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6.InitialconditionsEc21282017.pptxIII. Initial Conditions
Ec 2128A
Readings
Section III of the reading list.
Intro
In order to understand China’s economic d’ment since 1949, need to know the starting point
What was the state of the economy inherited by the new Communist leadership in 1949?
Before 1949, had China started to develop, embarked on modern economic growth?
Sustained increases not only in GDP and pop, but also in GDP per capita
Growth accompanied by underlying structural change
Pre-1949: Conventional View
No modern economic growth before 1949
Slow growth in both GDP and population
Stagnant: no sustained increase in GDP per capita
Existing social, political, economic institutions hindered growth
Implication: Needed big changes, maybe revolution…
In this context, post-1949 economic performance impressive
Pre-1949: Revisionist View
Yes, beginnings of modern economic growth before 1949
GDP growth began to accelerate, outpace pop growth
GDP per capita sustains increases
Interrupted by Japanese invasion, civil war, WW II
No reason growth would not have continued once peace restored
Implication: Room for improvement, but…
Post-1949 economic performance builds on, continuation of, pre-1949 development
Outline: Initial Conditions
I. Snapshot of the pre-1949 economy
A. Population B. GDP structure and sectors
1. Agriculture
2. Industry
Moving Picture: Where was it going?
A. The debate: Was there growth in GDP per capita?
B. Explanations why, or why not:
Conventional vs. Revisionist views
C. Implications for post-1949
I. Snapshot
Time frame of snapshot: mid-1930s
Peak level of GDP prior to 1949
Before Japanese invasion (1937) and Civil War (1945-49)
Two + decades after fall of Qing (Ch’ing) dynasty and establishment of “Republican” government in 1912
1912-1949 called the “Republican,” “Nationalist,” or “Guomindang”(国民党) period
7
A. Population
500‑600 million
Growth: fairly slow, 0.6‑0.9% a year
Compared with post more recently:
1 billion in 1981; 1.38 billion in 2015
Pop growth 1950-1978: 2.0% a year
Pop growth now: <0.5% a year
Regional distribution of pop: then and now, very uneven
Then: 1953
Now: 2010
http://www.china-mike.com/wp-content/uploads/2011/01/china-physical-relief-map-topography.jpg
Pop distribution, circa 1949
Head: NEast (Manchuria) 7%, now around 9% (3 provinces—Heilongjiang, Jilin, Liaoning)
Wings: NWest 5%, now around 10%
Thighs: SWest 17%, now around 16% (mostly Sichuan + Chongqing, also Yunnan & Guizhou)
Breast: The rest, North, East, Southeast and Center 25+17+13+14=70% (now about 2/3)
Within regions: concentrated in basins and along waterways
SECTORAL DIST. OF POPULATION
Urban pop (cities of 2500 or more): 10-15%,
highly concentrated in Beijing‑Tianjin, Shanghai, Canton (Guangzhou).
Rural pop: 85-90%.
Labour Force
Agriculture: 80%
Non-Agriculture: 20%
Only a small % in modern industry as we think of it
Most in traditional industries (handicrafts), and services like trade and transport.
Outline: Initial Conditions
I. Snapshot of the pre-1949 economy
A. Population √ B. GDP structure and sectors
1. Agriculture
2. Industry
Moving Picture: Where was it going?
A. The debate: Was there growth in GDP p.c.?
B. Explanations why, or why not:
Conventional vs. Revisionist views
C. Implications for post-1949
B. GDP Structure & Sectors
1. Agriculture
Why is agriculture important for early economic development?
What role did AG play in China’s early economy?
AG’s Role in Development
AG sector can play a key role supporting early economic growth
Source of key resources for industrialization
Labor
Food for workers
Raw materials
Funds for investment
The main market for IND products
Rural institutions a base to support IND d’ment
Did AG in pre-1949 fulfill this role?
AG in Pre-1949 China
The DOMINANT economic sector
60 to 80% of GDP
Major employer
Non-AG sectors were closely tied to AG
Commerce, transport mainly serviced AG
Much industry was in processing of AG products, e.g., flour milling, textiles, tobacco,
Features of the AG Sector
Limited cultivatable land area
Cultivated land area only 10% of total land mass
Had to support a large population
Comparison to U.S. (1930s): US had the same total land mass, but 20+% cultivated, with ¼ the population
Some believed: land was a constraint on growth
Structure of Farming: Farm Size and Distribution
Farm structure important for equity and efficiency
Land was the major asset, tied to incomes
Land productivity important for supporting IND d’ment
Landholding a major issue in the Communist agenda
Communists thought pre-1949 land distribution was unfair, inefficient
Pre-1949 and early 1950s: redistribution of land to the tiller
1950s: larger, “more productive” farms through collectivization
After 1978: decollectivization—shift back to small-scale, household farming
Need to understand these institutional changes in light of the inherited structure of household farming.
Farm size in 1930s China: small, declining
Median farm size about 3 acres (Riskin, pp. 23, 30)
Size of about 2 football fields (Canadian 1.75 acres; US 1.3 acres)
In North America at that time, average farm size was 150+ acres
Farm size had declined due to population growth, and limited cultivatable land area
Farm size distribution
Unequal, but not bad by international standards
China did not have large-scale plantations
Only 1% of farms exceeded 25 acres
Farm size distribution, mid-1930s
| Farm Size (acres) | % of families | % of land |
| landless | 10% | 0% |
| Less than 2.5 | 66% | 28% |
| 2.5 to 25 | 24% | 71% |
| > 25 | <1% | <2% |
Source: Feuerwerker, p. 78. Nat'l Land Survey figures. Cited in Riskin, p. 29.
Land tenure distribution
Land tenure and farm size are different
Land tenure refers to ownership
relevant for inequality of wealth & income
relevant for economic security, access to credit (collateral), and social status
To what extent did farmers in pre-1949 China own vs. rent land? And, how much rent did they pay?
Land Tenure
Tenancy in China not high by int’l standards
Most farmland (64%) cultivated by owners
Most farm households (70%) owned some land
So: about 1/3 of farm families were pure tenants
tenancy highest in fertile rice lands of the south, especially Yangtze and Pearl River deltas
Base areas of CCP during civil war were in areas where land dist. more equal, not less equal
These numbers exclude landless families
Less than 10% of families were landless
(Data from Feuerwerker, p. 81‑82, and Buck and Natl Land Survey, cited in Naughton.)
This is not to say that there was no inequality or dire poverty!
Land dist. varied regionally, so in some areas more unequal than others
Many households were in debt
When average income is very low, it does not take a lot of inequality to have profound effects: a small increase in the amount of land owned can make a big difference
AG Production and Technology
Why important?
Determines whether AG could generate surplus for investment
Indicator of the capability & sophistication of labor force
AG technology in pre-1949 China was TRADITIONAL
Used traditional inputs (land, labor, draught animals)
No modern, manufactured inputs (e.g., chemical fertilizers, pesticides, diesel fuel)
No power machinery
Very labor intensive
AG technology was highly SOPHISTICATED
“traditional” ≠ backward or crude
AG technology in China had evolved to a high level
Major changes in technology over time, e.g., new world crops, new cropping techniques
Improved varieties, seeds
Corn, peanuts, potatoes
Multiple cropping
Farmers willing and able to innovate, adopt new methods
Supported by imperial policies, e.g., written pamphlets to disseminate improved farm practices
See Perkins, Agricultural Development in China, 1368-1968
Yields high: grain yields 2.5 mt/ha, at that time second only to Japan
http://rmc.library.cornell.edu/presidents/view_image.php?img=51
Experimental rice field near Nanjing, 1920s
As a result of sophisticated technology and high yields:
Farmers had output to sell
Local and inter-regional commerce was developed
Periodic farm markets/fairs (Skinner)
Farmers in much of China participated in markets
Development of supporting institutions
Paper money
Written commercial contracts, legal practices
Traditional banks
Merchants’ associations
Summary of pre-1949 AG
New regime inherited an AG sector with positives
Sophisticated, adaptable and innovative farmers
Distribution of land and income not TOO skewed
And negatives
No prospect for increasing land area: further output increases only through higher yields
Yields already high
Fragmented landholdings
Decay/destruction of farming infrastructure, e.g., irrigation works, during 1940s
B. GDP Structure & Sectors
2. Industry
Industry plays a key role in the early development process
What was the nature of IND in pre-1949 China?
IND in Pre-1949 China
Small
At most 10-15% of GDP
This includes modern and handicraft IND, plus mining, plus utilities
Most of this was “traditional” industries
“Modern” industries maybe 5% of GDP
Growing rapidly
7 to 8% a year from 1910 to late 1930s
But from a small base…
Structure of IND: Regional
China proper: concentrated in Treaty Ports
Established following China’s defeat in Opium Wars in 1840-42
Treaty required China to open certain cities to foreign residents and businesses: foreign “concessions”
Additional cities added following further armed conflicts and defeats by the West
Treaty Ports included: Wuhan (Hankow), Shanghai, Tianjin (Tientsin), Guangdong (Canton), Qingdao (Tsingtao)
First manufacturing/IND activity established by foreigners in Treaty Ports, but quickly native IND also developed
Some short videos on relevant history in case you are interested
http :// www.youtube.com/watch?v=n-rnwZCJTOE (Japanese invasion)
http:// www.youtube.com/watch?v=DzsQjQatvL0 (Opium wars and foreign influence)
Manchuria
Industrialization began under Japanese occupation of Manchuria (started in 1930)
By 1940, Manchuria produced nearly 30% of Chinese industrial output
Note that IND base in Manchuria was damaged during WWII, and then much equipment removed by Soviet armies, who occupied Manchuria after the war
Structure of IND: Type of IND
75% Light IND/Consumer goods
In China proper IND was mostly production of consumer goods
Mostly small scale, traditional, handicraft
Mostly processing of AG products, e.g., textiles, flour milling
Also mining (e.g., coal)
25% Heavy/Producer goods
Mostly in Manchuria
Iron and steel, mining, autos and trucks, machinery, chemicals
Role of Foreigners
Subject of debate—more later
Clearly important for initial development of modern IND
By 1930s native IND output larger than foreign
After WWII, Nationalist government took over Italian, German and Japanese IND
Together accounted for 46% of IND capital in 1946
Large state-owned IND sector even before 1949
Linkages
Was IND sector linked to rural/AG economy?
Did it substantially draw resources from AG?
Did rural sector demand and buy IND products?
Linkages important for “virtuous cycle”
If IND using resources from AG, then it generates income and employment in rural areas
Rising income and employment in rural areas creates demand for IND products
Rapid growth of IND can then generate broader economic d’ment
Linkages
Manchuria: not linked
Japanese industries were structured to supply products to Japan
Profits repatriated to Japan
China proper: Debate about linkages
Conventional view: links were weak
Revisionist view: links were important
Summary of pre-1949 IND
Inherited an IND sector with positives
Dynamic growth
Core of skilled IND workers and managers
Strong Linkages?
And negatives
Small
Regionally and structurally imbalanced
Overwhelming majority of China’s pop had NO direct exposure to modern IND
Weak linkages?
Outline: Initial Conditions
I. Snapshot of the pre-1949 economy √
A. Population √ B. GDP structure and sectors √
1. Agriculture
2. Industry
Moving Picture: Where was it going?
A. The debate: Was there growth in GDP p.c.?
B. Explanations why, or why not:
Conventional vs. Revisionist views
C. Implications for post-1949
II. Moving Picture: Where was China’s economy going?
Conventional View
No Modern Economic Growth
Distribution of income worsening
Little investment
Technologist explanation
Distributionist explanation
Economy in disarray
Implications for post-1949?
No Modern Economic Growth
Growth in per capita GDP very low, 0.1% (K.C. Yeh) to 0.5% (Perkins) per year
IND sector still very small
No improvement in personal welfare
"At best, the great majority of Chinese merely sustained and reproduced themselves at the subsistence level to which, the callous might say, they had long since become accustomed.“
--Albert Feuerwerker
Income distribution worsening
Growth was not evenly distributed
Neast: AG output was expanding, but benefited small population
Center and East: output stagnant or growing slowly
Markets & commercialization aggravated inequality
Middlemen had local market power: farmers bought dear, sold cheap
Landlords, merchants lent to farmers at high interest rates, then repossessed their land when they were unable to repay
Income distribution worsening, cont.
Tenancy was rising
Due to markets, debt, and natural disasters, poorer farm families were losing land
Rising tax burden
Land tax the major source of government revenue
In 20th century more taxes added, e.g., head tax
New taxes were regressive: heavier burden on the poor.
Decline in handicrafts
Handicrafts a major source of income: 25% of rural income generated by subsidiary occupations, esp. textiles
Modern IND and imports displaced handicraft production
Little Investment
Without investment, no possibility for M.E.G.
Two explanations for low investment
Technologist (Elvin, Dernberger, Perkins)
Distributionist (Riskin, Lippitt, Moulder)
Both explanations hinge whether there was an "investible surplus" in the AG sector
Technologist: no investible surplus
Distributionist: there was investible surplus, but it was not being invested
Technologists: No Surplus
China had big population, limited land
In the past: AG output had been able to grow along with population
Expansion onto new land
Intensification of AG production
By 1900, no potential for increasing AG output
No more land
Traditional AG technology had reached its limit
Stuck in a “High Level Equilibrium Trap”
High-Level Equilibrium Trap Model: Agricultural Production Function
AG output
Q = F(Land0; Pop)
Population
Subsistence line
Subsistence = b x Pop
AG output
Q = F(Land0, Pop)
Population
Subsistence line
Subsistence = b x Pop
AG output
Surplus E Q = F(Land0, Pop)
Plow Phigh Population
Subsistence line
Subsistence = b x Pop
AG output
E
Deficit
Plow Phigh Population
Subsistence: Equilibrium E*
Subsistence = b x Pop
Q = F(Land0, Pop)
Q* E*
P*
Improvements in Traditional Technology
Q = F’(Land0; Pop)
Q = F(Land0; Pop)
Q* E*
P* Pop
Technological change → surplus
Q = F’(Land0; Pop)
Q = F(Land0; Pop)
Q* E*
Surplus
P* Pop
Surplus → population growth
Q = F’(Land0; Pop)
E’
Q = F(Land0; Pop)
Q* E*
P* Pop
Pop growth → new equilibrium E’
Q’ Q = F’(Land0; Pop)
E’
Q = F(Land0; Pop)
Q* E*
P* P’ Pop
This process continued for many centuries
Technological improvement
Temporary surplus (output > b x pop)
Pop growth erodes surplus
More technological change
BUT: by 1900
No more land
Yields per unit land very high
Farming extremely labor intensive
No potential for further yield increases through improvements in traditional technology
“High Level Equilibrium Trap”
High Level Equilibrium Trap: Emax
Emax Q = Fmax (Land0; Pop)
Qmax
E’
E*
Pmax Population
Features of Emax
No more sustained growth in AG output
No more sustained growth in population
No more sustained growth in output per capita
No more ability to produce surplus
With no surplus, no investment for IND
No Modern Economic Growth
Distributionists: Surplus, but not Invested
China had a surplus (or potential surplus), but it was not invested productively
Why?
Indigenous values and institutions: surplus used for consumption, or investment in land, gold and silver
Surplus taken by taxes, government used taxes for nonproductive purposes
Western nations extracted the surplus (Dependency Theory)
Opium
Maritime customs controlled by Western countries
Repatriation of profits earned by foreign businesses
Economy in Disarray
After the fall of Qing dynasty, new Republican government faced political challenges
China not unified politically
Regional warlords controlled their localities, maintained their own armies
Struggles for power, regional warfare and rivalries
Fractured political environment inhibited unified economic development
(Source: James Sheridan, China in Disintegration)
Conventional View: Summary
China’s economy not experiencing modern economic growth
Three explanations
Technologists: no surplus due to high-level equilibrium trap
Distributionists: surplus, but not used for growth
Disarray: fractured political environment prevented unified growth
II. Moving Picture: Where was China’s economy going, cont.
Revisionist View: China WAS starting Modern Economic Growth
GDP grew between 1.9% and 2.3% a year
Full percentage point higher than Conventional estimates
Implies growth in per capita output of 1% to 1.7%
Growth in per capita income of 1‑2% a year is similar to that achieved by some developed countries during their initial periods of takeoff
Between 1887 and 1930, Japan's national income per capita grew 1.6% a year. This was when the foundation was laid for Japan's later growth.
In England, the crucial period of takeoff was 1750 to 1850. Phyllis Deane (The First Industrial Revolution) suggests that
between 1750 and 1850 product per head in Britain grew at a rate of 0.9% a year.
growth rate then rose even higher to 1.5% by the early to mid‑1800s and then to about 3% in late 1800s
From today's perspective, these growth rates seem low, but, as Phyllis Deane writes, they "represented sustained growth which was beyond the wildest dreams of earlier generations." (p.223)
Other aspects of Revisionist view
Despite the lack of political unity, there was increasing national economic integration.
rice and wheat prices in many regions were highly correlated with int'l prices. A national grain market was emerging, and it was tied to int'l markets.
national silver market also seemed to be emerging.
banking system had developed a national network
Modern banks had branches throughout China, which were linked locally to smaller, native banks and moneylenders.
Bank notes were widely used.
Growth of banking system permitted capital to flow across regions to most profitable investments.
Other aspects of Revisionist view, cont.
Modern and traditional sectors complementary: Growth in the modern sector created new opportunities for growth in the traditional sector, rather than displacing traditional occupations. E.g.,
Cotton: imports of spun yarn displaced handicraft spinning, but spinning had always been a bottleneck in handicraft weaving. Weavers now began to use machine spun yarn, which permitted more, better quality cloth production.
Banking: modern and native banks cooperated, borrowed and lent to each other, were interdependent. The modern banks did not displace the native banks.
Transport: traditional forms of transport fed into the modern transport networks, served as the feeder network.
Other aspects of Revisionist view, cont.
The treaty port economy was not isolated, but linked to the hinterland
Urban and IND d'ment created a demand for AG consumer goods and raw materials.
This demand prompted commercialization and increased output and incomes in the rural areas.
Higher incomes in rural areas meant growing demand for IND products
Revisionists summary
Between 1910 and the late 1930s, China's economy was not stagnant, but growing.
Many of the changes occurred gradually, and China still remained a poor country, but the base was being laid for sustained growth.
Basis of the Revisionist View
Evidence based
Painstaking research in archives, historical sources
New historical materials available with opening and reforms
Most people agree that IND sector was growing and dynamic
Area of disagreement: what was happening in AG?
Evidence for AG is spotty, weak
Conventionalists basically assume that AG output and pop grew about the same rate
Rawski argues that rising wages and incomes in rural China reflected growth in agricultural output per capita.
He presents evidence to support his conclusion that wages and incomes were rising in AG/rural China
Evidence from survey about farmer attitudes: Peasants thought they were better off than they used to be. Variation by region, but "average" response was that things had improved
Evidence on textile consumption: Rising textile consumption per person.
Cloth consumption is highly income elastic (very responsive to income increases) at low levels of income
This indicates that incomes were rising.
Evidence on wages for unskilled labor: Wages of women textile workers in cities, and of mine workers in North China, rose over these decades, and especially in the late 1920s and early 1930s.
Labor was mobile, unskilled workers in factories and mines came from the countryside
Capitalists would not have raised wages out of goodwill
Only explanation: AG incomes must have been rising
In order to attract workers, capitalists had to increase wages to keep pace with rural earnings
Initial Conditions: Summary
You now have an idea of the initial conditions of China's economy inherited by the new regime
You also know that different scholars have very different views about whether China was developing or not prior to 1949. Even those who agree that China's economy was stagnant disagree about why it was stagnant
Which view is correct?
Uncertainty remains—more research needed
My opinion: sympathetic to Revisionists
The conventional view was held without questioning for a long time
Revisionist work shows that conventional views are based on incomplete evidence and strong assumptions
Work by Rawski and Brandt heavily based on data and evidence
Data and evidence still incomplete, but
They do a better job than most in assembling an “arsenal” of evidence
Implications for post-1949?
Different views hold different implications for post-1949 development
Each view gives a different understanding of why China had, or had not, developed
Each has different implications for what was needed post-1949
What main factors hindered growth?
Conventional : Technologists?
Conventional: Distributionists?
Conventional: Disarray?
Revisionists?
So, what policies, development strategy, were needed?
Conventional : Technologists?
Conventional: Distributionists?
Conventional: Disarray?
Revisionists?
QUESTIONS FOR YOU TO THINK ABOUT
Next Section of the Course:
IV. China’s Development Strategy
Will cover:
Development strategy and policies adopted after Communists took power in 1949
Reflected new leaders’ views about what China needed in order to develop
Based on their views about China’s pre-1949 economy
In 1950s, policy program included:
Strong, unified governance of China
Redistribution and socialization of property
Independence from foreign influence, self-reliance
Cultural change through education, propaganda
Government mobilization of resources for investment in IND
Introduce modern technology in IND, rely on traditional tech in AG
No population control policies—encouraged fertility
Which view did these policies reflect?
Was it the correct view?
…to be continued…
