A little history of Chinese economy


Skyline of Pudong, Shanghai, China, seen from across the river. PHOTO/Wikimedia

Today’s China is vastly different from what it was during Mao’s socialist period (1949-1976). Half of the Chinese population has now moved from Mao’s beloved countryside to shining—and polluted—megacities. Smartphones abound where bikes were once considered valuable wedding presents.

The World Bank credits the Chinese government for lifting 800 million people out of poverty (World Bank, 2018), and takes the view that Deng Xiaoping’s “reform and opening” policies were necessary to achieve this feat. Indeed, the fact that rapid economic growth and progressive institutional liberalization happened simultaneously can lead some to establish a causal link between the two. But we can ask ourselves whether there really were no other reasons for this formidable success. What favorable conditions for economic growth were present in 1978?

See the first part of this report: An Overview of Chinese Debt

1. Mao-era socialism

A lot has been said about Mao-era socialism. Neoclassical critics take the view that the rule of the Communist Party held the economy back and prevented China from developing its full potential during that time. But between 1948 and 1958, the economy grew at an average rate of 6% per year (Loong-Yu, 2012), which is perfectly respectable for a country with such a large population, and a land ravaged by the Second World War.

In their book China’s Development: Capitalism and Empire (2012), Michel Aglietta and Guo Bai explain that after the fall of the Qing Empire in 1911 and the establishment of the Republic of China, “all the ingredients of liberal capitalism were formally present: a ruling bourgeoisie, parliamentary elections in 1913, capital opening, and willingness to modernize the country”. Yet liberal capitalism did not arise. Why?

One of the main reasons is that rural-urban relations in traditional China were a huge obstacle to industrialization before 1949. There was a high tolerance of labor surplus in rural China that prevented urban areas from attracting a large, concentrated population of laborers. Additional agricultural production in China was absorbed by the rural population, preventing the concentration of material resources in cities. Lastly, large surplus labor entails low labor costs, which discourages the adoption of capital-intensive modes of production.

This shows that adopting market institutions alone was not sufficient to sustain development. Markets could not have accomplished such rapid and profound change in rural China. But Mao’s rule brutally transformed the countryside and destroyed this traditional rural-urban relationship with the forced collectivization of agriculture. Peasants were forced to give up their family lands to live and work in collective farms, and had to produce a set quota of agricultural products every year.

The Maoist state was determined and used brutal means to impose its power. The central leadership was inspired by two ideas: capital-intensive industrialization in heavy industries, inspired from the Soviet Union, and minimal exchanges with the outside world.

This policy worked wonders during the first years of the Communist party’s rule, marked by post-war reconstruction; industrial production rose 54% between 1949 and 1952 (Aglietta and Bai, 2012). The industrial sector remained the fer de lance of the Chinese state during the Mao-era. Under the planning system, industrial salaries were set by the state and did not rise with productivity gains. Profit margins were thus possible under state planning, and were turned into capital accumulation, which was badly needed at the time. For this system to work, salaries had to be kept from rising significantly, which explains why the government maintained such a tight control on the economy until 1978.

At the same time, companies had an important social role— they contributed to the Chinese welfare model of the time, which was named the “iron rice bowl”. Companies were responsible for housing employees and their families, sometimes operating schools and hospitals. Some of these public enterprises struggled when market mechanisms were reintroduced in China, leading neoclassical economists to call them “zombie enterprises”.

Meanwhile, attempts to profoundly restructure rural China failed miserably. Collectivization after 1949 had completely destroyed the working incentives of farmers and did not lead to significant increases in output and productivity, as farmers were not encouraged to produce food beyond quotas set by the state (Aglietta and Bai, 2012).

In 1956, the party decided to experiment with decentralization and market mechanisms, launching the “Hundred Flowers movement”. This short period was the Chinese equivalent of the NEP [1] —it sadly degenerated into the catastrophic experience of the “Great Leap Forward”. Initially, the state gave up direct control of over 8,100 enterprises, or the equivalent of 88% of the companies under its control; economic planning was relaxed, and local authorities gained the rights to set their own targets for the production of both agricultural and industrial products. But repetitive and incompetent investment on the part of regional governments and a lack of national coordination led to disastrous consequences. Rural China was unable to produce enough food to nourish a growing urban population, having been deprived of a great part of its labor force by an impressive rural exodus. Such an imbalance led to the famine of 1959-1961.

Despite the many tragedies that they brought, the forced collectivization of agriculture and the measures accompanying it profoundly shook rural China from its lethargy. Literacy and health made significant progress thanks to the creation of village schools and the dispatch of “barefoot doctors” that cost virtually nothing for rural populations. As a consequence, between 1952 and 1978, illiteracy dropped from 80% of the population to 16.4%, while health standards improved (Brandt and Rawski, 2008).

But the rural population was still segregated from the urban population by the “hukou” system (household registration system), an imperial form of control revived under Mao. Under the hukou system, rural dwellers cannot move freely to cities, and those who choose to migrate must lead hidden lives without benefitting from any sort of social welfare (Ngai, 2005). In other words, these hundreds of millions of migrant workers constitute a highly mobile, vulnerable and docile labor force. They proved to be a formidable asset for the development of capitalism after 1978.

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