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Peoples economy

Print edition : May 08, 2009 T+T-

IN the book under review, the author presents a concise and easily readable account of the phenomenal transformation of the Chinese economy, within a short period of half a century or so, from a stagnant, if not decaying, feudal set-up to the most rapidly growing economy in the world. Chinas economic order today is officially designated as a socialist market economy. There may be differences of opinion about whether the emphasis is on socialist or R 20;market, but the undisputed fact, as the author points out, is that there is no other country in the recorded history of the world economy that has been able to sustain an almost uninterrupted phase of high growth of close to 10 per cent per annum and for well over a quarter of a century.

For those who are not familiar with old Chinas early economic history, T.K. Bhaumik provides a chapter at the outset dealing with its early phase from about 1700 B.C. until the establishment of the Peoples Republic of China in 1949. The treatment is short just 25 pages and admittedly sketchy.

Even Chapter Two, dealing with Mao Zedongs China (19491976), is brief. Maos economic policies had come in for a great deal of criticism not only from his enemies but also from the then leaders of the Soviet Union, who were eager to see him follow what they had done. After his death, some of his close associates turned against many of his pet policies. Surely he had made mistakes the Great Leap Forward (1958-62), which fumbled into the Great Famine of the early 1960s, for instance. But Mao had taken over a dilapidated economy that had suffered long decades of neglect, foreign aggression and civil war. His first task was to get hold of the situation and initiate a process of long-term reconstruction and rejuvenation. He paid attention foremost to letting the masses understand that it was their effort and hard work that would give them sustenance and security. In this task he was quite successful. Reviewing the performance of Chinas new economy up to the recent years, Bhaumik states that it is the people of China who built it up with the state giving them direction and support. Mao, then, is the founder of both the Peoples Republic of China and the Peoples Economy of China.

The main theme of the book is the changes in the Chinese economy in the post-Mao period; in fact, the distinct change in direction that Deng Xiaoping brought about after he consolidated power following the two-year power struggle in the wake of Maos death in 1976. Deng assumed leadership under difficult circumstances.

Within the country and the party, he had to fight against Mao loyalists, including Maos widow and Hua Guofong, the Chairman of the party, for a break with the past. The chaos resulting from the Cultural Revolution had to be contained and cleared up. In terms of Chinas relationship with the rest of the world, the Treaty of Friendship with the Soviet Union had ended and diplomatic relationship with the United States had been established. There was the global oil crisis of 1978-79 and most of the Western economies were experiencing recession.

In this situation, Deng found the opportunity to bring about radical changes in economic policies. One of his daring decisions was to open up the Chinese economy to external influences, both in terms of trade and more so in terms of capital inflow. In turn, it necessitated a greater role internally for money and markets. But markets would function only if people were allowed to make use of them, to trade, to make profits and become rich. Whether such proclivities were compatible with the socialist ideology and the sense of community and equality that had been emphasised so far immediately became major issues. Deng deftly handled them. New slogans such as To become rich is glorious were introduced and popularised.

And to allow human instincts to have their legitimate role within a basically socialist system, the Household Responsibility System (HRS) was introduced. According to it, households could lease land for five to 15 years from the collectives, and with the help of family labour, produce what they liked and sell the produce at market price, subject only to a quota to be given to the collective and the state. This had the desired effect, and grain production increased from 304 million tonnes in 1978 to 390 MT in 1988, though there was a fall in the cultivated area. There was also substantial diversification of productive activity into dairying, poultry, piggery and fishing in the rural areas and a consequent increase in exchange and marketing.

More important, perhaps, was the stimulus given to non-agricultural activities. Many new township and village enterprises (TVEs) emerged producing primarily light consumer goods. The production processes were not particularly modern or even efficient from a purely technological angle, but they unleashed the entrepreneurial spirit and ensured that the growth of the economy was labour-intensive and employment-generating. Soon problems relating to the TVEs would become contested economic issues, but China, at that phase in its economic evolution, found a way to reduce poverty and enable people, especially in the rural areas, to enjoy the comforts of rising incomes and consumption. This emphasis on rural development also strengthened the decentralisation of administrative and fiscal systems.

The first phase of the open-door policy fitted in well against this background. China took advantage of the problems of the Western capitalist economies of the late 1970s and early 1980s and the eagerness of global capital to move into new territories to allow foreign capital to come in for direct investment, build foreign exchange reserves, and step up international trade. Initially at least, a dual economy was deliberately set up. The bulk of the economy, as described above, constituted the domestic sector and only selected areas of the coastline were brought under the regime of foreign capital, with very little contacts between the two segments of the national economy. Later on, this too would create problems, but at the time it was done, it was considered the most appropriate strategy.

By early 1990, China was ready to spell out its long-term objective. At the 14th Party Congress in September 1992, it was resolved that the goal of economic policy would be the Socialist Market Economy. But it was not to be a reform to Leave it to the Market as had happened in most of the erstwhile socialist countries of Europe, or as enthusiastically canvassed for a while even in India. It was made clear that the party would still be in command, determining the character and nature of the transition to a market economy. In 1998, it was clarified that the thrust areas of the transition would be a rule-based system ensuring a level-playing field, clarity on property rights and ownership, and building of market-supporting institutions. That transition under the leadership of the party is still going on.

To be more specific, that transition has involved rationalising the vast body of state-owned enterprises (SOEs) and making them responsive to market signals; establishing the links between the SOEs and the large number of private enterprises that were springing up; dealing with the problems of open unemployment resulting from the rationalisation of the enterprises; building up of banking and credit institutions; carrying out financial and currency reforms; tuning up the economy to international requirements, particularly after the countrys formal entry in 2001 into the World Trade Organisation (WTO); and much more. The distinctive feature of Chinas new economy that is still taking shape is that all these matters are being deliberately thought through. China is showing that a socialist market economy does not just leave it to the market and that a market economys concern is not merely to get prices right.

Bhaumik devotes the main part of the book (Chapters Five to Eight on pages 115 to 230) on how these issues have been handled. The treatment is simple and well organised. Not even a summary is attempted here. But the following passage may give an idea of what the Chinese were able to achieve over a short period of a little over a quarter of a century: In 1978, China had an impoverished, and, if one may say so, autarkic socialist economy, wherein over 950 million people produced a gross domestic product (GDP) of USD 215 billion and more than 43 per cent lived in absolute poverty. In 2005, 1.3 billion Chinese people had a per capita GDP of over USD 1,700, an eightfold increase over 1978. The size of the real economy in 2005 (at USD 2.2 trillion) was more than ten times the size in 1978. On top of this the economy grew by 10.7 per cent in 2006, and pushed the GDP to over USD 2.4 trillion and per capita GDP exceeded USD 1,800. Phenomenal indeed!

But this unprecedented achievement in human history has given rise to new problems also. In order to appreciate and evaluate these problems, it is important to take note of a comment that Bhaumik makes: Actually, there are several Chinas within the booming national economy. Several diverse Chinas, one must add. Although China now is more under a central authority than ever before, it is a fact that its economy is still a bunch of disjointed provincial economies. The provincial and local administrations retain a great deal of autonomy. The physical diversity makes this almost inevitable. Added to it is the fact that economic activity is now under different sponsorships many are still state-owned, but there has been a rapid growth of privately owned enterprises during the past three decades while many old collective and cooperative units continue. Then there are the emerging modern corporations, including the multinationals. These production units have different rules of the game, though increasingly they all come under the laws of the market.

Under these conditions, rapid growth has led to an increase in disparities. What in an aggregate sense is referred to as the growth of the national economy has been substantially confined to the coastal regions and to industrial and financial activity, while large areas of the interior and the north-west still hold on to livelihood activities at rather low levels. While those who have been incorporated into the technologically advanced manufacturing activities have considerably improved their earnings and living conditions, many are becoming unemployed with little to fall back on.

Rural-urban differentials and housing also show glaring disparities. Above all, income inequalities have become embarrassingly conspicuous. As many as 300 million Chinese just manage to survive; of them 130-140 million survive on $0.55 a day, points out Bhaumik. The bottom 10 per cent, accounting for only 1.8 per cent of the total consumption expenditure, had a per capita expenditure of about $149. Against this, the top 10 per cent of the population, with a share of 33.1 per cent, enjoyed an annual per capita consumption expenditure of $2,750. However, this structure was not totally unanticipated.

If during the first phase of the transformation of the economy Mao aimed at equality at a low level, Deng and those who followed him were aware that the only way to move out of that situation was to have selective high growth resulting in inequalities. The Eleventh Plan (2006-2010) has been attempting broad-based high growth and remained substantially successful until the global recession made its adverse effect felt on the Chinese economy from 2008 onward.

There are other growth-related problems too. Technological upgradation is one among them. Those who engage in productive activity for survival do not bother much about the technology they utilise: they hold on to what they are used to or what is readily available. But a modernising economy aiming at high technologies and international competition must make intelligent choices about technology. New technologies have started flowing into China after it opened up. But are they the most suited for China? Already Chinas growth is proving to be extensive in the consumption of natural resources, leading to environmental degradation. Again, those at the helm of affairs are quite conscious of these issues. A Green National Accounting Study has been launched and since 2006 there has been a substantial increase in the allocation for research and development (R&D).

Chinas economic relationship with the rest of the world also poses new problems. In the initial stages of economic reconstruction, China had no intention of becoming a major player in the global economy. Indeed, for long China remained a closed economy. And when it opened up, an attempt was made to insulate the domestic economy as much as possible. For instance, foreign banks were not allowed to do business in domestic currency, and their operations were confined to the new special economic zones that were set up, that is, essentially to finance import and export transactions.

Foreign direct investments (FDIs) were heavily controlled too. Things began to change when foreign capital began to flow into the country in bulk. By 2001, foreign exchange reserves constituted 17 per cent of the GDP, and by 2005 it went over 40 per cent, that is, $770 per capita, about the highest in the world. Foreign trade too picked up phenomenally. Exports, for instance, increased from less than $10 billion in 1978 to over $760 billion in 2005, while the exports/GDP ratio increased from 5 to 35 per cent.

It is no longer possible to insulate the domestic economy and economic policies from global influences (as China is learning now). One area where this is seen clearly is in terms of the Chinese currency, the yuan. For domestic reasons China is eager to maintain a stable value of its currency in terms of leading global currencies, especially the U.S. dollar. But the U.S., into which Chinese exports are flowing and thus making the country indebted to China, has been exerting pressure to have free convertibility between the two currencies, leading to an appreciation of the yuan (which will reduce exports into the U.S.). China has resisted this so far.

At another level, China tends to buy regionally and sell globally, as the author puts it, piling up export surpluses with the U.S. and the European Union but having import surpluses from Japan, East Asian neighbours and the rest of the world. A matter of concern for China and the global economy as a whole is whether China will retain its export thrust, and if it does, how the rest of the world will cope with it. In particular, China will have to be concerned about the very unbalanced trade structure with the U.S. and Japan which will have economic and political ramifications. A further significant fallout of high growth, marketisation, and economic interactions with external agencies has been the high level and rapid spread of corruption. Contacts and influences have always had a prominent role in Chinese society and governance. Hard cash seems to be taking over their role now.

Bhaumiks concluding observations also deserve special attention. China is a state-driven, state-managed market economy, he says. It is the state that is at the helm of affairs, he adds. And, in China, for all practical purposes, the Chinese Communist Party (CCP) is the state, and throughout the process of economic transition the CCP has demonstrated its unique ability to manage various challenges entirely on its own. Along with it is the fact that it was the people of China, initially the liberated peasants in the rural areas, who began to walk the tough road to prosperity. Hard work is apparently an inbuilt quality of an average Chinese male and female alike, says the author. Driven by self-confidence, they believe that they can make a difference in their lives, if only they are allowed the scope to do so.

A country where the people know that they are the ones who shape their destiny and where there is a leadership that is alert and forward-looking will face many problems on its journey, but it will also find ways to deal with them.

For those who wish to have a quick appraisal of the working, achievements and problems of Chinas new economy, I recommend Bhaumiks book.