Economic Development of China

Jared Vedros

Country Study - China

Economics 377

04 December 2005

Economic Development of China

The emperor of France in the early nineteenth century, Napoleon Bonaparte, once stated, "Let China sleep. For when China awakes, it will shake the world" ("When China Wakes"). China has certainly awakened. Its incredible economic growth is proof enough of its new-found stature among the world's states. China currently boasts a real GDP growth rate of 9.1% (2004 estimate) (CIA World Factbook). For the past twenty years, the growth rate has hovered around 9% and 10%, leading many economists to call China an economic miracle. However, China's developmental story has been a rocky one.

When tracing China's economic history, it is best to distinguish between several different time periods: the pre-communist era (? B.C. - 1949), the era of Mao (1949 - 1976), the era of Deng (1978 - 1997), and the recent past and present time. The pre-communist era can be broken up further. From 221 B.C c. to 1911 A.D., dynasties ruled China. These years were marked by both a poor peasantry and a rich land-owning elite class. During the late eighteenth and early nineteenth centuries, the population grew and economic growth stopped altogether (Kesselman et al. 623). Western powers pushed China to open its doors to "free trade." Great Britain, against China's wishes, kept selling opium to the Chinese. China's efforts to stop this led to the Opium War. China's defeat led to their forced opening to foreign trade. Whole sections of their economy and even some territories, like Hong Kong, were taken by the British. Several years later, corruption among the government and landlords culminated into a peasant uprising called the Taiping Rebellion which lasted from 1850-1864. 20 million lives were lost (Kesselman et al. 624). This intense conflict further damaged the struggling Chinese economy.

In 1911, the 2,000-year-old dynastic system was overthrown and the Republic of China was formed. Dr. Sun-Yat-sen consolidated power after the revolution. However, he was unable to hold on to power because of rival warlords distributed around the country. Because of this instability, China plunged into a lengthy period of civil war between the Nationalist Part led by Chiang Kai-shek and the Chinese Communist Party. To make things even worse, Japan invaded China in 1937 during World War II. When the civil war fighting was finally over in 1949 and Japan had been defeated, the Communist Party of China came out on top with Mao Zedong as the supreme leader. The turmoil of a hundred years of rebellion, invasion, and civil war had devastated the Chinese economy (Kesselman et al. 633).

During the era of Mao, the government allowed capitalism to continue for several years in order for the economy to stabilize. But once things stabilized, the economy was swiftly converted to a command system based upon the Soviet model of state socialism (Kesselman et al. 633). All economic activity was driven by government planning and not market forces. Mao enacted a Soviet-style Five Year Plan that lasted from 1953 - 1957. This entailed the government taking control of the production and distribution of nearly all goods and services. However, Mao was still dissatisfied because of the economic inequalities between those living in the coastal industrialized cities and those in the rural agricultural areas. To combat this, Mao launched the Great Leap Forward, which intended to promote a more egalitarian and less bureaucratic economic development strategy. In one instance, "more than 1 million backyard furnaces were set up throughout the country to prove that steel could be produced by peasants in every village, not just in a few huge modern factories in the cities" (Kesselman et al. 633). Because of the combination of the irrationalities of the Great Leap Forward and bad weather, famine claimed the lives of between 20 and 30 million. After that disaster, Mao called upon Liu Shaoqi and Deng Xiaoping to fix the economy, which they were able to do. But Mao was again unhappy with the inequality. He devised something worse even than the Great Leap. He called it the Great Proletariat Cultural Revolution. It involved purging anyone who disagreed with Mao's brand of Marxist-Leninist thought. The bizarre purge ended the lives of many intellectuals and important government leaders and bureaucrats. When Mao died in 1976, the country was on the brink of civil war. The economy had grown slightly, but barely was able to keep up with the rising birthrate. Overall, the Mao era was characterized by a command economy that never was able to grow and raise the standard of living in China.

Once Mao was dead, the previously purged Deng Xiaoping was released from prison and came into power in 1978. The ideas that led him to be purged now brought market reform to China. While Deng firmly believed in a Communist form of government still, he knew that market reforms would help China succeed economically. He once said in a speech, "It doesn't matter whether a cat is white or black, as long as it catches mice" (Xiaoping 293). What he meant was that it didn't matter whether a policy was a socialist or capitalist one as long as it spurred on the economy. Deng allowed more freedom to the economy in the form of less governmental control. Profit motives were put in place and provided incentives for private enterprises to be started. Private entrepreneurs and families made economic decisions instead of bureaucrats. One article describes the events that followed:

The enormous rural communes set up by Mao Zedong were dismantled. Peasant farmers were permitted to sell food on the private market. Two years later, the doors to foreign investment were thrown open in specially designated zones along the southern coast (Chu C1).

The tremendous growth that has taken place in China can be attributed to the market reforms of Deng Xiaoping. Beginning in 1978, one can chart the progress of China's economy as it has steadily grown upward. Deng's reason for these incremental changes was purely pragmatic - market reforms work. The Chinese people largely embraced the reforms; over 150 years of poverty had led them to be open to any kind of reform.

Many of the developmental strategies employed during the Deng era were very gradual. While countries like Russia later implemented "shock therapy" when they transitioned to a market economy, China did the opposite:

The state had gradually receded from control over the economy, cautiously experimenting with new institutions and implementing them incrementally within existing institutional arrangements.