Transforming China: Globalization, Transition and Development

by Peter Nolan

Overview

These essays both enhance an understanding of China's immense success in meeting these challenges in the past and provide an indication of the challenges that still lie ahead. China's system reforms have been described as 'groping for stones to cross the river'. The journey across the river is far from over, and the other bank is only dimly visible.

Product Details

ISBN-13:	9781843311232
Publisher:	Anthem Press
Publication date:	05/11/2004
Series:	China in the 21st Century
Edition description:	New Edition
Pages:	342
Product dimensions:	6.10(w) x 9.20(h) x 1.00(d)

About the Author

Peter Nolan is Sinyi Professor of Chinese Management at the Judge Institute of Management, Cambridge University, and Fellow of Jesus College, Cambridge University.

Read an Excerpt

Tranforming China

Globalization, Transition and Development

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By Peter Nolan

Wimbledon Publishing Company

Copyright © 2004 Peter Nolan
All rights reserved.
ISBN: 978-0-85728-746-5

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CHAPTER 1

THE STARTING POINT OF LIBERALIZATION: CHINA AND THE FORMER USSR ON THE EVE OF REFORM

The contrast in performance of China and the former USSR under reform policies has been dramatic. In China there was explosive growth, a large reduction in poverty and a major improvement in most 'physical quality of life indicators' (Banister 1992, World Bank 1992a). The economy of the former USSR collapsed, alongside massive psychological disorientation and a large deterioration in physical quality of life indicators, including a huge rise in death rates (Ellman 1994). The contrast in reform paths is well known. China's approach to economic reform was experimental and evolutionary, under an authoritarian political system. The USSR followed the 'transition orthodoxy' of revolutionary political change under Gorbachev, followed by shock therapy and rapid privatization in the Russian Federation under Yeltsin.

Systematic comparison of the two countries' experience under reform is still limited (but see, for instance, Aslund 1989, Sachs and Woo 1994, Goldman 1994: chapter 9, Nolan 1994, 1995). Much the most influential proposition in this literature is the argument that the difference in results is explained not by the difference in reform policies but, rather, by the different starting-points:

It was neither gradualism nor experimentation, but rather China's economic structure, that proved so felicitous to reform. China began reform as a peasant agricultural society, EEFSU [Eastern Europe and the former Soviet Union] as urban and overindustrialised ... In Gerschenkron's famous phrase [China] had the 'advantage of backwardness' (Sachs and Woo 1994: 102-4).

This proposition has been absorbed rapidly into the mainstream of popular perception of the reasons for the difference in outcome from post-Stalinist reform in China and the former USSR.

This chapter examines the two systems of political economy on the eve of their respective system reforms in order to evaluate their respective possibilities for accelerated growth. It concludes that there were indeed large system differences. However, many of these were to China's disadvantage. It argues that despite the differences, the systems each possessed large possibilities for accelerated growth with the introduction of market forces in an incremental fashion, in a stable political environment with an effective state apparatus. These possibilities stemmed to a considerable degree from common features of the communist system. The chapter concludes that on the eve of reform China did not on balance possess greater possibilities for improved system performance than did the USSR. It argues that the main explanation for the differences in outcome must, therefore, be sought in the policies chosen, not in system differences. We begin by comparing both societies on the basis of economic factors crucial to the possibility of accelerated growth.

ECONOMIC FACTORS

Advantages of the Latecomer

There are three main 'advantages of the latecomer'. Firstly, it may be advantageous to have a large share of the population in agriculture, since a rural labour surplus provides the potentiality for rapid 'Lewis-type' growth in labour-intensive industries. Secondly, latecomers can draw upon a much greater pool of international savings than was available to the early starters. Thirdly, a latecomer can employ more advanced technology than was available to the early industrializers. However, there are many problems with these arguments as applied to the Sino-Soviet comparison.

Economic Structure

Industry In the early 1980s a reported 62 per cent of Soviet GDP came from the industrial sector, which is a higher share than even for the advanced industrial economies (Table 1.1). However, China also was hugely 'over-industrialized'. In China in the early 1980s, industry reportedly produced 47 per cent of GDP, ahead of even the advanced capitalist countries (Table 1.1). There were serious inefficiencies in both Chinese and Soviet industry, but 'over-industrialization' may have been an even greater burden for China than for the USSR, since in China's case the 'over-industrialization' was in a vastly poorer country, with a much lower income level from which to generate savings to finance investment.

In the USSR in the early 1980s the proportion reportedly employed in industry (around 45 per cent: Table 1.1) was higher than in the advanced economies. However, the difference was not large, and it stood at a similar figure in several of the advanced capitalist economies. Moreover, to some degree the relatively high proportion employed in industry reflected the high levels of over-manning in industry in all the communist countries. This was a form of 'disguised unemployment' (Arnot 1988). Suitable institutional reform could have raised labour productivity and encouraged state enterprise managers to release labour to be employed in other sectors.

Agriculture China's employment structure was close to that of a typical low-income country, with around three-quarters of the population still employed in agriculture. Although the USSR had a much lower proportion of the workforce employed in the farm sector, the share was still large compared to the advanced capitalist countries (Table 1.1) and was probably much higher than the usually reported figure (see Table 1.13 for a much higher estimate). There were large possibilities in Soviet agriculture, as in Soviet state industry, for releasing surplus labour to undertake useful work in other sectors.

Having a large proportion of national output and employment generated in agriculture is not necessarily an advantage for a reforming communist country. An important reason for the success of the East Asian Four Little Dragons was that each had a relatively small farm sector at the start of their phase of accelerated growth (Little 1979: 450). In a densely populated economy such as China's the capital needs for expanding agriculture are large. If a sufficient condition of rapid growth was having a large share of output and employment in the farm sector, impoverished countries would long ago have 'caught up'.

Services Both China and the USSR had a low proportion of employment in the service sector (Table 1.1). They each had large possibilities for improvements in welfare and for attracting surplus labour from industry, agriculture and from the state bureaucracy, simply by allowing people to set up service sector businesses. Under China's reforms the service sector's share of employment rose from 14 per cent in 1978 to 23 per cent in 1991 (derived from SSB, ZGTJNJ 1992: Section 4). In the USSR in the late 1980s, the Law on Individual Labour Activity (1986) and the Law on Cooperatives (1988) were followed by a rapid growth of small-scale service-sector activity.

State Sector Most Soviet workers were employed in the state sector, which included industry, state services, notably government administration, as well as state farms. These workers had secure jobs, incomes and housing, and welfare provision. In China, only a small proportion of the workforce was in these sectors. Most of the growth in employment in the non-state sector during reform came from rural dwellers, and only a small part from the state sector. Obviously in this respect successful reform in the USSR would have taken a different path from that in China.

The Soviet state sector was far from homogeneous. Although the Tareto tails' of extreme inequality in income distribution were missing, there were wide differences in income and standard of living between different occupations and sectors (Yanowitch 1977: chapter 2). Moreover, there were quite wide differences in average income and large differences in labour force growth rates between regions (Feshbach 1983). Generally speaking, income levels were lower and population growth rates much higher in central Asia than in the European republics. As new employment opportunities emerged outside the state sector during a successful economic reform programme, then, it is not difficult to imagine how workers might have begun to migrate between sectors, occupations and regions. This could have happened in many ways, including the following:

• Direct bidding of full-time permanent labour out of the state sector through higher wages.

• 'Part-time' work in the non-state sector by state-sector workers.

• State-sector workers might retain their right to work in the state -sector enterprise but cease to be paid wages from that enterprise, and being allowed to more or less permanently work full-time in the non-state sector.

• Workers in the state sector could be allowed to retain their rights to work in the state enterprise and their social security benefits from it in return for some form of fee paid to their original enterprise.

• State enterprises could themselves invest in new enterprises (either directly or as joint ventures with capital from other sectors) in the production of goods and services, the areas for which demand was growing rapidly, allowing the redeployment of surplus labour from the original enterprise.

Some form of all these arrangements occurred in China during its reforms, but the rapid growth in the new entrants to the workforce and the huge rural labour surplus in farm employment tended to reduce the extent of migration from the state to the non-state sector.

Capital Markets

The accelerated globalization of capital after the 1970s provided a large potential 'catch-up' opportunity for reforming communist countries. Post-1978 China attracted substantial direct foreign investment because it provided political stability, cheap labour costs with a low probability of strike action, reliable investment guarantees and rapid growth behind high protectionist barriers which made it attractive as a potentially huge market. China did enjoy an advantage of having a large amount of capital in the hands of the Chinese diaspora. Some other reforming countries also have large diaspora. For example, the Indian diaspora's financial resources probably exceed those of overseas Chinese. However, only a small proportion of this has been invested in India despite India's economic liberalization. Clearly, a large diaspora is insufficient. The reforming country needs to implement policies which encourage its overseas citizens to invest in their native land.

At the start of its reform, the USSR had high potential to attract direct foreign investment. The core of the Russian economy to the West of the Urals was essentially a part of Europe, which was to become the largest single market in the world in 1992. It had vast natural resources and a much more educated and skilled labour force than China's (see below). They were prepared to work hard for much lower incomes than comparably skilled people in the advanced capitalist countries. Moreover, its infrastructure was vastly more developed than that of China. A successful reform strategy would have generated huge needs for foreign capital. The fact that it failed miserably to attract foreign direct investment (rated as the second riskiest country for investments in 1993: The Economist, 21 August 1993) is attributable to massive instability caused by policy choices in politics and economics.

Technological Catch-up

Both China and the USSR achieved low returns in terms of civilian technical progress from their investment in science. Scientific research workers were isolated in institutions and universities. Enterprise managers had a strong interest in resisting technical progress, let alone themselves attempting to pursue it (Nove 1983: 76). By introducing the profit motive to industry (alongside other necessary reforms), large increases in output could in principle have been achieved from existing scientific personnel. The potential for the USSR to gain from this was considerably greater than was the case for China.

In both cases a large share of scientific expertise was allocated to the military sector. This reflected the USSR's frontline position in the Cold War and China's post-1960 'war on two fronts' against both the US and the Soviet Union. In the early 1980s Soviet defence expenditure amounted to around 15 per cent of GNP (USCJEC 1983: 306), and the defence sector claimed a large share of the best resources (USCJEC 1982: 340). China's defence sector was much less technically advanced than that of the USSR in the 1970s. However, the share of industrial resources pre-empted by the military sector was at least as great as in the USSR, accounting for around 21 per cent of industrial output value in 1980 (USCJEC 1975: 477). In both cases there existed a large 'peace dividend' from the end of the Cold War which could have released scientific and material resources for civilian use. This dividend could have been especially large if the end of the Cold War had coincided with well-devised policies to introduce competition to industry leading to the intensive use (in order to make profits) of scientific skills and capital stock formerly tied up in the military sector. The USSR's scientific expertise would have been hugely attractive to foreign investors if the correct institutional environment, such as peace and a suitable, enforceable legal framework, could have been constructed and steady growth of demand ensured. Tragically, under the conditions of collapsed domestic demand and shattered political institutions, foreign countries often preferred to import scientists rather than organize production within Russia.

Despite the 'turn to the West' in the 1970s resulting in increases in the USSR's technology imports, equipment imports still accounted for only around 2 per cent of total domestic equipment investment (Hanson 1978: 31). In the 1950s most of China's technology imports had come from the USSR. In the 1960s 'self reliance' had become the watchword and imports of equipment and technology were reduced to the selective acquisition of the most advanced technology: '[China's] stock of Soviet equipment was rapidly becoming obsolete and domestically produced equipment was primitive' (USCJEC 1978: 311). Both China and the USSR possessed a large opportunity for technical catch-up, provided the foreign exchange could be generated to pay for technology-enhancing imports. China was in a much less favourable position than the Soviet Union to select and absorb foreign technology, since its scientific capabilities had been badly damaged during the Cultural Revolution.

Size

The vast size of China and the USSR provided a considerable potential advantage compared to other reforming Stalinist economies. This provided them with the opportunity to restructure with a relatively small loss of efficiency behind protectionist barriers. Domestic industries could potentially move towards profitability at world market prices within a relatively closed economy with growing internal competition while simultaneously achieving economies of scale.

Social Capability

Poor economies mostly have failed to catch up with advanced ones. Catch-up tends to occur only above a certain income level (Gomulka 1991). In order to 'catch up', countries need a certain level of 'social capability' to be able to exploit advanced technology: '[A] country's potential for rapid growth is strong not when it is backward without qualification but rather when it is technologically backward but socially advanced' (Abramowitz 1986, 388).

The Labour Force

General Educational Level Socialist ideals of the communist countries were reflected in the relative equality of access to education. China's level of general education in the 1970s was advanced for a low-income country, at least in the urban areas (Table 1.2). However, a mere 17 per cent of the labour force worked in industry (Table 1.1). In the mid-1970s the vast bulk of the Chinese population was a semi-literate peasantry, over one-third of whom lived in dire poverty (Nolan 1983, World Bank 1992a). Around 35 per cent of the adult population was estimated to have been illiterate, around the same figure as for Indonesia (Eberstadt 1986: 315). Moreover, the country's primary and secondary education was hugely disrupted by the Cultural Revolution, which led to schools being closed across much of the country for two to three years and, even when they reopened, ideological education took a high priority in the curriculum.

The USSR by the 1980s was a highly urbanized country. Its achievements in basic education compare favourably even with those of the advanced capitalist countries (Table 1.2). In the mid-1970s the USSR's per capita consumption of educational services was ahead of all Western countries except the USA (Schroeder 1983: 319).

(Continues...)

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Excerpted from Tranforming China by Peter Nolan. Copyright © 2004 Peter Nolan. Excerpted by permission of Wimbledon Publishing Company.
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Table of Contents

Introduction; 1. The Starting Point of Liberalization: China and the Former USSR on the Eve of Reform; 2. China's New Development Path: Towards Capitalist Markets, Market Socialism or Bureaucratic Market Muddle?; 3. Politics, Planning, and the Transition from Stalinism: The Case of China; 4. Democratization, Human Rights and Economic Reform: The Case of China and Russia; 5. Beyond Privatization: Institutional Innovation and Growth in China's Large State-Owned Enterprise (with Wang Xiaoqiang); 6. China and the Global Business Revolution; 7. The Challenge of Globalization for Large Chinese Firms (with Zhang Jin); 8. The Causation and Prevention of Famines: A Critique of AK Sen; Epilogue: Adam Smith and the Contradictions of the Free Market Economy: a Note