18 The People’s Republic of China
BOX 1
Area (Thousand sq. km.)
China
9,597
Yuan
Population 2000 (millions)
1261
Population Growth Rate
1.1%
GNI per capita 2000
$840
GNI per capita PPP
$3,940
GDP Growth 1990-2000
10.3%
Inflation Rate (1995 – 2001)
--
% of GDP
Value Added as %
of GDP 2000
Currency
Agriculture
16%
Industry
49%
Services
34%
General
Government
Expenditure
15%
22%
Exports
INTRODUCTION
CENTRAL PLANNING, 1952–1959
The Soviet model was followed with reliance placed on five-year materials balance plans.
Soviet planners and technicians were imported and a formal planning apparatus put into place.
In the early 1950s the Chinese economy was by no means in a parallel position to that of the Soviet
Union, because:
China’s population was much larger
Communications systems were much less well developed -- Poor flow of info to center.
Chinese economy was not as highly unified and integrated as that of the Soviet Union.
Poor transportation and the historically high degree of regional self-sufficiency (exacerbated during the
period of “warlordism” in the 1920s and the struggle with the Japanese) meant that gains from
centralizing the economy were much more difficult to grasp.
Much power remained in the hands of municipalities and provinces, and even the prefectures and
townships.
At the height of planning in China, only 500 commodities fell under mandatory central control, in
contrast to the more than 20,000 commodities that were part of the Soviet material balance plans.
THE GREAT LEAP FORWARD, 1958–1961
1

The end of the first five-year plan in 1958 coincided with reforms to the planning system that
recognized the impracticability of “taut”1 central planning in the Chinese economy,

Superceded by the Great Leap Forward, a political initiative to harness the ideological fervor of
the Chinese population to the task of raising industrial output.

At the same time as China continued to pour investment into capital-intensive heavy industry,
Mao and the leadership exhorted the population to increase the output of basic industrial goods
through labor-intensive enterprises in rural areas. This approach of using both capital- and laborintensive technologies to produce the same goods was characterized as “walking on two legs.”

Mao Tse Tung urged a sharp increase in steel production through the development of small-scale
furnaces, and it is estimated that some two million small furnaces were established during the
first two years of the Great Leap Forward, employing some 80 million people on a full or parttime basis. Official statistics show that industrial output grew sharply at the outset of the Great
Leap Forward; net material product was up by 22 percent in 1959 alone, but it soon became
apparent that this was being achieved at great cost, and much of the growth was actually an
illusion.

After an initial period of feverish activity, the incentives of revolutionary fervor and rhetoric
cooled.

The countryside became scarred and the environment adversely affected.

Soviet advisors were frustrated by what seemed a perverse rejection of socialist rationality, and in
an atmosphere of growing antagonism between the two nations, technical assistance was
suspended in 1960.

Net material product in China fell sharply in 1961 and 1962, but greater stability was
reestablished in 1963 and a period of relative calm saw a rise in industrial output.

Continuing investment in heavy industry helped the rebound, and industrial output rose sharply
between 1963 and 1966. Chinese technocrats filled the void left by the departing Soviets,
pursuing central planning once more, though with a greater degree of pragmatism.

The high degree of provincial autonomy left local governments free to use their flexibility to
increase output in whatever way they chose.
Taut in this context refers to a “lack of slack” in the planning system, provided by keeping inventories to a minimum.
THE CULTURAL REVOLUTION, 1966–1970

Mao’s Proletarian Cultural Revolution.

Exactly what prompted the Chinese leader to embark on that course at that moment in history is
still open to dispute.

In part he seemed convinced that only complete rejection of western influence would enable
Asia, including China, to be economically self-reliant.

He was also genuinely convinced that Stalinist economic management had resulted in a new
structure of class and privilege as obnoxious to him as the old.

Finally, and perhaps decisively, he felt a need to strengthen his own political position vis-à-vis
the technocrats and bureaucrats.

The Cultural Revolution resulted in Chinese society being turned upside down. Bureaucrats,
planners, and technocrats were stripped of authority and sent off to the countryside for “political
reeducation,” while power shifted to radical political cadres.

There were considerable economic costs to the turmoil. Again the economy lurched into a sharp
recession with material output falling by about 15 percent in both 1966 and 1967; it rebounded
again in the last years of the decade as some form of normality returned.

By the beginning of the 1970s it was clear that the era of Mao and Chou En Lai was nearing its
close, so political factions began maneuvering for power.

On the left, the gang of four, led by Mao’s wife, tried to sustain the Cultural Revolution.

On the right, a moderate and technocratic leadership sought the restoration of rule by bureaucracy
and party. Both Mao and Chou died in 1976 and nominal power passed to Mao’s chosen
successor Hua Qua Feng.

However, by this time the moderates were in ascendance and Deng Xiaoping, a highly capable
administrator, was rehabilitated from the indignities inflicted on him during the Cultural
Revolution and restored as party leader.
THE FIRST PHASE OF REFORM, 1978–1993
Deng resolved to find new approaches to promote growth. December 1978 saw a profound shift in the
direction of the Chinese economy as the Central Committee of the Communist Party of China (CCP)
issued a communiqué that, in effect, launched the modern period of reform.


Agricultural Reform
Grain output per person employed had risen by less than 10 percent during a 25-year period,
despite considerable expenditures on infrastructure, informational outreach, and factor inputs,
especially fertilizers.

Under collectivization, agricultural production had been organized into communes (typically with
a population of about 40,000 people). These were further subdivided into brigades and
production teams. Decisions about what to grow and how to grow it were passed to the
communes from superior political units – inflexible.

Worker remuneration was generally through sharing the net production of the brigade on a per
worker basis taking little account of individual or family productivity --- free rider problem.

Households were allowed small plots for the own cultivation, from which the surplus could be
sold in the local markets, and productivity was in general much higher in these small niches in
the system.

The reforms that began in 1979 were largely the result of local initiative and were

Initially this took the form of enlarging the size of the private plots and increasing the
procurement price that the state paid for crops that were produced privately -- reforms evolved
into the household responsibility system (HRS), which became the dominant arrangement in
agriculture after 1982.

Under HRS quite large plots of collectively held land were leased to households for a fixed
period of time, initially 15 years for annual crops and up to 40 years for tree crops. In return for
tenure, each household was responsible for providing a share of the production team’s output
quota based on plot size.

Production in excess of this “contract” could be sold either on the free market for what it would
fetch or to the state at negotiated prices. By 1984, 93 percent of China’s cultivated land was
contracted to households, but,

it was not until 1985 that the state passed legislation formally sanctioning it.
Effect of Reforms

Countryside became prosperous.

The state response was to cut the procurement prices for grain.

Farmers responded by shifting resources out of grain production and into more profitable, less
regulated commodities like vegetables and meat. Grain output fell as a result in the mid-1980s.

The government’s response was to raise the procurement prices of grain once more, but this time
it tried to avoid the fiscal consequences by increasing the prices paid by urban consumers.

This step toward price liberalization led to the ultimate deregulation of the grain market; by
May 1993 grain prices were decontrolled in about 80 percent of the country and prices
determined by the interplay of supply and demand.
The Rise of Rural Enterprise
township and village enterprises (TVEs) as the most dynamic sector in the Chinese economy.
TVEs are industrial activities that were initially collectively owned by the communes.
Although they are collectively owned, TVEs are much more akin to western firms than the state-owned
enterprises (SOEs) for several reasons:
1. They face a hard budget constraint and are seldom bailed out by government subsidy --- banks are
inclined to extend credit only on strictly economic terms.2
2. As new enterprises, TVEs fell outside the scope of the rather rigid planning system and were from the
beginning unfettered by mandatory controls. They enjoy, therefore, considerable freedom of initiative over
what to produce and how. Large pent-up demand for light industrial products both for the domestic market
and overseas. TVEs were able to exploit this vacuum.
3. Unlike SOEs, TVEs had no captive market for their products and from the start success depended on
identifying demand and meeting it with quality products. In both domestic and overseas markets strong
forces of consumer sovereignty were at work, which encouraged an emphasis on quality and product
development that was absent in the state sector.
4. TVEs were allowed to sell their products at market prices, and given the fact that they were operating
largely in competitive markets, this implied a continuing pressure to contain costs and advance productivity.
5. TVEs were not encumbered by the social expenditures required of state enterprises. In common with many
socialist countries, SOEs in China were responsible for a range of social services including childcare,
education, and health care that raised labor costs.
6. TVEs were also able to be much more nimble in their employment practices (hiring and firing) and were
able to establish performance-based compensation systems, which maximized individual incentives and
raised productivity.
7. TVEs are allowed to retain profits and keep them within the enterprise as investment. Initially the TVEs
were assisted by concessional tax treatment that was helpful in building capital in the “infancy” stage.
Although initially they had access to credit from the rural credit cooperatives, the financial sector cut the SOEs off from credit almost
completely between 1988 and 1991, resulting in a lot of failures and employment loss.
2
Particular features of the Chinese economy under planning also favored growth of TVEs :
1. The concentration on heavy industrial growth through the state owned enterprises had led the government to
neglect the light industrial sector. This presented a wide window of opportunity in light industrial
production, through which the relatively nimble TVEs quickly, and profitably, moved.
2. The rise in agricultural productivity and the high birthrates of the 1960s had left large reserves of labor in
the rural communes. The extension of educational opportunities, especially for women, under communism
had created substantial human capital.
3. The high degree of provincial autonomy and the concern of local governments to promote economic
development (in part motivated by the need to absorb surplus labor) meant that few impediments were
placed on TVE growth, and many incentives were offered at the local level.
Starting from a very low base at the beginning of the 1980s, the emergence of TVEs had a rapid impact
on China’s economy. By 1996, there were some 23.3 million TVEs within China, employing more than
135 million workers, or about 20 percent of total national employment. The rural enterprise sector as a
whole accounted for only 19.2 percent of industrial output in 1978, but this had risen to about to 50
percent by 1996.
Recent years a strong trend toward the privatization of collectively owned TVEs, and the share of truly
collectively owned enterprises has been falling, and along with it the share of employment.
The collectively owned enterprises are being converted into joint stock enterprises, partnerships and
proprietorships. Perhaps more ominously, employment in the rural enterprise sector seems to have
peaked at the 1996 level, and has fallen in successive years since, down to less than 125 million persons
in 1999. It will create a body of unemployed or under-employed migrants. This is happening already
and the measured plus disguised unemployment may be as high as 80 million persons.
REFORMING STATE-OWNED ENTERPRISE
Although the TVEs are the bright star of the Chinese economy, sustained economic development
depends to some degree on successful reform of the state-owned enterprises (SOEs).
These predominantly heavy industrial enterprises were once seen as the key to China’s industrial future
and represented economic security to the masses, a job with an SOE was by and large guaranteed for life,
usually carried housing benefits, and was often referred to as an “iron rice bowl.”
The state-owned sector still accounts for the bulk of employment in the industrial sector. It still
consumes over 40% of total industrial labor but manages to produce only about 25% of the output,
reflecting serious inefficiencies.
This resulted in a scheme, known as the contract responsibility system (CRS), by which SOEs
contracted for a four-year period to a production quota to be delivered to the state, and to specified
financial payments it would make to the state in lieu of the profit remittances that the enterprises had
formerly paid. Any output above the quota level could be disposed of by the enterprise at market prices.
By 1988, 90 percent of all SOEs were operating under such contracts.
In parallel with these arrangements, and introduced during the same period of 1986–1988, a third
responsibility system was introduced—the fiscal contract responsibility system (FCRS).
These arrangements, however, did provide great incentives for the enterprise.
Exceeding a quota was highly desirable as excess output could be sold for whatever the market would
bear.
Moreover, since the marginal tax rate on profits was zero, and the dividends payable to government
fixed, all the profit above predetermined fixed levels could be retained in the enterprise.
The industrial output of the SOEs rose sharply in response.
First, each contractual arrangement was individually negotiated, and enterprises had an incentive to fight
for high levels of inputs and low quotas to acquire the resources for a surplus to sell on the private
market. Given the asymmetry of information between the bureaucracy and the enterprise, this had
significant negative consequences.
The second disadvantage was the abandonment of all pretense of a “level playing field” in the tax system
in favor of what should more accurately be called a “revenue” system.
Third, although the boom in the industrial sector should have increased government revenue from taxes
on enterprises, revenues proved highly inelastic with respect to growing income.
A fourth, and very important, problem was that the CRS resulted in a two-tier price system— potential
gains from arbitrage between the state and private sectors and from the deliberate understatement of
quota outputs. This led to a sharp increase in corruption.
CREATING A MODERN ENTERPRISE SECTOR
REFORMING THE TAX SYSTEM
China today does not have a well-functioning tax system and gathers a lower share of its GDP into the
central government than any other East Asian nation, between 7% and 8%.
Local taxing powers are considerable; in total about 15% of GDP is taken into general government.
The reform in taxation seeks to replace what has been described as a revenue system, which can provide
fiscal resources for various levels of government but, because of a lack of consistency and equity, creates
perverse incentives.
Indirect Taxes
1.The Value Added Tax
Currently, central government finance relies heavily on indirect taxes, which provide 79% of revenue.
Under the new system, VAT will have close to universal coverage with a 17 percent rate applied to most
goods and a 13 percent rate on food, farm supplies, and utilities
2. Customs and Tariffs
The average tariff rate is about 40 percent, but rates rise with the degree to which the goods are
“finished.” Raw materials are subject to rates in the 0 to 20 percent range, intermediate and capital goods
fit into the 20 to 40 percent category and finished may be subject to duties as high as 80 percent. The
effective rate of protection for the Chinese manufacturing industry provided by this structure is very
high. Reforms presently being implemented will reduce the maximum tariff on all goods to less than 40 .
Direct Taxes
The Personal Income Tax
The personal income tax has as its base all personal income from wages, salaries, rents, and business
sources, less a standard deduction of ¥800 per month for Chinese citizens. This excludes a large part of
the domestic population from paying tax at all, especially rural residents. For everyone above the
threshold, income will be subject to sharply rising progressive rates starting at 5 percent. In the case of
wage income the maximum marginal rate is 45 percent, and for “unearned” income the top rate is 35
percent. .
The Corporate Income Tax
The corporate tax is now leveled at a rate of 33% of corporate profits and now applies to corporations,
collectives, foreign financed enterprises and state owned enterprise, though a clause allows for the
negotiation of taxes in special circumstances. Because the state-owned sector is in aggregate only
marginally profitable and so it contributes little to revenues.
THE FINANCIAL SYSTEM
As in the case of the tax system, the effective reform of the financial sector can do double duty. First, a
stable and rationally developed system allows for greater allocative efficiency through the improved
channeling of resources from savers to investors. Second, a coherent financial system is essential for the
implementation of effective monetary policy.
The Banking Sector
Table 18.1: The Big Four Banks, 2002
Chinese State-Owned Banks
Industrial and Commercial bank of China
Agricultural Bank of China
Bank of China
China Construction Bank
Total
For Comparison
Citibank
Memo Items
Bad loans as percent of government revenue
Bad loans as a percent of GDP
Branches
Loans,
$ billion
% Loans
Non Performing
Value of
Bad Loans
28,000
50,000
13,000
24,000
115,000
325
199
192
182
897
29.8
42.1
27.5
19.4
29.9
97
84
53
35
268
6,421
392
2.3
9
166%
26%
Source: Standard and Poors, Citibank
Table 18.1 gives some indication of the problems that the banking system now faces. All of the big four
banks have a large number of NPLs on their books. The largest bank in terms of loans is the Industrial
and Commercial Bank of China (ICBC), which has a portfolio $325 billion of loans, 29.8% are presently
non-performing using the official definition. This measure probably underestimates the severity of the
situation. The situation is worse at the Agricultural Bank of China, which has 42.1% loans of loans nonperforming. Taken together the Big Four have $897 billion in outstanding loans, an average of 29.9% of
the loan portfolio. To give some dimension, this amount represents some 26% of Chinese GDP, or 355%
of annual central government tax revenue. To give some transnational comparison, Citibank has a loan
portfolio of $392 billion of which 2.3% is non-performing.
INTERNATIONAL TRADE
Before the onset of reform, all of China’s foreign trade was handled through a few foreign trade
corporations that acted as import and export agencies. Since reforms began in 1993, trade has been
liberalized, both in terms of the agencies that can enter into international trade and in terms of the tariffs
and licensing restrictions that constrained it. Enterprises, whether in the state, the collective, or the
private sectors, have become more able and more anxious to seek out and export to markets of their own
choosing.
The impact of this export boom on China’s trade position has been huge. In 1978 the trade to GNP ratio
for China was about 5 percent; by 1993 this had risen to 35 percent, making China a highly open
economy by world standards.3 The Chinese share of world trade doubled between 1978 and 1993, from 1
percent to 2 percent of the total.
TABLE 18.2
Highlights of Chinese Overseas Transaction, 1993–2001 (millions of U.S. dollars)
1989
Exports
Imports
Trade balance
Current account balance
Outgoing direct investment
Incoming Direct Investment
1991
43,220
48,840
25,620
24,317
780
3,393
1993
58,919 75,659
50,176 86,113
8,743 -10,454
13,272 -11,609
913 4,400
4,366 27515
1995
128,110
110,060
18,050
1,618
2,000
35849
1997
182,670
136,448
46,222
36,963
2,563
44237
1999
194,716
158,734
35,982
21,115
1,775
38753
2000
249131
414657
34474
20518
916
38399
2001
266075
232058
33384
17401
6884
44241
SOURCE: International Monetary Fund, International Financial Statistics 2003
Exports showed remarkable growth increasing six-fold in a twelve-year period between 1989 and 2001.
The commodity composition of trade also underwent a dramatic shift. In 1978 agricultural products dominated
exports, comprising 63 percent of the total. Today light industrial exports dominate.
Inflow of foreign direct investment capital into China. Since the mid 1990s this has poured in at the rate of
about $40 billion dollars per annum. The pace slowed somewhat after the Asian financial crisis but in 2001 it
reached $44 billion again, roughly 3.6% of China’s GDP.
3
Some care should be taken with this statistic; although trade is valued in dollars, GNP is understated since it is not in PPP terms. In
reality, the denominator should be larger. Moreover, at this time trade with Hong Kong was accounted as a foreign trade transaction.
SPECIAL ECONOMIC ZONES
China has made extensive use of various forms of special economic zones (SEZs) in its reform push.
Generally economists do not like but there may, however, be economic logic in the provision of such zones:
1. In the case of a region dependent on a declining industry, concessional treatment might attract investment
that would secure employment and prevent the waste of already committed social investment.
2. There may be economies of scale in the provision of infrastructure and services, and incentives designed to
increase the density of industrial activity may be rational.
3. There may be external economies of agglomeration in the form of spillover and pool effects. For example,
one of the frequently cited reasons for technology parks is the high degree of knowledge spillover; in other
industries labor pool effects may be important.
4. The government may wish to restrict some activities and policies to a limited geographical area. This may
be done for environmental reasons or, in the special case of China; it might be desirable to limit the impact
in order to analyze the effects before generalizing the policies.
Box 1
Regional Inequality and National Unity
One disturbing feature of China’s growth is that the disparity of income has become dramatically
more pronounced in recent years. Moreover, the regional income differential is worsening and will
be aggravated further by the terms of China’s accession into the World Trade Organization. At
present the provinces of the eastern seaboard (particularly Guangdong, close to Hong Kong, and
Zhejiang, around Shanghai) have average incomes that are four to five times greater than the national
average measured in official exchange rate terms. This is now about $900 per year, although much
better at almost $4,000 in purchasing power terms Hong Kong, absorbed into the People’s republic
in 1997, is one of the wealthiest areas in the world; its per head income at the time of the reunion
was roughly $25,000. The provinces of interior all have incomes per head less than the national
average, and some are below 50% of that figure. Accession to the WTO will, according a recent
report from the OECD, have the effect of stimulating the export-oriented eastern seaboard while
harming the predominantly agricultural west, which will be battered by an influx of cheap foreign
grain. Hence the disparities will become worse. Economic theory suggests that there will be some
form of convergence over time. All other things being equal, investment should increasingly seek
out the low wage provinces and hence lead to a growth of industrial employment and income.
However, experience in many areas (Italy, Germany, Brazil) suggest that this is not inevitable.
Externalities are important and growing industries tend to be attracted to growing areas, where
infrastructure, education and transportation opportunities are favorable. Although migration from the
interior might also have some equalizing effect, the overall prognosis is one of worsening disparities
and consequent political pressures. The important question is whether or not this will affect the
political unity of China. The policy alternatives are not attractive; “benign neglect” will see the
position worsen, and discontent might become unmanageable. On the other hand redistributive
schemes to favor the less well off provinces would require an increase in taxation in the prosperous
eastern areas. This would certainly be unpopular with the rich and would by no means be certain in
promoting growth in the interior..
THE IMPORTANCE OF A “KINDRED MODEL”
Despite the poverty of the country and the limitations of its resource base, China has enjoyed in its
transformation an asset that most countries can only experience in a much lesser degree: assistance and example
from “kindred” populations abroad. The tongbao (which literally means “same womb”) populations of Hong
Kong, Macao, and increasingly (at least until the decline in relations in early 1996) Taiwan have played a very
important role in Chinese growth. Singapore, geographically and culturally more remote but with an affluent
population, expensive labor, and surplus capital, also has had an increasing part to play.
Although these communities have in total a very small population in relation to the People’s Republic (about
one-fortieth), they have had an important role in several dimensions:
1. A demonstration effect. These communities have provided a demonstration that Chinese people can
transform their economic circumstances in a relatively short period of time, given favorable policies. The
standard of living enjoyed in Taiwan and Hong Kong is an assurance to many Chinese that economic
transformation is feasible. This tends to promote both personal saving and investment as a response to
confidence in the future.
2. Trading partner. The overseas communities have provided an important trading partner for China. This is
especially true of Hong Kong, whose prime function is to serve as an entrepôt for the mainland. Over 40
percent of China’s exports are routed through Hong Kong, and although the opening of other city ports will
reduce this share, the proximity of Hong Kong to the rapidly growing areas is highly significant.
3. Investor. Overseas Chinese communities account for the larger part of incoming direct foreign investment
into China. Hong Kong alone accounts for over 50 percent, and Taiwan is growing as a source as its
economy experiences rapidly increasing labor costs.
4. Sources of information. In the early stages of transformation of a socialist economy, information about
technologies and markets is at a premium. Residents of the overseas communities do much to provide China
with a window on the world: over 95 percent of visitors to China are people of Chinese ethnicity.
THE CHARACTER OF CHINESE REFORM
Gradualism
One difference in reform strategy can be highlighted by the use of a metaphor. Vaclav Havel, the playwright who
became president of the Czech Republic during its transition to a market economy, once characterized the CEEE
approach to reform by stating that it is impossible to “cross a chasm in two leaps.” The Chinese approach, on the
other hand, can be summarized by stating that China is “touching stones to cross a river.” In other words, China
proceeded on its own path by a process of experimentation, moving forward slowly only in areas where policies
had been tested and seen to work. So far, it must be said, this has proved a more successful policy than
revolutionary reform, or an economic “big bang.”
Partial Reform
China has not been averse to creating situations in which reform is incomplete. The clearest of these areas lies in
the contract responsibility systems, which resulted in a two-tier price system for agricultural and industrial goods.
Such systems have the advantage of keeping with the gradualist approach to reform, and they also provide
substantial incentives to the relevant economic actors. Marginal economic allocation decisions are made in
response to market prices, and this fact has a beneficial impact on overall economic efficiency. However, as
noted earlier, two-tier prices provide considerable returns to arbitrage from the state to the market system, and
that engenders corruption.
Decentralization
Chinese reform has been accompanied by a weakening of central control over the constituent parts of the
economy. This is not an uncommon feature; a parallel can be seen in the breakup of the Soviet Union and in the
fissiparous tendencies currently in evidence in Russia itself as ethnically differentiated areas alike Chechnya
attempt to break away. In China the outcome of devolution has been positive, in that it has allowed the provincial
authorities to be flexible and pragmatic. Some observers are concerned that this trend will end in the demise of
China as a centralized state, torn apart by growing income inequality, increased provincial chauvinism, and a
weakened center inadequately supported by a national fiscal system.
Accommodating Spontaneous Reform
While from the outside it might appear that the entire process has been one of rational experimentation, in reality
Chinese reform has been characterized by a willingness to allow spontaneous reform. In part this is because the
weakening control of the State Council, discussed earlier, leaves it with little alternative but to acquiesce, and
reform legislation has the character of making virtue of necessity.
Economic Liberalization without Political Democratization
The main point of difference between change in Central and Eastern Europe and China has been the relative pace
of political and economic reform. In the former Soviet Union and Eastern Europe, political reform was rapid and
ran ahead of economic reform. This tended to feed the raising of expectations with respect to economic progress,
which were disappointed. In China the reverse has been the case. Economic freedom has evolved much more
rapidly than the political variant. Social stability has been correspondingly greater, dissent has been suppressed,
and this, it can be argued, has provided a solid platform for growth and incoming direct foreign investments.
Western nations might like the idea of democracy, but their entrepreneurs are more prone to invest in predictable
authoritarian states.
DID REFORMS ACCELERATED GROWTH?
TABLE 18.3
Decomposition of Chinese Economic Growth, 1953–1990: Average Annual Growth Rates
1953-1978
1953–1978
1979–1994
(excl. 1959–1970)
Output
5.9
9.2
7.6
Output per head of population
3.8
7.5
5.4
Output per worker
3.1
6.3
4.5
Ratio of investment to net material product
19.9
24.8
21.7
Capital
10.2
9.9
13.2
Labor
2.6
2.7
3
Total factor productivity
20.7
3.8
20.8
SOURCE: Eduardo Borensztein and Jonathan Ostry, “Accounting for China’s Growth Performance,” American Economic
Review, May 1996, 225.
CHINA AND THE WORLD TRADE ORGANIZATION (WTO)
4

In November 1999 China took a remarkable step forward by committing itself to membership in
the WTO. It finally achieved accession in December 2001.

Agriculture will be sharply affected by membership4. Tariffs on wheat and maize will fall by the
year 2004 to just 14.5 percent, not enough to protect most of China’s farmers from more efficient
U.S. producers. This will exacerbate the problem of rural unemployment.

Manufacturing tariffs are set to tumble as well. In automobiles, for example, the tariff will fall
from 100 percent to 25 percent, a shift that will put most of China’s many vehicle makers at risk,
although foreign manufacturers are likely to be fast in establishing or expanding production in
China. Joint ventures are to be sanctioned in telecommunications, which will expose the stateowned telephone dinosaurs to the best of foreign technology.

Biggest sectoral impact may well be in banking and finance. Foreign banks will be largely freed
of restrictions and will be able to operate throughout China. The inefficient and poorly financed
state banks will be forced to compete for funds and loans.
OECD, China in The World Economy: Agricultural Policies in China after WTO Accession, Paris: OECD. 2002.
China in the 21st Century

At the 16th Communist Party Congress approved Mr. Jiang’s theory of the “Three Represents”,
an ideological innovation that claims that the communist represents the workers the peasant (the
traditional two represents) as well as now extending its umbrella to the capitalist class. This
allows China’s growing body of private entrepreneurs to join the party.

Growth continues at a robust 7-8% per annum, but pace is inadequate to absorb the growing
number of unemployed. China needs to create about 8 million jobs per year merely to stop the
unemployment situation from getting worse,

The unemployment crisis has two sources.

First, there is excess labor in the countryside that cannot be absorbed by rural industrial growth


State owned enterprise sector needs to get rid of about 20 million workers in the next five years.
.