 Economists vs. historians

 The traditional economy

 Beginnings of industrialization, 1912-37

 War and civil war, 1937-49

 Legacies of pre-1949 economy  1949 seems to be a divide in China’s history

 Not only is form of government radically different - China has grown rapidly since 1949 – despite some disastrous policies under Mao

 Prior to 1949, China never exhibited modern economic growth

 Historians view 1949 as turning point, while economists believe China was actually successful in early part of 20th century, i.e., it would likely have grown without the socialist revolution * See Myers (1991)  Economists stress role of economic continuity, i.e., favorable conditions either side of 1949; also, witness growth of and Taiwan after 1950s

 Historians stress different social conditions either side of 1949 – prior to revolution: - unfair distribution of land/other assets - corrupt political power preventing growth - increased population pressure on limited resources  Acceleration of growth due to new set of conditions after 1949, i.e., revolution provided way to solve problems  Traditional Agriculture: - China very rural – 90% living in countryside - farm technology consisted of selected seeds (rice), organic fertilizer (human and animal), and irrigation - required large and intensive application of labor – first in Lower , spread to other areas where irrigation was feasible - supported growing population – 72 million (1400) to 381 million (1820) – 36% of world population - China accounted for ~ 30% of global GDP in 1820  Commercialized Countryside: - densely populated countryside supported network of markets, especially Lower Yangtze and Pearl River deltas - regions tied together by water transport along major rivers, plus Grand Canal between Lower Yangtze and North China Plain - supported commercialized pre-modern economy with some sophisticated institutions, and competitive markets based on small-scale households “bottom- heavy” (Rawski, 1987) (i) Institutions – paper money, written contracts, banks, legal resolution of disputes (ii) Markets – competitive in goods and inputs (iii) Real social mobility despite inequality – no castes or aristocracy defined by birth (iv) Small-Scale – household-based economy, with agricultural and non-agricultural production on small- scale, but linked to different markets - household/small-firm specialization common, e.g., silk production split into separate tasks vertically - chains of small processors and middlemen linked household producers, merchants and consumers  Crisis of Traditional Economy: - by end of 18th Century, most cultivatable land farmed, few opportunities for investment - despite income of elite - in decline – public food reserves declined after 1790s; poor maintenance of key irrigation systems – famines due to floods/droughts - social stresses fell disproportionately on poor - land distribution not unequal, but income inequality significant “The Chinese peasant is like a man standing on tiptoe up to his nose in water – the slightest ripple is enough to drown him” (Tawney, 1964) - China entered century-long decline just as Europe grew  Failed Response to West and Japan: - foreign encroachment on China occurred at a time of dynastic weakness and economic crisis - China had long run a trade surplus with world (silk, tea and porcelain), paid for with silver - by early-1800s, Britain becoming dominant power, sought a commodity to redress trade imbalance - opium, grown in India, exported through Hong Kong – China faced economic (falling supply of monetary metals) and social (addiction) problems  Failed Response to West and Japan: - attempts to stop opium led to war with Britain in 1839, defeat resulting in , 1842 – Hong Kong ceded to Britain, 5 Treaty Ports opened under foreign control

- China lost four more foreign wars, notably Sino-Japanese war of 1895, resulting in seizure of Taiwan

- 1895 resulted in opening up of China to foreign investment, concentrated in Treaty Ports, e.g., , governed by foreign powers

- Qing government eventually collapsed in 1911 following foreign occupation of Beijing and 1901 – control over tax revenues ceded to foreign powers  Failed Response to West and Japan: - China’s opening to outside world coincided with long period of national humiliation - Beginnings of modern industry in China date to 1895 - Foreign investment concentrated in Treaty Ports, not subject to Chinese jurisdiction – 80 at their peak, Shanghai most important - Extra-territoriality (exemption from domestic law) and control of Treaty Ports politically very controversial – even influences attitudes in modern China  Economic Decline by 1913: - China’s population of 437 million had fallen to 25% of world’s population - China’s GDP had fallen to 9% of global GDP, and GDP/capita had fallen to 40% of world average from 90% in 1820 - from being a center of civilized world, China had fallen to position of underdevelopment and backwardness - impact of West highly traumatic in terms of decline, predatory nature of , and failure of Chinese government to deal with challenge  After 1911 - period of warlord domination, fragmentation and civil war, until unification by the Nationalist Party in 1927

 1927-37, the “ decade”, China had relative peace

 Industrial development began, along with modern transportation and communication links

invested in education and agricultural extension

 Modern factory production grew 8-9%, 1912-36, producing 2% of GDP by 1933  Two patterns to industrial growth:

(i) Treaty Port industrialization: modern industrial enclaves developed in ports, e.g., 42% of output in textiles, with 70% produced in Shanghai, and

Industrialization started by foreigners, but Chinese capitalists became key actors – by 1930s, 78% of value of factory output from Chinese-owned firms

(ii) Manchurian industrialization: investment in heavy industry, mining, and railroads by Japanese government - objective to produce raw materials for their domestic industries, but little local skill-transfer China proper Manchuria

Market Domestic China Japanese industry

Ownership Chinese, foreign Foreign

Structure Light, consumer Heavy, mining, goods, e.g., textiles producer goods, e.g., steel (Anshan) Skill formation Steady accumulation Little skill transfer

Linkages Backward Few or none  Modern sector did grow in 1920-30s, but unclear what impact was on traditional sectors - Rawski (1989) argues positive impact of growing demand from industry, cities and trade on agriculture, handicrafts, and transport - beyond areas around coastal cities, most farmers continued to operate at subsistence level

 Industrialization started, but had not yet begun to fundamentally change structure of Chinese economy  Japanese influence in Manchuria increased and extended 1905 to 1931, followed by Japanese invasion of China proper in 1937

 China then involved in almost unbroken period of warfare until the Communist victory in 1949

 Japanese invasion weakened Nationalist government, and Communist guerillas gained legitimacy fighting Japanese

 End of Pacific war in 1945 laid stage for civil war between Nationalists and Communists  War obscured important changes over this period: (i) Rise and fall of Japan-centered East Asian economy: Japan at center (manufacturing and services); inner circle of Taiwan and Korea (food producers); middle circle of Manchuria (intermediate input supplier); outer circle of China proper (sites for investment) – collapsed in 1945 (ii) Rise of Manchuria: building of industrial economy by Japanese had long-term impact on China – by 1949, accounted for majority of its industrial capacity (iii) State intervention: 66% of industry state-run by 1947 (iv) Inflation: Nationalists printed money to finance war – severe macroeconomic imbalances  Immediate legacy for Socialist era (1949-78): - disruption/damage to economic infrastructure - financial chaos with hyperinflation - China still very poor  Experiences aided transition to socialism: - strong aversion to foreign influence – adoption of inward-looking socialist development - Nationalists considered incompetent - willingness to accept repression - inherited heavy industry developed in Manchuria  Benefits for post-1978 economy: - experience of household-based economy critical to meeting market needs - rapid growth of “township and village enterprises” (TVEs) in densely populated commercialized countryside – met needs neglected under socialism - Lower Yangtze region regained prominence, and Northeast receded in importance - SEZs echoed Treaty Ports, but under Chinese jurisdiction, part of “dual track” approach, and helped re-establish links between Hong Kong, Taiwan and PRC  China’s current economy, and its development, show a rediscovery of the traditional system

 Did the traditional economy fail? Only in the sense that it was repressed as a result of war and civil war, and socialism making it seem irrelevant

 Traditional economy has rebounded, with commercial/entrepreneurial networks proving relevant again as economic reforms have proceeded