China's Economic Transformation

Gregory C. Chow

• Publisher: Wiley-Blackwell
• Year: 2014
• ISBN:
  9781118909942
• Edition: 3
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

Now available in a fully-revised and updated third edition, this established textbook provides a penetrating and comprehensive analysis of the historical, institutional, and theoretical factors that have contributed to China's economic success.

• Includes coverage of China's foreign investments, trade with regional partners, Chinese human capital, and bureaucratic economic institutions
• Covers a diverse set of important issues, including environmental restraints, income distribution, rural poverty, the education system, healthcare, exchange rate policies, monetary policies, and financial regulation
• Accessibly written and intelligently organized to offer a straightforward guide to China's economic evolution
• Written by a lauded economist, researcher, and advisor to government officials in mainland China and Taiwan

Part I
Historical Background and General Survey

1
Economic Lessons from History

---

One event is selected from each major dynasty in China’s history to provide important lessons for understanding the present-day Chinese economy. The period of the Republic of China since 1911 is discussed in more detail to provide a historical-institutional setting for the current economic system. A list is provided on what history can teach us about the present-day Chinese economy.

---

1.1 Introduction

China’s economy has become a leader of the world economy. The country has close to 1.4 billion people or almost a fifth of the world population. The national output is the second largest in the world and will exceed that of the United States by 2020. The rate of growth of total output was about 9.5 percent per year up to the world economic recession beginning in 2008 and remained much higher than that of the United States afterwards, making China the most important force driving the world’s economic recovery. Hence it is interesting and important to understand how the Chinese economy has evolved and how it functions today.

In this book we apply the theory and method of economics to understand the Chinese economy. We will study the dynamic process of China’s economic transformation and growth. What historical forces drove China to a planned economy from the 1950s to the late 1970s? How did the planned economy work? What were the reasons and driving forces for economic reform since 1978? How did such dramatic changes occur after the economic reform? Why was China successful in transforming a planned economy to a market economy? To what extent is the Chinese economy a market economy? How do different economic institutions in China function today? What economic laws are at work to explain the functioning of various aspects of the Chinese economy? What are the current economic problems? What are the prospects of China’s future development?

In this chapter, we will present some important historical facts of China together with interpretations of these facts from the viewpoint of economics. Since the history of China is often described by the dynasties we will select the important facts selected from the major dynasties. At the end of this chapter we will provide a list of important questions about China’s history which a student of the Chinese economy should ask in future study. The main part of this chapter discusses what we have learned from history. The last section discusses what we can and should learn from history.

China has the longest living civilization, with a written language that can be traced back to 3000 BC. Throughout Chinese history, we can find examples of economic laws at work, of how people tried to improve their economic well-being or to maximize their satisfaction or profits. We can also find evidence of the market economy at work and of a deep understanding of it on the part of the ancient Chinese. It is the purpose of this chapter to draw several economic lessons from China’s history and from some recent historical events that have affected the development of the Chinese economy. In section 1.2 I will select one important event or example from each major dynasty. In section 1.3 a more detailed account will be given for the period between 1911, when the Republic of China was established, and 1949, when the People’s Republic of China was founded, because the history of this period is more relevant to the present-day economy. In chapter 2 a historical and institutional account in even greater detail will be provided for the period after 1949, in order to provide a setting for the discussion of economic reform introduced in 1978.

1.2 Significant Events in Major Historical Dynasties

China’s history went through different dynasties. The people were ruled by an emperor. In theory the emperor was supposed to have received a mandate from heaven to rule. In practice the rule was established by military conquest, but the ruler was guided by a moral principle to be kind to the people, and could remain in power only if he did not deviate too much from this principle. Each emperor was succeeded by his offspring until some successor failed to perform his job adequately and the throne was seized by someone else in a revolution. Then a new dynasty was established. The historians serving in the court of the ruling dynasty wrote about the virtue of its founder, the successful revolutionary, and the vice of the defeated emperor and the previous dynasty. As a familiar Chinese saying goes, “The winner is the emperor; the loser is the bandit.”

1.2.1 Shang, 1900 BC

Although recorded Chinese history preceded the Shang period, I will start there. Visitors to a museum containing ancient Chinese art objects will find the beautifully and delicately engraved bronze vessels of this period. They will also find tortoise shells on which there are traces of writing. The shells were used for fortune-telling. After the tortoise shells were burned they cracked and formed lines that were interpreted for guidance on what would happen and when one should or should not do certain things. The writing on them is a precursor of the Chinese written language in the form of characters. (The fact that the characters of written Chinese are based on the shapes of objects rather than on the sounds of the spoken words, as in European written languages, may explain partly why the Chinese have a different way of thinking, which emphasizes the concrete, in contrast to the European and American tendency to dwell on the abstract and metaphysical.) Such objects show that Chinese civilization was already fairly advanced 4,000 years ago. It will be pointed out later in our study of the Chinese economy that human capital is a very important element for economic development. Human capital means the knowledge and skill possessed by people. The skill that was used by the Chinese people 4,000 years ago to make bronze vessels has been transferred with further improvements through the centuries to current Chinese laborers who make toys and computers. The abundance of skilled labor in China today is an important factor contributing to its rapid development, and so is entrepreneurship, which can be traced back to the training of the mind in ancient Chinese learning and the practices governing human relations in ancient Chinese culture.

1.2.2 Zhou, 1100 BC

Chinese civilization was advanced during the Zhou period. Major Chinese classics were written during this period. These classical works are still read by some people in China today and by most educated Chinese in the first half of the twentieth century. They include the Book of Changes (Yiching), the Book of Poems, and the Book of Li (etiquette). The Book of Changes is available in many Western bookstores. It was designed for fortune-telling and has been found intriguing by modern mathematicians. The Duke of Zhou, author of the Book of Li, was an inspiration to Confucius. At the end of the Zhou dynasty there was the “Spring and Autumn” period, named after a classic of the same title written by Confucius. It was a golden period in the development of Chinese civilization, with diverse schools of thought flourishing. Daoism, for example, advocates inaction, letting nature take its course, and minimum government intervention. Many important ideas about politics, philosophy, and economics can be found in the writings of that period (see Chan 1963).

Confucius’s teaching was only one school of thought at that time, but became dominant in the later part of the Han dynasty. Economists debate today whether the Confucian tradition, which is deeply rooted in Chinese culture, is a positive or a negative factor for the country’s economic development, although no one can deny that it is an important factor. On the positive side, Confucius’s teachings to uphold a high moral standard and to honor one’s commitments are helpful in business transactions. They provide a social order under which a market economy can function. They encourage family ties and trustworthiness among friends, which may form the basis for loyalty in a business enterprise. Confucius valued learning and the acquisition of knowledge, and this may account for the abundance of human capital in China and its neighboring Confucian countries. On the negative side, his thinking is said to promote too much respect for tradition and thus to be a hindrance to progress. The use of personal honor as a safeguard for business commitments might be a poor alternative to a modern legal system – for ethics is considered more important than law under the Confucian tradition. The negative side of respect for social order and family values is the sacrifice of individual freedom and self-interest. Individualism is taken for granted in many Western societies but is not necessarily considered a virtue in China, where social responsibility for the common good is more highly prized.

1.2.3 Qin, 200 BC

When the Zhou dynasty became weak, many regional rulers took control of their territories. The period is known as the period of Warring States, which followed the “Spring and Autumn” period. There were seven states competing for the throne. Among them was Qin, which finally succeeded in unifying China. The successful first Qin emperor standardized written Chinese and the units of measurement for weight and length. He directed the completion of a large part of the Great Wall to prevent invasion from the north. He was a strong ruler, in fact a dictator, who hated dissenting intellectuals and burned many books and killed dissenting scholars. His tomb in the city of Xian is a great tourist attraction. It is over 1.5 kilometers in diameter and is too large, complicated, and structurally protected for the current Chinese government, even with modern technology, to excavate, except for a small part near its entrance. The excavated soldiers in the entrance, who are supposed to protect the Qin emperor in his grave, are a magnificent example of the arts of the period.

The story of the Qin emperor is significant because 22 centuries later Chairman Mao Zedong of the Chinese Communist Party followed some of his examples. In a famous poem surveying China’s history, Mao referred to the Qin emperor with admiration, but was pleased to hint that he would surpass all ancient heroes. Mao succeeded in unifying China in 1949 – a very difficult and important accomplishment in a tumultuous period that we shall describe later in this chapter. In so doing he provided political stability and national pride for the Chinese people. He was a strong ruler. His government simplified written Chinese (over the objections of many Chinese all over the world) and tried to impose one spoken language all over China. China has essentially one written language but many different spoken dialects that cannot be understood by all. He mistreated and sacrificed numerous intellectuals during the periods of “letting one hundred flowers bloom” in 1957 and the Cultural Revolution of 1966–76, sending them to work in the countryside as laborers. He mobilized the masses to build great projects comparable in scale to the building of the Great Wall, such as the commune system in agriculture created in 1958 under the Great Leap Forward movement. To understand present-day China we have to understand Mao’s influence, and Mao himself was influenced by his study of Chinese history, including in particular the history of the Qin emperor.

1.2.4 Han, 206 BC to 220 ad

The Qin emperor was a strong ruler but his son, who succeeded him, was not able to rule effectively. The dynasty ended soon after his death. The next dynasty, the Han, lasted until 220 ad, including Western Han and Eastern Han. For this dynasty I select a passage written by the great Chinese historian Sima Qian (family name Sima), who wrote a book of Chinese history, Records of the Historian. Young (1996: 138) cites and focuses on the following passage from the chapter entitled “The Biographies of the Money Markets.”

There must be farmers to produce food, men to extract the wealth of mountains and marshes, artisans to produce these things, and merchants to circulate them. There is no need to wait for government orders: each man will play his part, doing his best to get what he desires. So cheap goods will go where they will fetch more, while expensive goods will make men search for cheap ones. When all work willingly at their trade, just as water flows ceaselessly downhill day and night, things will appear unsought and people will produce them without being asked. For clearly this accords with the Way and is in keepi...