Before 1978, China was reeling from a series of failed attempts to develop a thriving economy, such as the socialist command economy and Mao Tse Tong’s Great Leap Forward. The nation had experienced some positive aspects of socialism, but the economic price of those benefits was too high and the system was unsustainable. Since 1978, with the original lead of Deng Xiaoping, and his “Open Door Policy,” the People’s Republic of China (PRC) has been transforming China’s economy from a Soviet-style centrally-planned economy to a more market-oriented economy, still contained within a strong Communist Party control structure, but with more foreign capital, non-governmental organization and citizen involvement. The overall effect has been to quadruple China’s output and to make it, on a purchasing power parity (PPP) basis, the second largest economy in the world after the US in 2003, even though, on a per capita basis, the country is poor.1 However, this amazing growth has not come without a price, causing such problems as environmental degradation, monetary instability, and massive worker displacement. Today, China struggles with problems of a modern economy that is influenced by central planning and increasing independent market forces, as well as increasingly influential external pressures and absolute natural resource limitations.
Reasons for Changes
Through the early 1950’s, the revolutionary Communists led by the dictator, Mao Tse Tong, succeeded in preserving a unified Chinese power, and ventured upon a courageous Soviet model program of sweeping economic and social development and reconstruction programs in an attempt to build the Chinese industrial base and recover from decades of war, inflation, and civil infrastructure breakdown. During his leadership Mao led the nation in a radical new direction, called the “Great Leap Forward,” intending to greatly increase the rate of industrial development through huge communes (cooperatives) and backyard factories. It proved to be a failure and caused market breakdown, decreases in agricultural production, and produced low quality, unsellable goods. Mao subsequently led the nation on an exhausting path of internal cultural revolution against his political opponents. Both movements cost the nation tens of millions of lives and enforced strict control over citizens’ lives. Mao succeeded, however, in maintaining a strong Chinese sovereignty and a high priority, if not heightened necessity, of developing a strong industrial production. 2
After Mao passed, his cultural rivals within the Communist Party of China (CPC), whom he accused of being pro-capitalist, returned to power and, led by Deng Xiaoping, proceeded to lead the nation in a more market-oriented direction of economic reform and cultural freedom. The goal of the reforms was to generate enough surplus capital to modernize the Chinese economy. Neither the socialist command economy nor Mao’s attempts at a leap to communism through agricultural communes had developed enough surpluses to modernize.2
“In the early years of the People's Republic, China's revolutionary managers gave people a taste of some of socialism's upside, but the economic means of sustaining these benefits turned out to be impractical, and the man who was prepared to concede that was Deng Xiaoping. After mind-numbing disasters like the Great Leap Forward and the Cultural Revolution, Communist China was indeed lucky to have survived long enough to see his return to power in 1978, for it was running out of time.”3
Changes
In 1970s, and in particular 1978 via the 3rd Plenary Session of the 11th CPC Central Committee, Deng Xiaoping and his comrades began a reformation of the national economy with the goal of transitioning from total central planning to a more market-oriented economy, utilizing pricing systems, and gradually opening the Chinese economy to outside interests. The government first changed agriculture by implementing the “contract responsibility system,” allowing farmers to sell their excess production from individual plots for profit in open markets, rather than farming for collectives. This was followed by village enterprises, or industries owned by the village, an “open door” policy allowing greater foreign trade and foreign direct investment. “These initiatives immediately increased the standard of living for most of the Chinese population and generated support for later, more difficult, reforms.”5
Five Special Economic Zones (SEZs) were created and given a special set of laws that allowed for a more independent mode of business within their limited space than was allowed in the rest of China. The special rules within the SEZs allowed greater independence of business management, foreign capital investment and ownership, products that are primarily export oriented, and activities driven by market incentives, rather than central planning. SEZs are considered separately in central planning and have province-level authority on economic administration.4 “This difficult task of price reform was achieved using the dual-track pricing system, in which some goods and services were allocated at state controlled prices, while others were allocated at market prices. Over time, the goods allocated at market prices were increased, until by the early-1990s they included almost all products.”5
The creation of SEZs opened the door for a large influx of foreign capital investment, thereby increasing output capacity dramatically. The Shenzhen SEZ, the most active of the five, had an average annual growth rate of 38% from 1980 to 2003.3 The SEZs were followed by 14 open coastal cities in 1984, enlargements to the SEZs, numerous opened border, river, and inland areas in 1988. In 1992, the State Council opened capital cities of all inland provinces and autonomous regions, as well as 15 trade zones, 32 state-level economic and technological development zones, and 53 high-tech industrial development zones in large and medium-sized cities. “As these open areas adopt different preferential policies, they play the dual roles of ‘windows’ in developing the foreign-oriented economy, generating foreign exchanges through exporting products and importing advanced technologies and of ‘radiators’ in accelerating inland economic development.”4
Foreign investment began with Hong Kong investors, and grew with other Asian money, eventually attracting international attention. China was increasingly seen as more than just a cheap manufacturing center, but as a center for capital investment, able to sustain long term equity growth. China is and has been viewed as a low-cost manufacturer, primarily due to its low cost of labor. “A worker at a Chinese factory typically costs a company 50 cents to $1 per hour (average $0.86), compared with $2 to $2.50 per hour in Mexico and $8.50 to more than $20 for the U.S.”6 This extremely cheap human resources cost carries over into the new open investment environment in which foreign capital can reap huge rewards from exploiting the lower production costs in China than in other manufacturing zones. This difference in wage contributes to a massive trade imbalance between China and the US, in which Chinese exports to the US were $125 billion in 2002 and US exports to China were only $19 billion.5 The US can afford to consume far more of China’s inexpensive products, and Chinese consumers have far less income to spend on the more expensive American products. Also, Chinese exports to the US are rising 20% per year, much higher than the US’s. 5
Results
The result of the reforms has been a quadrupling of GDP since 1978. In 2004, with its 1.3 billion people and a GDP of $6.4 trillion, or $5,000 per capita, the PRC is the second largest economy in the world after the U.S. by purchasing power.1,7 Chinese economic development is among the fastest in the world, about 9% per year. 1 In 2002, exports were $312.8 billion, with 45% produced by foreign-invested enterprises and nearly $39 billion in foreign direct investment in 1999, and imports were $165.8 billion.8 “On the darker side, the leadership has often experienced in its hybrid system the worst results of socialism (bureaucracy, lassitude, and corruption) and of capitalism (windfall gains and stepped-up inflation). Beijing thus has periodically backtracked, retightening central controls at intervals.” 8
Hidden Costs
China’s amazing growth over the last two decades has not come without some costs that are less easily represented with a Yuan value. These costs include environmental degradation, pollution, loss of precious arable land due to urban sprawl, a dramatic increase in natural resource needs, and 80 to 120 millions people who are stranded between rural and urban life with little hope of economic usefulness beyond unskilled part time jobs.
Chinese agriculture supports 20% of the world’s population on only 7% of its arable land, with a goal of moving as many as 400 million to cities in the next 25 years, who will need additional infrastructure like roads, and housing, etc. China has changed from being nearly self sufficient to importing huge quantities of grain and other resources. It is the world’s largest importer of copper, aluminum, and cement, and second largest importer of oil. Meanwhile, China’s own resources are being severely impacted. China is the 2nd largest carbon dioxide producer, and set to become the 1st, and its car ownership is doubling every year. 75% of the country’s energy needs are supplied by coal fired power plants, with new coal plants in production.9 China is home to 16 of the world’s 20 most polluted cities.
More than half of China’s citizens face water shortages or contamination, water tables are dropping, and “yet people still want houses with swimming pools, like in the US.” 9 Now under construction, the Three Gorges Dam on the Yangtze River is to be the world’s largest hydroelectric project, providing electricity for the rapidly expanding cities.
Natural resources aren’t the only problem. “Michael Ma, an environmental business consultant, has found Chinese workers packed into dark, smoky factories in scenes he describes as reminiscent of 18th century Europe. ‘Some multinationals are as guilty as local companies of taking advantage of loose environmental and labour controls’, he said. ‘They find loopholes so they can make quick money. And if there's any problem - they just move deeper into the countryside.’” 9
The Broad View
As has been demonstrated, China has a tremendous economic potential and current development, partly due to such a huge population, cheap labor, strong governance, a willingness to radically change and adjust to trends, a desire to compromise on its past adherence to a strict communist position and to work with the rest of the world on the world’s terms. The hidden costs of China’s development parallel the US’s on an even larger scale, and seem to be a significant real world red flag to China’s seemingly unstoppable growth, but the pace of development is so significant that such inhibitors seem to be lost in the smog. Fortunately, there is a movement within China as in the rest of the world to link monetary value to other more subtle values such as ecological and social value.
Works Cited
1. "China" The World Factbook. 2004. Central Intelligence Agency.
8 Dec. 2004 <http://www.cia.gov/cia/publications/factbook/geos/ch.html>
2. “History of the People's Republic of China” Wikipedia. 2004. Wikimedia Foundation, Inc.
8 Dec 2004 <http://en.wikipedia.org/wiki/History_of_the_People%27s_Republic_of_China>
3. “The People’s Republic at 55” China Economic Review. 2004 China Economic Review Ltd.
8 Dec 2004 <http://www.chinaeconomicreview.com/subscriber/articledetail.php?id=314>
4. “Special Economic Zone” Wikipedia. 2004. Wikimedia Foundation, Inc.
8 Dec 2004 <http://en.wikipedia.org/wiki/Special_Economic_Zone>
5. “Chinese Economic Reform” Wikipedia. 2004. Wikimedia Foundation, Inc.
8 Dec 2004 <http://en.wikipedia.org/wiki/Chinese_economic_reform>
6. “People’s Republic of China” Wikipedia. 2004. Wikimedia Foundation, Inc.
8 Dec 2004 <http://en.wikipedia.org/wiki/People%27s_Republic_of_China>
7. "Rank Order - GDP" The World Factbook.
2004. Central Intelligence Agency.
8 Dec. 2004 <http://www.cia.gov/cia/publications/factbook/rankorder/2001rank.html>
8. “Economy of China” Wikipedia. 2004. Wikimedia Foundation, Inc.
8 Dec 2004 <http://en.wikipedia.org/wiki/Economy_of_China>
9. “Paying the Price for China’s Growth” Tim Luard. 2004. BBC News Online, China
8 Dec 2004 <http://news.bbc.co.uk/2/hi/asia-pacific/3743332.stm>