Nelson Mark - Economy of China Exam 1

Confucius

(551-479 BCE) A Chinese philosopher, created one of the most influential philosophies in Chinese history.

New structure of government

1 State Council 2 Provincial 3 County 4 City/Village. 5 Danwei (workplace unit)

Phases of Reform

1) Rural (1978-92) - introduction of market mechanism 2) Urban (1993-) - urban and industrial; SOE reforms, internationalization, globalization

Mao's death

1976, Mao's death was long and very draw out. It predictably caused a power struggle between the left wing gang of four and the right winged Hua Guofeng.

GDP growth

1978-2010 average annual real GDP growth about 10% - spectacular given the Rule of 70

Economic transition (1989-1992)

After Tiananmen Square, conservatives gained power. But they under-estimated how much people hate inflation and popularity of reform. Reforms popular because benefits were widely shared. "Reform Without Losers.' Conservatives tried to roll back reforms. 20% inflation from 1993-1995. Then the conservatives lost influence, economic reform resumed in 1992-1993. Began with Deng' Southern Tour. Message: continue reforms, experiment with different things, downplay ideology. All that matters is growth, and preserving power of CCP. End of reforms and progress in rural areas. End of rural dynamism. Policy biased against rural areas. First phase was called 'reform without losers'. Some gained, but nobody lost out.

Structural change

Agriculture > Manufacturing, Exporting > Post-industrial (services)

Chinese-American Alliance

Attack on Pearl Harbor brings US into WWII, China and US become allies. Rampant corruption in the KMT. (Documentary: KMT soldiers treated like slaves). Chiang still won't fight Japanese. Wants troops to fight communists. In the USA, hate on Chinese switched to Japanese.

Second Opium War (1856-1860)

Britain and France joined to fight, easily defeated China again

First Opium War settlement

Britain gets Hong Kong Island Britain also gets $6 million compensation Access to 5 treaty ports where westerners could live, trade, have permanent missions. British rule in these treaty ports After Britain gets concessions, US, French, Germans followed to get their own piece of the China pie

Treaty of Tianjin

Britain gets more Hong Kong territory Britain can take Chinese workers abroad to work (as coolies), on plantations, mines, build railroads, and so forth. China gets carved up and occupied. Regions run by foreigners (British, Germans, French). Chinese people unhappy about this. Huge revolt kicks out the (child) emperor and ends the Imperial system. 1911.

Qin Emperor

Built terracotta army to defend him in the afterlife; makes Xian his capital; standardized currency, weights/measures, written language

Recovery 1949-1952

CCP inherits broken economy and hyper inflation. Inflation controlled by 1950. Industry and agriculture recovers by 1952. Countryside: land still privately owned. Land redistributed to private households. CCP urged peasants to seize property from landlords and split among the peasants. Urban areas: Initially, CCP welcomes non-communists to stay and work with new government. The so called 'New Democracy'. Capitalists, intellectuals and scientists convinced to contribute to new China.

Japanese invasion of China

Chiang refuses to fight the Japanese. His officers mutiny, kidnap him and threaten to execute him unless he commits to fighting the Japanese. Communists and KMT joint together in the United Front, which ends quickly when the KMT turns on the communists (again). The Japanese seriously brutalized the Chinese people.

Gradual Reform

China chose gradual reform. Not like big-bang reform of USSR. Felt huge risks, due to Cultural Revolution. If they failed, could be the end. Huge resources devoted to expensive industrial projects, nothing to satisfy consumers. Example: rural communities permitted to run township and village enterprises outside the plan because that would contribute to local investment and economic growth. Foreign businesses were allowed to operate freely in Special Economic Zones (SEZs) because that would increase investment in China and might persuade foreign corporations to transfer technology to China.

First Five Year Plan

China still a mixed economy. Small household farms still dominated agriculture, but government was a monopoly over grain purchases. Step 1 was land reform. Next, socialization of agriculture. Step 2: Pool family farms into cooperatives. This makes farming more efficient by increasing scale. Freed up some labor. This was popular. Step 3: Collectivization. Private property abolished. Peasants not allowed to own tools, animals or land. Agriculture under government (village) control. Countryside markets shut down. Poor incentive structure lowers output and makes peasants worse off. Not popular Step 4: Communes (combined hundreds of collectives), for agricultural output.

First Opium War (1839-1842)

China tries to stop drug pushing, asks Victoria to put it to an end but to no avail. China attacks British opium merchants, destroy their inventory. British retaliate and easily defeat the Chinese (have not won a war since); tired of the restricted access in China.

Trade and exploration

China, mostly inward looking. Outward looking during a short window. Zheng He 1371-1433 (Admiral during Ming dynasty) A eunuch. Over time, demand for eunuch services increased and practice became voluntary, as condition for employment. Pathway to better material life, but there are tradeoffs Why? Emperor had 000's of concubines; eunuchs had reputation for being power hungry, conniving (must be self-selection).

Failure of the Macartney mission

Chinese court viewed the British as arrogant, uninformed barbarians trying to get special favor from the Son of Heaven. Chinese unimpressed by the gifts/trade show. Unserious toys. Told Macartney to leave when he wanted to kneel instead of kowtow. Rejected by a letter in the place of the emperor.

The Central Country

Chinese people viewed the country to be center of world. China did not export ideas, but let others come to seek them. Chinese viewed theirs as superior civilization. All others were barbarians. Chinese court aware of India, Roman empire, but uninterested in their ideas.

Rural sector reforms (agriculture) under Deng

Collectives tried various things, then settled on a radical solution: contracting specific parcels of land to individual farm households. Becomes known (again) as the "household responsibility system"; Collective leases rights to plots of land to households. Everything produced on the leased plot above the contractual amount to be forked over to the government, can be sold or eaten by the household. Is a myth that this was initiated by Deng. He had the good sense to allow it. Some rogue farmers banded together to do it. Deng simply allowed it to go on. Farm households manage the agricultural production cycle on a specific plot of land. Agreement is to turn over contracted amount of low-price grain after the harvest. Collectives become modern version of landlord. Chinese leaders did not block, and eventually gave it support. Agricultural output surges

Zheng He's exploration

Commanded huge fleet, 28000 sailors 7 expeditions to extrade trade, economic relationships. A tributary system. Went to south-east Asia, India, Middle east and Africa The emperor died. Next Ming emperor ended it all, had the fleet dismantled. Abandoned seafaring at exactly the time the Portugese started exploring, then the British

Chinese Communist Party in power

Controls managerial career paths. All working adults are connected to party and government through workplaces (collectives or urban state/collective units); urban jobs, controlled by CCP to manage public sector personnel. Hierarchy: each level supervises performance, appointments of personnel at the next lower level. CCP controls career paths and incentive structure.

Regulatory and Institutional Restructuring - Banking

Dual-track system out. SOEs integrated into market system, real profits and losses. People's Bank of China (PBOC) given a central banking charter (1995) to conduct monetary policy, oversight of State owned banks. Address problems of SOB lax financial supervision and non-performing loans. Reform with Losers: SOE workers. Unemployed! Thrust into a labor market. Loss of Iron Rice Bowl

End of Ming Dynasty

Due to corruption (23,000 people, many family, on the Imperial court payroll). Bankrupted the government, famine. Overthrown by the Qing, from Manchuria. Europe forging ahead. The Renaissance, other innovations and social change. China stagnated and withdrew

Regulatory and Institutional Restructuring - globalization

Efforts to open the economy begins in 1993. FDI allowed, through joint ventures. Undertook broad range of reforms to harmonize with international standards with eye towards admission to WTO

Deng Xiaoping

Emerges as leader of the CCP - pragmatic reformist, but definitely not a pro-democracy guy. Policy goal: Make everybody rich, including the CCP. Everyone is in business. A mercantilist, pro-business government

The Confucian system

Emperor is the supreme being, son of heaven, intermediary between heaven and earth; rules made by the Mandate of Heaven

Impact of Xinhai Revolt

End of the old China - no more arranged marriages, footbinding, queues, Son of Heaven; People were upset by humiliation/occupation by foreign powers/poor economic situation/loss of Chinese prestige

Grain procurements

Enforced collections of fixed quotas of grain from the peasants. Taxation.

Qin and the people

Enslaves the nation: allowed to grow food, work on the wall, or serve in the military (conscription)

Sun Tzu and the Art of War

Established under Han rule; used to manage barbarians, keep them divided, places importance of psych advantage over opponent; emphasized avoiding conflict, undermining enemy morale, minimal fighting

Family hierarchy

Father at the top Eldest son obeys the father Younger son obeys older son Wife obeys the husband DIL obeys MIL

Han Dynasty

Freed the people from slavery. A relatively prosperous era. Population increased. Hence the term Han Chinese. Maintained, expanded Qin centralized government; Confucianism becomes the state philosophy

Great Leap Forward (1958)

Goal: to pass UK and match the US in 15 years. Strategy: Get people to work day and night by promising them a better future. Raise L in production function (Y = F(K, L)) The people were so enthusiastic, out there building reservoirs, planting trees, singing happy revolutionary songs, dreaming of worker's paradise. Step 4: Communes (combined hundreds of collectives), for agricultural output. Also construction projects, social services, develop smallscale industries

Outcome of Tianamen

Government would not meet with students, hunger strikes occur, crackdown ends protests

Chinese respect for education

Han introduced exam system based on Confucian texts for civil service jobs. Gateway to the gentry, escape harsh life of physical labor.

Foreign invasions

Illustrates superiority of Chinese society, culture, and governance. Foreign conquerors became Chinese, rather than trying to change China. Shows how deep the identity and culture and institutional makeup of the society is. Mongols (Yuan dynasty 1271-1368) Gengis Kahn. Not enough grass for animals to graze. Went to China: "No greater joy than to massacre one's enemies, steal their horses and cattle, and rape their women." Died when a princess got revenge by castrating him Kublai Kahn- Gengis's grandson. Took the Chinese name Yuan Manchurians (Qing overthrew Ming) 1644-1911

Qing Dynasty's inwardness

Imposed measures to keep out the barbarians (and foreign ideas); Restricted points of entry and routes to Beijing Access to market limited to regulated seasonal trade in Guangzhou. In off-season (winter), foreign merchants had to go home. Could not stay in China Illegal to teach Chinese to foreigners or to sell them books on Chinese history or culture Foreigners allowed to communicate only with specially licensed merchants

Special Economic Zones

In 1979, the Chinese government set up these zones on the coast near Macau, Hong Kong and Taiwan. Improved transportation, lower taxes, and other incentives attracted investments from foreign businesses. They helped stimulate innovation and helped China grow economically. FDI had to be joint ventures. Idea is to lure overseas Chinese investors. Easier to do business in SEZ. Example, Foxconn. The taiwanese company that assembles i-phones in Shenzen

Tianamen Square Protests

In china, urban youth and students conducted a peaceful demonstration for democratic reforms. They were fired on by soldiers, which brought an end to their protests. The suppression of the protest showed that China's leaders would use force to prevent certain reforms.

Effects of Mao's policy

Industrial output grows quickly. Agriculture stagnates. Equipment, coal, chemical fertilizer, motor vehicles, steel. Heavy-industry sectors supply other's demands. Spillovers to market development and consumption-small. Example, steel: links downstream by supplying good, low cost steel to machinery/ equipment, which is good for them. Links upstream to coal, iron ore, and specialized machinery.

Rural economy (FRC)

Inequality. Many farmers didn't own their land. Of rural households, 24% owned and farmed their land. 30% were tennant farmers. Other rural households were landlords. Life was hard for peasants. Many in debt, paying 20%-40% in interest rates. Held hard feelings toward landlords.

Concurrent macroeconomic reforms

Inflation told leaders to upgrade monetary institutions. Tightened macroeconomic policy. SOEs had to be profitable or they'd be shut down or privatized. As state gives up control over resources, revenues decline.

Han Agriculture

Intensive application of labor to small land plots. High land productivity, low labor productivity. APL > MPL' 0. Developed early-ripening rice. Two crops per year Irrigation projects Organic fertilizer (poop)

Explosion preceded by other Asian countries

Japan, Korea, Taiwan, HK, Singapore, etc.

Three Way War

KMT in power with Chiang as fascist dictator; Surviving communists retreat to countryside (Marx/Russian strategy: Revolution by urban workers vs Mao strategy: Mobilize peasants-that's where the people are! Peasants hate landlords) and set up alternative government and the Red Army. Additionally, Japan tries to colonize China. Is country with large growing population, no natural resources. Japan invades Manchuria (1931). Chiang says fine. Save troops to fight communists, Japan installs puppet government, Puyi head of state.

Long March (1934-1935)

KMT winning the fight against communists. Had them surrounded. Communists doomed. Then, about 85,000 of the communists evaded encirclement, and were pursued by the KMT. Found refuge at communist base in the north. 5% or 10% made it. Survivers burnished credentials in the CCP. During LM, power struggle between Russian backed members and Mao. Mao wins, emerges as CCP leader. Communists regroup, redouble effort to win over peasantry.

Communist Land Reform

Land reform (i.e., kill the landlords, take the land, divide among peasants). Communists in charge: Next topic, central planning era.

Why China became weak

Leaders wanted to maintain status quo. Dismissive attitude towards the barbarians. A huge miscalculation. Militarily weak: the Sun Tzu philosophy backfired-didn't build a large military, leaders diverted tax revenue (corruption)

Nationalists (KMT)

Led by Sun Yat Sen and later Chiang Kai Shek, tried to eliminate warlords and unite nation, but only Russia was interested in helping them

Dynastic change

Lose mandate of heaven Bad management, bad harvests, poor treatment of peasants, famine, oppressive taxation

Results

Managers given production quotas. Incentives were to meet high quotas, so they faked the numbers. Superiors believed the faked numbers. Since they believed agriculture was so productive, they cut back on resources available for food production. Government increased the grain procurement (tax). Believed crackpot science for agricultural techniques (deep plowing, superdense compact planting) could double crop yields. Result: less total food produced, more extracted from country side. Some labor moved from country side to work in (legitimate) steel mills. Backyard steel mills-Communes ordered to make steel. People burned their furniture, window frames etc. to fuel the steel furnaces. Melted pots and pans, tools to remake as new steel. The output was useless.

Qing Dynasty (1644-1911)

Manchurians were militaristic. Conquered the corrupt and bankrupt Ming rulers. In early years, Qing turned China into military power, expanded territory: Took over Mongolia, Tibet, Xingjian (in northwest) Forced men to wear the unpopular queue. Built the Forbidden City. Indication of excess.

The Cultural Revolution

Mao withdraws from government, gives up being head of state. Liu Shaoqi becomes HOS, works with Zhou Enlai and Deng Xiaoping to rebuild country. Switch from heavy industry towards consumer goods. Experimented with "household responsibility system" for peasants. Rights to plots leased to peasants who could grow crops to sell in rural market place. Then Mao becomes resentful. Plots the Cultural Revolution to purge the party. Mobs drag Liu out of his house and beat him. He dies in prison. Deng exiled to remote village. Deng's son thrown off the roof of a building. The Red Guards maurade thorugh the country causing havoc and destruction.

What country is China most similar to in GDP per capita?

Mexico, Brazil, or Egypt - other countries such as Korea, Taiwan, or Haiti have significantly smaller populations

First Republic of China - Industrial Economy

Naughton claims 1911-1937, before Japanese invasion, was a time of relative peace (Disagree!). Beginnings of modernization, in the treat ports by foreigners in foreign factories (Primarily textiles) - Naughton calls it enclave industrialization - Technology transfer: Chinese entrepreneurs learned the technology and start producing from Chinese-owned firms Manchuria. Industrializing by Japan Focused on heavy industry (railroads, steel). Supplying the Japanese war military machine, becomes launch pad for Mao's heavy industry. Bottom line: Emerging small 'modern' sector. Mass production in factories.

Han social structure

No aristocracy. No special advantage through birthrights. Socially mobile society. Contrast inheritance system with Europe. Sophisticated institutions

First census

Occurs under Qin rule, for the purposes of tax collection

Income Distrbution

One of the most unequal

British solution

Opium from India; create demand as drug pushers by developing Chinese opium habit/addiction

Xinhai Revolution (1911)

Overthrew China's last imperial dynasty (Qing Dynasty) and established the Republic of China, this revolution consisted of multiple revolts and uprisings.

Advanced technology

Paper (50 AD) Advancements in iron smelting. Good for making tools, and ploughs pulled by oxen. Seismonitor (detect earthquakes) Negative numbers (mathematical sophistication) Anesthesia

Qin governance structure

Partitions country into 36 provinces, led by appointed governors who collect taxes, conscript soldiers/laborers

Boxer Rebellion

People upset at Qing emperor for being so weak. 1899 rebellion in Beijing, China started by a secret society of Chinese who opposed the "foreign devils". The rebellion was ended by British troops.

First Republic of China (1912-1949)

Period characterized by, internal strife and civil war, WWII, no economic growth or progress Average annual GDP growth 1900-1950: 0.02% Population: 1900 was 415 million. 1950 was 552 million.

Hundred Flowers Campaign

Period from 1956 to 1957 in which Mao encouraged intellectuals to offer criticism of national policy, followed by crackdown on critics. People in CCP upset by criticism. Backlash. Mao reverses himself. Call critics 'rightists.' Initiate 'Anti-rightist' campaign. Target and purge the rightists, send to forced labor camps. Shuts down dissent that could have been useful when campaign causes tragedy in next years.

Student demands

Reevaluate government treatment of Hu Yaobang and endorse his views on democracy (freedom) End campaigns against spiritual pollution and bourgeois liberalization. (freedom) Publish salaries and assets of government leaders and their families (corruption) End Government censorship of the press, allow publication of private newspapers (speech) Increase government spending on higher education, increase wages for intellectuals (crummy living conditions) End restrictions on demonstrations in Beijing (speech) Hold democratic elections to replace corrupt or ineffective officials appointed by the CCP (corruption)

Han Economy

River system used to conduct commerce; Dense population conducive to markets. Widespread use of money, even paper currency Rule of law-established contract law, good for business. Merchant associations. Manufactured goods, done by households, not firms. Artisans perform small scale production.

Warlords

Roam countryside, effectively little nations backed by foreign interests. Own military, tax system, currency.

Township and Village Enterprises (TVEs)

Rural factories and businesses in China run by local gov't and private businesses; backbone of industrialization and growth, not agriculture

China at the beginning of the 19th Century

Russia expands into China's outer rim, Japan tried to occupy Chinese lands in order to become center of E. Asia. China weathers threats by using barbarians against barbarians.

Communists (CCP)

Russia promised help with the warlords, but only with communist involvement. Stood for (i) land reform, class warfare, (ii) expunging old attitudes like Confucianism, and (iii) atheism

Regulatory and Institutional Restructuring - corporate governance

SOEs reorganized as limited-liability corporations, and getting listed on stock market. Create financial regulation platform. SOE sector (and employment) significantly downsized

Benefits of Dual Track System

SOEs/collectives assigned a compulsory output plan of procurement for which they could use additional capacity to produce above the planned amount to sell in local markets. Allowed SOEs to learn and adapt to the market

Geography

Same geographic size as the US. Beijing latitude same as NYC. USA: 1/3 mountain, desert. 40% arable. 330 million people China: 2/3 mountain, desert. 10% arable. 1.3 billion people

Socialism with Chinese Characteristics

Socialism is public ownership of capital; A centralized plan; Egalitarism; Special attention to welfare of working people. Chinese characteristics: Reforms are legitimate as long as they promote growth and do not threaten the Chinese Communist party.

Deng's Southern Tour (1992)

Socialist Market Economic System. Deng was saying that economic reforms were good. The top leadership made it official and endorsed the socialist market economy system, meaning the market mechanism would extend to the entire economy. SOE downsizing, re-structuring. Focus on profitability The SOEs were money losers. They were either privatized, allowed to go out of business, merged with other SOEs. SOE sector downsized (SOE employment falls by 40 percent). End of the Iron Rice Bowl. Joint venture FDI-to learn the technology, Build exports through Special Economic Zones, then the WTO. Dismantled dual-track system

Rural sector reforms (collectives) under Deng

State gives up monopoly on industrial production. Encourages collectives to get into manufacturing. The surge in agricultural productivity led to surplus of rural labor, that supplied the emerging demand for labor by TVEs. Rural townships own largest number of collective enterprises, but are found in schools, neighborhoods and army units. These are Township and Village Enterprises (TVEs). Business can be farming, manufacturing,transportation, or commerce. Members decide how profits are distributed and retained, and how much people are paid. This is a local designation, not an ownership designation. Early on, most TVEs were collectives, but also private. State sector is largely absent in rural areas

CCP's main source of revenue

State owned enterprises

Essence of Confucianism

Strong national leader, strong family leader. Family and nation is more important than individual's wants and desires

Challenges of Reform

The landscape: Virtually no private businesses. Most significant urban enterprises were state owned, had little decision-making authority, and were more like government departments than business firms. Farmers were organized into rural collectives that owned all the land; they were forced to farm in teams and sell their output to the government at low, state-fixed prices. Individual prices and profit were meaningless. Companies had no stake in profitability.

Policy reversal overview

Tianamen Square caused the policy reversal; Rural enterprises starved of financing, driven out of business. Emphasis on urban areas and SOEs. Floating migrant population. Government embraces globalization and trade. Ascendancy to WTO.

Mao's economic aim

To keep China as an industrial power by developing a massive socialist industrial complex through direct government control. Based on trade partner USSR (source of technology), channel investment into heavy industry. Planned economic system phased into service (1949-76)

CCP makeup

Top echelons of the party: Reformers had rural backgrounds, were from the rural areas. Conservatives had urban backgrounds.

Qin and Confucianism

Tries to eradicate Confucianism by burning texts, killing scholars

Mao's command economy

Urban: Government owns large factories, transportation, communication enterprises. Rural: agricultural collectives own the land, manages the farm economy. Planners assigned production targets to firms, allocated resources and goods among the producers. Prices have no allocative significance. Factory products expensive, farm products cheap. Movement of people restricted to keep peasants in countryside. Finances used to audit and monitor, not to drive investment decisions.

Material balance planning

Used to run the economy. This is computing sources and uses of an individual commodity to allocate all supplies. Planners assign quantities, ignored prices.

Chinese Civil War

War between communist Mao Zedong and nationalist Chaing-Kai Shek. Nationalists steal aid sent by relief agencies, lose control of economy (14.1% inflation per day in 1949) The communists took over and forced the nationalists to retreat to Taiwan.

Heaven

Where the ancestors went after they died. Evidently everyone gains admission. Everyone happy there.

Self-employment establishments registered in China

Year Urban Rural 1981 0.86 million 0.96 million 1986 2.9 million 9.2 million 1988 3.8 million 10.7 million

Northern Expedition (1926-1928)

a campaign to unite China and defeat the warlords. in 6 months, the KMT and CCP defeated 34 warlords. Received food from peasants. KMT and CCP co-operated, together defeating northern warlords and imperialists. The soldiers on the Northern Expedition asked peasants not to pay rent / debts. After wiping out warlords, KMT ambushes communists in Shanghai

George Macartney

big guy in England. Former Governor of this place and that place. Envoy to Catherine the Great. Former Governor of Madras (region in India). 1793 Mission: Establish diplomatic ties between Britain and China. Establish embassies in Beijing and London. Obtain access to more ports on the coast. British want silks, tea, porcelain etc. This is the government acting on behalf of the business community. Royals have financial stakes too. England has a pro-business, mercantilist government.

Dual Track System

coexistence of market and planned economies starting in 1979; state gave up monopoly of SOEs for industrial production; innovative rural reforms start up; mix of private, collectively, and foreign owned businesses (FDI)

Confucianism

ideas of Confucius, emphasizing such values as family, tradition, behavior, and mutual respect; Does not mention God or an afterlife - not a religion. Instills a hierarchy of superiors/inferiors

Mandate of Heaven

in Chinese history, the divine approval thought to be the basis of royal authority; the Son of Heaven is responsible for disasters, bad harvests, etc., Heaven can remove the mandate from a bad ruler (a people's revolt);

Considered a ____ income country

middle income

Origins of Chinese capitalism

rural enterprise saves China - central tenet of Huang's book; Many large private sector manufacturing enterprises were rural in nature. Kelon Group, until 2005 China's largest refrigerator maker, was founded by entrepreneur in rural Shunde county in southern Guangdong province. Huanyuan, China's largest air-conditioner maker, is based in the Hunan. China's first automobile exports likely from the agricultural hinterland of Anhui province where Chery is located. Very few successful corporate giants originated in Beijing and Shanghai and Tianjin. Central planning was always weaker in rural areas than in cities

Qin Dynasty

the Chinese dynasty (from 246 BC to 206 BC) that established the first centralized imperial government (221) and built much of the Great Wall

Most Favored Nation

trading status describes a condition in which a country grants other countries favorable trading treatment such as the reduction of import duties