Transition and Development in China Review

Transition and Development in China
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Transition and Development in China ReviewChina's transition from a planned economy has succeeded while similar reforms in the Soviet Union and its satellites created initial production downturns and increases in unemployment, and their subsequent efforts have not been nearly as successful as China's. The key theme of this book is comparing China gradualist path with Poland's more radical path, as well as Hungary (another more gradual approach); in reality, the author doesn't even come close to accomplishing these goals, but it doesn't matter given her other contributions.

China undertook its transition and development process without a clear blueprint at the outset - instead, it was led by Deng's insistence on facts and results. Unfortunately, the book is replete with long-winded and often impenetrable writing, and the chapters lack focus or overall cohesion; to be fair, much of the problem is due to poor Chinese-English translation. Further, it does not cover a number of important components - eg. how China's state-owned enterprises (SOEs) were eventually forced to compete, the continuing controversy over forcing joint venture partners to contribute technology (a WTO violation, albeit a clever one), the latest on RMB manipulation (an IMF violation, also clever), the Tienanmen disaster and its link to economic reforms, why certain key sectors (eg. communications, energy, autos, metals, aviation, transportation) were retained under government control yet made competitive, Deng's early 1990s 'Southern Tour' to revive transition efforts, how the government prevented speculation in its RMB currency, etc. The 'good news' is that, with considerable reader effort, the book explains why China's economy evolved the way it did, beginning with the logic of Mao and how that became a 'negative legacy.'

China's first 30 years of development were led by Mao and dominated by concern over Sino-Soviet relations and the Cold War. A $2 billion loan from the Soviet Union started things out. The 'Third Front' (locating key industries in innermost areas), accumulating funds for heavy industry and chemicals through agricultural sales (supposedly boosted through forming communes and following new centrally-directed tactics) and light industry (eg. textiles), and advocating catching the U.K. in steel production within 15 years formed the core of Mao's 'Great Leap Forward.' Mao emphasized that each region should construct its own independent industrial base, for military security reasons. Budget authority was concentrated in the central government. About 30% of investment was military. Family registration, food, and labor control systems were established to prevent massive unwanted migration; these were later relaxed, then eliminated after post-Mao reforms ended food scarcity.

Difficulty in supervising the agricultural communes caused work points to be allocated equally, and production suffered; inept direction from the top (planting seeds too closely, deep plowing, leaving large areas fallow to concentrate fertilizer usage, mandating the killing of insect-eating sparrows because they also ate grain, constructing irrigation systems without proper engineering, diverting field labor to steel production, etc.), along with flooding and droughts brought massive shortages and starvation; Mao's plan to use grain exports to repay the Soviet loan and impress the world further acerbated problems. Agricultural labor productivity decreased from 7 (U.S. = 100) to 6; at the time Japan was 48, USSR = 28, Taiwan = 18. Backyard steel production was another Great Leap disaster - technologically impossible, it drained resources. Overall, Chinese heavy industry lacked incentives for efficient capital investment or maintenance, and massive inefficiency resulted. The ensuing Cultural Revolution (1966-76) brought more economic stagnation, political chaos, and intellectual decline - the latter due to school/university closings and the persecution of intellectuals. Upon Mao's death, both his and the Chinese Communist Party's (CCP) status among the Chinese people had greatly deteriorated.

Transformation began under Deng Xiaoping in 1978, aided by the recognition of the huge disparity between China and the world. (It was especially embarrassing to be compared with Hong Kong and Taiwan - areas China wanted to reclaim. The 'good news' is that rather than cover this up aka North Korea, China confronted reality.) Deng's ultimate goal was to double GDP by 1990 (achieved by 1987), double again by 2000 (achieved by 1994), and once again by 2030-2050 (achieved in 2004) to become a 'middle-developed' country. Peace, abandoning class struggle, and an open-minded mentality (pragmatism) were essential to accomplishing this. Deng also argued that military expenditures had to be reduced until China achieved a higher level of economic development.

Author Yun provides interesting comparisons of Mao and Deng's personalities and their impact. Mao feared the outside world - he had only been to Russia; Deng had spent six years in France and also been to the Soviet Union. Deng was also less emotion and more rational than Mao, more gradual than Mao's 'radical' tendencies, more focused on economics compared to Mao's emphasis on politics, and more pragmatic than Mao's egalitarian emphasis. Under Deng, China turned from autarky to encouraging foreign investment and technology. His slow approach allowed citizens to endorse the changes because it seemingly thereby became a process without losers - major reductions in state-owned enterprises (SOEs) and government didn't occur until the mid-1990s, at which time fast-growing alternatives (TVEs, foreign firms, private firms) and a new social safety-net were able to cushion those displaced.

Deng stressed 'learning by doing' ("less talking, more action"), and experimentation ("crossing the river by feeling the stones"), rather than ideology or dictation. Xiaogang village provided the first experiment - 18 farmers secretly broke up their commune land and other assets in 1978 into private segments, and quickly prospered; previously their families had been reduced to begging. This was quickly endorsed the CCP leadership, adopted by almost all farmers, and boosted reformers' credibility with an early success. Reforming agriculture was not only the first step, it was also the easiest, and most important step. 'Most important' because it freed some 200 million to move to more productive new Town/Village enterprises (TVEs) established by nearby governments (eg. light manufacturing) or to new foreign-owned factories in the coastal regions. (Those hoping China's recent industrial strife signals the end of its low-cost manufacturing need to remember that about 250 million more rural residents are waiting for their opportunity for industrial jobs.) Factory productivity was 26% lower in 2000, compared to other Asian economies, but has since grown at an annual rate of 6.6% and passed those others.
'Special Economic Zones' (SEZs) were almost as quickly established in several coastal areas, some adjacent to Hong Kong and Macao. These facilitated experiments (eg. taxes, work rules, investments) - politically easier to sell, and safer because large-scale disasters such as Mao's 'Great Leap Forward' were thereby prevented. China's gradualism approach was both the result of lack of consensus, and Deng's tactic of avoiding confrontation. 'Partial reforms' were accepted in some instances - dual pricing being the most obvious example. Production exceeding assigned quotas was allowed to be sold at market, instead of state-set prices; some products, such as coal, were priced lower for manufacturing input than home heating - an obvious invitation for corruption. Eventually state-set prices and food rationing were abolished, and authority, revenues, and responsibility for economic development were delegated to factory managers, provinces and cities. China's large SOEs were forced to compete with multinational enterprises (MNEs) in the mid-1990s - massive layoffs, mergers, and privatizations followed. This may have been initiated by China's leadership using 2001 WTO membership requirements to leverage and direct change after the Tienanmen disaster protesting corruption, inflation, and failure to grow fast enough. Many of the SOEs and TVEs were taken over by management buyouts (MBOs) or local bureaucrats. Five cycles of cutbacks in the number of government agencies and personnel have taken place, the latest in 2003. State-owned banks were the last sectors to undergo reform - formerly their loans were mostly based on relationships and directed to SOEs; this had resulted in large amounts of non-performing loans that the state was forced to absorb.
Deng's fellow leaders initially were mostly conservatives that opposed change; on the other hand, they recognized that more of the same would destroy the CCP and themselves. Deng was able to take control after the 'Gang of Four' (Mao's wife + three others) overplayed their hand and were jailed after Mao's death. Through unwavering support for the CCP's monopoly power, his respect within the military (Deng had led fierce resistance efforts against the Japanese), clever replacement of the 'Old Guard' with newer, more educated and progressive leaders, a willingness to retreat when problems or resistance occurred, and remaining in power for over a decade (1979-1992), Deng was able to turn China around and achieve his goals. Today, economic development continues to be a major focus, but has been joined by pollution, inequality (both inter-regional and local), and corruption concerns. Disrespect for the CCP and its leaders, however, is no longer an issue - a 2010 Pew Poll found Chinese citizens having the greatest satisfaction with national conditions (87%) and the economy (91%) of 24 nations; U.S. citizens scored our government at 30% and 24%.
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