China

V

Economy

In the 1950s China’s Communist government began bringing a majority of economic activity under state control and determining production, pricing, and distribution of goods and services. This system is known as a planned economy, also called a command economy (see Communism: Centrally Planned Economy). In 1979 China began implementing economic reforms to expand and modernize its economy. The reforms have gradually lessened the government’s control of the economy, allowing some aspects of a market economy and encouraging foreign investment; however, the state-owned sector remains the backbone of China’s economy. China refers to this new system as a socialist market economy. As a result of the reforms, China’s economy grew at an average annual rate of 10.2 percent in the 1980s and by 10.2 percent annually in the period of 2005. This was among the highest growth rates in the world. However, the reforms also have caused problems for China’s economic planners. Income gaps have widened, unemployment has increased, and inflation has resulted from the extremely rapid and unbalanced development.

In 2005 China’s gross domestic product (GDP) was $2,234.3 billion. The size of the country’s economy makes China a significant economic power; despite this, it remains a low-income, developing country because it must support a huge population of 1.32 billion. In 2005 China’s per capita GDP was just $1,712.80. Industrial activity (manufacturing, mining, and construction) contributes the largest percentage of the country’s GDP, amounting to 48 percent in 2005. Transportation, commerce, and services together accounted for 40 percent. And agriculture, together with forestry and fishing, contributed 13 percent.

A

History of China’s Economy

China developed an agricultural economy more than 2,000 years ago. During the Han dynasty (206 bc-ad 220) the Chinese developed several tools and practices that farmers in Europe and the Middle East adopted only centuries, or even a millennium, later. The cast-iron moldboard plow, for example, made it easier to cultivate hard or stony land. Although heavier than wooden plows, these plows created much less friction and could be pulled by a single animal, even in the waterlogged clay soils of southern China.

After the Han period, however, China’s agriculture and economy advanced more slowly. For centuries, China’s economy was based on farming that used ancient methods, and much of the agricultural activity was performed at a subsistence level. By the 19th century China had an underdeveloped agricultural economy that was backward compared to the developing industrial economies of Europe and North America.

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In the mid-19th century Britain defeated China in the Opium Wars and forced China to create coastal treaty ports, in which foreign residents could live and trade. A period of Western penetration followed, during which railroads and highways were constructed, some industrial development was begun, and new energy sources, such as kerosene and electricity, were introduced. However, such activity had little impact on China’s economy overall. In 1911 Chinese revolutionaries overthrew China’s last dynasty, the Qing, and the new Chinese republican government attempted to modernize the economy. But in the decades that followed, civil wars and a war against Japanese occupation stifled economic growth and development.

In 1949 the Chinese Communist Party (CCP) came to power and founded the People's Republic of China (PRC). During the first few years of its existence, the PRC focused on rebuilding from the ravages of war and redistributing land to 300 million poor peasants. Then, in 1953, China implemented a planned economy, and the government took over all means of production. The state outlined how the economy was to be developed in a series of five-year plans, which detailed how investment funding, production materials, and other resources were to be allocated. Success was measured by the fulfillment, or over-fulfillment, of the production targets and timetables established in the five-year plans. As a result, quality and innovation became less important than they had been in the past. The government assigned people to jobs and there was little possibility of job transfer. The state also controlled wages and prices and owned all transportation and housing. Household and personal consumption was controlled by the government through a system that rationed food, cotton cloth, and other daily necessities. Consequently, enterprises, families, and individuals had very limited choice in their economic behavior.

A

1

Five-Year Plans

The first five-year plan, implemented from 1953 to 1958, outlined changes for all economic sectors but particularly emphasized expansion of heavy industry. The government created hundreds of large, state-owned, industrial enterprises, and by 1958 China had a solid industrial base. In the agricultural sector, meanwhile, the state organized workers into large, cooperative farms. Agricultural output increased, but not nearly at the same rate as industry.

Initially, the authors of the second five-year plan modeled it on the first. By the beginning of 1958, however, they had revised the plan to address the concern of Chinese leader Mao Zedong that agriculture was not growing as fast as industry. The revised plan was to be accomplished through an economic and social campaign intended to radically increase China’s agricultural production while maintaining high industrial growth. The campaign became known as the Great Leap Forward.

At this time, China was becoming increasingly isolationist in its foreign policy, and one goal of the Great Leap Forward was to make the country self-sufficient. A key component of the program was the establishment of small furnaces for making steel from low-grade ore, scrap metal, and even household implements. Millions of peasants and city workers were ordered to abandon their fields and factories in order to run primitive backyard furnaces. Although the program pushed China’s total iron and steel production past Britain’s in just a few years, the result over time was massive economic dislocation as well as wasted resources, including widespread deforestation for the sake of obtaining fuel to fire furnaces.

In agriculture, the government established huge rural people’s communes, which brought all rural land and major farm equipment under collective ownership. Although China sowed a huge grain crop in 1958, much of it went to waste because of inadequate transportation and storage facilities. Worse, a policy of deep plowing and the practice of planting grain even in conditions unsuited to its cultivation did a great deal of ecological damage. Silting and runoff from ill-considered and poorly executed irrigation projects, and the destruction of trees, grasses, and ponds, contributed to catastrophic floods in 1959 and 1960. The misguided industrial and agricultural policies of the Great Leap Forward, compounded by these environmental calamities, resulted in three years of famine in which more than 20 million people died.

As a result of the famine and the economic failures of the Great Leap Forward, China launched a period of economic readjustment. By 1965 production in many fields again approached the level of the late 1950s. The third and fourth five-year plans were begun in 1966 and 1971. However, both agricultural and industrial production were severely curtailed by the effects of the Cultural Revolution (1966-1976), a political campaign that was intended to revolutionize Chinese society but that ultimately caused social chaos and near economic collapse.

In the fifth five-year plan, begun in 1976, China's leaders decided to move at a faster pace on all economic fronts to make up for the losses suffered in the preceding ten years. However, the biggest economic changes occurred after the CCP, under the leadership of Deng Xiaoping, adopted the national objective of modernizing agriculture, industry, defense, and science and technology in 1978. Subsequent five-year plans focused on achieving this objective.

A

2

Reform and Opening

The first reforms toward achieving the new national objective began in poor rural areas in 1979, when the government replaced communal farming and distribution with the household contracting and responsibility system. Under this system, individual farm households worked separate plots of land owned by an economic collective. The households could sell produce at farmers’ markets for whatever price buyers were willing to pay in return for selling a certain amount of produce to the collective at a predetermined price. The contract and responsibility system was successful because it gave farmers an incentive to reduce production costs and increase productivity.

In 1984 the government shifted the emphasis of the economic reforms to urban areas. It extended greater decision-making power to managers of state-owned enterprises, and replaced the system of collecting all profits with one of collecting taxes on profits and then allowing enterprises to make their own reinvestment choices. Furthermore, while still insisting on public (state) ownership of enterprises as the predominant form, the government also encouraged other forms of ownership, such as collective and private ownership.

Meanwhile, China also opened its market to the outside world. To help quicken the pace of modernization, the state encouraged foreign investment and the import of advanced technology. In 1980 China began establishing special zones for foreign investment. The original four were called Special Economic Zones (SEZs) and consisted of Shenzhen, Zhuhai, Shandou, and Xiamen, all in southeastern China. By the late 1990s a variety of similar types of zones had been added, including a fifth SEZ, Hainan Island. Most zones are located in urban economic centers, particularly coastal cities, cities along the Yangtze River, provincial capitals, and cities and towns along China’s borders.

In 1992 the government announced the goal of establishing a socialist market economy, meaning a market economy led by the CCP. To accommodate this change and other economic reforms, the government has shifted its role in the economy. Under the planned economic system, the state determined production and pricing. In a market economy, however, consumer demand for goods and services determines production and pricing. The Chinese government's new role involves creating a stable and competitive economic environment through the application of laws and regulations. In 2001 China became a member of the World Trade Organization (WTO). In joining the WTO, China agreed to further reduce government control over the economy, including reducing state subsidies and dropping many restrictions on foreign investment.

B

Labor

In 2005 China had a total labor force of 776 million, the largest in the world. In 2002 agriculture, forestry, and fishing employed 44 percent of the workforce. Mining, manufacturing, and construction employed 18 percent. The remainder, 16 percent, worked in the service sector, which includes banking, government, transportation, tourism, and retail trade.

Official unemployment in China was 4.2 percent in 2005. However, the real problem of unemployment and underemployment (employment that is less than regular, full-time employment) is much more serious. Many state-owned enterprises have more workers than are needed. To increase production efficiency, these enterprises have begun laying off many people. Furthermore, eliminating inefficient communal farming methods created a huge pool of unemployed and underemployed people in the countryside. Each winter since the reforms began, millions of peasants have traveled to cities in search of seasonal work. This has caused havoc in railroad transport and social problems in urban areas that have neither enough jobs nor housing to absorb these workers.

China's economic reforms have brought major changes to the work place. Previously the state assigned people to jobs. Although workers had little choice in their assignments, they generally could count on life-long employment. Furthermore, state enterprises provided retirement, social security, medical care, and in many cases subsidized housing to their employees. However, these costly benefits contributed to the losses that plagued many state-owned enterprises. Under the reforms, enterprise managers have received greater freedom to hire and fire workers. Job mobility has increased, but so has job insecurity. The central government has transferred many responsibilities for retirement and social security systems to provincial governments.

Trade unions are organized in all of China’s industrial sectors, and more than 100 million Chinese workers belong to trade unions. Some of the unions were founded as early as the 1920s. Many more were founded after the establishment of the PRC in 1949. All trade unions are under the All-China Federation of Trade Unions, an umbrella organization of the CCP. The unions work for the interests of union members in matters such as labor protection, workers' welfare, and the settlement of labor disputes. The unions are also an instrument for bringing workers and the CCP together.

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