the Eastern European or Russian models
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Urban-Rural Divide I
A large and systematic urban-rural difference was created and sustained by administrative decisions and management systems Urban residents vs. rural residents: different types of "residence permit" Urban residence permit (urban household registration, or hukou) is a mechanism to restrict migration from rural to urban areas The clear dividing line between urban and rural residence has been crucially important, and must be dismantled gradually
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Urban-Rural Divide II
Urban residence privileges
Food, cotton cloth, edible oil coupons, and entitlement to other scarce goods (e.g., bikes, watches) Primary and secondary education Guaranteed job
Additional benefits for those working in the urban sector (state or collective sector)
Health care Retirement benefits Work unit-supplied housing at very lost cost
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Urban-Rural Divide III
The institution of Danwei ("work unit")
more than a work unit (e.g., production in enterprises or education in universities) a microcosm of urban society, into which individuals were born, lived, worked, and died provides most welfare benefits exercises micro-level political control ("Your father married to your mother-in-law".) the hub of social networks
Danwei keeps one's dossier
implicit ownership of labor barrier of labor mobility
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Urban-Rural Divide
Rural residents
Danwei is the resident village population within a Commune Rely on village support Very limited legal convertibility from rural to urban residency
obtain a job in urban sector marry to a urban person much like a foreigner getting a green card in the U.S.
A real economic barrier to move to the urban area was the lack of food coupons
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Inequality is accelerating
Source: USDA.
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Political Instability
Politics overweighs economics. Some popular slogans:
"Politics should take first priority" "Socialist weeds are more fragrant than capitalist grain." "Smash the Old World. Establish a New World."'"
Mao's political targets
1957: 1959: 1966: 1971: 1975: rightists rightist factions within the Party bureaucratic establishment within the Party his own successor (Lin Biao) the Premier (Zhou Enlai) and Confucius
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