POLITICAL ECONOMY

China

From 1949 to 1978, China had a Soviet-style state socialist political economic model. The state owned all property and controlled the economy through central planning. State bureaucrats assigned targets and quotas to producers at all levels of the economy and allocated basic goods to consumers.

As was the case in the Soviet Union, this centrally planned political economic model favored the development of heavy industry at the expense of consumer goods. It also led to the creation of a massive state economic policy-making bureaucracy not present in capitalist political economies. Between 1949 and 1952, the state gradually nationalized most private industries and mobilized the economy to recover from the eight years of war with Japan and four years of civil war. By 1952 the communist state had distributed land to over 300 million landless peasants. In the mid-1950s, peasants were strongly encouraged to form larger agricultural cooperatives, pooling land, equipment, and labor and sharing profits; such cooperatives gave the state greater political control over the countryside.

Despite the agrarian roots of the Chinese revolution, Mao and the Communist Party sought to emulate Stalin's successful crash industrialization policy by launching the Great Leap Forward (1958-1959). Mao believed that Communist-led mass campaigns could be marshaled for rapid industrial growth, and to pursue that goal he favored politically indoctrinated party cadres ("reds") over those with economic training ("experts"). Vowing to progress "twenty years in a day" and to catch up with the industrialized West in fifteen years, Mao promoted the creation of small-scale, labor- intensive industry (so-called "backyard industries") located in both cities and the countryside. The Great Leap Forward further collectivized agriculture by creating gigantic communes that became party-controlled providers of education, health care, public works, and industrial production. The Great Leap Forward was a gigantic failure. The diversion of energy to industry and away from agriculture, and a drop in food production caused by the forced collectivization of agriculture, was largely responsible for a three-year famine that killed as many as 30 million people.

By the early 1960s, Mao had been marginalized from economic policy-making, and most of his Great Leap policies had been abandoned. Large-scale agricultural communes were disbanded, and peasant households were allowed to operate as independent producers, supplying their goods directly to the state and selling their surplus on the free market. Industries began to emphasize expertise over political correctness and material over moral incentives.

Responding to his own marginalization, Mao attacked these new policies as "capitalist" and in 1966 launched the Great Proletarian Cultural Revolution. The persecution unleashed during the next decade targeted those with the most expertise; the impact on the economy was devastating. Once again, Mao's disastrous policies were shelved.

In the mid-1970s China was still a poor and isolated economy, and the Communist Party leadership focused on creating rapid economic growth rather than on traditional communist goals of equity. After the death of Mao in 1976, and under the leadership of Deng Xiaoping, economic reform began gradually. ¹ Agricultural communes were disbanded and replaced with the "household responsibility system," a euphemism for largely private farming. Individual farmers still had to sell a set amount of their produce to the state but were free to sell any surplus on the open market. Food production improved dramatically, and famine became a thing of the past. Industries were decentralized into "collective enterprises," were allowed greater economic freedom, and were encouraged to generate profits. The importance of China's state sector gradually diminished, dropping from about 80 percent in 1980 to under 20 percent by 1996. By the mid-1980s, private industry was permitted (though heavily regulated initially), and the state gradually eliminated price controls. Hoping to end China's economic isolation, the government created Special Economic Zones in 1979 to lure foreign investment with tax breaks and incentives.

By the 1990s, China's socialist command economy had been transformed into a "socialist market economy." The reforms sparked two decades of astounding economic growth. From 1980 to 2000 China's economy grew at over 10 percent annually, and its GNP quadrupled. Millions were lifted out of poverty, but China remains a poor country. Its per capita GDP at Purchasing Power Parity in 2000 was only $3,976, compared with $34,142 in the United States, $9,037 in Mexico, and $8,377 in Russia.

The reforms have created both rapid growth and huge problems. As China's enterprises become more profit oriented, they are free to lay off unproductive labor. As a result, Mao's "iron rice bowl" (lifetime employment and state-provided social services) has given way to massive unemployment. The Chinese leadership is gambling that China's growing private sector will be able to absorb the unemployed. After decades of communist emphasis on equality, the reforms of the last two decades have made China much less equal and have magnified inequality between individuals, between urban and rural Chinese, and between regions. ² China's GINI index (a measure of inequality where a score of 0 equals perfect equality and 1 equals total inequality) rose from .386 to .462 between 1988 and 1995. ³ Most direct foreign investment has been concentrated along China's eastern coast, especially in Guangdong Province, Shanghai, Beijing, and Tianjin, while China's poorer interior has received very little of this investment. The growing inequality is partly responsible for the estimated 100 million Chinese who comprise China's "floating population" (rural migrants seeking greater prosperity in urban areas) and has also been blamed for rising crime rates. ⁴ Chinese no longer enjoy guaranteed access to health care, and even the traditional benefit of free universal education has been eroded.

In the increasingly competitive economic environment, state enterprises have struggled. The state attempted to restructure state-owned enterprises (SOEs) through mergers and consolidation, and the number of such firms has been reduced from 100,000 in the mid-1990s to about 60,000 today. Today 74 percent of industrial output is produced by the private sector, however, the state sector is still enormous, continues to suffer from inefficiency, corruption, and surplus labor, and consumes a disproportionate amount of credit granted by state-owned banks. The Chinese state has continued to subsidize unprofitable state industries, in large part through the state-owned banking system, because it wants to avoid politically dangerous levels of unemployment.

Rural Unemployment and Transition

Seventy percent of China's population lives in the countryside. Economic reforms have benefited the countryside, but not as much as urban areas, and rural China is still desperately poor. As a way of favoring industrialization, China has kept prices for farm products artificially low, and as the country modernizes its agriculture, hundreds of millions of Chinese have migrated to the cities to escape rural poverty. Such immigration is technically illegal, and rural Chinese who migrate to cities face harsh conditions and discrimination, but the state has not been able to stem the tide.

Growth of Foreign Presence

China's entry into the World Trade Organization (WTO) in 2001 promises greater challenges to its economy. WTO membership will require China to further liberalize its economy and domestic firms, especially state-owned enterprises, will face growing competition from foreign enterprises. Even China's debt-ridden state-banking sector will be exposed to foreign competition by 2005. Despite the tremendous liberalization of the Chinese economy, the country still has a closed economic system. China's economy is freer than Russia's but is still more restricted than the economies of Mexico, Japan, the United Kingdom, and the United States.

The Economic Freedom of the World index, created by the Fraser Institute, a Canadian think-tank, measures how consistent countries' policies are with economic freedoms, including personal choice, competition, and property rights. In 2003, Hong Kong was the most economically free country of the 123 surveyed. The least free countries are found in the Middle East, Africa, and Latin America. The Fraser Institute says that economic freedom is highly correlated with the human-development index, as measured by the United Nations.