The New China

Comparative Economic Development In Mainland China, Taiwan, And Hong Kong

Alvin Rabushka, Michael Kress

• Publisher: Routledge
• Year: 2019
• Topic: Politics & International Relations
• eBook ISBN:
  9781000303834
• Subtopic: Asian Politics
• Index: Politics & International Relations

In a thoroughly researched and clearly written account of the development experiences of mainland China, Taiwan, and Hong Kong, Alvin Rabushka examines three societies with similar populations but very different political and economic institutions. Rejecting one-dimensional explanations of successful development, Rabushka looks at the way in which

1
Introduction

Since the end of World War II, more than one hundred new nations scattered throughout Asia, Africa, Latin America, and the Caribbean faced the task of transforming their poor, traditional societies into modern economies. The majority followed a strategy for economic development that emphasized government intervention in economic matters and, in some instances, state ownership of key industrial sectors. A few attempted comprehensive central planning for the entire economy. The specifics of these policies varied among countries, but often included government-directed capital formation, foreign-exchange controls, limitations on overseas investment or ownership, high tariffs to encourage domestic industry to develop substitutes for imports, high marginal rates of direct taxation for the purpose of redistributing income, and other regulations on economic activity. Most sought, received, and remained dependent on foreign aid.

Basic indicators of economic development published in the World Bank’s annual World Development Report¹ reveal that the most successful examples of post-World War II economic development in the world are located in the Pacific Area Basin. Hong Kong, Singapore, Taiwan, Malaysia, and Korea grew so rapidly that they graduated from the ranks of the developing world.

Why did these Asian countries prosper? Was it because they chose the correct economic policies? Or, rather, because their Oriental populations were diligent, thrifty, and ambitious? It would be a mistake to dismiss these personal traits out of hand. Oriental people inherited an old Confucian tradition, which emphasized love of learning; personal advancement through hard work and self-sacrifice to gain “face” for one’s family, community, and country; respect for elders and authority; and moral virtue. Chinese people flourished almost everywhere they settled. Southeast Asia is replete with stories of penniless Chinese immigrants who went from rags to riches. Indeed, Chinese helped promote major economic progress in such countries as Thailand, Indonesia, the Philippines, and Malaysia, all of which enjoyed higher growth than most African and Latin American nations.²

The view that development depends on cultural traits lends little hope to millions living in famine-starved Africa and in other stagnant or slow-growing economies. No analyst of development seriously advocates importing millions of Chinese to invigorate other poor economies. To the extent that culture explains development, the design and implementation of economic policies becomes less important. Development is simply a matter of good luck!

The Chinese-culture thesis of development may itself be subject to inquiry. The presence of Chinese people cannot account for sharply higher growth rates in Taiwan and Hong Kong than in mainland China during the past three decades or for the fact that per capita income in Hong Kong in 1985 was thirty times more than that in mainland China.³ In fact, mainland China enjoyed a greater abundance of natural resources than Taiwan or Hong Kong, which suggests that other factors such as political stability, economic institutions, secure property rights, the rule of law, and individual incentives play a role.

Mainland China, Taiwan, and Hong Kong: A Preview of Comparative Development

In 1949, Mao Zedong⁴ established Communist rule over the Chinese mainland. His defeated adversary, Chiang Kai-shek, retreated to the island of Taiwan, where his Nationalist government imposed authority over an economy decimated by war. Meanwhile, on the Southeast coast of China, the British restored administrative rule over their Crown Colony of Hong Kong, which the Japanese had sundered during World War II.

Between 1949 and 1985, these three territories, populated by people of Chinese descent (save a minuscule foreign community in British-run Hong Kong), pursued economic policies that ranged from attempts at comprehensive central planning to almost complete laissez-faire. In mainland China, Mao Zedong implemented a program of Soviet-style emphasis on heavy industry coupled with his own radical version of rural collectivization. Government planners controlled all factories, farms, and enterprises, set prices for all goods and services, assigned production inputs and specified output targets, allocated labor, rationed goods in short supply, determined individual incomes, and chose the mix between consumption and investment.

Since 1978, Deng Xiaoping, China’s liberal economic reformist leader, had deemphasized Soviet-style central planning in favor of greater reliance on market forces. He instituted far-reaching rural reforms that placed primary responsibility for agricultural production in the hands of individuals and households and moved gradually in the mid-1980s to establish labor and capital markets in the urban, industrial sector.

In Taiwan, Chiang Kai-shek’s government initially undertook policies of land reform and import-substitution-based industrial development, which entailed substantial government participation in the economy. In the 1960s, following the withdrawal of U.S. economic assistance, his government switched directions to a private-enterprise-based, export-oriented strategy of industrialization. To this day, however, the government has continued to undertake major industrial development projects. In short, Taiwan has combined some state ownership of heavy industry, the banking system, and provision of infrastructure with a largely free-enterprise, export-oriented economy.

Finally, Hong Kong maintained its historically based free-market, free-trade, low-tax policies. The British territory remained the industrial world’s closest approximation to the model of perfect competition found in economics textbooks. Although many of its political, social, and economic characteristics were unique, it nonetheless illustrated the workings of a largely private-enterprise, market-disciplined economy.

In September 1982, China announced that it would recover sovereignty over Hong Kong on July 1, 1997, when Britain’s 99-year lease over Hong Kong’s New Territories expires. The prospect that China intended to replace British rule sent the colony’s financial, stock, and property markets into a sharp tailspin, which reflected an initial loss of confidence in Hong Kong’s future. Confidence was temporarily restored after Britain and China signed a Joint Declaration on December 19, 1984. Britain agreed to restore sovereignty over Hong Kong to China; in return, China agreed to allow Hong Kong to maintain its capitalistic economic system for 50 years after 1997.

None of the three was a Western-style democracy. A Communist totalitarian regime maintained a firm grip on the mainland; an authoritarian Nationalist government ruled Taiwan; and a benign, slightly antiquated British colonial regime, struggling to localize and democratize, administered Hong Kong. In general, decision makers in all three regimes were able to impose long-term economic policies of their choosing, relatively free from the public pressures and voting interests that influence politicians in genuine democratic systems.

The three societies experienced different growth patterns in the postwar era. In Hong Kong, per capita income grew from about $180 in 1949 to surpass $6,000 during 1985. In Taiwan, per capita income rose from $70 to exceed $3,000 over the same period. In each case, annual real growth in gross national product (GNP) averaged between 8 and 9 percent for more than 30 years. At annual growth rates of 9 percent, economic output doubles in 7 to 8 years, quadruples in 15 to 16 years, grows eightfold in 23 years, and multiplies sixteenfold in 31 years. Sustained 9 percent annual growth over one generation increases national output sixteen times.

On the mainland, in comparison, per capita income grew from $50 in 1952 to about $180 by 1985, reflecting slower growth.⁵ Sustained growth of 5 percent, China’s postwar experience, doubles national income in 14 years and quadruples it in 28.⁶ Five percent was fast compared with many African countries, some of which lost ground in the past 20 years, but it lagged far behind rates of 8–10 percent. The gap meant that the gulf in living standards separating mainlanders from Chinese in Taiwan and Hong Kong during the postwar era increased in both absolute and relative terms. Moreover, much of mainland China’s postwar investment went into heavy industry, with little emphasis placed on the production of consumer goods.

More than three decades have passed against which to evaluate the performance of these three different economic systems. The comparison is especially significant for the Chinese-culture thesis of development inasmuch as the population in each is of the same genetic stock and each is situated in the same part of the world.

Admittedly, not all Chinese are alike. Hong Kong and Taiwan are disproportionately populated by coastal (Shanghai and Fujian) and Southern Chinese, who are renowned as hard-working, ingenious, competitive, and entrepreneurial peoples. These two lands have few of the more conservative, less venturesome people who inhabit Northern China and the vast hinterland. (Foreign travelers in the nineteenth century noted the laziness of the average inland Chinese, who seized every excuse to sit, drink tea, gossip, and consume hours chewing melon seeds.) Hong Kong, in particular, is home to several million refugees from mainland China, who displayed considerable effort, talent, desire, and courage to cross a dangerous border and start over again from scratch.

But these hard-working coastal and Southern Chinese made little economic progress in their own homeland in the late nineteenth and early twentieth centuries, when South China was being tom by civil war and rampaging warlords. Many fled for the relatively greater political security and economic opportunity afforded in the Dutch, French, and British colonies of Southeast Asia. The colonial powers maintained law and order, established well-defined systems of property rights, and, in keeping with prevailing Western beliefs of the time, left the creation and distribution of wealth largely to the private sector. This simple comparison illustrates the observation that differences in economic performance between mainland China and Taiwan or Hong Kong cannot be explained solely by reference to regional characteristics of the Chinese population.

Many factors bear upon productivity. These include availability and productivity of land, climate and weather, floods and drought, natural resources, size and scale of the economy, location, internal distances, the presence and magnitude of a rural hinterland, technology, national-defense requirements, sophistication of the economy, continuity in economic policies, individual incentives, property rights, opportunities for social mobility, immigration patterns, the development of human capital, the quality of political leadership, legal systems and practices, tax structures, subsidies, budgetary practices, orientation toward trade, and monetary policies.

To anticipate but one example: Three years of bad weather, coupled with the policies of the Great Leap Forward that destroyed individual incentives, produced famine in parts of China during 1959–1961. Three years of good weather combined with incentive-enhancing rural reforms introduced in 1978 enabled the same Chinese population to produce three successive record harvests during 1982–1984. Both good weather and the higher prices farmers received for their produce stimulated higher output.

Comparing Economic Policies

Many factors influence economic growth. As mentioned before, culture, resources, economic system and policies, weather, the introduction of new technology and physical capital, and the development of human capital-as well as the interactions among these factors-affect economic activity. A single historical comparative study of three economies cannot prove beyond any doubt a proposition about the relative virtues of different economic policies and systems and the relative importance of different economic factors that impinge upon economic growth. But it can highlight differences in economic performance among people of common cultural extraction.

This book seeks to explain why Taiwan and Hong Kong grew much faster than mainland China. Two critical factors in explaining these different rates of growth are the structure of institutions and the effects of different degrees of government intervention in the three economic systems. Growth depends on more than injections of technology and capital. It also depends on the underlying incentives that motivate and reward individual behavior. These incentives are determined by political and economic institutions, which supply rules and mechanisms for enforcing those rules. The key rules include the definition and enforcement of property rights, which encourage improved productivity and the expectation that individuals will be able to reap the rewards of their own work or investments. Political institutions bear critically on the enhancement or destruction of individual incentives.

In addition to the structure of institutions and the presence of incentives, the degree to which free competition exists affects levels of output in each system. For example, economic planners in centrally directed economies may attempt to run an entire economy, but many day-to-day decisions are still made by local decision makers. The planners interfere with, distort, and slow down market forces, but never fully destroy them. They distort, but never wholly eliminate, price information.⁷ In short, interference with market forces and erosion of incentives retard economic efficiency and growth.

The degree of free competition varies widely from one economic system to another. This book compares different degrees of government intervention and free competition in economic markets in three Chinese-populated societies. It compares the extent to which markets were regulated and how differences in public policies and practices affected output in these markets.

Markets exist in all economies, regardless of the degree of government regulation that is exercised. A market is a place or device enabling people to negotiate exchanges. In a market, individuals or firms buy or sell whatever goods and services may be available. Buyers and sellers conclude their exchanges after settling on a price, which is typically expressed in the units of some currency, unless goods are rationed by coupons or allocated by some other nonprice mechanism that might include instructions from state planning officials. Prices signal to both producers and consumers the relative worth of any given item compared with any other item. When the price of any item goes up, producers tend to supply more of that item and consumers tend to demand less. When the price declines, the reverse happens. Sometimes prices are set by the state and are not free to move in response to changing demand and supply conditions, which often produce surpluses or shortages.

Markets not only allow individuals to exchange the goods and services they produce for those they want; they also allocate resources for the society as a whole. People interacting in markets determine what products and services are provided within a society and how much of each is produced, although the government often dominates these decisions in centrally planned economies.

The objective of any economic system is to produce the largest possible supply of goods and services from an existing stock of natural and human resources: This is the notion of maximizing economic efficiency. Another objective of any economic system is to increase output from one year to the next, thus raising living standards: This is the notion of growth. Thus it makes sense to adopt policies that increase efficiency and yield high growth. However, some governments emphasize egalitarian or other nonmaterial values and are willing to trade off some efficiency and settle for slower growth in exchange for greater equality in the distribution of income or other social goals.

The notion of a free-market economy is a simplified model employed by economists, a point that is helpful in understanding the concept of economic efficiency. In a free-market economy, the government does not interfere with the prices established by market forces-the supply and demand conditions resulting from millions of individual decisions to buy and sell-nor does it protect existing firms from the pressure of competitors. New producers are allowed to compete with existing ones, and existing producers are allowed to go out of business if they wish. In a free market, prices reflect true scarcities, thus enhancing the efficient use of scarce resources. However, only in exceptional cases are markets completely free of all government regulation. Still, there is considerable variation in the degree of competition and the degree to which relative prices reflect relative scarcities, and thus efficiency, in different economies.

Of course, markets do not exist in a vacuum. Somebody has to define property rights, enforce contracts, and protect people from fraud. The responsibility for these tasks falls upon government. Government comprises the legally based institutions of a society that make legally binding decisions. With a legal monopoly on coercion, government officials have the power to tax and regulate economic activity to attain a variety of national objectives. These may include preventing monopolies, cleaning up pollution, provisioning a standing army, negotiating international treaties, redistrib...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• CONTENTS
• List of Tables
• Preface
• 1 Introduction
• PART I MAINLAND CHINA
• PART II TAIWAN
• PART III HONG KONG
• PART IV THREE ECONOMIES
• Appendix: Economic Statistics
• Bibliography
• Index
• About the Book and Author
• Series Page