Globalisation, Transition and Development in China

Rui Huaichuan

• Publisher: Routledge
• Year: 2004
• ISBN:
  9781134318049
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

Based on extensive original research, Globalisation, Transition and Development in China explains China's development strategy and its underlying forces, and the success of this strategy. It examines China's gradualist approach which emphasizes development first and regards transition and globalization as secondary, enacting liberalization of domestic markets and integration into the world economy in a paced way, avoiding dramatic changes which might impede or even reverse development, and argues that this approach is broadly correct. It considers China's failures, including the failure to build large globally competitive corporations despite the intention to do this, and shows how China's economic strategy has been implemented in detail with a case study of the large and important coal industry.

1
The challenges facing China

Development is a task of prime importance for the CCP to execute power and develop the country’s prosperity.

The 16th CCP Congress Report

Introduction

A challenge, by its nature, is something that one must confront. Reviewing China’s history of development during the last two decades and looking forward to the future, it is clear that numerous issues have to be dealt with. The most important of the challenges that China has to confront can be broadly thought of in three different categories. First, the challenges that arise from development – from the current state of relative underdevelopment. Second, those from transition – moving from the legacy of the previous command economy to a market economy with Chinese characteristics. Third, those from globalization – from the closed door to close integration with the world economy.

By way of introduction, the next three sections of this chapter will examine why these three challenges are the most important ones that China must confront. The final section will then examine what the inter-relationship between these three challenges is and why the state still has a crucial role in dealing with them.

Development

‘Development’ can be understood as a concept very broadly. In his dissertation, Conceptualising Development, Clark (1999: 31–2) listed at least 30 abstract concepts of development employed in economics and the social sciences. Development in this study, however, mainly focuses on ‘economic development’, simply thought of as an improvement of people’s living standard, which is generally accompanied by a reduction in absolute poverty.

Over the years the Chinese people have paid a high price in realizing that development is a supreme challenge, and that it must be striven for, but in an acceptable way. When the Chinese Communist Party (CCP) took over power in 1949, Chairman Mao commented that old China was ‘poor and blank’ (yiqiong erbai). The country was in a bad state after years of civil war, foreign intervention and invasion. Mao, like nearly all of the Chinese, had a very strong ambition to turn China into a wealthy and powerful state. With the background of the ‘cold war’ and central planning based on Soviet experience, Mao soon concentrated on developing heavy industry which tended to eclipse the importance attached to light industry and agriculture. Although some dramatic progress was undoubtedly made under Mao’s regime (see, for example, Bramall 1989, 1993), his policy as a whole failed to improve people’s living standards to the level originally hoped for, especially for the rural population (Breth 1977; Perkins 1994; Yao 2000).¹ And undermining some of the positive steps forward, Mao encouraged the nation’s population growth², and this now fundamentally constrains China’s development (Banister 1987). Mao was also a believer in ‘big bangs’. During his regime ‘mass movements’ were frequently initiated. Some of these, such as the Great Leap Forward and the Cultural Revolution, turned out to be unprecedented human tragedies.

Mao’s achievements and thinking on China’s development led to disillusionment with Chinese socialism. Socialism was described by Marx and proclaimed in Mao’s time as a brilliant egalitarian society where people were all equal (with access according to need to sufficient food, materials, education and public health services). In reality, under Mao’s regime there was overwhelming poverty (especially in rural China). Perversely, inequality, particularly between the urban and rural areas, also existed. Disillusionment with socialism and the sincere wish to make life better created the mandate for Deng Xiaoping to shift China’s development strategy, to transform its socialist command system, and to focus on economic growth and improving people’s living standard. In Deng’s (1992: 370) words, ‘China is such an immense country. Without reform and opening the door, without economic development, without improving people’s life, China could only expect death’. Therefore, ‘only development is the paramount force’ (fazhan caishi ying daoli) (Deng 1992: 377). Reforms since the 1980s have broadly attempted to follow this line of thinking. As 80 per cent of the Chinese are basically peasants, to promote development mainly means promoting the living standards of this group.

Development is a supreme challenge in China basically because of its underdevelopment. An underdeveloped country is identified as having ‘low per capita GDP, labour-surplus, resource-poor variety in which the vast majority of the population is typically engaged in agriculture amidst widespread disguised unemployment and high rates of population growth’ (Ranis and Fei 1961: 533; also see Ghatak 1978; Lewis 1954). The characteristics of underdevelopment that China faced during the early reform period were reflected in a number of important factors.

First, there was the unfortunate combination of relatively limited natural resources, an already dismal state of the environment and a huge and far from stable population (see Smil 1993). Second, over 80 per cent of the population were rural with very low per capita GDP. As Yao states:

By the end of [the] Cultural Revolution, three quarters of the rural population (570 million) lived in absolute poverty and did not have sufficient food to eat or warm clothing to wear. …[R]ural per capita disposable income in 1978 was only 285 yuan in 1990 prices. This was significantly lower than the official poverty line of 318 yuan, and it was much lower than the poverty line of 454 yuan applied by the World Bank.

(Yao 2000: 448)

Third, China had a long history of rural underemployment (Buck 1937, Rawski 1979, Huang 1985). According to Rawski (1979: 124–5), a very important cause of rural underemployment under Mao’s regime was industry’s relatively slow absorption of labour. This in turn resulted from the then government’s development strategy which emphasized heavy industry, and the command economy implemented a resource allocation system, which led enterprises to favour the use of capital rather than labour to expand output. Limited creation of employment outside agriculture forced more labour absorption into the farming sector (this latent pool of labour was later to play an important part in the expansion of TVE coalmines). Agriculture, it is estimated, had absorbed 97.3 million workers between 1957 and 1975, or about two-thirds of the overall labour force increase during these years (Rawski 1979: 125). Perhaps unsurprisingly, available data show that overall factor productivity dropped substantially between 1957 and 1975 in China’s agricultural sector (Rawski 1979: 128). These findings proved that while there was already underemployment in agriculture, the labour absorbed in agriculture was not able to increase productivity but rather added to even more underemployment. The disguised unemployed rural labour force was estimated still to be as high as 100 million by the 1980s (Du 1989: 7; Chen 1989: 212).

After the Cultural Revolution there was a huge debate in China about how best to shape the challenges from such underdevelopment (Naughton 1995: 59–76). The debate ended in April 1979 with a fundamental reorientation of economic development strategy.

The basic idea of reorientation was to reduce heavy industry investment and shift resources to agriculture and consumption, thereby also moving the economy onto a more moderate growth path with less strain on available resources.

(Naughton 1995: 76)

Eventually, quite unlike the earlier Mao campaigns, the relatively modest and silent rural reform was the spark that set development alight. China’s industrial reform did not really fully start until 1984, six years later than agricultural reform.

Some very important literature on the dual economy enables us to understand why this development strategy shift was so important for China’s economic success. Lewis (1954, 1979) firstly pointed out that since the majority of the labour force in less developed countries (LDCs) consists of farm people, who also have the lowest incomes, the standard of living of the great bulk of the population can be raised ‘only by raising farm income’. However, the closely related problem is how to raise farm income when there is a large amount of disguised unemployment crowding the rural market.³

Disguised unemployment means that, even with unchanged techniques of agriculture, a large part of the population engaged in the agricultural sector could be removed without reducing agricultural output (Nurkse 1953: 32). While Nurkse believed that development could be initiated and accelerated in these countries, by forming capital through the employment of redundant rural labour, and by permitting better organization through ‘consolidation of scattered strips and plots of land’ (Nurkse 1953: 33), Eckaus (1955) responded that many underdeveloped nations have less capital than is required.

Lewis (1954) made the greatest contribution to this area of research which was the foundation of all subsequent ‘two-sector’ models. His unlimited supply of labour dual-sector model presents a most important analysis of the relationship between the subsistence and capitalist sectors of the rural population in developing countries. In his model, surplus labour is available in both rural and urban sectors, from subsistence agriculture, casual labour, petty trade, domestic service, wives and daughters in the household, and the increase of population. If the country is over-populated relative to its natural resources, the marginal productivity of labour is negligible, zero, or even negative. Surplus labour is disguised in the sense that everyone is working, but if some proportion is withdrawn, output will not fall; the remaining workers will just work harder.

Why do both rural and urban workers not receive their marginal product but can receive a higher traditional wage? Lewis believed that the average product per worker in agriculture determines the traditional wage. In peasant agriculture, each family member receives the family’s average product regardless of his or her contribution. Since there are no opportunities of receiving a wage higher than the average product on the family’s farm, there is no motivation to leave the farm and the average product will be greater than the marginal product.

However, the inequality between rural and urban income will eventually lead to migration from rural to urban areas, which determines that labour employed in the capitalist sector will also be paid the traditional wage as long as there is a surplus of labour in the subsistence sector. The low and constant wages permit large profits for potential reinvestment in the capitalist sector. The economy grows at a faster rate, because profits grow relative to the size of the capitalist sector and in increasing proportion of national income in reinvestment. The reinvestment in the capitalist sector will take more people into capitalist employment out of the subsistence sector. The surplus is then larger still, capital formation is still greater, and so the process continues until the labour surplus disappears. Meanwhile, the government can assist this transformation in many ways.

The message of the Lewis model is very clear for developing countries. First, development commonly relies heavily on transforming the rural surplus labour force from farm to non-farm sectors, not only in the sense of improving ‘the standard of living of the great bulk of the population’, but also in the sense of the nation’s final industrialization. Second, surplus labour can be used instead of capital in the creation of new industrial investment projects, or it can be channelled into nascent industries, which are labour intensive in their early stages. Third, the government, if it can, should play an important role in initiating and fostering such a transformation.

Ten years later after Lewis’s research, Fei and Ranis (1963: 283) presented a similar strategy for underdeveloped economies: ‘the heart of the development problem [in such an economy] lies in the gradual shifting of the economy’s centre of gravity from the agricultural to industrial sector through labour reallocation’. However, with many other critics of the Lewis model, Fei and Ranis assume that Lewis did not pay enough attention to the importance of agriculture in promoting industrial growth. Thus, the Fei and Ranis model (1964) highlighted three major points. First, the growth of agriculture is as important as the growth of industry. Second, the growth of agriculture and industry should be balanced. Third, the rate of labour absorption must be higher than the rate of population growth to get out of the Malthusian nightmare.

Such criticism is not entirely accurate, as Lewis actually emphasized the necessity ‘to make the countryside economically viable, with a larger cultivated area, with rising productivity on the farms, more rural industry, and better social amenities’. He even claims that ‘it is agriculture which finances industrialization.⁴Nevertheless, these criticisms should be a reminder for developing countries to pay attention to both agricultural and industrial prosperity and the transformation from rural to non-rural development because eventually industrialization is inevitable for further development.

These dual-economy models illustrate the importance of China’s shift in development strategy from heavy industry to improving people’s living standards, for which agriculture and rural development needed more attention. As already stated, the economic development of China took off after that of rural development. The household responsibility system (HRS) first caused a sharp increase in labour productivity, which in turn turned the rural labour force to more productive uses, making the disguised unemployment problem more explicit. Further, township-and village-owned enterprises (TVEs) were encouraged to grow. Since the labour force used by TVEs was ‘disguised unemployed’, so their withdrawal from agriculture did not cause agricultural output to decrease. By contrast, ‘[g]rain output increased from 305 to 407 million tons over the period 1978–84. Real per capita income more than doubled’ (Yao 2000). Moreover, the TVE sector was allowed to develop and, by the early 1990s, became more important than the agricultural sector in terms of output value. By 1995 ‘about 29 per cent of the total rural labour force was employed in the rural non-agricultural enterprises, while 56 per cent of the value of national industrial output was from the rural industrial sector’ (Meng 2000: 36). Finally, the industrial sector had also been developed by absorbing cheap labour and raw materials from agriculture and now by being forced to compete with TVEs.

Clearly, rural development, rural–urban transformation and TVE development were keys to improving economic development and people’s living standards, and thus instrumental in the success of reforms in China.

However, the challenge from the force to promote development is still critical in the twenty-first century. First, the level of development in China is still very low. By 2000, the average per capita GNP was $840, below the $1,230 for low-medium income countries, and far below the $5,170 world average, ranking 141 in the world (World Bank 2002: 19–20); the net annual rural income was only $194 (SSB 2001); and 114 million people still lived below the poverty line (Yao 2000).

Second, by 1999 there was still a labour suplus of 120 million in rural areas and population growth would lead to a predicted additional 28 million between 2000 and 2004 (Shi and Zhao 1999: 50). It is predicted that rural underemployment will become more serious in the future as demand for labour will decrease. The capacity of TVEs to absorb the rural labour force may decline because they have seen limited development since the mid-1990s and there is no guarantee that their rapid growth will resume. The increasing capital intensity of, and the technological innovations adopted in, the agricultural sector will also lead to less demand for labour. There is also a trend for the urban industrialized sector to absorb less rural surplus labour because of its increased use of more advanced technologies. Moreover, these last two trends will very likely be strengthened due to the impact of China’s joining the WTO.

Third, in the past, economic development in China, though impressive at times, has seemed unsustainable. China is currently meeting the daunting population challenge by producing 360 kilograms of grain per capita, but the extent to which it can do so sustainably into the future, and the extent to which the agricultural sector will promote broader development, will depend greatly on the success with which current land-tenure reforms are carried out (Prosterman 2001: 80). In addition, it depends on the effectiveness of dealing with those consistent ‘old’ problems such as land degeneration, deforestation and air pollution (see Smil 1993).

Finally, past economic development has also incurred new challenges for improving human, social and political development. Rapid income growth in China has been accompanied by rising inequalities. According to official estimates, China’s Gini coefficient rose to 0.45 by the end of the 1990s (Ma and Wang 2001: 43). Before economic reforms China was a more egalitarian society. Twenty years later income inequality is on a par with the income inequalities of her neighbouring countries in east Asia and the Pacific region (Yao 2000: 5). The rural–urban income gap has been responsible for half of the increase in inequality since 1985 (World Bank 1997a: 2–3).

It is commonly agreed by China’s policy-makers that these remaining challenges imply that the country must make a greater effort to improve its rural development:

In early industrializing countries, during the development period when their per capita GDP was over US$1000, they usually implemented policies that completely supported industrialization by giving...