1. China
• Same size as Canada
• Population 1.3 bn
– 0.8 bn rural
– 0.5 bn urban
2007:
• Arable land:15%
• Labor force :
–agriculture 49%
–industry 22%
–services 29%
• Savings rate:
40% of GDP
1940s:
Semi-feudal
Largely illiterate
Peasants 85% pop.
Grows 33mil
(pop. of Canada)
Every 18 months

3. History
• 1911: overthrow Manchu Dynasty, political
turmoil
• 1925-49: Civil war
– Communists: 100,000 rural guerilla forces
– Nationalists: 700,000
– Long march
• 1945: Nationalists side with Communists to
fight Japanese invasion
• 1949: Mao Zedong (age 54) declares People's
Republic of China
• 1953: first "Five-Year Plan“, heavy industry
• 1949-53: security "liquidates" 800,000 people
• 1957: "Let 100 flowers bloom, let 100 schools
of thought contend“
– criticism of decisions encouraged, unity must
be restored once criticism taken into account
– “It is not enough to attack reactionaries. We
must know what reactionaries want and
represent”
Mao Zedong andMao Zedong and
Deng XiaopingDeng Xiaoping

4. Mao Zedong Thought,
1950s• New Marxist theory: contradictions could arise between the rulers and
the ruled in a Communist state
• Small-scale strikes are "beneficial" danger signals, revealing trouble
that needs correction. Persuasion, not coercion, should be used
• Everything has two sides, a good side and a bad side
– Japanese attack: bad - it meant war; good - made it possible to
mobilize nation around Communist party
– World War II: bad- destruction; good - crushed old imperialist
colonial rule, brought closer to overthrow of capitalism
• Communist populations must be exposed to a certain amount of
negative propaganda if they are to understand the nature of struggle
between communism and capitalism
– Chiang Kai-shek's works and some Voice of America presentations
to be published in China
• Population must be stabilized at present level 600 mil
– No enough food, funds for education
– Propaganda to urge young people not to marry until they are 28 or
30, devote their early years to building up the country
– Abortion and birth- control made available in the cities
• seldom in rural areas, where 75% of population lives
– material benefits are withheld from mothers after the third child

5. • Create 26,000 rural communes - 500 mil peasants
– Canteens, nurseries, kindergartens, tailoring teams, one standard of pay in
goods - to wipe out the use of money
– 3 simple meals daily, uniform, shoes, towel, soap
– 2 hours of military drill a day, firearm training, rifles are stacked near places
of work.
– 5 am march to work, 8am breakfast, 1pm lunch, an 1.5 hours rest, workday
ends at 6pm, communal supper. One Sunday off every second week
– "to make full use of labor power”, “to insure that there is no waste of the
labor time of men and women"
– state directs financial resources into projects of "national character"
• Consequences
– agricultural production dropped to subsistence level
• Free-rider problem: little incentive to work hard, little initiative
– Industrial output, heavy industry (steel) grew
– Exports fell
– Urban areas: Shortages of food, rationing, long lines, widespread hunger
– Shortage of cotton and raw materials for textiles and other light industries
– food crisis, black market to carry food parcels from Hong Kong
• 1962: Mao admits Great Leap Forward was a disaster
– peasant encouraged to engage in sideline occupations - handicraft work,
raising livestock, given a small private plot to grow food
Great Leap Forward (1958-
1960)

6. • Late 1950s-60s: Ideological conflict with Soviet Union
– Yugoslavia and USSR abandoned Marxism-Leninism, revisionists
– Soviet leaders sold out China’s interests to United States
• Khrushchev's policy of "peaceful coexistence"
– Soviet "social-imperialism" expansionism
– All Soviet personnel expelled from China
– 1969: Soviet and Chinese border patrols clashed
• Russia increased army presence along Chinese frontier
• Cultural Revolution - campaign to revive revolutionary spirit
– “younger generation does not know the sweat of the march, the
hunger of short rations, the deadly chatter of the machine gun, the
blood and the toil”
– can not be trusted to make correct choice capitalism vs communism
– Policies: universities closed, purge of professors, lecturers, teachers
• University students are to be admitted on the basis of class origin (worker
or peasant background) and ideological purity, not examinations
• Conformity, no independent thought
• 1976: Death of Mao Zedong
Break up with USSR, 1960s
Cultural Revolution (1966-76)

7. Reform 1978-84:
Agriculture
•Liberalization of agriculture
•Creation of township and
village enterprises (TVE)
– Dismantle collective farms
– Land distributed to households as 30 year leases
– Peasants can not sell or use land as collateral for loans
– Lease holders required to sell some planned amount at
planned prices, market any amount beyond that
• Semi-ownership of land  rise in labor productivity
• Labor freed-up formation of small-scale crafts and
service TVEs
– 91% of agricultural output planned in 1978, 5% in 1993
– Secure rights would encourage farmers to invest more,
make land more productive, help food security
•Time lag between rural and urban reforms (6
years) spared farmers from soaring agricultural
input prices

8. Reform 1984-present:
Industry
•SOE: can market above-quota output
•1996: plans controlled <10% of industrial
outputs
•"Open-door policy" :
–Special Economic Zones (SEZ) and Economic,
Technological Development Districts (ETDD)
–exempt from most controls on foreign
investment
•1989: Stock markets open
•Since 1992: "socialist market economy“
•Late 1990s: privatization of housing stock
•Gradualism with spectacular results
–No massive urban unemployment or poverty
•Lessons:
–start small, focus on reforms with greatest
probability of success
–gradually move on to more difficult problems
–limit amount of change people have to deal
with at any one time  support for further
reforms
–Self-sustaining process

9. How was 10%
annual growth
achieved?Three economic fundamentals
sufficient for growth (Chow, 2003):
1. Abundance of high-quality human
capital
2. Market institutions
3. Availability of modern technology
to a late comer
– Examples: Japan, Hong Kong,
Singapore, Taiwan and South Korea
• Plus continued political stability
• Rate of growth will continue to be
>7% in the next 15 years because 3
economic fundamentals remain
• 2020: will surpass US in total output
• Min real GDP growth 7% - necessary
to produce acceptable employment
growth and maintain social stability

10. Success of Reform
• Initial conditions before reform
–less was planned in China (1,200 commodities)
than in Soviet Union
• Not much resistance to reforms
–After previous policies failed
• Investment from Chinese Diaspora
–50 mil abroad, wealth equal to mainland
–labor intensive industries which were losing
comparative advantage in Hong Kong and
Taiwan moved to mainland China
• Reformers pragmatic, not ideological
–Preserving political monopoly of communist
party
• Competence of government officials
–leaders (Deng Xiaoping, Zhao Ziyang), and
lower level officials selected mainly according
to ability
• Successful policies chosen by
experimentation

11. Challenges
•Wealth differential
–coastal vs interior provinces
–urban vs rural population
• Real rural income growth 2004: 6.8%, 2005: 6.2%
• Urban incomes growth 2005: 9.6%
–150 million surplus rural workers adrift between
villages and cities, subsisting through part-time,
low-paying jobs
• Need population policies to prevent migration to cities
–“New socialist countryside” campaign, 2005
• spending on rural infrastructure
– roads, schools and hospitals
– abolish all school fees
– provide peasants with health insurance
–No provision for ownership of land –
fundamental problem  no rural land markets

12. Challenges
President Hu Jintao
Dual economy
1. private small and medium firms
– not favored by taxes, other policies
2. large corporatized SOE
– state is largest shareholder
– state hires managers
– banking and “commanding heights”
– state sector produces 25% GDP
– hard to sell shares to minority shareholders
– drain on state budget
• <1/3 make profit
• technologically backward
• account for most of bad loans by state banks
• could cut down 1/3 of staff with no effect on
output
• provide almost all social services to their
workers
• workers earn most income moonlighting for
private firms
• employ >10% of work force (100 million)
• good source of corruption

13. • Rising demand for energy
• Largest oil consumer after US
• World's biggest producer and consumer of coal
• Coal: 4/5 of China's energy use
• Massive investment in hydro-power
• 11th Five-Year Plan: 20% reduction in energy consumption per unit of
GDP by 2010

14. Environmental degradation
• Toxic spills
• Hydropower dams diminish river
flows
• Number of cars up from 4m in
2000 to projected 130m by 2020
• Air pollution causes 427,000
extra deaths a year

15. • Assembly from imported components = >50% of all exports
– Toys, telecoms equipment, electronics, computers
• China’s effect on other countries’ production and trade
– Japan’s exports: shift from exporting finished goods to Europe and
North America towards exporting parts for assembly in China
– Japan’s imports: office machines and computers used to come
from America and Europe, now come from China
Main imports: oil, copper, gas, timber

16. Economy
• The Economist:
“ …global inflation, interest rates, bond
yields, house prices, wages, profits and
commodity prices are now being
increasingly driven by decisions in China.”
• Fixed exchange rate
– since 1994: $1= 8.28 Yuan, 2005: 8.11 Yuan
• Implicit subsidy to manufacturers
– Cheap exports- higher world demand
– 28% undervalued
– Government buys $$ to keep Yuan from
appreciating
– Foreign-exchange reserves largest in the world
– $$ spent on US bonds, mortgage-backed
securities, physical assets
– What if China stops buying US debt?
– Interest rates in US increase to attract investors
– Recession in US
– Global recession

17. • Wages rise 2-3 times faster than in
other low-wage Asian economies
– Along China's eastern seaboard
(manufacturing for export) monthly pay
$250-350
– In Thailand, Philippines, Indonesia average
wages in manufacturing $100-200
– Companies moving further inland - cheaper
labor but less skilled workers, higher
transport costs
– Still 200m underemployed workers in rural
areas
• How can other countries compete with
China?
– make their manufacturing more
sophisticated
– specialize in research and
development, design, branding,
financing, logistics
– foster competition in domestic
service industries

18. Challenges
• Financial system needs reform
–near monopoly of state on banking
• Non-performing loans
• Lack of transparency
• Legal system, rule of law, private property rights protection
– protection from political elite, corrupt bureaucrats
– limited enforcement of patent and intellectual property rights
– Japanese high-tech firms are wary of locating in China, fearing that their best
design work will get pirated
• Demographic problem in near future
– fertility rate fell from 6 children per woman in 1960s to 1.7 currently
– cultural preference for sons
– 23 million more young men than women - "marriage squeeze"
– increased crime, HIV and other STD, war
• Human rights
– persecution of monks loyal to Dalai Lama
– destruction of Tibetan Buddhist culture Beijing
– Capital punishment - thousands executed each year
• crimes from murder to tax evasion
• Threat to invade Taiwan ?