GEB 1305

China and the World

Lecture 3

The Development of Modern China:

Economic Development
Growth in the Republican Era, 1911–1949
GDP

• GDP estimates show that China was underdeveloped in the 1930s

• Maddison's (1998; 2010) PPP-based estimates put per capita Chinese GDP in 1934 - 36 at:

• 10% of US GDP and

• 26% of Japanese GDP

• China's relative backwardness is therefore clear

• Recent work continues to contrast Chinese stagnation with the transformative growth experienced
across Europe and north America in the two centuries up to 1945 (Pomeranz 2000; Allen et al.
2011).
Growth in the Republican Era, 1911–1949
Literacy Rates

• The post-1949 population censuses – which show literacy rates in the early 1980s by year of birth –
indicate high illiteracy rates for female born before 1949 (Bramall 2008: 194) :

• 95% for those born before 1923, and

• 70% even for those born in the late 1930s

Life Expectancy

• May have been as low as 25 years at birth in the Chinese countryside during the early 1930s
(Barclay et al. 1976).
Growth in the Republican Era, 1911–1949
Rate of Change

GDP Growth
• Chinese GDP growing at around 1% per year in the Republican era (Liu and Yeh, 1965;
Yeh, 1979)

Population Growth
• 0.5% per year

à The Chinese economy was growing at a glacially slow pace.

Growth in the Republican Era, 1911–1949

Three main reasons to explain this poor performance:

1. Basic infrastructure was lacking

• E.g.: China's railway network was thin and did not reach beyond the eastern provinces.

2. The Chinese economy was only shallowly integrated into the world economy

• This protected it during the Depression of the 1930s (Wright 2000), but it also meant that

only the coastal region reaped much benefit from foreign trade and investment.
Growth in the Republican Era, 1911–1949
Three main reasons to explain this poor performance:

3. The unproductive use of the surplus (Lippit 1974; Riskin 1975)

• This was blamed on parasitic landlords, who extracted a surplus via high rents and interest rates
but failed to re-invest it (Tawney, 1932)

à poverty and glaring inequalities in income and wealth

Solution: land reform, and it was the historic role of the Chinese Communist party to carry this out in
conquered territory in the late 1940s, and across the rest of the Chinese mainland in the early 1950s.
Root Cause: state failure, partly in terms of a failure to invest in infrastructure but also, and more
fundamentally, an unwillingness on the part of the Republican government to embrace the cause of
land reform.
Growth in the Republican Era, 1911–1949
• The war with Japan had devastating consequences, especially for eastern China.

• The industrial stock of Manchuria, the heart of what modern industry China possessed,
was heavily depleted by Soviet removal of much of the plant and equipment after 1945

• Some of China's most productive agricultural centres were laid waste by the impact of
warfare;

• The best demonstration of this is the famine which hit Henan, very much a border province
between Nationalist- and Japanese-occupied territory, and which led to perhaps 1.5 to 3
million excess deaths out of a provincial population of 30–40 million (Garnaut 2013).
The Maoist Era, 1949–78
• Much western and Chinese scholarship distinguishes between early (1949–56) and late Maoism (1956–78)
(Walder, 2015)

• In this account, the early 1950s was a period of great success, and the Party's mistake was to launch a ‘premature
transition’ to socialism in 1955–56.

• Mao’s China was always going to have a socialist command economy.

• The new PRC became part of a postwar Soviet-driven system of economic cooperation, signing trade agreements
with most of the newly communist Eastern European countries, and benefiting from Soviet technical assistance.

• The terms of such assistance were often favourable to China, with Moscow providing steel and factory fittings in
return for pork and tobacco.

• Sometimes the PRC also made gestures of solidarity, as in 1953, when it urgently despatched food to East Germany
after East Berlin had been shaken by protests against the government
The Maoist Era, 1949–78
Policy Mistakes:
• The attempt to accelerate growth in the late 1950s by developing rural iron and steel
production, which was premature and was a key factor in causing the devastating
famine of 1958–62, which killed over 30 million people
• The political instability associated with the Cultural Revolution was harmful for
industrial production
• High levels of defence spending, especially on Third Front enterprises established in
western China between 1964 and the late 1970s (Naughton 1988)
• Over-emphasis on grain production at the expense of cash crops (Shapiro 2001)
The Late 20th Century – “Open Door” Policy
• Deng recognized that the Cultural Revolution’s profound anti-intellectualism and xenophobia were proving
economically damaging to China

• Cultural Revolution had led China away from the path of genuine modernization.

• Now, the party’s task would be to set China on the right path in four areas: agriculture, industry, science and
technology, and national defence à “Four Modernizations”

• To do so, many of the assumptions of the Mao era were abandoned:

• Breaking down of the agricultural collective farms that had been instituted under Mao. Farmers were able
to sell an ever-larger proportion of their crops on the free market, and it was stated explicitly that cash
crops and small private plots of land were an essential part of the economy and should not be interfered
with.
• Urban and rural areas were also encouraged to set up small local or household enterprises, with nearly 12
million such enterprises registered by 1985.
The Late 20th Century – “Open Door” Policy
• Economic equality was no longer the goal of government.

• ‘To get rich is glorious’, Deng declared, ‘It doesn’t matter if some areas get rich first.’

• At the very start of reforms in 1978, China understood the importance of undertaking a gradual opening of its
economy to international trade and investment.

• It did so in a restricted manner by creating export processing zones (known as SEZs) with a focus on long-
term foreign direct investment (FDI)

• In 1980, the two initial SEZs were created in Guangdong and Fujian provinces, with another two added in a
year later also in the south.

• After Deng Xiaoping's southern tour of 1992, there was dramatic expansion of these export-processing zones,
which attracted FDI by offering concessions on tax and preferential treatment

• Nearly all provinces had a SEZ by the end of the 1990s (Lardy 1998).
The Late 20th Century – “Open Door” Policy

Special Economic Zone (SEZ)

• As a “window” for observing global trends in economic, scientific, technological,

managerial and market developments.

• As “a training ground” for talents in the Mainland.

• As “experimenting ground” for reforms such as special economic management

systems, flexible economic measures for enhancing economic cooperation and
technology interflow between China and foreign countries.
The Late 20th Century – “Open Door” Policy
Special Economic Zone (SEZ) – Preferential Treatment Provided for Overseas Businessmen

Management
• SEZ enterprises may be cooperative or wholly-overseas-owned ventures.

• They are free to employ personnel from Hong Kong and Macao or foreign personnel as managing
staff.

Tax

• All equipment and means of production are exempt from import tax.

• All finished or semi-finished products for outside consumption are exempt from export tax.
• For enterprises involving investments exceeding US$5 million, reductions of 20-50% income tax, or
tax holidays of one to three years may be granted in addition to exemption from the local surtax.
The Late 20th Century – “Open Door” Policy

Special Economic Zone (SEZ) – Preferential Treatment Provided for Overseas Businessmen

Foreign Exchange Controls and Management

• SEZ enterprises may open accounts and settle foreign exchange matters at the Bank of China

and registered overseas banks in the SEZ.

• All properties are transferable and capital funds may be remitted out of China should a SEZ

enterprise decide to cease operation.

The Late 20th Century – “Open Door” Policy

• In 1992, another iteration known as Free Trade Zones (FTZs) were created to facilitate the take-
off of the ‘open door’ policy.

• FTZs are specially designated urban areas selected for receiving preferential trading privileges.

• The investment incentives in FTZs are extremely attractive since exports and imports are free of
any taxes or tariffs so long as the goods are not sold in China.

• Items intended for re-sale in China were, by contrast, subject to high tariff rates.

• The best-known FTZs are Shanghai's Pudong district, particularly Waigaoqiao, Tianjin Harbour,
Shenzhen's Futian, Dalian, and Haikou on Hainan Island.
The Late 20th Century – “Open Door” Policy
• China continued its push to attract more advanced technologies by developing High-Technology
Development Zones (HTDZs) in 1995.

• The intent of the HTDZs was to increase China's research and development (R&D) capabilities
through fostering both domestic and foreign investment.

• With the exception of the three inner provinces (Xinjiang, Tibet, and Ningxia Autonomous Regions),
every province has at least one of the 53 HTDZs.

• Each zone includes a number of ‘industrial parks’ and ‘science and technology parks’ open to
domestic and foreign high-tech investors.

• E.g. ‘Haidian’ district in Beijing, often likened to Silicon Valley

China in the Global Economy

• The ‘open door’ policy was successful in boosting exports as well as imports

• China quickly rose throughout the 1980s to increase its global market share in

manufactured goods trade by six-fold in a decade and to become the world's largest trader

within another decade by 2009.

• China started negotiating for entry into the WTO in 1986 and succeeded 15 years later (in

2001).
 China in the Global Economy
• To join the WTO, China agreed to:

§ reduce tariffs across the board on imports of manufactured goods to below 10% and

§ heralded a period where its own exports, particularly in labour-intensive products like textiles and clothing, could
be sold worldwide as part of the multilateral trading system that covered the near totality of international trade
and certainly vast swathes of manufactures which themselves accounted for over 80% of world trade.

• Joining the global trade body, though, was more involved, as the rules-based organisation mandated changes in
China's governance of its business sector in a number of ways:
• some of these were due to the WTO's own principles, such as non-discrimination
• but some were also because of the concessions granted by China in negotiating with each of the existing WTO
members for entry. E.g. China agreed to eliminate geographical restrictions such that foreign firms can operate in
more than one province, whereas previously it resisted such expansion so that a firm with offices in Beijing could
not transact in Shanghai.
 China in the Global Economy

• In other areas, China is bound by its own terms of accession.

• One of the WTO's articles pertains to a harmonised intellectual property regime that caused
China to significantly revise its own patent and related laws, particularly in terms of
implementation.

• Again, China signed up to the WTO's IPR rule, known as the TRIPs (trade-related aspects of
intellectual property) agreement, upon entry, so it agreed to be bound by its tenets despite
having an under-developed legal system

• In many respects, institutional change accompanied China's entry into the world economy.
 China in the Global Economy

• In the 30 years from 1978 to 2021:

• China’s GDP soared from RMB 364.5 billion to RMB 114.4 trillion

• Per capita GDP increased from US$ 156 to US$ 12,556

• Urban per capita disposable income increased from RMB 343 to RMB 47,412

• Rural per capita disposable income increased from RMB 134 to RMB 18,931

• The country’s foreign exchange reserves increased to USD 3.2 trillion.

China in the Global Economy

• Internationally, China is becoming ever-more concerned about its own image,

because it is making its presence more prominent in Africa and Latin America,
where it is becoming an exporter of finance capital (in sharp contrast with its
desire to import FDI).

• In Africa in particular, it has used its influence to invest in countries such as

Zambia, Zimbabwe, Nigeria, and South Africa, where minerals, uranium, and oil
are found.
 China in the Global Economy

• Although China is developing a legally protected concept of private property (a law enshrining this

was passed in 2007), and state ownership of industries and enterprises is clearly declining, the state
and the CCP are still heavily entwined with business.

• Party officials have frequently switched from taking a political role to an entrepreneurial one, and

good relations with the CCP are often essential to win licences to do business, or to raise capital to

set one up.

• The state and the party have changed form immeasurably since the era of Mao, but neither has

retreated from society; they have merely found new ways to interact with and control it.
References
• Bramall, C. (2018) “Continuity and Change: The Economy in the Twentieth Century”, in W. Wu &
M. W. Frazier (eds) The SAGE Handbook of Contemporary China. SAGE Publications Ltd.

• Yueh, L. (2018) “Evolution of Market Reforms”, in W. Wu & M. W. Frazier (eds) The SAGE
Handbook of Contemporary China. SAGE Publications Ltd.

• Mitter, R. (2008) “Making China Modern” in Modern China : A Very Short Introduction. Oxford
University Press.

• Mitter, R. (2008) “Is China’s Economy Modern?” in Modern China : A Very Short Introduction.
Oxford University Press.