China and economic globalisation: Dynasties, Mao and Deng period

China and economic globalisation: Dynasties, Mao and Deng period

Sam Choon Yin (March 2005)

 

Introduction

In the simplest term, economic globalisation encompasses more intensive integration among economies to exchange goods, services, technology and ideas. This can be translated into better understanding of one’s culture and ways of living, many of which are essentially the product of liberalism. Some observers believe that common belief of democratic principles like freedom to choose and fair elections promote peace in the sense that these economies are less likely to go into war with each other. Russett (2001) provides evidence in support of this view, suggesting that democracies rarely engaged in any level of militarised disputes with each other. For instance, he finds that pairs of democratic states have only one-eighth chance to threaten the use of force against each other and only one-tenth changes of actually doing so. It was also found that established democracies fought no wars against one another during the entire twentieth century, a reason being that ‘democracies are more likely to employ democratic means of peaceful conflict resolution’, and that they are ‘readier to reciprocate each other’s behaviour, to accept third party mediation or good offices in settling disputes, and to accept binding third-party arbitration and adjudication’ (p. 233).

Economic globalisation should also promote prosperity. Classical economists like Adam Smith and David Ricardo propounded the idea that countries specialising in those goods which they have an absolute advantage or comparative advantage and then export them, tend to produce more output. In theory, this should lead to an improvement in global welfare. In reality however, the proposition is not without problems. Many governments in both developed and less developed countries are not willing to let go protectionist measures. Developed countries like the US, Japan and those in Europe for example provide subsidies to their farmers. They undermine the poorer farmers in less developed countries in exporting their output to the richer countries. The poorer nations on the other hand are reluctant to remove tariffs, citing protection of infant industries as a reason. It is also believed that many of the governments are not willing to forgo the much needed tax revenue to finance their expenditure programs to improve the people’s life.

China is one of the economies currently in transition. Recognising that globalisation is a non-reversible trend China started to open-up its economy since the end of 1978 (more specifically, during the Third Plenary Session of the 11th Central Committee of the Communist Party of China). In 1986, China began its negotiation to join the World Trade Organisation (WTO). Unfortunately, it took 15 years to complete. One of the difficulties faced by the Chinese was that the country was not able to clarify to what extent it had been practising market economy as defined in the West. For example, before 1992, China representatives were not able to respond to questions by Western representatives with regard to the operations of the market economy in China, like who actually determined the product prices in organisations and whether an enterprise in China could operate independently or not. It was not until the late Deng Xiaoping clarified in 1992 that what China practiced was a socialist market system, which eventually provided a much-needed framework for internal government officials to follow, and the rest of the world to better understand China’s model of economic development. Deng made it clear that the market economy concept was and should not be a monopoly of Western capitalism. From then on, the National Congress of the CPC used the framework in implementing the social market economy for China and subsequently paved the way for China’s entry into the WTO.[1]

As part of the China-WTO agreement, China is required to reduce its tariff (since 1992, tariffs had been reduced from an average of 43 percent to 17 percent), reduce its non-tariff measures like import quotas and license restrictions, open-up services trade like the telecommunications, finance, legal, accounting and air services. The Chinese on the other hand wanted a balance of rights and obligations. It argued that upon entrance to the WTO, China should enjoy long-term, stable and most-favoured-nation status among all the WTO members. China also reminded the WTO that as a developing countries China should enjoy all preferential treatment given to all developing countries according to the WTO regulations. Furthermore, China’s accession should correspond with China’s specific situation and thus the opening up of young and services industries must be given a transitional period. China’s entrance to the WTO signals a major change in the global economy.

Early periods

It is useful to note that China’s economic relations with other countries did not begin in the 20th century but much earlier. During the Qing dynasty (1644-1796) for example, China had recorded consistent trade surplus with the European counterparts. Chinese tea and orange were particularly attractive to the Western countries.[2] The trade deficit with China did annoy the Europeans to some extent and the problem was compounded by the fact that Europeans traders were not allowed to trade fairly in the Chinese ports and market. This soon changed following the sale of opium from the European merchants from Portugal and Britain to the Chinese. The huge demand for opium from the Chinese reversed the balance of trade in favour of the Europeans. The imperial government tried to stamp out the traffic in opium by passing laws to forbid the import of opium. But poorly guarded ports/check points and corruption meant that it was not difficult for traders to smuggle opium to China.

The country’s resentment over the opium trade, compounded with British unhappiness over the textile manufacturers’ inability to trade fairly with China led to a war between the two countries in 1839. It did not help that prior to the outbreak of the war, the Chinese government had confiscated and destroyed British stock of opium. The war, popularly known as the opium war, went on for three years before British firepower prevailed. The Qing government had to ask for peace and suffered dearly from the war. In the peace treaty signed in 1842, the Qing government had to open five treaty ports to trade, surrender Hong Kong to the Great Britain and pay the British government a small indemnity. Trade expanded as a result albeit in favour to the West.

Mao Zedong and China’s Economic Policies

It was after the World Was II where rapid spread of western democratic values began. The economic and military power of the west advanced the liberalism doctrine to economies threatened by the communist forces. China on the other hand strongly advocated the communist ideas in the post WWII. Led by Mao Zedong and the Red Army, the communist quickly defeated Chiang Kai Shek’s Nationalist Party (possibly the crucial turning point was the surrendering of Shenyang, a metropolis at southern Manchuria to the communists). Chiang and the Kuomintang government retreated to the island of Taiwan. The communist proclaimed a new government, the People’s Republic of Chine (PRC) on 1 October 1949.

With the benefit of hindsight, the capitalism prevailed. Economies adopting the system grew more rapidly as compared to communist countries like China, Cuba, North Korea and the former Soviet Union. The planned economies were fuelled with problems, partly because they failed to develop the necessary infrastructure and institutions to support the development process. These nation states as a result remained backward. Shaw (1997, p. 500) notes that international relations also suffered in this regime citing examples like the fallout between Russia and China, and political violence as observed in Yugoslavia (in 1949) and Eastern Germany (in 1953). With these problems looming, it is not surprising then to see China opening up its doors in the early 1980s, albeit slowly. Likewise, the Eastern European countries began to throw out the centrally planned system. The latter event basically coincided with the end of the Cold War. The fall of the Berlin Wall in 1989 liberated the liberalism school and paved the way for a general acceptance of the democratic system as ‘good’ and all other systems as ‘bad’. Shaw (1997) argues that it is this political-military unification in the post Cold War period - dominated by the Western bloc (comprising North America, Western Europe, Japan and Australasia) with the ‘Third World periphery’ - that has contributed significantly to cultural and economic globalisation.

To be fair, Mao’s economic policies were met with some success in the early years. Essentially, he saw industrialisation as the key to greater power. However, despite having abundant natural resources, China was at that time hampered with the lack of capital. The problem was worsened by the ruins resulted from the war with Japan. Modest financial loans from Soviet Union and the seizure of property of landlords provided inadequate capital. The Chinese required capital urgently. China had to rely on the agriculture sector to produce only enough for the farmers to eat and the surplus sold to the foreign markets. The revenue collected from exports was used to buy machines and technical equipments. Expansion of the heavy industry, which formed part of the First Five Year Plan of the Chinese economy (1953-1957), was promoted. The targets of the plan were largely reached. For example, the production of iron and steel tripled between 1952 and 1957.

Pleased with the results, Mao launched the Second Five Year Plan. More demanding than before, Mao wanted to make a Great Leap Forward with everyone being asked to be an ironmonger to boost the output of iron and steel. But the government soon abandoned the ambitious project realising that the crude iron produced was nearly filled with impurities. The Great Leap Forward was deemed as a failure even among Mao’s compatriots.[3] Inadequacy supply of farm products (worsened by the drought problem) forced the Chinese economy to import food and other, a problem that was exacerbated by the increased in the population to about 800 million. Starvation, malnutrition and diseases took 16 million lives between 1959 and 1961.

During this period (late 1950s) there was a growing disagreement on Mao’s economic policies. Mao’s authoritative power was thus undermined. He blamed the education system for promoting a widening gap between the intellectuals and manuals and between urban workers and peasants. The intellectuals and urban residents were essentially more receptive of capitalist ideas and wanted government policies to reflect more of the people’s views. To crush these critics, Mao used the civilian organisation known as the Red Guards to ‘uphold’ his ideas to the extent that professionals like professors, scientists, factory managers and government leaders were interrogated, beaten up and some killed. Fearing that capitalist ideas were going to reach the younger generation, higher education was closed in July 1966 and remained closed until 1969/1970. This period of fear and chaos, popularly known as the Great Proletarian Cultural Revolution, lasted from 1966 to 1976, the year Mao died.[4]

Deng Xiaoping and China’s economic policies

The death of Mao Zedong on 9th September 1976 and termination of the reign of the ‘Gang Of Four’ marked the rise of Hua Guofeng in the political arena. Hua took over as Chairman of Chinese Communist Party (CCP). The political leadership of the party changed hands again in 1978 when Deng Xiaoping defeated Hua in the political struggle. Deng immediately launched his idea of ‘Four Modernization’ - industrialization, agricultural development, defence and science and technology. According to Deng, the Four Modernization would only be achieved if China opened up its economy and allowed foreign investments and technology to come in.          

By opening up the economy, the individuals in the non-state enterprises were allowed to undertake their own decisions. Even high-ranking officials in the state enterprises were given more responsibility and competition to enhance their potential abilities. The economic reform reduced the role of government in the following ways. First, in terms of ownership, the pre-reform system of single ‘unified’ of enterprise was abandoned. Individual, private and foreign capital ownership were instead permitted. An example was in the agricultural sector where co-operative sector and merging of some state industries into enterprises were possible. Second, workers were rewarded for better job done although the seniority system would still play a role in determining total remunerations. Third, price controls of most goods were lifted. This essentially allowed price mechanism to have a greater say in determining the price and quantity supplied. Basically, individuals were to be given more freedom to make decisions but under the direction and macroeconomics regulation of the government. This perhaps is what they mean by transforming China into a ‘socialist market economic system’.

The nominal GDP increases by more than three times between 1970 and 1991. The growth was partly due to the increase in the foreign direct investment. Most of these investments took place in designated areas - the Special Economic Zones of Shenzhen, Zhuhai, Xiamen and Shantou as well as the 14 coastal areas set up in 1984.[5] Incentives in the form of reductions and exemptions from taxes were set up to encourage foreigners to build their factories there. With the availability of low wage ‘semi-skilled’ workers and large domestic market, investors from Singapore, U.S, Hong Kong and Taiwan were attracted to China. Total trade as a share of GNP grew steadily from 12.8 per cent in 1980 to 37.96 percent in 1992 (Ding, 1995, p.42).[6]

In the agriculture sector, a large proportion of the growth was due to the highly successful ‘Production Responsibility System’. The program, initiated by Deng, was aimed at improving the living conditions of the rural farmers. The Production Responsibility system managed to increase farmers income threefold from 160 yuan in 1980 to 630 yuan in 1990. (Note that the nominal income of the rural farmers increases year after year although their income relative to the urban workers fell after 1984). The system encouraged the farmers to use high yielding inputs to increase output and maintain low costs means of production to reap maximum benefit. The farmers were motivated to do so as the new system allowed the farmers to sell their surplus output in the free market after fulfilling the quota that must be sold to the government. The used of chemical fertilizers had increased tremendously from 89 to 167 kg per hectare since 1980 (Tollens, 1993, p.71). Moreover under the new system, the farmers were given more autonomy to decide on the means of production and the allocation of resources, which under the old system were in direct control of the state. With the system in placed, the farmers slowly switched to the production of cash crops in order to fetch higher prices in the open market. As a result, the agricultural output grew at an average annual rate of 3.9% from 1952 to 1990. The growth rate from 1952 to 1980 was 3.1% and made a quantum jumped to 8.2% in the period 1980-85 (after the reforms) and thereafter declined to a respectable 5.1% (Tollens, 1993, p.70).

A factor that had contributed to the development of the rural area was the rise of Town and Villages Enterprises (TVEs). There were more than 17 million rural enterprises comprising of machinery, construction materials, food processing, textile and chemicals. The growth of the TVEs turns out to be a successful story of China’s economic reform. Not only had they helped to improve the income, employment, productivity and status of the rural areas, TVEs have also contributed about 33% of China’s exports worth US$ 40 billion in 1994 (Lu, 1994, p.1).

However, Lu (1995, p.16) noted that TVEs entrepreneur had an inclination toward the development of personal relationship with the manager of state-owned enterprises. Without proper controls in place, this essentially translates to more serious corruption particularly when the incentives and opportunities to do so become more abundant during the transitional period. TVEs entrepreneur also made unauthorized copy of technology from other firms like making pirated copies of computer software, compact disc etc. Their actions could jeopardize the relationship between China and foreign countries.

Conclusion

This article outlines China’s economic globalisation progress from the early periods to the era dominated by Deng Xiaoping. After Deng, the economic architects include prominent figures like President Jiang Zemin, Premier Zhu Rongji, President Hu Jintao and Premier Wen Jiabao. This period saw impressive economic growth in the Chinese economy (in 2004, the Chinese economy grew by 9.5 percent). The new challenge, as was noted in the recently completed NPC and CPPCC[7] session in March 2005 is to build a harmonious society within China to better integrate the Northern and Western parts of China as well as promoting the rural sector.

 

References

Ding, Jingping, 1995, ‘China’s Domestic Economy In Regional Context’, The Center for Strategic and International Studies, Washington D.C.

Linges, G.J.R & Forbes, D.K, 1990, China’s Spatial Economy: Recent Developments and Reforms, Oxford University Press, New York.

Lu, Ding, 1995, ‘Development of China’s Township & Village Enterprises: Lessons For Vietnam’, Cyclostyled.

Russett, Bruce, 2001, ‘How Democracy, Interdependence, and International Organisation Create a System for Peace’, in C. Kegley and E. Wittkopf (eds.) The Global Agenda, 6th Edition, McGraw-Hill, New York, pp. 230-241.

Shaw, Martin, 1997, ‘The state of globalisation: towards a theory of state transformation’, Review of International Political Economy, 4, 3, Autumn 1997, pp. 497-513.

Tollens, Eric, 1993, ‘Agricultural Reforms and Prospects for Agricultural Development’, in Frantzen, Piet (editor) ‘China’s Economic Evolution’ VUB Press.



[1] Given the huge market in China, it was not surprising that more and more economies around the world wanted to negotiate with China as it began to integrate with the global economy. As China bids to enter the WTO in 1999, the results of bilateral and multilateral negotiations were put together in legal terms of the WTO that were accepted by both sides. China obtained formal approval as a member at the November 2001 Doha meeting and become a formal member in early 2002.

 

[2] The Middle Kingdom was often regarded as self-sufficient which translated to lower imports relative to exports. Emperor Qian Loong made this point succinctly in his letter to the King of Great Britain, ‘There is nothing that we do not possess….the products of the foreign barbarians are really not needed to balance supply and demand’.

 

[3] During the Great Leap Forward, farmers were arranged in communes (large agriculture units) with no ownership of land but were given merely food and shelter.

 

[4] Things stated to get better in the early 1970s. Failing health forced Mao to concede party leadership to Premier Zhou Enlai who unlike Mao, believed that China desperately needed to restore the position of trained administrators, technicians, educationalists and scientists.

 

[5] Even before the economic reforms in 1979, the development of these three areas has been unequally distributed. The disparity was created due to historical events (e.g. the concentration of the treaty ports in the 18th century in the east) and perhaps a more important factor, the physical constraints faced by the western provinces. Its inaccessibility and poor topographical conditions increased the costs of industrialization in the west. Despite knowing this, Mao attempted to industrialize the interior zones by allocating 60% of the total investment outlays during the Second (58-62) and Third (66-70) Five-Year Plan in the interior with special emphasis on heavy industries (Linges and Forbes, 1990, p.13). This is because firstly, Mao wanted to develop the potential of the interior provinces and secondly, there was a need for China to be self-sufficient after the breakdown of the Sino-Soviet relationship in June 1960 (ibid, p.14).

 

[6] Deng believed that developing the coastal areas with good infrastructure and transportation facilities is a much better policy than the one implemented by Mao (who stresses balanced growth). Deng hopes that the growth and benefits enjoy by the coastal areas will trickle down to the interior zones. However, Deng’s policy has lead to greater income inequality. Thus, the establishment of the Special Economic Zones in 1979 and 14 coastal cities in 1984 marked the expansion of disparities between the coastal and the interior provinces.

 

[7] National People’s Congress (NPC) is China’s top legislative body. The CPPCC stands for National Committee of the Chinese People’s Political Consultation Conference.