The Confucian Agora
“Communist’ China, Sixty Years Later
By Vichy L. Fournier
For the past thirty years China has been home to the fastest growing economy in the world. With an average increase in GDP of 10% per year and 8% per capita income. In the present recession it remained one of the eight countries in the world to maintain economic growth, while the United States economy shrunk by an estimated 3%.1 Measured in terms of Purchasing Power Parity (PPP), China is the largest economy in the world after the United States. China is the world’s third largest trading nation, and a leading destination for direct foreign investment.
Swedish economist Stefan Karlsson predicts China to become the largest economy2 in the world, comparing it to that of the United States in 18793. Similar sentiments were echoed by multimillionaire investor Jim Rogers: “…if you were smart in 1807 you moved to London, if you were smart in 1907 you moved to New York, if you were smart in 2007 you moved to Asia.”4
Although the radical growth of the Chinese economy is taken almost for granted in the modern world, it was not always the case: before nineteen eighty it was one of the poorest countries in the world with a standard of living so low that many people starved. After decades of rule by Mao Tsetung as an officially communist nation, the economy in China was centrally controlled through intensive plans of industrialization similar to those of the Soviet Union. Despite a number of ‘five year plans’ to expand industrial output and improve the living standards of the Chinese people, China remained technologically backwards and financially destitute – possibly in a worse condition than it had been during the Great Depression. Although it was marginally liberalized in the latter part of the 1970s, China’s present march to world economic prominence came almost overnight in the 1980s.
What Happened?
After the death of Mao Tsetung in 1976 a tarnished figure from the past, Deng Xiaoping, slowly became the defacto leader of the Chinese Communist Party. Called the ‘Paramount Leader’, this unofficial position gave him incredible control over the policies pursued by the Chinese Central Government. Ousted from his government positions in the late 1970s due to suspected ‘counter-revolutionary’ and even ‘reactionary’ sympathies, Mao had nonetheless allowed Deng to remain a member of the Communist party.
With the support of several sympathetic spirits within the party’s upper ranks, such as General Secretary Zhao Ziyang, Deng instituted a number of reforms which encouraged a separation of the government from the party, privitazation of large sectors of the economy and the introduction of market mechanisms. Deng’s attitude toward the market was defined nearly twenty years early, at the 1962 Guangzhou conference. When someone questioned whether China should become capitalist or remain socialist Deng’s famous reply was, “I don’t care if it’s a white cat or a black cat. It’s a good cat so long as it catches mice.” He called his economic philosophy, ‘socialism, with Chinese characteristics.’5 Others have opted for the term ‘state capitalism’.
During the 1980s-1990s Deng and his supporters implemented several reforms, some directly but most in a ‘bottom up’ fashion, allowing local governments to take the initiative. All of these reforms were aimed at liberalizing and modernizing the Chinese economy while still maintaining strong control for the Chinese Communist Party.
Initially the steps were small, such as implementing contract-responsibility for the foreign trade sector, and allowing foreign trade agencies to retain some of the receipts from trade. These agencies were decentralized, severed from their provincial branches and responsible primarily to their local jurisdictions. Later, fiscal subisidies for these companies were abolished. Light industrial companies were made responsible for their own profits and losses, and allowed to manage themselves. Further developments would lead to full privatization of many sectors, as well as new legislation permitting the establishment of private for-profit enterprises by citizens. Even in areas where state-agencies still exist, there are required to compete for business with private companies.
Perhaps one of the most notable features of economic reorganization was the establishment of Special Economic Zones, some suspect on the advise of American economist Milton Friedman.6 These SEZs have many special features that make them attractive to commercial development such as special tax rebates for foreign investment and reduced regulations on international trade. These Special Economic Zones were later supplemented by free-trade zones, “economic and technological development zones” and industrial development zones. Altogether there are over one hundred such regions in China, and they contribute a disproportionate amount to the GDP of mainland China. Some, such as Shenzhen, are comparable to Hong Kong and Taiwan in terms of prosperity and business opportunities.
Another key feature in the advancement of the Chinese economy has been the reduction of tariffs, encouraging the import of foreign goods and capital. These have gone from an average rate of 41% in 1992 down to 6% in 2004.6 The Chinese currency, the Renminbi (whose principle unit is the Yuan), became convertible under current accounts and became tied to a basket of currencies, especially the strong Singaporean dollar (the SGD).
The black and grey markets in China are enormous, with pirated DVD stands being ran right across the street from the local gendarme.8 The Chinese government, while officially prohibiting many of these activities, is aware of their economic value and often treats them with a policy of salutary neglect. This has caused strain with many film and software companies who depend upon copyright legislation to protect their revenues.
In contrast with Western powers and Japan, China has no minimum wage, taxes up to 30% lower, rampant tax evasion and practically no welfare or social security. In 2007 China passed laws giving strong protection of property, which is making it ever more possible to keep what you earn – but, you have to earn what you keep.
China is Not the Land of Milk and Honey – Yet
Despite the advances made in economic progress and the institutional requisites such advancement requires, China still has a long way to go. While it may be said to be in advance of the West and Japan in many areas, in some areas it is clearly behind. The Chinese Communist Party still retains a strong grip on the people of China, and is reluctant to loosen that grip. This has led to continued obstruction of economic opportunities, state support of inefficient but politically connected business and incredible corruption.9
Chinese steel production is a prime case – fragmented across many inefficiency micro-companies and continuously expanding despite falling demand, production of new, small steel plants continues due to the influence of local officials10 upon lending institutions such as banks. It is estimated that the excess production alone exceeds that of the entire output of the United States. Export oriented enterprises, failing due to the fall in international demand, are now being subsidized by the Chinese government which is extended credit to foreign buyers – at the cost of Chinese taxpayers11. Likewise, the remaining state industries are nearly as inefficient as they were in the days of Mao. Gao Shanquan, a Beijing University professor, estimates the number of redundant workers in state-owned organizations at over twenty-four million.
The recent stimulus push has only worsened the problem of capital malinvestment, drawing criticism from the central bank itself12. The easy-credit policy of the banks has led to a lending boom13, and encouraged commodities speculation on futures markets, creating an unsustainable bubble that hikes resource costs for productive industries14.
Chinese Views on the Market Economy
It should be clear at this point that the view of China as a command economy on the Soviet model is incorrect – just as false is the view of China as clinging to Communist dogmatism. These Chinese Communist Party itself is now primarily attractive because of the political and financial connections it affords, and is akin to a rotary club. Most illustrative is a comparison of Chinese to US citizen views.
There are other signs indicative of China’s intellectual shift to towards market liberalism. The reality show “Win in China” is one of the most popular on teleivision – contestants offer rival business plans, and the winner gets over $1 million USD in capital financing to carry it out. The book Economics in One Lesson, by libertarian journalist Henry Hazlitt, is a national best-seller. It is sold alongside FA Hayek’s Road to Serfdom and the Cato Institute’s Toward Liberty in Beijing’s bookstores. The Southwestern University of Finance and Economics in Chengdu sports a life-sized statute of Adam Smith. 15
In 2005, Globescan polled twenty countries. China had the highest proportion of respondents in the world who agreed that the “free market economy is the best system on which to base the future of the world.” Over 74% of Chinese polled agreed with this, as compared to 71% of US citizens. A multinational survey, held by the Chicago Council on Global Affairs in 2006 found 87% of Chinese agreeing with “globalization, especially the increasing connections of their country’s economy with others around the world, is mostly good for their country.” Only 60% of Americans surveyed agreed with this statement. Lastly, the same CCGA survey found that 65% of Chinese agreed that “international trade is good for the job security of workers.” In contrast, only 30% of US citizens surveyed agreed with this statement. Given the proportional size of their population (China has over four times the population of the United States), it may be safe to say that there are more market capitalists in China than in the United States.
Citations and References
1. “Output, Prices and Jobs.” The Economist 24 Sept. 2009
2. Karlsson, Stefan. “The Future of the World Economy.” Mises Daily Article. 4 April 2009 < http://mises.org/story/1804>
3. Karlsson, Stefan. “Why China 2009 Isn’t Like Japan 1989.” Stefan Karlsson’s Blog. 1 Sept. 2009
4. Gardner, Bradley. “Jim Rogers.” China International Business Magazine 16 Sept. 2009
5. Deng Xiaoping. From a talk with the Japanese delegation to the second session of the Council of Sino-Japanese Non-Governmental Persons, 30 June 1984.
6. Friedman recommended creating “free private markets” to General Secretary Zhao Ziyang when they met in 1989.
7. Karlsson, Stefan. “The Future of the World Economy.” Mises Daily Article. 4 April 2009 < http://mises.org/story/1804>
8. Corson, Trevor. “Chinese Blue-Collar Blues.” The Atlantic February 2007.
9. “The city’s government officials… infuriatingly corrupt and keen to skim profits, used their new entrepreneurial skills at every turn to block progress toward efficient management.”
Corson, Trevor. “Chinese Blue-Collar Blues.” The Atlantic February 2007.
10. Gee, Marcus and Hoffman, Andy. “China’s Runaway Steel Train.” Globe and Mail 11 Apr. 2009
11. Zhang Bin, Liu Dan and Xiao Dan. “China’s Marshall Plan in the Making?” The Economic Observer #432 17 Aug. 2009
12. gencies. “Central banker warns of risks in stimulus push.” China Daily English 4 July 2009
13. Xie, Andy. “Fear the Dark Side of China’s Lending Surge” Caijing.com <http://english.caijing.com.cn/2009-06-19/110186641.html>
14. Ouyang Xiaohong, Zhang Bin and Yuan Zhaohui. “Hot Money Returns to China.” The Economic Observer #431 10 Aug. 2009
15. “Dorn, James. “Adam Smith in China.” The Freeman May 2007.
Further Reading
Arrighi, Giovanni. Adam Smith in Beijing: Lineages of the 21st Century. New York: Verso, 2007.
Rogers, Jim. A Bull in China: Investing Profitably in the World’s Greatest Market. New York: Random House, 2007.