Chinese Economy

Margaret C. Simms, Wolfgang Klenner

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000159905
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Handelspolitik

This study deals with changes in the Chinese development strategy since the end of the Seventies. It examines the main characteristics of the previous development policy, the reasons for the change in orientation and the new aspects that have emerged, and analyzes China's new foreign trade policy.

CHAPTER 1

CHANGES IN DEVELOPMENT POLICY

1. At the end of the seventies China’s economic policymakers decided on a development strategy that differed in important respects from the policy followed previously. For example, expansion of the output of consumer goods and the raising of private incomes were to become the focus of development efforts and the extensive decentralisation of economic decision-making right down to the production unit was to provide scope for plant initiatives, although the central authorities would not be relinquishing control over the economy.¹

The Chinese leadership brought about this change in development policy because certain economic problems with which they had been wrestling for some time could not be solved by means of the previous development plan; indeed , some of the problems were being caused by the plan itself. They also felt that their ambitious development goals could not be achieved under the previous policy.

The reasons for the change in development policy and the objective it served are examined more closely in the analysis that follows. First, however, the main characteristics of the previous development policy and their consequences shall be discussed.

I. Characteristics of the previous development policy and its consequences

2. The development concepts with which China’s economic policy-makers experimented until the second half of the seventies show distinct differences in certain respects. For example, at the beginning of the fifties the government first attempted to get a grip on the economy by means of the strictest centralisation possible. At the end of the fifties, by contrast, the authorities wanted to involve the ‘‘masses” in the development process by delegating much of the power of decision to lower administrative levels¹ and to cast off the cloak of underdevelopment once and for all in a “great leap forward”. There were too many failures, however, so that in the early sixties a programme of consolidation was begun which again gave the central authorities greater scope for decision-making. The Cultural Revolution, which began in the second half of the sixties, brought renewed shifts in power and changes in the direction of policy:² influence over economic decisions came to be exercised mainly by ideologically inspired party officials in the lower regional administrative units.³

3. For all the differences, the concepts did have points in common, however. For example, in almost all the phases the proportion of national income devoted to capital formation was very high by international standards. For many years China’s investment ratio was well over 30 per cent and in some periods even exceeded 40 per cent of the material national product.⁴ (In China, as in the other centrally-planned economies, the national accounts are drawn up in accordance with the system of material product balances. The material national income is comparable with the net national product at factor cost less the value added of a few branches in the services sector, but is not identical with this aggregate.¹) By way of comparison, India’s investment ratio stood at 24 per cent in 1973.²

4. Investment was channelled mainly into heavy industry. As a rule, more than 50 per cent of state gross fixed capital formation went into the development of this sector.³ It also had a prior call on other national resources, because economic progress was equated with indus-trialisation, which at that time was generally held to be determined by the level of heavy industrial production, particularly steel output.

5. In keeping with the policy of large-scale investment and the priority given to the development of heavy industry, incomes policy measures provided little scope for wage increases. The bulk of the growth in national income was used to expand the nation’s capital stock and not to raise private incomes. The per capita incomes of the urban and rural population therefore showed only small rates of growth.

6. Another characteristic of the development concepts pursued hitherto was the very limited use of foreign resources to develop the economy. China feared that excessively close economic ties with other countries could place her in a position of dependence that would lay her open to economic and political blackmail and make it difficult for her to follow an independent development path. Hence for many years foreign trade was no more than a stop-gap. For the same reason the level of imports was determined by the amount of foreign currency earnings; the leadership also had strong reservations about external debt, not least for historical and ideological reasons,

7. It is less easy to recognise common features in the organisational policies pursued under the different development concepts, but they are there nonetheless. Although the division of economic powers among different administrative levels (central government, provinces, cities, districts and people’s communes) was repeatedly re-organised, production units always remained bound by the directives of the economic administrators and had very little scope for taking their own decisions. A further constant was the fact that the prices at which enterprises purchased their intermediate inputs or sold their products were essentially set by the administration. In these circumstances decentralisation occurred only within the economic administration machine; there was practically no change in the degree to which production and trading enterprises were dependent on the relevant central ministries or local bureaux.

8. The previous development policy enabled China to achieve remarkable success in heavy industry, in other words in the area on which most of the development effort was concentrated. Between 1952 and 1980 the output of coal rose ninefold, the generation of electricity by a factor of 40, the production of raw materials by a factor of 27 and cement production by one of 26.¹ China is now well up among the leaders in the world league table for these commodities; she occupies third place in the worid in the production of coal, primary energy and cement, fifth in raw steel output and ninth in the production of crude oil.

9. By contrast, production figures were unsatisfactory in the consumer goods sector, in which relatively little was being invested. In many years the increase in production was so low that with the rapid population growth¹ there was no notable improvement in the standard of living. For example, in 1978 the allocation of grain per head of the population was not much higher than in the mid fifties.² The supply of other food stuffs also remained very low; for instance, the annual per capita consumption of meat came to only 8.5 kg in 1979, as against 110-120 kg in the USA.³ Edible oil and sugar were also in short supply; at the end of the seventies the annual consumption of sugar came to little more than 2 kg per head (as against 30 kg in Japan and 8 kg in India⁴) and even this low level could be reached only by importing considerable quantities. There were shortages of textiles, which were still rationed. In 1979 quotas of cotton cloth were little more than 5 metres per head (corresponding to less than 40 per cent of the world average) and were barely more generous than they had been in 1969.⁵ Supplies of many consumer durables such as bicycles clocks, radios and furniture were also totally inadequate.⁶

10. The long-standing shortages in the consumer goods sector actually became a hindrance to development at the end of the seventies. The population had foregone consumer goods and made great development efforts for so many years that they finally wanted to share in the fruits of industrialisation and would accept no further postponement of consumer spending. This imposed distinct constraints on the previous development policy, with its emphasis on the highest possible investment in heavy industry, so that the economic policymakers were forced to revise their thinking.

11. A further incentive to change lay in the lack of significant success in achieving continuous and balanced economic growth. Phases of economic progress were all to often followed by periods of serious setbacks. Admittedly, these setbacks can be attributed largely to natural causes in a country that is still as heavily dependent on agriculture as China, but battles over the direction of policy also had a prejudicial effect on the economy because of the close links between politics and economic activity in china. In the main, however, the reductions in growth rates were probably caused by the specific priorities of the old development strategy.¹

It was not only the consumer goods sector that was in a bad way; other important sectors and branches were also neglected because the authorities had such a one-track interest in spectacular rates of growth in selected branches of heavy industry and consequently paid insufficient attention to links with other sectors and industries.² The result was economic imbalance, which repeatedly stunted growth in past decades. By 1978 the imbalance had become so serious that it was doubtful whether the previous development strategy had any sense at all.³

12. Growth in industry, which is still heavily dependent on agricultural inputs, was for example limited by the poor production figures for the neglected agricultural sector. The imbalance between sectors producing and raw materials on the one hand and manufacturing industry on the other also had a dampening effect. Shortages in the supply of fuels, energy and raw materials meant that even the manufacturing capacity that was available could not be fully utilised. There was also a shortage of transport capacity which impeded the division of labour between enterprises and between regions and hampered the realisation of specialisation advantages and productivity gains. In these circumstances a continuation of the previous policy would have been risky and might have foundered for lack of co-operation from the underpaid population.

13. The all-important organisational concepts also had to be viewed in a critical light. State enterprises had previously been bound by the directives of the economic authorities covering basically all matters except production itself, such as procurement, sales and investment in additional or replacement machinery. A smooth mode of operation had already proved very difficult in these circumstances, because all too often the economic administrators were ill-informed. Moreover, neither the economic authorities nor the enterprises were obliged by market mechanisms to match production to demand; as a consequence, many enterprises produced goods for which there was no demand, thus exacerbating the imbalances (paragraph 58).

As the economic interdependence among sectors grows in line with increasing development and specialisation, the retention of this organisational structure promised to magnify the problems that had already arisen. It was therefore realised that decentralisation of the economy right down to the level of the enterprise was urgently required if China was to enjoy steady growth.¹

II. The re-orientation of development policy

14. In order to come to grips with the hitherto unsolved development problems, China’s economic policymakers decided to change their development priorities and drew up a catalogue of procedural measures from which they expected quite specific development effects. These measures are to be accompanied by organisational reforms designed to give market forces an important role in the economic process and in this way create the conditions necessary for continuous, smooth and demand- oriented growth. The individual measures are described below.¹

1) New development priorities

15. A larger share of national income than hitherto is to be made available for consumption by significantly reducing the investment ratio. Whereas at the end of the seventies investment still accounted for more than 36 per cent of the material national income, the proportion is to be cut to little more than one-quarter.²

The economic policymakers assume that with the present strong economic imbalance a substantial investment programme would only have limited growth effects in any case and that investments on the previous scale would simply lead to “overinvestment”. Hence those projects that can be expected to have only a marginal effect on production have been shelved. Concentration on the most profitable investment plans would then create some room for wage increases without causing too great a slowdown in growth.

16. The government believes that the trend rate of growth can even be accelerated by introducing quite specific additional measures which also form a central part of the new development concept. Hence in spite of the reduction in the investment rates, it should be possible to reach a growth path that is steeper than that which could have been achieved if the development strategy had remained unchanged.

17. These measures include changes in the sectoral allocation of resources aimed at increasing the supply of consumer goods quickly and creating a sound infrastructure. Light industry and agriculture are to receive more investment funds than previously and are also to receive preference in the allocation of other resources. The transport sector, residential construction, the education system and the health system are also to be expanded more strongly than before in order to create the essential prerequisities for smooth long-term growth by establishing an infrastructure in the widest sense of the word. By contrast, there is to be a dramatic reduction in the funds provided for branches or heavy indus...