II. The Centrally-Planned Economy Flashcards
Historical Bg
- Trade imbalances (economic impact of the opium wars) ->
- Beginnings of modernization ->
- Peak of power during Qing Dynasty ->
- Mccartney visit
Depletion of Silver Reserves: China’s economy was based on a silver standard, meaning silver was the primary medium of exchange. The massive outflow of silver to pay for opium depleted China’s silver reserves, leading to a scarcity of currency within the country.
Trade Imbalance: The opium trade exacerbated China’s already existing trade imbalance with Western powers. While China exported goods like tea, silk, and porcelain, the importation of opium led to a significant imbalance, with silver flowing out of the country to pay for the drug.
-> Descent into economic weakness, inability to provide public goods -> had to contact the west -> economic openess -> Qing dynasty became a quasi-colonial state ->
- Trade Imbalances (Economic Impact of the Opium Wars): The Opium Wars led to significant economic consequences for China, including trade imbalances and the outflow of silver due to the importation of opium.
- Beginnings of Modernization: The economic pressures and defeats suffered during the Opium Wars prompted some Chinese leaders to consider modernizing and reforming various aspects of Chinese society, including the military, education, and industry.
- Peak of Power during Qing Dynasty: The Qing Dynasty reached its zenith of power during the 18th century, particularly under the reign of Emperor Qianlong. China was a dominant force in East Asia and experienced periods of economic prosperity and cultural flourishing.
- Macartney Visit: The visit of the Macartney Embassy in 1793 symbolized China’s increasing isolationism and resistance to Western influence, contributing to missed opportunities for economic growth and modernization.
- Descent into Economic Weakness, Inability to Provide Public Goods: Following the Opium Wars and other internal and external challenges, China experienced a decline in economic strength and an inability to effectively provide public goods and services to its population.
- Contact with the West and Economic Openness: Faced with internal weaknesses and external pressures, China gradually opened up to the West through a series of treaties and agreements, leading to increased economic engagement and modernization efforts.
- Qing Dynasty Becomes a Quasi-Colonial State: As a result of unequal treaties and foreign concessions, particularly during the late Qing Dynasty, China effectively became a quasi-colonial state, with foreign powers exerting significant influence over its economy, politics, and territory.
Explain to me the Trade Imbalances: Monetary Framework
MV = PQ quantity theory
m = money supply
v = velocity of money
p = price
q = output/gdp
China = silver standard
Britain = gold standard
● If X> M, silver flowed into China; M (money supply) increases supporting economic expansion
● If X < M, silver flowed out of China; M decreases – can’t support economic expansion;
● Imports of opium continued and reversed the trade imbalance
● Twin problem of economic downturn and social problem
When is the Republic Era of China
What are the 2 types of industrialization
Republic: 1911 to 1949
- TREATY PORTS (ENCLAVES)
- light industries
- finished goods - MANCHURIAN
- heavy industries (northeast) - MILITARY INDUSTRIAL CAPACITY
2 patters of industrialization
- CHINA PROPER
domestic china - market
chinese, foreign - ownership
light, consumer goods - structure
steady accumulation- skill formation
- MANCHURIA
japanese industry
foreign
heavy, mining, producer goods
litter transfer of skills
few or no linkages
Republic historical background
- Increased State Intervention by the Nationalist Government
- Military industrial capacity - Shanghai to Chongquing Sichuan Province
- Creation of planning commission
- Government-sponsored development
- Nationalist government (Koumintang Party-KMT) confiscated Japanese
and collaborators factories - Economy - KMT controlled in 1947
- CCP inherited this infrastructure in 1949
- Developed heavy industries – iron, cement, power generation to support the East Asian Co-Prosperity Sphere and WW II
- Relationship with other Japanese colonies – Taiwan and Korea
- System collapsed after the war
- East Asian Integration – revival post 1997 Financial crisis
- Contribution /legacy of Manchurian industrialization
- Industrial output peaked 1936 to 1942
Explain the GREAT LEAP FORWARD strategy
Strong aversion to foreign dominance: Close door policy
Context: smooth adoption of socialist institutions given the aversion
of Western institutions
Korean War: 1950; Confrontation with Taiwan
Need for a strong national defense
Political isolation and economic embargo
Mao’s personality dominated the GLP –wanted to surpass the growth
of the West
Developed countries - industrialized
Developing countries want to develop - industrialization
Weak industrial foundation: 10% of output–industrial sector;
90% from agriculture.
Limited ability for capital accumulation
What is the industrialization strategy
Difference between growth (output) and development
China is labor –rich and capital-scarce
Industrialization requires capital –intensive technology
Many developing countries choose industrialization
Different degree of market intervention within different socio-
political institutions
capital intensive technology — BE MORE CAPITAL INTENSIVE AS AN ECONOMY AND AS A COUNTRY
What is the relevance of savings and investment
The capacity of an economy to accumulate capital depends on how much it saves and how efficient is that savings transformed into investment
Where does capital come from?
SAVINGS, INVESTMENT, LOANS, GOVT. SUBSIDIES, ETC.
Open economy, foreign direct investment, official
development assistance, foreign loans
Y = C+ S + T
Savings ( leakage) = Investment (Injection)
Taxes ( Leakage) = Gov’t Exp. (Injection)
Y= C+ I + G
Y= C+ S + T + ( X-M)
Give me the Trinity Framework
- Distorted Macro Policy Environment
- Planned Resource-allocation mechanism
- Micro-management institutions
What does distorted macro policy environment aim to do
LOWER THE COST OF RAW MATERIALS
LOW
1. interest rate policy
2. exchange rate policy (not a factor but a CONSTRAINT to development because you NEED foreign exchange to buy foreign capital)
3. nominal wages
4. prices for energy and raw materials
To be more capital intensive, the government wanted to SUPPRESS ALL COSTS OF PRODUCTION, including the costs of raw materials so that they can increase their profits
The government wanted to maximize profits with TR = P*Q
TR = P*Q
TR = P*Q - (rL + wLabor + iK + piE) - RM
deduct land, labor, capital, entrepreneur, raw materials
How did the government increase savings?
encourage people to save
Where did the capital come from again? HOW did they accelerate capital accumulation?
By SAVING and then channeling all that savings into INVESTMENT and capital equipment
- To be more capital intensive, the government wanted to suppress all costs of production
What happened in the 1st leg
- Low price policy for agricultural products — they needed food to be cheap in order to suppress consupmtion
- Low nominal wages — lessen exepenses
- Low prices for agricultural products and basic living necessities
- Privilege - urban factory workers — needed to lower prices in order to encourage TENABLE (feasible and maintanable overtime) and sustainable wages
Why do low prices persist? Why does China need to implement lower prices?
Market economy: shortage will not persist
Planned-economy – the shortage will persist
Kornai– the role of institutions
SHORTAGE FRAMEWORK
What is the Trinity Framework? Why did they do it?
Gov’t was fanatical in improving investment because they believed that that’s the only way that they can industrialzie
→ for them to industrialize, it has to be heavy industry which is very capital intensive
What is the 2nd leg? What is it?
Planned Resource Allocation Mechanism
This institution was created so that the 1st leg (distorted macro policies) will work
● Kornai- shortage: shortage will persist if prices fixed below equilibrium under institutional arrangements
● Price/market-mechanism - replaced with several resource allocation institutions
What were the institutions created?
- PEOPLE’S COMMUNES
- collectivization of household farms
- household farms were collectivized into one big unit
- farmers lost their land use rights - STATE MONOPOLY IN AGRICULTURAL PRODUCTS
- prices and production QUOTAS were SET
- government was the biggest BUYER and SELLER
- to secure supplies and cheap food prices for urban residents
- no incentives for farmers - FINANCIAL SECTOR
- funds/credit is rationed to priority –heavy industry sector
- nationalized all banks
- People’s Bank of China (PBC) – center of financial
system (their central bank)
- Centralized the management
of all deposits and loans
- Deposit and loan rate – fixed
by PBC - FOREIGN TRADE
- International Trade - unified in 1950
- The State was the monopolist and the monopsonist: the single seller and the buyer of all traded goods - MATERIALS MANAGEMENT
- To allocate cheap energy and
raw materials
- Establishment of the State
Planning Commission
1955
Materials goods classified:
1. Managed by CENTRAL govt
- essential goods for national economy and people’s livelihood managed
2. Managed by LOCAL govt
-Non-staple foods and agricultural/sidelines products
What is the Kornai solution?
Low prices continues to persist because of the role of INSTITUTIONS that were created to do the allocation
What are the 5 institutions created again
1.People’s Communes
2. State monopoly on agricultural products
3. Financial Sector
4. Foreign Trade
5. Materials Management
3rd leg of the trinity framework — what is it for?
MICRO MANAGEMENT INSTITUTIONS
First 2 pillars doesn’t ensure that the GLF will work
Resources will still continue to flow to profitable industries. The government is in COMPETITION FOR RESOURCES against these other sectors
To make sure that the policies and the allocation mechanism will work (first 2 legs), they needed to micro manage institutions
What is micro-management?
- Need for complete control
- COMPULSORY production PLANNING system
- Unified expenditure and revenue system ( fiscal policy)
- Large scale private factories were transformed into joint state-private ventures
- New investment from State
- Uniform and fixed profits and dividends
What is the problem in micro management
Principal-Agent problem
Principal: State
— goal is to maximize profits
— accelerate capital
accumulation
Agent : managers and workers (in each factory)
Different interests
AFTERMATH OF THE GLF
What are the results of the centrally planned economy?
Militarization of the economy
Decentralized operation
Autarky – closed door inward looking policies
Absence of material incentives
Market-driven labor mobility stopped ( Lecture 3 Hukou
By 1956, State run enterprises accounted for 67.5%
output
Joint state-private ventures 32.5%
Private enterprises were gone
Basically, The government owned
EVERYTHING by 1956
○ They ran everything
○ No ownership of private property at that time
○ Even land was owned by the state
GLF RESULTS (Good)
Economic Growth 1949-1978
High relative to world average
Lower than emerging newly industrialized economies (NIEs) in East Asia
8.2% growth from 1953-1978
5.1% 1960 t0 1978
Established a rather complete industrial system
Share of industry in GNP increased from 12.6% in 1949 to 46.8% in 1978
Share of agriculture dropped from 68.4% to 35.4
- Rate of capital accumulation -
greater than in developed countries - High and increasing investment rate – initiated a self-sustained process of industrialization
● Consumption suppressed: savings in agriculture - allocated to heavy industry
GLF RESULTS (Bad)
- Uneven growth (due to heavy increase in industry)
● High growth achieved “inefficiently”
Can’t have everything:
- If you want high savings, you must lower consumption
- If you want higher consumption, your savings will decrease
- Total factor productivity improved
very little from 1952 to 1981. - Investment concentrated in heavy industries
○ Within manufacturing highest shares - coarse processing relative to refined
■ Can extract iron from ore but they couldn’t produce high-grade steel products (unrefined)
○ Investment accelerated but was concentrated in the heavy industry
● Share of manufacturing in GNP - more than doubled between 1952 and 1978;
● Slow employment creation: 6% to 12.5% of total labor employed in industry
● Agriculture & services sectors
account for 87% of total employment
- Industrial incompatible
structure with was factor endowments (The way industries were set up didn’t match the resources available.) - Engaged in heavy-industry industrialization (capital-intensive) — But China is labor abundant
- Standard of living improved slightly in 20 years: Y= C+|+G
- Inward-looking economic policy - reinforced incompatible factor endowments
GLF SILVER LINING
Investment in human capital, i.e., health and education: benefited lower income groups; literacy increased
○ There were improvements in health and education that benefited largely
Chinese characters were radically simplified twice, 1956 and 1966: Pinyin
What is the linchpin for industrialization
HUKOU - historical institution
What is HUKOU
hu: household, Kou: mouth
Baojia 包家– household CONTRACTING system
Qin and Eastern Han - for population registration, census and taxation
Again, what is the Lecture 1.1 Historical Background : Contributions of historical
institutions?
Population registration – building block for the autocratic
state
- Conjugal household was the basic unit of production,
taxation and social reproduction - Social stability – geographic and occupational
- All persons who traveled away from their native place –
required to carry passports
What is the household contracting system?
BAOJIA
SOCIO-POLITICAL BACKGROUND OF HUKOU
- Given: Abolition (ending) of private ownership of land (1955)
- Rural land – collectively owned
- Farmers/rural household – direct ownership of their houses
- Free access to land the house/outbuildings were built on
- All farmers – members of collectives
- Access to land - equalized through membership in collectives
- Farmers’ hukou - membership in collectives
FEATURES OF FULL-BLOWN HUKOU
- To support the goal of accelerating capital accumulation through heavy
industries industrialization - Cheap and stable supply of food is necessary
- Low agricultural prices for food – effect on production
- To enforce the stable /sustained supply of cheap food -farmers must
remain in the farm! - To gain greater control on physical mobility /rural to urban migration
2 types of hukou & 2 features of HUKOU
Rural – membership in collectives
Urban – assignment of a danwei
Population was divded into 2 mutually exclusive types of people
AGRICULTURAL
NON-AGRICULTURAL
what are the factors that enables an individual to go AGAINST market forces
- Push factors (i want to leave)– movement /migration of labor rural to urban
- Search for better opportunities/higher wages
- Pull factors (i want to go there) - expansion in industrial production
- Hukou supports the second pillar of the Trinity
- Restricting rural to urban migration
- Ensuring farmers stay in farms to produce basic food necessity
- The centralized procurement of farm output allocates the food
“purchased” at low prices from farmers
What are the ENHANCED FEATURES OF A FULL-BLOWN HUKOU
- Population – non agricultural and agricultural
Producers – productive population working for the STATE
- Non-productive population: housewives, dependents, Employees in service sectors
- Family was divided – father (urban Hukou) ; wife and children ( rural Hukou)
- Mobility/migration follows the State’s planning criteria and objectives
How is the 2nd pillar connected to the Hukou system
Excess demand persisting at D1 – S1 given the low levels of equilibrium
Second Pillar of Trinity (Planned Resource Allocation mechanism)
Government centralized procurement agencies BUYS all of S1 AT P1
S1 is distributed to “ selected” citizens based on Hukou registration since SUPPLY IS NOT ENOUGH AT S1
FEATURES OF FULL=BLOWN HUKOU
- Nation-wide – both cities and rural areas
- Changes and additional administrative institutions
- Detail procedures for migration
- Control movements between urban and rural; intra-urban and intra-rural
- Restriction within urban centers/across jobs danwei (cant change jobs)
- Restriction within county, townships, collectives
- Migration certificates
- Rationing of grains, clothing, heating ( coal), urban housing
- Part of urban wages consisted of coupons
- Basic food necessity – two prices (nominal price and coupons)
- Additional measures – control access to transport
- Urban residents – place of employment danwei (單位) – nationalized single work unit integrated into a national administrative hierarchy
- Plus urban household Hukou – place of birth and hukou of mother
- Assigned danwei is lifetime
- Basic building block
- Work units built up a system of benefits and entitlements
- Access to socio-economic benefits/part of an implicit social contract (job /employment, access to low-price food grains, health care, education for children – primary and middle school, subsidized/low cost housing, pension)
Effects of Hukou on relative incomes
- Real incomes of rural resident decreased!!!
- Rural labor force increased
- Area of land farmed –constant
- Marginal product per capita (in real terms) decreased
- Given fixed government procurement prices
- Value of MP per worker decreased
- Real incomes of urban residents increased
- Greater demand for labor – expanding heavy industries
- Urban employment increased, including women
- Two income earners per household
- Smaller family size – birth control
- Given unchanged/fixed nominal wages
- Real income of urban households increased
