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The Newsletter of FPRI's Wachman Center
THE RISE OF CHINA'S ECONOMY
by Thomas G. Rawski
Vol. 16, No. 6
June 2011
Thomas G. Rawski, Professor of Economics and History, joined
the University of Pittsburgh's faculty in 1985 after
fourteen years at the University of Toronto. His research
focuses on the nature and implications of recent
developments and long-term changes in the economy of China.
He delivered this paper at A History Institute for Teachers,
March 19-20, 2011 on "China and India: Ancient
Civilizations, Rising Powers, Giant Societies, and
Contrasting Models of Development," held at the University
of Pennsylvania. This History Institute was co-sponsored by
The Foreign Policy Research Institute's Wachman Center as
well as by three centers at the University of Pennsylvania -
Center for East Asian Studies, South Asia Center, and Penn
Lauder CIBER (Center for International Business Education
and Research). [1]
Available on the web and in pdf format at:
http://www.fpri.org/footnotes/1606.201106.rawski.chineseeconomy.html
THE RISE OF CHINA'S ECONOMY
by Thomas G. Rawski
China's remarkable economic boom, now in its fourth decade,
has spawned numerous discussions of "China's Rise."[2]
Beijing's self-congratulatory slogan "China's peaceful rise"
has advanced this theme. From a historical perspective,
however, this terminology seems misplaced. Both the Ming
(1368-1644) and Qing (1644-1912) empires occupied key
positions in Asian trade and diplomacy. Crude figures
compiled by Angus Maddison, author of several sweeping
studies of global economic history, show China contributing
nearly one-third of global output as late as 1820. The great
boom of the late twentieth century has enabled China to
regain some of the global economic weight and leverage that
the Middle Kingdom enjoyed during the Ming and much of the
Qing eras.
The industrial revolution pushed European and North American
productivity far ahead of China and India, former giants
whose combined share of global output plunged from nearly
half to under one-tenth between 1820 and 1950.[3] Prior to
1800, Europeans-for example Marco Polo[4]-viewed China as
prosperous and well-governed. As China's relative economic
position eroded, opinions shifted. Both Europeans and
Chinese came to view China as a backward society whose very
foundations-families, beliefs, values-obstructed progress.
Hu Shi (1891-1962), a prominent philosopher who served as
China's wartime ambassador to the United States, summarized
this perspective in Chabuduo xiansheng (?????), a witty
vignette portraying Chinese people as incapable of the
precise thinking needed in the modern world.[5]
China's recent economic boom, along with the success of Hong
Kong, Taiwan, and Singapore, demonstrates that Chinese
culture is not inimical to economic progress. Indeed, the
opposite perspective, which sees Chinese society as
unusually capable of producing individuals who can operate
effectively in market systems, helps to explain China's
historic prominence as well as its recent economic surge.
Early work by the late G.W. Skinner (1925-2008), a brilliant
and innovative Sinological anthropologist, highlights the
economic capabilities of ordinary Chinese before and during
the heyday of European imperial expansion. Chinese
migrants, many of whom "came to Siam almost straight from
the farm," dominated Thailand's domestic and international
commerce. Skinner explains this in terms of cultural
contrasts. In the "Thai universe," shaped by the ecology of
"an underpopulated and fertile land where the requirements
for subsistence were [_] easily obtained. [_] thrift as such
was of limited value, and work for its own sake simply
senseless." The migrants hailed from a different universe:
"the south Chinese peasant lived in a grimly Malthusian
setting where thrift and industry were essential for
survival." Ideology reinforced this divergence: Chinese
struggled for wealth to preserve family and lineage
continuity, while Thai norms frowned on "excessive concern
for _ material advancement." Differences in proverbs tell
the story: for the Chinese, "Money can do all things," but
for the Thai, "Do not long for more than your own share."
[6]
Recognizing the strength of entrenched Chinese interests,
the British forced the Thai monarch to grant them "equal
commercial rights as well as additional privileges" in 1855,
benefits that soon extended to "all the major trading states
of Europe and America." In 1890, "after thirty-five years of
Western free-trading_ under privileged conditions," Chinese
merchants still controlled nearly two-thirds of Bangkok's
trade, more than double that engrossed by the British. In
Siam, as in China and Japan, the domestic business of
European and American firms was invariably managed by "a
Chinese merchant of some wealth, Western training, and
standing in the Chinese community." Chinese dominance
extended even to the rice trade, "the biggest prize of all
in Siam," where "the pioneering Western mills were abandoned
or passed into Chinese hands."[7]
Chinese economic capabilities originated in Chinese village
life. The Ming-Qing era witnessed a rapid expansion of
commerce. Rural households attended periodic markets to
buy, sell, or barter farm produce, labor services, animals,
fodder, handicraft materials and products, household
necessities, and loans, sometimes on a daily basis.[8] The
reliance of these markets on a complex monetary system that
used copper cash for small purchases and silver coin,
ingots, and bullion to manage tax payments and wholesale
transactions injected the variable exchange rate between
copper and silver into the economic lives of all Chinese.
Rural markets were highly competitive: poor but energetic
individuals could enter the commercial world as middlemen,
earning commissions facilitating local transactions.
Written documents occupied an important position in economic
life. Arrangements for short- and long-term labor services,
for renting, mortgaging or transferring land, for selling,
storing, or conveying merchandise, and for marriage,
adoption, apprenticeship, and division of family property
routinely involved written contracts. The operation of
kinship groups, mercantile and native-place associations,
crop-watching societies and other private organizations
revolved around complex written arrangements. Both men and
women (who often brought their own funds into their
husbands' households) participated in village-level economic
life. Documents also permeated interactions with the state.
These circumstances placed a premium on literacy and
numeracy, even for humble villagers. In late Qing, literacy
extended to 30-45 percent of males and 2-10 percent of
females-high figures when compared with pre-industrial
Europe.[9] Age-heaping, the tendency of illiterates to give
their age in round numbers (so that more people identify
themselves as being 20 years old than 19 or 21), is
prominent in many low-income nations, but notably absent in
nineteenth-century China.[10]
While suffering the low incomes, short life expectancy, and
high infant mortality that afflict poor people everywhere,
Chinese villagers attained disproportionate levels of
entrepreneurial capability, organizational skill and
commercial sophistication that often enabled them to out-
compete natives of other Asian countries and even Europeans,
not just in Shanghai and Bangkok, but across wide swathes of
Asia. Colonial authorities in Batavia, Manila, and
Singapore found the services of Chinese to be
"indispensable."[11] These unusual features did not extend
uniformly across China's landscape, but concentrated in
regions with the most extensive development of trade. These
included the lower reaches of the Yangzi River, which formed
the hub of domestic commerce, as well as the southern
coastal provinces of Fujian and Guangdong, the source of
large-scale overseas migration.[12]
These regional differences persist. Chinese executives
report wide regional variation in manufacturing capability:
"Managers at a leading maker of auto parts were only able to
produce products that were less 'quality demanding' in their
inland facilities. _ [where] efforts to raise standards
encounter broader cultural obstacles."[13] Even though
massive infrastructure growth has reduced economic distances
between inland cities and China's ports, foreign investments
cluster along the coast. Speaking in 2008, Commerce
Minister Chen Deming emphasized the regional imbalance in
commercial expertise, promising to "help set up centers to
train business brains in East China for the central
region."[14]
During the nineteenth century, growing pressure by
expanding European powers, later joined by the United States
and Japan, led to a procession of "unequal treaties" which
compelled China to cede territory and authority to avoid
open warfare with the militarily superior imperial powers.
While the resulting erosion of Chinese sovereignty created a
lasting sense of grievance, the economic consequences of the
"unequal treaties" were broadly beneficial. The free trade
regime imposed under the 1842 Treaty of Nanking lasted
nearly a century. Even though free trade imposed costs
associated with unrestricted imports of opium,[15] Peter
Lindert conjectures that "common folk were among the
greatest gainers" from China's growing exports of labor-
intensive commodities-tea and silk in the nineteenth
century, cotton textiles in the twentieth.[16] Treaty
provisions allowing foreigners to reside, trade, and, after
1895, to operate factories in an expanding roster of open
ports accelerated the inflow of new technologies and
ideas-among them telegraph, steamships, railways, new-style
banks, company law, and advertising-that contributed to
long-term economic modernization.
Despite these supportive circumstances, sustained growth was
slow to arrive. To be sure, the Taiping Rebellion of
1851-1864 inflicted massive damage, turning some prosperous
regions into wastelands. But what of the 40-plus years
between the suppression of the Taipings and the Qing
collapse of 1911? One might expect that the combination of
political stability, open and competitive trade, and a
government moderately supportive of reform would have
kindled substantial economic advance, especially with the
extra momentum that recovery from war often provides. But
available materials do not encourage this line of thinking.
Nor do we have a clear idea of what structures or forces
might have limited economic advance during the final Qing
decades. The list of possible constraining factors includes
the difficulty of building momentum in a large economy and
the state's tiny fiscal resources-each quite different in
Japan, as well as China's lack of readily accessible coal
deposits.[17]
Despite domestic political instability and mounting Japanese
incursions, the decades between China's 1911 revolution and
the outbreak of the Sino-Japanese war in 1937 finally
delivered a marked economic upswing. Manufacturing grew
steeply, albeit from a tiny base, along with components of
the urban economy. These gains spilled into the much larger
farm sector, as urban factory growth raised the demand for
cotton and wheat, expansion of transport networks enlarged
markets for rural products, and banks experimented with
retail farm lending. Rising wages in textiles and coal
mining, occupations that attracted unskilled rural migrants,
and in agriculture itself attest to modest but definite
increases in agricultural productivity and incomes, changes
that affected the majority of China's vast labor force.[18]
The outbreak of war in 1937, followed by a steeply rising
inflationary spiral, imposed a double blow that reversed a
quarter-century of economic advance, but not before new
institutions had demonstrated their strength by cushioning
China's economy against the worst consequences of the global
depression that began in 1929. Although large outflows of
silver, the foundation of China's pre-war currency system,
threatened to tip China's economy into a deflationary
downdraft, China's private bankers, operating without the
benefit of official regulation or support, persuaded their
fellow citizens to increase their reliance on private
banknotes and deposits with the result that the money stock
actually increased during the 1930s. This contributed to the
surprising resiliency of China's economy, and limited the
depth and duration of the decline in prices, wages,
investment, and output, all of which were far smaller than
in many other nations.[19]
PEOPLE'S REPUBLIC OF CHINA ESTABLISHED
Following Japan's surrender and the conclusion of the
ensuing civil war, leaders of the newly established People's
Republic of China faced a poisonous cocktail of runaway
inflation, budget deficits, and widespread reluctance to
hold currency or bank deposits. These difficulties were
quickly resolved despite the added complication of China's
October 1950 entry into the Korean War.
Buoyed by this initial success, China's new leaders
redirected their economic efforts toward growth. Their
actions reflected the widespread mistrust of private
enterprise and international markets common among low-income
nations at the time. China's alliance with the Soviet Union
and confrontation with the U.S. strengthened the tilt toward
planning, public enterprise, and isolation from global
markets. The design of China's economic plans followed
Soviet example (as did India's): concentrate resources in
industries that can ramp up domestic capacity to expand
industrial investment. As in the USSR, raising output of
"machines to produce machines" became the key goal. This
trajectory called for large-scale expansion of steel,
electricity, mining, machine-building, and related
industries, along with a supportive educational and research
infrastructure. Planners viewed higher consumption as a
cost-essential (in small quantities) to preserve
incentives-rather than a policy objective.
The effort to channel resources toward industrialization
posed difficult choices for rural policy. Raising crop
purchase prices could increase farm output and incomes, and
provide new opportunities for resource transfer, but only if
investment in consumer goods and farm equipment sufficed to
maintain farmers' incentives. Alternatively,
collectivization might enlarge the available surplus farm
products without shifting investment away from priority
sectors. Farm policy vacillated between these poles until
1958, when Mao Zedong's personal intervention shifted policy
decisively toward collectivization. Farmland, tools,
livestock, and rural labor were hastily absorbed into large
"People's Communes," amid an intense campaign to raise
output of grain and steel. This "Great Leap Forward"
shattered administrative routines, wasted vast resources,
undermined work incentives, and triggered a man-made famine
that cost 30 million lives. To make matters worse, growing
friction between Beijing and Moscow prompted the USSR to
withdraw its technical support, crippling numerous
industrial projects.
Soon after economic planners managed to restore some
semblance of normal economic functioning, Mao Zedong
intervened again to promote another disruptive political
movement, the "Cultural Revolution," which began in 1966.
Economic costs, although far smaller than during the "Great
Leap," were considerable, especially in education, where
colleges and schools either shut down or abandoned normal
standards for up to ten years.
The death of Mao Zedong in 1976 was widely seen as a turning
point for economic policy. People were not satisfied.
Despite important economic achievements in growth,
industrialization, technology (including nuclear weapons and
space exploration), and human development (rising literacy,
declining infant mortality, control of infectious diseases),
China's socialist system had fallen short in two key
dimensions. The commune system failed to solve China's food
problem: as one local leader put it "hunger suddenly emerged
without warning [in 1959] _ For the next twenty years, the
problem of hunger was part of our lives."[20] Furthermore,
the country lagged far behind the economic achievements of
neighbors whom most Chinese viewed as inferior: defeated
Japan, colonial Hong Kong, Kuomintang-controlled Taiwan.
REFORMS IN THE 1970s
In reviewing the astonishing outcome of the reforms begun
during the late 1970s, it is essential to recall their
modest scope. The initial effort included three components.
Impoverished localities began to experiment with household
farming. Four new Special Economic Zones in the southern
coastal provinces of Guangdong and Fujian exposed a sliver
of China's isolated economy to international trade and
investment. Government-owned urban firms could now retain a
modest share of profits as an incentive to "enliven state
assets"; revived markets for industrial inputs and products
provided an outlet for retained profits.
The agricultural initiatives met with instant success.
Farmers raced to abandon collectives and reinstate household
cultivation. Massive (and completely unexpected) increases
in agricultural production raised farm incomes and improved
the diets, energy and productivity of villagers everywhere.
Rising farm output swelled exports and curtailed food
imports, eliminating long-standing concerns over the
availability of food and foreign exchange supplies. The farm
boom disgorged new supplies of industrial materials (grain,
cotton, sugar, fruit) and revealed vast surpluses of rural
labor. Together with rising rural demand and increased
access to urban markets and expertise, these changes fuelled
an explosive boom in rural industry.
Results of the trade initiatives also dwarfed expectations.
Initial prospects seemed limited because the managers of
China's special zones, unlike their counterparts in Taiwan
or the Philippines, lacked international experience. But the
opening of trade zones coincided with growing pressure from
higher wages and land prices on the cost of labor-intensive
exports originating in Taiwan and Hong Kong. These exporters
began to shift operations to the mainland, where the new
combination of abundant low-cost labor with the knowledge,
skills, and experience of Hong Kong and Taiwanese
entrepreneurs generated an export boom that soon launched
China from self-imposed isolation into the developing
world's largest recipient of foreign investment.
Looking back, it now seems evident that the unexpectedly
large payoff to modest reforms in agriculture and trade owed
much to the legacy of human capital accumulated within China
and among overseas Chinese during the decades and centuries
prior to 1949. While "agricultural projects in East Africa
_ suffer from a shortage of well-trained African accountants
_ [who can manipulate] a simple cost-accounting system,"[21]
Chinese villagers quickly mastered the complex record-
keeping demands of the commune system. Once reform began,
the supply of managers and accountants easily accommodated
massive expansion of township and village enterprises, which
mushroomed to encompass 18.5 million firms with 92.6 million
workers and over $10 billion worth of goods procured for
export in 1990.[22]
Urban reform turned out to be far more complex. Vast swathes
of Chinese manufacturing were creatures of the plan that
lacked any market heritage. Furthermore, urban reform cut to
the core of Chinese socialism, which, despite its rural
background, had long focused its attention on the
development of cities and the welfare of urbanites. Chinese
leaders entered the reform process with vague notions of
improved economic performance rather than clear objectives.
At the same time, entrenched party and bureaucratic
interests eliminated any possibility of sweeping reform.
This turned the transformation of China's urban, industrial
economy into a lengthy process that gave birth to the
distinctive features of Chinese gradual reform.
With "big bang" reforms of the sort attempted in Russia and
Eastern Europe neither feasible nor, in the view of Chinese
leaders, desirable, urban reform evolved as a series of
policy experiments and initiatives, decentralized responses,
and official reactions. At the outset, Deng Xiaoping and
his reform-minded colleagues sought to improve outcomes
rather than to pursue a clear vision for China's post-reform
economy. Because Chinese planning was relatively
decentralized, with provincial and local leaders enjoying
greater authority and control than in the Soviet Union,
central reform initiatives typically focused on enabling
measures that broadened the opportunities and choices
available to enterprises and lower-level governments.
Instead of eliminating price controls, China gradually
raised the share of sales transacted at market prices.
Rather than privatize, a growing range of firms began to
issue shares. Production planning did not vanish, but its
span of control gradually diminished.
This open-ended approach invites decentralized reactions
that the center cannot fully anticipate or control.
Governments at all levels become participants; sometimes
even followers, as well as leaders of reform. Reform unfolds
as a process replete with interactions among governments,
enterprises, workers, and consumers rather than as a
sequence of events in which the state imposes decisions on
businesses and individuals.
UNFORESEEN OUTCOMES
The heterogeneous nature of China's pre-reform system meant
that the effect of Beijing's reform initiatives was far from
uniform. The uneven impact of enabling reforms destabilized
outcomes and intensified competition. Competition reduces
profits. In socialist China, government agencies and state-
owned enterprises, which controlled the bulk of capital
assets, suffered mightily. The steep decline in
government's share of national product during the 1980s
illustrates the importance of unforeseen outcomes. Some
enterprises reacted to financial pressures by developing new
products, trimming costs, and raising productivity. Others
bombarded their official sponsors with claims of "unfair
competition" and pleas for financial assistance.
Supervisory agencies, short of funds because of the slow
growth in their revenues from profits (or taxes on profits),
often found it easier to respond with further reform
initiatives than with cash.
In this way, Chinese reform created a "virtuous cycle" that
enabled myriad small reforms to cumulate into substantial
institutional change. Reform expanded competition and
created financial pressures that spurred some participants
toward innovation, resulting in further intensification of
competition. Even when financial pressures resulted in
lobbying rather than innovation, the typical response
involved further partial reform, which unleashed fresh
rounds of competition.
This system produced an odd structure in which the balance
between plan and market varied widely for different official
agencies, regions, enterprises, and households. Variation
allowed participants to weigh their own prospects under each
system. As Susan Shirk has shown, the result was a gradual
shift of opinion toward preference for market outcomes that
culminated in the China's Communist Party's 1993 decision to
pursue a "socialist market economy with Chinese
characteristics." [23]
Comparison of circumstances in 1993 with the recent past
shows that subsequent development has followed the track
established by the 1993 decision, under which government was
to undertake macroeconomic management, regulation of health,
environment etc., and setting strategic priorities for the
economy, leaving other decisions to the market. The shift
from plan to market continues: the share of industrial
output originating in state-owned or collective firms that
are subject to strong official controls plunged from 81.7 to
11.0 percent between 1993 and 2008. The move from public to
private ownership has accelerated, with the share of
domestic private firms and firms with offshore investment in
industrial production leaping from 18.5 to 56.4 percent
during the same period.[24] Continued movement from
isolation toward global involvement is also clear: between
1993 and 2008, annual two-way trade advanced from $195.7
billion to $2.56 trillion, China's trade ratio (combined
exports and imports as a percentage of GDP) rose from 28 to
around 60 percent, incoming foreign direct investment jumped
from $28 to $92 billion, and China emerged as a substantial
source of outbound direct investment, with annual flows
rising from $4.4 billion in 1993 to $52.1 billion in
2008.[25]
These important structural changes occurred amid a further
acceleration of growth that has pushed the leading edge of
urban prosperity into new territory, with affluent
households now able to afford luxury housing, private
automobiles, international travel, and overseas schooling
for their children. Strong momentum has enabled China's
economy to power through sharp setbacks from the
international financial crises of 1998 and 2008/09 as well
as the 2003 SARS epidemic.[26]
REFORM SUCCESS
One vital ingredient in China's long-term reform success
came from domestic policies that pushed aside major
obstacles to improved economic performance by improving
incentives and allowing increased entry, competition,
mobility, and price flexibility. Although these reforms
remain incomplete-private businesses, for example, still
confront formidable legal, administrative, and institutional
barriers-they created sufficient momentum to overcome the
friction and drag linked to a host of less critical
inefficiencies associated with price distortions, imperfect
markets, and institutional shortcomings (for example in
banking, property rights, and corporate governance)-all of
which retarded growth and increased its cost without
endangering the ongoing boom.
The combination of Chinese land and labor with the capital
and expertise of Taiwan and Hong Kong industrialists
provided a particularly important boost to exports and
employment during the first decade of reform. China's
coastal regions used the experience and confidence gained
from initial cooperation with Overseas Chinese entrepreneurs
to attract rising investment flows from multi-national
corporations. Foreign investment has powered China's revival
as a great trading nation and contributed to the expansion
of Chinese manufacturing capability (for example, in
automobiles).
CHINA'S FUTURE
What of the future? China's economic prospects appear
strong. Rapid diffusion of education will further improve
its already impressive pool of human resources.
Entrepreneurship flourishes despite remaining barriers to
the expansion of private business. With public interest in
socialist ideology notably absent, China's political elites
understand that continued economic growth is essential to
maintaining their own power; their focus on development is
therefore intense. Manufacturing, the largest and strongest
sector of China's economy, seems poised for further
upgrading, which will benefit from enlarged flows of college
graduates, domestic R&D activity, and new ideas from China's
growing portfolio of international investments.
China's efforts to harvest these promising economic
opportunities must confront formidable obstacles. Although
international media and NGOs tend to exaggerate the dangers
arising from environmental and public health hazards as well
as tensions linked to ethnic and economic inequalities,
these issues pose major challenges, as do corruption and the
intertwined problems of unemployment and (especially rural)
education. The biggest dangers, however, lie elsewhere.
On the domestic side, a largely unreformed investment
mechanism allows government decisionmakers to channel funds
from state-owned banks into state-controlled investment
projects. This relic of Soviet-style planning holds back the
growth of output, productivity, and (especially) employment,
extends a long-standing pattern of grotesque seasonal
fluctuations, creates mountains of bad loans that increase
the risk of financial instability, and truncates expansion
prospects for private businesses (which find themselves
crowded out of financial markets).
On the international side, global market access, which has
made China the greatest beneficiary of globalization,
remains essential to China's future prospects. The recent
economic crisis shows how quickly disruption of overseas
export sales can undercut domestic economic activity (best
measured at the moment by electricity use) and employment
(Chinese economists reckon that the 2008 crisis caused over
40 million layoffs). Imports of energy, materials,
equipment, components, and technology are equally essential.
Chinese plans to grapple with a wide range of pressing
economic issues routinely anticipate unfettered access to
world markets for funds, expertise, and ideas as well as
commodities.
China's continuing growth spurt, now in its fourth decade,
is a major event in world history that has delivered massive
benefits to its citizens, and also to its trade and business
partners, including the United States. Chinese economic
expansion also creates conflict-in the economic sphere
alone, China has become involved in disputes over cross-
national shifts in production and employment, corporate
takeovers, trade imbalances and protection, environmental
hazards, currency valuation, intellectual property, internet
censorship, labor standards, subsidies, and many other
issues.
Beijing's intense focus on building a prosperous Chinese
future, along with China's large and growing reliance on
global markets to promote its economic objectives, tilts
China's international behavior toward cooperation rather
than conflict. Despite the inevitable friction that
accompanies the China's expanding economic, political,
military, and technological strength, this orientation,
which is evident in Beijing's approach to issues surrounding
trade, environment, property rights, and the Korean
peninsula, creates an opportunity for the international
community to adjust to China's expanding power and influence
through mutual agreement rather than armed struggle.
----------------------------------------------------------
Notes
[1] The author acknowledges beneficial advice from Lucien
Ellington and two anonymous reviewers.
[2] For example, C. Fred Bergsten et al, China's Rise:
Challenges and Opportunities (Washington: Peterson
Institute, 2008); William W. Keller and Thomas G. Rawski
eds., China's Rise and the Balance of Influence in Asia
(Pittsburgh, U. of Pittsburgh Press, 2007).
[3] Angus Maddison, The world economy: a millennial
perspective (Paris: OECD, 2001).
[4] The Travels of Marco Polo, available at
http://books.google.com/books?id=VovVAAAAMAAJ&printsec=front
cover&dq=travels+of+marco+polo#v=onepage&q=&f=false
[5] For Chinese and English versions, see
http://www.readchinese.net/chabuduoxiansheng
[6] G. W. Skinner, Chinese Society in Thailand (Ithaca:
Cornell U. Press, 1957), pp. 97, 92, 93. 95.
[7] Ibid. 102, 105.
[8] G. W. Skinner, Marketing and Social Structure in Rural
China (Ann Arbor: AAS, 1965).
[9] Evelyn S. Rawski, Education and Popular Literacy in
Ch'ing China, (Ann Arbor: U. of Michigan Press, 1979), chap.1.
[10] Joerg Baten et al, "Evolution of living standards and
human capital in China in the 18-20th centuries."
Explorations in Economic History, forthcoming.
[11] Sarasin Viraphol, Tribute and Profit: Sino-Siamese
Trade, 1652-1853 (Cambridge: Harvard Council, 1977), p. 170.
[12] For an architectural example, see
http://www.nytimes.com/2009/12/04/world/asia/04taishan.html?emc=eta1
[13] Loren Brandt and Thomas G. Rawski eds., China's Great
Economic Transformation (Cambridge: Cambridge U. Press,
2008), p. 625
[14] Gong Zhengzheng, "Central China Urged to Up Ante."
China Daily, 28 April 2008, p. 2.
[15] Carl Trocki warns that "Much of the literature [on
opium] is emotional, uninformed, highly prejudiced and
intended to persuade rather than to inform" (Opium, Empire
and the Global Political Economy (London: Routledge, 1999),
p. 177).
[16] "International Economics," in Thomas G. Rawski et al,
Economics and the Historian (Berkeley: U. of California
Press, 1996), p. 229.
[17] On coal, see Kenneth Pomeranz, The Great Divergence
(Cambridge: Cambridge U. Press, 2000).
[18] Thomas G. Rawski, Economic Growth in Prewar China
(Berkeley: U. of California Press, 1989), chap. 6.
[19] Ibid, chap. 3.
[20] Shu-min Huang, The Spiral Road (Boulder: Westview
Press, 1989), p. 61.
[21] Uma J. Lele, The design of rural development: lessons
from Africa (Baltimore: Johns Hopkins U. Press, 1975), pp.
127, 131.
[22] China Statistical Yearbook 1991- abbreviated below as
CSY (Beijing: China Statistics Press, 1991), pp. 377, 628;
David Zweig, Internationalizing China (Ithaca: Cornell U.
Press, 2002), p. 121.
[23] Susan Shirk, The Political Logic of Economic Reform in
China (Berkeley: U. of California Press, 1993).
[24] CSY 1994, p. 373; 2009, Table 13.1.
[25] Data from CSY, 1994 and 2009; Penn World Tables; UNCTAD
website.
[26] Official data conceal the impact of these reversals on
overall output. For example, official reports for the
fourth quarter of 2008 show electricity output falling by
12.1 percent compared to year-earlier results, but claim
that GDP expanded by 6.8 percent during the same period.
----------------------------------------------------------
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(http://www.fpri.org/).
Foreign Policy Research Institute
Over 50 Years of Ideas in Service to Our Nation
www.fpri.org
Footnotes
The Newsletter of FPRI's Wachman Center
THE RISE OF CHINA'S ECONOMY
by Thomas G. Rawski
Vol. 16, No. 6
June 2011
Thomas G. Rawski, Professor of Economics and History, joined
the University of Pittsburgh's faculty in 1985 after
fourteen years at the University of Toronto. His research
focuses on the nature and implications of recent
developments and long-term changes in the economy of China.
He delivered this paper at A History Institute for Teachers,
March 19-20, 2011 on "China and India: Ancient
Civilizations, Rising Powers, Giant Societies, and
Contrasting Models of Development," held at the University
of Pennsylvania. This History Institute was co-sponsored by
The Foreign Policy Research Institute's Wachman Center as
well as by three centers at the University of Pennsylvania -
Center for East Asian Studies, South Asia Center, and Penn
Lauder CIBER (Center for International Business Education
and Research). [1]
Available on the web and in pdf format at:
http://www.fpri.org/footnotes/1606.201106.rawski.chineseeconomy.html
THE RISE OF CHINA'S ECONOMY
by Thomas G. Rawski
China's remarkable economic boom, now in its fourth decade,
has spawned numerous discussions of "China's Rise."[2]
Beijing's self-congratulatory slogan "China's peaceful rise"
has advanced this theme. From a historical perspective,
however, this terminology seems misplaced. Both the Ming
(1368-1644) and Qing (1644-1912) empires occupied key
positions in Asian trade and diplomacy. Crude figures
compiled by Angus Maddison, author of several sweeping
studies of global economic history, show China contributing
nearly one-third of global output as late as 1820. The great
boom of the late twentieth century has enabled China to
regain some of the global economic weight and leverage that
the Middle Kingdom enjoyed during the Ming and much of the
Qing eras.
The industrial revolution pushed European and North American
productivity far ahead of China and India, former giants
whose combined share of global output plunged from nearly
half to under one-tenth between 1820 and 1950.[3] Prior to
1800, Europeans-for example Marco Polo[4]-viewed China as
prosperous and well-governed. As China's relative economic
position eroded, opinions shifted. Both Europeans and
Chinese came to view China as a backward society whose very
foundations-families, beliefs, values-obstructed progress.
Hu Shi (1891-1962), a prominent philosopher who served as
China's wartime ambassador to the United States, summarized
this perspective in Chabuduo xiansheng (?????), a witty
vignette portraying Chinese people as incapable of the
precise thinking needed in the modern world.[5]
China's recent economic boom, along with the success of Hong
Kong, Taiwan, and Singapore, demonstrates that Chinese
culture is not inimical to economic progress. Indeed, the
opposite perspective, which sees Chinese society as
unusually capable of producing individuals who can operate
effectively in market systems, helps to explain China's
historic prominence as well as its recent economic surge.
Early work by the late G.W. Skinner (1925-2008), a brilliant
and innovative Sinological anthropologist, highlights the
economic capabilities of ordinary Chinese before and during
the heyday of European imperial expansion. Chinese
migrants, many of whom "came to Siam almost straight from
the farm," dominated Thailand's domestic and international
commerce. Skinner explains this in terms of cultural
contrasts. In the "Thai universe," shaped by the ecology of
"an underpopulated and fertile land where the requirements
for subsistence were [_] easily obtained. [_] thrift as such
was of limited value, and work for its own sake simply
senseless." The migrants hailed from a different universe:
"the south Chinese peasant lived in a grimly Malthusian
setting where thrift and industry were essential for
survival." Ideology reinforced this divergence: Chinese
struggled for wealth to preserve family and lineage
continuity, while Thai norms frowned on "excessive concern
for _ material advancement." Differences in proverbs tell
the story: for the Chinese, "Money can do all things," but
for the Thai, "Do not long for more than your own share."
[6]
Recognizing the strength of entrenched Chinese interests,
the British forced the Thai monarch to grant them "equal
commercial rights as well as additional privileges" in 1855,
benefits that soon extended to "all the major trading states
of Europe and America." In 1890, "after thirty-five years of
Western free-trading_ under privileged conditions," Chinese
merchants still controlled nearly two-thirds of Bangkok's
trade, more than double that engrossed by the British. In
Siam, as in China and Japan, the domestic business of
European and American firms was invariably managed by "a
Chinese merchant of some wealth, Western training, and
standing in the Chinese community." Chinese dominance
extended even to the rice trade, "the biggest prize of all
in Siam," where "the pioneering Western mills were abandoned
or passed into Chinese hands."[7]
Chinese economic capabilities originated in Chinese village
life. The Ming-Qing era witnessed a rapid expansion of
commerce. Rural households attended periodic markets to
buy, sell, or barter farm produce, labor services, animals,
fodder, handicraft materials and products, household
necessities, and loans, sometimes on a daily basis.[8] The
reliance of these markets on a complex monetary system that
used copper cash for small purchases and silver coin,
ingots, and bullion to manage tax payments and wholesale
transactions injected the variable exchange rate between
copper and silver into the economic lives of all Chinese.
Rural markets were highly competitive: poor but energetic
individuals could enter the commercial world as middlemen,
earning commissions facilitating local transactions.
Written documents occupied an important position in economic
life. Arrangements for short- and long-term labor services,
for renting, mortgaging or transferring land, for selling,
storing, or conveying merchandise, and for marriage,
adoption, apprenticeship, and division of family property
routinely involved written contracts. The operation of
kinship groups, mercantile and native-place associations,
crop-watching societies and other private organizations
revolved around complex written arrangements. Both men and
women (who often brought their own funds into their
husbands' households) participated in village-level economic
life. Documents also permeated interactions with the state.
These circumstances placed a premium on literacy and
numeracy, even for humble villagers. In late Qing, literacy
extended to 30-45 percent of males and 2-10 percent of
females-high figures when compared with pre-industrial
Europe.[9] Age-heaping, the tendency of illiterates to give
their age in round numbers (so that more people identify
themselves as being 20 years old than 19 or 21), is
prominent in many low-income nations, but notably absent in
nineteenth-century China.[10]
While suffering the low incomes, short life expectancy, and
high infant mortality that afflict poor people everywhere,
Chinese villagers attained disproportionate levels of
entrepreneurial capability, organizational skill and
commercial sophistication that often enabled them to out-
compete natives of other Asian countries and even Europeans,
not just in Shanghai and Bangkok, but across wide swathes of
Asia. Colonial authorities in Batavia, Manila, and
Singapore found the services of Chinese to be
"indispensable."[11] These unusual features did not extend
uniformly across China's landscape, but concentrated in
regions with the most extensive development of trade. These
included the lower reaches of the Yangzi River, which formed
the hub of domestic commerce, as well as the southern
coastal provinces of Fujian and Guangdong, the source of
large-scale overseas migration.[12]
These regional differences persist. Chinese executives
report wide regional variation in manufacturing capability:
"Managers at a leading maker of auto parts were only able to
produce products that were less 'quality demanding' in their
inland facilities. _ [where] efforts to raise standards
encounter broader cultural obstacles."[13] Even though
massive infrastructure growth has reduced economic distances
between inland cities and China's ports, foreign investments
cluster along the coast. Speaking in 2008, Commerce
Minister Chen Deming emphasized the regional imbalance in
commercial expertise, promising to "help set up centers to
train business brains in East China for the central
region."[14]
During the nineteenth century, growing pressure by
expanding European powers, later joined by the United States
and Japan, led to a procession of "unequal treaties" which
compelled China to cede territory and authority to avoid
open warfare with the militarily superior imperial powers.
While the resulting erosion of Chinese sovereignty created a
lasting sense of grievance, the economic consequences of the
"unequal treaties" were broadly beneficial. The free trade
regime imposed under the 1842 Treaty of Nanking lasted
nearly a century. Even though free trade imposed costs
associated with unrestricted imports of opium,[15] Peter
Lindert conjectures that "common folk were among the
greatest gainers" from China's growing exports of labor-
intensive commodities-tea and silk in the nineteenth
century, cotton textiles in the twentieth.[16] Treaty
provisions allowing foreigners to reside, trade, and, after
1895, to operate factories in an expanding roster of open
ports accelerated the inflow of new technologies and
ideas-among them telegraph, steamships, railways, new-style
banks, company law, and advertising-that contributed to
long-term economic modernization.
Despite these supportive circumstances, sustained growth was
slow to arrive. To be sure, the Taiping Rebellion of
1851-1864 inflicted massive damage, turning some prosperous
regions into wastelands. But what of the 40-plus years
between the suppression of the Taipings and the Qing
collapse of 1911? One might expect that the combination of
political stability, open and competitive trade, and a
government moderately supportive of reform would have
kindled substantial economic advance, especially with the
extra momentum that recovery from war often provides. But
available materials do not encourage this line of thinking.
Nor do we have a clear idea of what structures or forces
might have limited economic advance during the final Qing
decades. The list of possible constraining factors includes
the difficulty of building momentum in a large economy and
the state's tiny fiscal resources-each quite different in
Japan, as well as China's lack of readily accessible coal
deposits.[17]
Despite domestic political instability and mounting Japanese
incursions, the decades between China's 1911 revolution and
the outbreak of the Sino-Japanese war in 1937 finally
delivered a marked economic upswing. Manufacturing grew
steeply, albeit from a tiny base, along with components of
the urban economy. These gains spilled into the much larger
farm sector, as urban factory growth raised the demand for
cotton and wheat, expansion of transport networks enlarged
markets for rural products, and banks experimented with
retail farm lending. Rising wages in textiles and coal
mining, occupations that attracted unskilled rural migrants,
and in agriculture itself attest to modest but definite
increases in agricultural productivity and incomes, changes
that affected the majority of China's vast labor force.[18]
The outbreak of war in 1937, followed by a steeply rising
inflationary spiral, imposed a double blow that reversed a
quarter-century of economic advance, but not before new
institutions had demonstrated their strength by cushioning
China's economy against the worst consequences of the global
depression that began in 1929. Although large outflows of
silver, the foundation of China's pre-war currency system,
threatened to tip China's economy into a deflationary
downdraft, China's private bankers, operating without the
benefit of official regulation or support, persuaded their
fellow citizens to increase their reliance on private
banknotes and deposits with the result that the money stock
actually increased during the 1930s. This contributed to the
surprising resiliency of China's economy, and limited the
depth and duration of the decline in prices, wages,
investment, and output, all of which were far smaller than
in many other nations.[19]
PEOPLE'S REPUBLIC OF CHINA ESTABLISHED
Following Japan's surrender and the conclusion of the
ensuing civil war, leaders of the newly established People's
Republic of China faced a poisonous cocktail of runaway
inflation, budget deficits, and widespread reluctance to
hold currency or bank deposits. These difficulties were
quickly resolved despite the added complication of China's
October 1950 entry into the Korean War.
Buoyed by this initial success, China's new leaders
redirected their economic efforts toward growth. Their
actions reflected the widespread mistrust of private
enterprise and international markets common among low-income
nations at the time. China's alliance with the Soviet Union
and confrontation with the U.S. strengthened the tilt toward
planning, public enterprise, and isolation from global
markets. The design of China's economic plans followed
Soviet example (as did India's): concentrate resources in
industries that can ramp up domestic capacity to expand
industrial investment. As in the USSR, raising output of
"machines to produce machines" became the key goal. This
trajectory called for large-scale expansion of steel,
electricity, mining, machine-building, and related
industries, along with a supportive educational and research
infrastructure. Planners viewed higher consumption as a
cost-essential (in small quantities) to preserve
incentives-rather than a policy objective.
The effort to channel resources toward industrialization
posed difficult choices for rural policy. Raising crop
purchase prices could increase farm output and incomes, and
provide new opportunities for resource transfer, but only if
investment in consumer goods and farm equipment sufficed to
maintain farmers' incentives. Alternatively,
collectivization might enlarge the available surplus farm
products without shifting investment away from priority
sectors. Farm policy vacillated between these poles until
1958, when Mao Zedong's personal intervention shifted policy
decisively toward collectivization. Farmland, tools,
livestock, and rural labor were hastily absorbed into large
"People's Communes," amid an intense campaign to raise
output of grain and steel. This "Great Leap Forward"
shattered administrative routines, wasted vast resources,
undermined work incentives, and triggered a man-made famine
that cost 30 million lives. To make matters worse, growing
friction between Beijing and Moscow prompted the USSR to
withdraw its technical support, crippling numerous
industrial projects.
Soon after economic planners managed to restore some
semblance of normal economic functioning, Mao Zedong
intervened again to promote another disruptive political
movement, the "Cultural Revolution," which began in 1966.
Economic costs, although far smaller than during the "Great
Leap," were considerable, especially in education, where
colleges and schools either shut down or abandoned normal
standards for up to ten years.
The death of Mao Zedong in 1976 was widely seen as a turning
point for economic policy. People were not satisfied.
Despite important economic achievements in growth,
industrialization, technology (including nuclear weapons and
space exploration), and human development (rising literacy,
declining infant mortality, control of infectious diseases),
China's socialist system had fallen short in two key
dimensions. The commune system failed to solve China's food
problem: as one local leader put it "hunger suddenly emerged
without warning [in 1959] _ For the next twenty years, the
problem of hunger was part of our lives."[20] Furthermore,
the country lagged far behind the economic achievements of
neighbors whom most Chinese viewed as inferior: defeated
Japan, colonial Hong Kong, Kuomintang-controlled Taiwan.
REFORMS IN THE 1970s
In reviewing the astonishing outcome of the reforms begun
during the late 1970s, it is essential to recall their
modest scope. The initial effort included three components.
Impoverished localities began to experiment with household
farming. Four new Special Economic Zones in the southern
coastal provinces of Guangdong and Fujian exposed a sliver
of China's isolated economy to international trade and
investment. Government-owned urban firms could now retain a
modest share of profits as an incentive to "enliven state
assets"; revived markets for industrial inputs and products
provided an outlet for retained profits.
The agricultural initiatives met with instant success.
Farmers raced to abandon collectives and reinstate household
cultivation. Massive (and completely unexpected) increases
in agricultural production raised farm incomes and improved
the diets, energy and productivity of villagers everywhere.
Rising farm output swelled exports and curtailed food
imports, eliminating long-standing concerns over the
availability of food and foreign exchange supplies. The farm
boom disgorged new supplies of industrial materials (grain,
cotton, sugar, fruit) and revealed vast surpluses of rural
labor. Together with rising rural demand and increased
access to urban markets and expertise, these changes fuelled
an explosive boom in rural industry.
Results of the trade initiatives also dwarfed expectations.
Initial prospects seemed limited because the managers of
China's special zones, unlike their counterparts in Taiwan
or the Philippines, lacked international experience. But the
opening of trade zones coincided with growing pressure from
higher wages and land prices on the cost of labor-intensive
exports originating in Taiwan and Hong Kong. These exporters
began to shift operations to the mainland, where the new
combination of abundant low-cost labor with the knowledge,
skills, and experience of Hong Kong and Taiwanese
entrepreneurs generated an export boom that soon launched
China from self-imposed isolation into the developing
world's largest recipient of foreign investment.
Looking back, it now seems evident that the unexpectedly
large payoff to modest reforms in agriculture and trade owed
much to the legacy of human capital accumulated within China
and among overseas Chinese during the decades and centuries
prior to 1949. While "agricultural projects in East Africa
_ suffer from a shortage of well-trained African accountants
_ [who can manipulate] a simple cost-accounting system,"[21]
Chinese villagers quickly mastered the complex record-
keeping demands of the commune system. Once reform began,
the supply of managers and accountants easily accommodated
massive expansion of township and village enterprises, which
mushroomed to encompass 18.5 million firms with 92.6 million
workers and over $10 billion worth of goods procured for
export in 1990.[22]
Urban reform turned out to be far more complex. Vast swathes
of Chinese manufacturing were creatures of the plan that
lacked any market heritage. Furthermore, urban reform cut to
the core of Chinese socialism, which, despite its rural
background, had long focused its attention on the
development of cities and the welfare of urbanites. Chinese
leaders entered the reform process with vague notions of
improved economic performance rather than clear objectives.
At the same time, entrenched party and bureaucratic
interests eliminated any possibility of sweeping reform.
This turned the transformation of China's urban, industrial
economy into a lengthy process that gave birth to the
distinctive features of Chinese gradual reform.
With "big bang" reforms of the sort attempted in Russia and
Eastern Europe neither feasible nor, in the view of Chinese
leaders, desirable, urban reform evolved as a series of
policy experiments and initiatives, decentralized responses,
and official reactions. At the outset, Deng Xiaoping and
his reform-minded colleagues sought to improve outcomes
rather than to pursue a clear vision for China's post-reform
economy. Because Chinese planning was relatively
decentralized, with provincial and local leaders enjoying
greater authority and control than in the Soviet Union,
central reform initiatives typically focused on enabling
measures that broadened the opportunities and choices
available to enterprises and lower-level governments.
Instead of eliminating price controls, China gradually
raised the share of sales transacted at market prices.
Rather than privatize, a growing range of firms began to
issue shares. Production planning did not vanish, but its
span of control gradually diminished.
This open-ended approach invites decentralized reactions
that the center cannot fully anticipate or control.
Governments at all levels become participants; sometimes
even followers, as well as leaders of reform. Reform unfolds
as a process replete with interactions among governments,
enterprises, workers, and consumers rather than as a
sequence of events in which the state imposes decisions on
businesses and individuals.
UNFORESEEN OUTCOMES
The heterogeneous nature of China's pre-reform system meant
that the effect of Beijing's reform initiatives was far from
uniform. The uneven impact of enabling reforms destabilized
outcomes and intensified competition. Competition reduces
profits. In socialist China, government agencies and state-
owned enterprises, which controlled the bulk of capital
assets, suffered mightily. The steep decline in
government's share of national product during the 1980s
illustrates the importance of unforeseen outcomes. Some
enterprises reacted to financial pressures by developing new
products, trimming costs, and raising productivity. Others
bombarded their official sponsors with claims of "unfair
competition" and pleas for financial assistance.
Supervisory agencies, short of funds because of the slow
growth in their revenues from profits (or taxes on profits),
often found it easier to respond with further reform
initiatives than with cash.
In this way, Chinese reform created a "virtuous cycle" that
enabled myriad small reforms to cumulate into substantial
institutional change. Reform expanded competition and
created financial pressures that spurred some participants
toward innovation, resulting in further intensification of
competition. Even when financial pressures resulted in
lobbying rather than innovation, the typical response
involved further partial reform, which unleashed fresh
rounds of competition.
This system produced an odd structure in which the balance
between plan and market varied widely for different official
agencies, regions, enterprises, and households. Variation
allowed participants to weigh their own prospects under each
system. As Susan Shirk has shown, the result was a gradual
shift of opinion toward preference for market outcomes that
culminated in the China's Communist Party's 1993 decision to
pursue a "socialist market economy with Chinese
characteristics." [23]
Comparison of circumstances in 1993 with the recent past
shows that subsequent development has followed the track
established by the 1993 decision, under which government was
to undertake macroeconomic management, regulation of health,
environment etc., and setting strategic priorities for the
economy, leaving other decisions to the market. The shift
from plan to market continues: the share of industrial
output originating in state-owned or collective firms that
are subject to strong official controls plunged from 81.7 to
11.0 percent between 1993 and 2008. The move from public to
private ownership has accelerated, with the share of
domestic private firms and firms with offshore investment in
industrial production leaping from 18.5 to 56.4 percent
during the same period.[24] Continued movement from
isolation toward global involvement is also clear: between
1993 and 2008, annual two-way trade advanced from $195.7
billion to $2.56 trillion, China's trade ratio (combined
exports and imports as a percentage of GDP) rose from 28 to
around 60 percent, incoming foreign direct investment jumped
from $28 to $92 billion, and China emerged as a substantial
source of outbound direct investment, with annual flows
rising from $4.4 billion in 1993 to $52.1 billion in
2008.[25]
These important structural changes occurred amid a further
acceleration of growth that has pushed the leading edge of
urban prosperity into new territory, with affluent
households now able to afford luxury housing, private
automobiles, international travel, and overseas schooling
for their children. Strong momentum has enabled China's
economy to power through sharp setbacks from the
international financial crises of 1998 and 2008/09 as well
as the 2003 SARS epidemic.[26]
REFORM SUCCESS
One vital ingredient in China's long-term reform success
came from domestic policies that pushed aside major
obstacles to improved economic performance by improving
incentives and allowing increased entry, competition,
mobility, and price flexibility. Although these reforms
remain incomplete-private businesses, for example, still
confront formidable legal, administrative, and institutional
barriers-they created sufficient momentum to overcome the
friction and drag linked to a host of less critical
inefficiencies associated with price distortions, imperfect
markets, and institutional shortcomings (for example in
banking, property rights, and corporate governance)-all of
which retarded growth and increased its cost without
endangering the ongoing boom.
The combination of Chinese land and labor with the capital
and expertise of Taiwan and Hong Kong industrialists
provided a particularly important boost to exports and
employment during the first decade of reform. China's
coastal regions used the experience and confidence gained
from initial cooperation with Overseas Chinese entrepreneurs
to attract rising investment flows from multi-national
corporations. Foreign investment has powered China's revival
as a great trading nation and contributed to the expansion
of Chinese manufacturing capability (for example, in
automobiles).
CHINA'S FUTURE
What of the future? China's economic prospects appear
strong. Rapid diffusion of education will further improve
its already impressive pool of human resources.
Entrepreneurship flourishes despite remaining barriers to
the expansion of private business. With public interest in
socialist ideology notably absent, China's political elites
understand that continued economic growth is essential to
maintaining their own power; their focus on development is
therefore intense. Manufacturing, the largest and strongest
sector of China's economy, seems poised for further
upgrading, which will benefit from enlarged flows of college
graduates, domestic R&D activity, and new ideas from China's
growing portfolio of international investments.
China's efforts to harvest these promising economic
opportunities must confront formidable obstacles. Although
international media and NGOs tend to exaggerate the dangers
arising from environmental and public health hazards as well
as tensions linked to ethnic and economic inequalities,
these issues pose major challenges, as do corruption and the
intertwined problems of unemployment and (especially rural)
education. The biggest dangers, however, lie elsewhere.
On the domestic side, a largely unreformed investment
mechanism allows government decisionmakers to channel funds
from state-owned banks into state-controlled investment
projects. This relic of Soviet-style planning holds back the
growth of output, productivity, and (especially) employment,
extends a long-standing pattern of grotesque seasonal
fluctuations, creates mountains of bad loans that increase
the risk of financial instability, and truncates expansion
prospects for private businesses (which find themselves
crowded out of financial markets).
On the international side, global market access, which has
made China the greatest beneficiary of globalization,
remains essential to China's future prospects. The recent
economic crisis shows how quickly disruption of overseas
export sales can undercut domestic economic activity (best
measured at the moment by electricity use) and employment
(Chinese economists reckon that the 2008 crisis caused over
40 million layoffs). Imports of energy, materials,
equipment, components, and technology are equally essential.
Chinese plans to grapple with a wide range of pressing
economic issues routinely anticipate unfettered access to
world markets for funds, expertise, and ideas as well as
commodities.
China's continuing growth spurt, now in its fourth decade,
is a major event in world history that has delivered massive
benefits to its citizens, and also to its trade and business
partners, including the United States. Chinese economic
expansion also creates conflict-in the economic sphere
alone, China has become involved in disputes over cross-
national shifts in production and employment, corporate
takeovers, trade imbalances and protection, environmental
hazards, currency valuation, intellectual property, internet
censorship, labor standards, subsidies, and many other
issues.
Beijing's intense focus on building a prosperous Chinese
future, along with China's large and growing reliance on
global markets to promote its economic objectives, tilts
China's international behavior toward cooperation rather
than conflict. Despite the inevitable friction that
accompanies the China's expanding economic, political,
military, and technological strength, this orientation,
which is evident in Beijing's approach to issues surrounding
trade, environment, property rights, and the Korean
peninsula, creates an opportunity for the international
community to adjust to China's expanding power and influence
through mutual agreement rather than armed struggle.
----------------------------------------------------------
Notes
[1] The author acknowledges beneficial advice from Lucien
Ellington and two anonymous reviewers.
[2] For example, C. Fred Bergsten et al, China's Rise:
Challenges and Opportunities (Washington: Peterson
Institute, 2008); William W. Keller and Thomas G. Rawski
eds., China's Rise and the Balance of Influence in Asia
(Pittsburgh, U. of Pittsburgh Press, 2007).
[3] Angus Maddison, The world economy: a millennial
perspective (Paris: OECD, 2001).
[4] The Travels of Marco Polo, available at
http://books.google.com/books?id=VovVAAAAMAAJ&printsec=front
cover&dq=travels+of+marco+polo#v=onepage&q=&f=false
[5] For Chinese and English versions, see
http://www.readchinese.net/chabuduoxiansheng
[6] G. W. Skinner, Chinese Society in Thailand (Ithaca:
Cornell U. Press, 1957), pp. 97, 92, 93. 95.
[7] Ibid. 102, 105.
[8] G. W. Skinner, Marketing and Social Structure in Rural
China (Ann Arbor: AAS, 1965).
[9] Evelyn S. Rawski, Education and Popular Literacy in
Ch'ing China, (Ann Arbor: U. of Michigan Press, 1979), chap.1.
[10] Joerg Baten et al, "Evolution of living standards and
human capital in China in the 18-20th centuries."
Explorations in Economic History, forthcoming.
[11] Sarasin Viraphol, Tribute and Profit: Sino-Siamese
Trade, 1652-1853 (Cambridge: Harvard Council, 1977), p. 170.
[12] For an architectural example, see
http://www.nytimes.com/2009/12/04/world/asia/04taishan.html?emc=eta1
[13] Loren Brandt and Thomas G. Rawski eds., China's Great
Economic Transformation (Cambridge: Cambridge U. Press,
2008), p. 625
[14] Gong Zhengzheng, "Central China Urged to Up Ante."
China Daily, 28 April 2008, p. 2.
[15] Carl Trocki warns that "Much of the literature [on
opium] is emotional, uninformed, highly prejudiced and
intended to persuade rather than to inform" (Opium, Empire
and the Global Political Economy (London: Routledge, 1999),
p. 177).
[16] "International Economics," in Thomas G. Rawski et al,
Economics and the Historian (Berkeley: U. of California
Press, 1996), p. 229.
[17] On coal, see Kenneth Pomeranz, The Great Divergence
(Cambridge: Cambridge U. Press, 2000).
[18] Thomas G. Rawski, Economic Growth in Prewar China
(Berkeley: U. of California Press, 1989), chap. 6.
[19] Ibid, chap. 3.
[20] Shu-min Huang, The Spiral Road (Boulder: Westview
Press, 1989), p. 61.
[21] Uma J. Lele, The design of rural development: lessons
from Africa (Baltimore: Johns Hopkins U. Press, 1975), pp.
127, 131.
[22] China Statistical Yearbook 1991- abbreviated below as
CSY (Beijing: China Statistics Press, 1991), pp. 377, 628;
David Zweig, Internationalizing China (Ithaca: Cornell U.
Press, 2002), p. 121.
[23] Susan Shirk, The Political Logic of Economic Reform in
China (Berkeley: U. of California Press, 1993).
[24] CSY 1994, p. 373; 2009, Table 13.1.
[25] Data from CSY, 1994 and 2009; Penn World Tables; UNCTAD
website.
[26] Official data conceal the impact of these reversals on
overall output. For example, official reports for the
fourth quarter of 2008 show electricity output falling by
12.1 percent compared to year-earlier results, but claim
that GDP expanded by 6.8 percent during the same period.
----------------------------------------------------------
Copyright Foreign Policy Research Institute
(http://www.fpri.org/).
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