NOTES ON CHINA'S PAINFUL PATH TO CAPITALISM (by Róbinson Rojas Sandford)
Between October 1976 and late 1978 the Chinese socialist path to
development was stopped and then dismantled by the counter-revolutionary
members of the Communist Party who staged a coup-d'etat in late 1976
to reverse the revolutionary process evolving since 1950. This
coup d'etat was the last battle in a civil war started in 1966, when the
new communist ruling class in China was challenged by part of the
industrial workers, students and peasants and a section of the Central
Committee of the Chinese Communist Party. Leaders of the new ruling
class were Liu Shao-chi (then president of China), Chou En-lai (then
Prime Minister of China), and Deng Xiaoping (then second in command
in the political bureau). Between 1966 and 1976 this civil war was
known as the "cultural revolution".
(For this period see
R. Rojas, La Guardia Roja Conquista China, Ediciones ML, 1968, and
R. Rojas, China: una revolucion en agonia, Martinez Roca, 1978)
The Chinese socialist revolution started in October 1949, after a
22 year civil war, had to main foundations: in the countryside
the people's communes, and in the cities the "complete unit of
production". Both organizations were in charge not only of the
production of goods, but also the welfare of the workers/peasants and
their families (health, education, housing, pensions, etc).
In 1978, the counter-revolutionary government dismantled the people's
communes, bringing forms of private property of land, and creating
conditions for a boom in production and a catastrophe in social life
(R. Rojas: The other side of China's miracle: unemployment/inequality)
That was the first step in the instauration of "savage-guided capitalism"
in China, by which the high ranks members of the former Communist party
became the "new extrepreneurial" class, and the main supply of wealthy
people doing business with transnational corporations, producing
extraordinary rates of economic growth and dramatic levels of poverty
in their own population.
TABLE 1 illustrate the economic miracle:
_______________________________________________________________________
TABLE 1: Gross Domestic Product (average annual growth)
GDP in 1995
1950-1978 1980-1990 1990-1995 (US$ million)
United Kingdom 2.70 3.20 1.40 1,105,822
United States 3.42 3.00 2.60 6,952,020
France 4.95 2.40 1.00 1,536,089
Germany 5.50 2.20 .. 2,415,764
----------------
South Korea 6.86 9.40 7.20 455,476
Brazil 6.83 2.70 2.70 688,085
Japan 7.73 4.00 1.00 5,108,540
----------------
USSR 6.17 1.90* -9.80* 344,711*
China 6.89 10.20 12.80 697,647
____________________________________________________________________
* Only Russia
Source: World Bank Tables and World Development Report 1997
____________________________________________________________________
The reform process consists of six main components:
1) The introduction of private farming under the "household
responsibility" system.
2) Encouraging private business
3) Restructuring public eneterprises
4) Promoting foreign trade
5) Policies to stimulate external financing
6) decentralizing administration to the provincial and local
level
--------------------------------------------------------------
LEAP FORWARD FULL CAPITALIST SYSTEM AFTER 1994
( MIXED ECONOMY-CAPITALIST):
1.- Old centrally planned economic system:
the government has OWNERSHIP and MANAGEMENT rights to
state-owned enterprises
the government was in charge of:
1 - planning
2 - what to produce
3 - allocation of manufactured products
4 - prices
5 - profits were remitted to the government
6 - losses were subsidized by the government
2.- SINCE 1978, reforms designated to:
(main: delegation of power and concession of profits to
enterprises)
1 - separate government administration from enterprise
management
2 - gaining expanded decision-making power
3 - altering management methods
problems: - unclear enterprise property rights relationships,
- irrational organizational structures
- unscientific management systems
Beijing Review, February 28 - March 6, 1994
3.- SINCE 1994, the need for "a modern enterprise system"
main tenets:
a) China will draw on the "useful experiences" of
modern enterprise systems in developed countries
b) the modern enterprise system is the secret of the
development of a market economy and socialized mass
production
c) China must explore alternatives for combining
PUBLIC OWNERSHIP with the MARKET ECONOMY
Proposal:
1) clear property rights relationships: investmens made "by
various contributions, including the state" (meaning
state, chinese private and FDI)
2) "Having obtained CORPORATE PROPERTY RIGHTS, the
enterprise will act in compliance with market demands":
- independent management
- sole responsibility for PROFITS and LOSSES
- pay taxes according to laws and regulations
- assume responsibility for preserving and increasing
the value of the assets of investors
3) "In accordance with the amount of capital investment in
an enterprise, THE INVESTOR ENJOYS certain rights:
1) the right to earn profits from assets legally due as
owner
2) to participate in making major decisions
3) to choose managers
4) investors are prohibited from directly interfering
in the enterprise's PRODUCTION and MANAGEMENT
5) when an enterprise declares bankcruptcy, the investor
assumes limited liability for the enterprise's debts
in line with the amount of capiyal invested.
4) China's modern enterprises will be based on PUBLIC
ownerships and common development will be allowed for
diverse economic entities, such as the:
individual
private, and
foreign sectors
"There will be increasing numbers of economic unit with MIXED
OWNERSHIP of PROPERTY".
"Property owned by the state and colectivities will continue
to make up a dominant portion of total assets in society".
"There will be a variety of organizational forms in China's
modern enterprises in accordance with the composition of
property".
"with regard to the KEY ENTERPRISES in PILLAR and BASIC
industries, the STATE will hold shares and attempt to attract
NON-GOVERNMENTAL investors to buy shares in order to expand the
leading role and scope of influence of state-owned economic
sectors".
(THE ABOVE IS TWISTED LOGIC R.R.)
"...ordinary small state-owned enterprises, some will introduce
contract in leasing management, while others will be transformed
into units under a leasing cooperative system, and still others
will be sold to the collectives or individuals"
(PRIVATIZATION)
" - the party organization will continue to play its role as the
political nucleus".
By the time of the above publication, the China Statistical Yearbook
gave the following figures:
______________________________________________________________________
Provincial Gross Value of Industrial Output by ownership system, 1994
(percentage of provincial GVIO)
Province State Collective Private Foreign-funded
sector sector* sector sector
----------------------------------------------------------------------
All provinces 34.1 40.9 11.5 13.6
Some provinces:
Heilognjiang 69.3 17.4 6.2 7.2
Jiangsu 20.0 63.0 5.0 12.0
Guangxi 42.9 26.4 22.1 8.5
Guangdong 21.7 33.4 7.3 37.7
Hainan 49.7 13.3 10.3 26.1
Zhejiang 16.1 56.4 17.7 9.9
Shanxi 43.7 36.5 17.3 2.5
______________________________________________________________________
source: China Statistical Yearbook 1995, derived from Table 12-6
* Collective sector refers to cooperatives
______________________________________________________________________
The other main foundation for the Chinese "guided capitalism" has
been two-fold:
-export-led growth
-transnational corporations export-led growth
Between 1980 and 1995, Chinese trade increased from 13 per cent of
GDP to 40 percent of GDP (trade is measured adding the value of
exports plus imports).
By 1996, China was the main destination of foreign investment in the
developing world. World Investment Report 1997 gives the following
figures:
FOREIGN DIRECT INFLOWS, BY HOST REGION AND ECONOMY
(million dollars)
1985-1990
(annual
average) 1991 1992 1993 1994 1995 1996
Developed
countries 116744 114792 119692 138762 142395 205876 208226
Developing
countries 24736 41696 49625 73045 90462 96330 128741
of which:
China 2654 4366 11156 27515 33787 35849 42300
________________________________________________________________________
Because of the large presence of foreign capital, some negative patterns
appeared on China's Balance of Payments, driven by the fact that
transnational corporations tend to import more than what they export
in order to maximize profits trough a sistem called "transfer pricing".
________________________________________________________________________
CONTRIBUTION OF DIFFERENT FIRMS TO CHINA's TRADE, 1994
Exporting Importing
Share of Share of
exports imports
Type of firm Number (percent) Number (percent)
------------------------------------------------------------------------
Foreign Trade Corporations 9,400 53 8,700 44
State-owned enterprises 7,800 17 3,600 8
Joint ventures* 30,000 19 64,800 34
Foreign-owned firms* 9,730 9 23,239 12
Collective and private firms 1,060 1 1,828 1
Other 520 0.2 5,378 1
TOTAL 58,500 100 107,513 100
____________________________________________________________________
Note: some numbers may not add because of rounding
* : foreign direct investments are in this type of firms, and
the figures tell that they contribute to 28% of exports and
46% of imports.
Source: International Trade Centre, "Survey of China's Foreign Trade:
An Analysis of China's Export and Import data ate the
Enterprise Level", Geneva, 1995
_______________________________________________________________________
Also, the role of foreign investment as a component of gross fixed
capital formation is very high, which could lead to instances of
dependency:
INWARD FOREIGN DIRECT INVESTMENT FLOWS AS A PERCENTAGE OF
GROSS FIXED CAPITAL FORMATION, BY REGION AND ECONOMY (percentage)
1985-1990 1991 1992 1993 1994 1995
Region/economy (annual avg.)
-------------------------------------------------------------------
Developed countries 5.5 3.2 3.2 3.7 3.5 4.4
of which:
Ireland 23.1 14.1 18.0 15.9 11.9 24.0
United Kingdom 13.7 9.4 9.8 11.0 6.8 13.2
United States 5.3 3.1 2.4 4.9 4.8 5.9
Japan 0.2 0.2 0.2 - 0.1 -
Developing countries 8.0 4.4 5.1 6.6 8.0 8.2
of which:
China 14.5 3.3 7.8 20.0 24.5 25.7
Singapore 59.3 33.6 12.4 23.0 23.0 24.6
Korea 1.9 1.0 0.6 0.5 0.6 1.1
Taiwan 5.1 3.1 1.8 1.8 2.5 2.7
Hong Kong 12.2 2.3 7.7 7.1 8.2 8.4
Mexico 16.9 8.5 6.4 6.0 14.3 17.1
Brazil 3.1 1.4 3.0 1.3 3.0 4.7
Ghana 17.8 2.3 2.5 9.4 22.6 22.2
Nigeria 34.9 19.8 26.3 36.5 50.5 50.0
__________________________________________________________________
source: World Investment Report 1997, UNTC, United Nations, 1997
__________________________________________________________________
The following set of tables gives a picture of changins patterns in
the structure of the economy:
________________________________________________________________________
STRUCTURE OF THE ECONOMY: AGRICULTURE
AS PERCENT AS PERCENT OF INDEX OF
OF GDP LABOUR FORCE PRODUCTIVITY*
1980 1995 1980 1990 1980 1990/95
------------------------------------------------------------------
United Kingdom 2 2 3 2 0.67 1.00
United States 3 2 3 3 1.00 0.67
France 4 2 8 5 0.50 0.40
Germany - - 7 4 - -
-----------------
South Korea 15 7 37 18 0.41 0.49
Brazil 11 14 37 23 0.30 0.61
Japan 4 2 11 7 0.36 0.29
-----------------
Russia - 7 16 14 - 0.50
China 30 21 76 74 0.39 0.28
-----------------------------------------------------------------
* Index of productivity is obtained dividing share in GDP by share
in labour force, which is compared with 1.00 which is the average
for the whole economy. The figures allow us to have an indicator
of relative levels of technology being utilized, etc (R.R.)
--------------------------------------------------------------------
STRUCTURE OF THE ECONOMY: INDUSTRY
AS PERCENT AS PERCENT OF INDEX OF
OF GDP LABOUR FORCE PRODUCTIVITY*
1980 1995 1980 1990 1980 1990/95
------------------------------------------------------------------
United Kingdom 43 32 38 29 1.13 1.10
United States 34 26 31 28 1.10 0.93
France 34 27 35 29 0.97 0.93
Germany - - 45 38 - -
-----------------
South Korea 40 43 27 35 1.48 1.23
Brazil 44 37 24 23 1.83 1.61
Japan 42 38 35 34 1.20 1.12
-----------------
Russia - 38 44 42 - 0.90
China 49 48 14 15 3.50 3.20
-----------------------------------------------------------------
* Index of productivity is obtained dividing share in GDP by share
in labour force, which is compared with 1.00 which is the average
for the whole economy. The figures allow us to have an indicator
of relative levels of technology being utilized, etc (R.R.)
--------------------------------------------------------------------
STRUCTURE OF THE ECONOMY: URBAN-RURAL BIAS
URBAN INDEX OF PRODUCTIVITY
---------------------------
RURAL INDEX OF PRODUCTIVITY
1980 1995
United Kingdom 1.69 1.10
United States 1.10 1.39
France 2.20 2.33
Germany - -
-------------------
South Korea 3.61 3.15
Brazil 6.10 2.64
Japan 3.33 3.86
-------------------
Russia - 1.80
China 8.97 11.43
______________________________________________________________________
source: World Development Report 1997, World Bank, 1997
______________________________________________________________________
The last set of data illustrates the dramatic dimension of urban-rural
bias in China, and how "guided capitalism" is creating a very unequal
society (see BOX 1 for the opinion of the World Bank on this)
_______________________________________________________________________
STRUCTURE OF THE ECONOMY: LABOUR FORCE
Total Average annual
(millions) growth rate
1980 1995 1980-90 1990-95
United Kingdom 27 29 0.6 0.3
United States 110 133 1.4 1.1
France 24 26 0.4 0.8
Germany 37 40 0.6 0.3
-----------------
South Korea 16 22 2.3 1.9
Brazil 48 71 3.2 1.6
Japan 57 66 1.1 0.6
-----------------
Russia 76 77 0.2 0.0
China 539 709 2.2 1.1
-----------------------------------------------------------------------
STRUCTURE OF THE ECONOMY: EXTERNAL DEBT
(US$ million)
1980 1995
South Korea 11,992 54,500
Brazil 71,520 159,130
Russia - 120,461
China 4,504 118,090
_______________________________________________________________________
source: World Development Report 1997, World Bank, 1997
_______________________________________________________________________
About environmental damage see BOX 2
_______________________________________________________________________
-unemployment (reaching more than 200 million workers by the
year 2000)
-the disintegration of the social fabric in urban and rural
social groups (prostitution and banditry)
-environmental destruction (ideological and physical pollution)
-the role of transnational corporations on the social effects
_______________________________________________________________________
The World Bank point of view: BOX 1
CHINA'S CHALLENGES: ENSURING GROWTH WITH EQUITY
HONG KONG September 22, 1997-While inequality may continue to rise
as China makes its transition to a mature market economy, economic
growth and social harmony can be sustained, provided the government
maintains equity in access to social services, enhances labor mobility,
and creates programs to protect the poor and vulnerable, according to a
new World Bank report,
Disparities in China: Sharing Rising Incomes, released today.
China's impressive growth since 1978 has raised 200 million people out
of poverty. But despite China's stunning growth over the past two decades,
some 270 million Chinese, about one-fifth of the world's poor, live on
less than a dollar a day. And income inequality-between rural and city
dwellers, the coast and inland areas, and now between men and women-is
increasing with growth.
The report attributes the rural/urban disparities to the failure of
rural income growth to keep pace with the increase in urban incomes,
while publicly provided services-housing, pensions, health, and
education-have augmented urban incomes by about 80 percent on average.
This large gap results from imperfect mobility in factor markets,
especially for labor. Despite increasing out-migration, continuing
impediments to mobility reflect the government's desire to control
the pace of migration and ensure grain self-sufficiency.
The absence of a housing market and limited access to social services
in urban areas pose additional constraints to labor mobility.
Widening regional disparities between coastal and inland areas are
linked to coastal areas' greater access to world markets, better
infrastructure and educated labor force, as well as government's
preferential treatment which has stimulated foreign investment. Perhaps
the greatest damper on growth of all, the report finds, is unequal
access to opportunities to improve income and welfare, resulting in
differential access to education and health care; rising discrimination
against women in the labor market; and imperfect labor markets.
The benefits of growth--which depend on peoples' education, mobility,
and land-are being distributed unevenly, as indicated by the rise in
China's Gini coefficient from a low 28.1 in the early 1980s to 38.8 in
1995, the report notes.
While emerging inequality often accompanies growth and can help nourish
creativity and productivity, high rates can impede growth, weaken poverty
alleviation, and contribute to social tension. In China, inequalities
caused by growth have been heightened by government policies favoring
urban over rural, the coast over the interior, and have had great affect
on the access to and quality of education, health care, and labor
mobility.
To ensure the benefits of growth reach all of society, the report
recommends:
- Targeting assistance programs that focus on education, health, and
- employment to protect the poor and provide safety nets for the
- vulnerable;
- Eliminating policy biases and strengthening the government's
- regulatory function by redressing the urban bias and removing
- the coastal bias in economic policies, as well as countering gender
- bias in household allocation decisions and in the marketplace,
- education, and workplace;
- Dealing fairly with the rich to combat corruption and to starve
- corruption incentives through enforcement of regulatory functions,
- reducing bureaucratic discretion, establishing clear and transparent
- rules for public decision-making and stamping out access to insider
- information through the proper regulation of financial markets
The World Bank and Poverty
Starting in the early 1980s, the Bank program of agricultural
investments buttressed by projects in agricultural education,
rural health care and rural water supply have been aimed at
raising rural incomes and living standards.
By the mid 80s, the pace of poverty reduction had slowed, and
although China made great progress in reducing the number of
poor, most of China's remaining poor were much more difficult
to reach, concentrated in resource-deficient areas where gains
of adopting "Green Revolution" agricultural technologies were
not generally possible.
In 1992, the Bank produced China: Strategies for Reducing Poverty in the
1990s, which was a result of its partnership with the Leading Group for
Poverty Reduction to find new approaches in assisting the remaining
absolute poor. The Bank's report did much to establish close cooperation
with China in their work on poverty alleviation, which resulted in the
national 8-7 plan for reducing absolute poverty.
In the early 1990s the Bank began making poverty alleviation an
explicit focus of lending and began a more conscious program
with agricultural and social sector lending channeled to areas
of concentrated poverty-the northwest, the "red soils" areas
in the southeast, and the resource-poor sections of the
southeast. Bank support for Poverty Alleviation.
During FY91-97 the Bank lent about $2.1 billion, almost all IDA funds,
for poverty alleviation, benefiting more than 104 million people.
________________________________________________________________________
CLEAR WATER, BLUE SKIES WITHIN CHINA'S REACH
HONG KONG, September 19, 1997 Despite the magnitude of China's
pollution problems, the country has an unprecedented opportunity to
better its quality of life, according to a new World Bank report,
Clear Water, Blue Skies, released today.
The Costs of Excessive Pollution
An estimated 178,000 people in major cities suffer premature deaths each
year because of pollution.
Indoor air pollution-primarily from burning coal and biomass for cooking
and heating-causes 111,000 premature deaths each year, mainly in rural areas.
Each year some 7.4 million work-years are lost to health damages related
to air pollution.
Acid rain in the high-sulfur coal regions of southern and southwestern China
threatens to damage 10 percent of the land area, and may already have reduced
crop and forestry productivity by 3 percent.
Children in Shenyang, Shanghai, and other major cities have blood-lead
levels averaging 80 percent higher than levels considered dangerous to
mental development.
The costs of water pollution are at least US$4 billion a year.
The effects of excessive pollution-in the form of premature deaths,
sickness, and damage to productive resources-are estimated to cost
China about $54 billion a year, or 8 percent of GDP. Yet, the same
rapid economic growth that has added to China's environmental woes
in the past can be harnessed to ensure a cleaner future.
The report, produced in close collaboration with China's National
Environmental Protection Agency and State Planning Commission, focuses
on two of China's most pressing environmental concerns: air and water
pollution and their relation to economic growth. The report specifically
addresses three important questions:
--What are the costs of pollution in China today?
--Will future economic growth impair or improve air and water quality?
--What policies are needed now to ensure that rising incomes translate
into a higher environmental standard of living for present and future
generations?
According to the report, China can turn its assets-increasing market
orientation, rapid economic growth, and strong administrative capacity-
into advantages for preserving and improving its environment for future
generations. This requires pursuing a new pattern of growth-one that
can both increase incomes and improve environmental quality.
The report recommends that a strategy for future environmental
protection should aspire to:
increase substitution of cleaner fuels-especially natural gas-for
coal in household cooking and heating;
improve energy efficiency and diversify energy supplies into
noncoal sources;
reduce emissions from industrial boilers and furnaces;
curb indoor air pollution in rural households;
increase wastewater collection and treatment from cities and towns
and industrial enterprises, especially small enterprises
phase out lead from gasoline by 2000.
promote public transit systems
use environmental master plans to shape the growth of cities; and
promote environmental education.
The report recommends that to achieve these outcomes, China should:
Harness the market to work for the environment, not against it.
This will require adjusting prices to cover economic costs and
incorporating social costs through pollution taxes.
Harness economic growth for the environment. This requires creating
incentives to elicit investments-from both the commercial state and
nonstate sectors and from the public sector-with the largest
environmental benefits for future generations.
Harness the government's administrative capabilities to the cause
of environment. This will require providing better regulations but
with fewer investment controls at the national level, as well as
ensuring better planning and pollution enforcement in urban
airspeeds and regional water basins.
A strategy that channels investment into cleaner production, encourage
material and energy efficiency, and encourages the conservation of scarce
resources could reduce emissions in 2020 below today's levels, improve
air and water quality, and lower pollution-related health costs by 75
percent-even as China grows by 6-7 percent a year for the next two
decades.
------------------------------------------------------------------------
RRojas Research Unit/1997
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