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Economics 110 Notes for April 11th

1. Collect Homework and Examination #2 (due today)

2. Brief History of the Communist Victory in 1949 a. Role of Mao b. Provide a map of China

3. Ideology of Mao ( a state religion!!) a. Guerilla Mentality – through sheer willpower, people could accomplish anything. Thus, people were more important than capital or technology. b. Primacy of politics over Economics (contrast to Marx) 1. Desire to eliminate “Homo Economicus” and develop Communist Man, who would be selfless and whose goal would be to benefit the group 2. Focus on moral incentives c. Equality was at least as important as economic growth d. Class struggle and revolution as a continuing process, not one that ends when there is a revolution -- extreme instability

4. Brief History to 1978 a. 1949 to 1958: system similar to the Soviet Union (Review) 1. Collective agriculture into communes by 1958 2. Industry under government control by 1956 3. Five Year Plans b. Great Leap Forward 1958-61 1. Organizational change to shift workers out of agriculture into large projects 2. Develop labor intensive small scale industries (backyard steel furnaces) 3. Grain production fell greatly – a major famine (effects today – article) 4. Political break with the Soviet Union c. 1961 to 1978 1. rising influence of the “pragmatists” – believe more in economic growth and on material incentives (greater importance of profits and of worker bonuses) 2. decentralize decision making in agriculture and create free markets d. 1966: The Cultural Revolution (see as a power struggle) – role of ideology 1. Purges and persecution 2. Moral incentives 3. Millions resettled to rural areas; education virtually ceased; Red Guards 4. Dazhai System 5. Revolutionary committees replace enterprise managers (red over expert) 6. Personality Cult e. The Third Front f. Early 1970s: pragmatists regained control 1. Nixon visit to China in 1972 g. Death of Mao in 1976 – economic results on Page 5 of Chapter 1 1. GDP per capita doubled since 1952; I/GDP rose; literacy rates were high; Life expectancy was very high 2

2. High unemployment; poor housing; high rate of population growth; technologically far behind the West h. Political battle of 1976 to 1978 – rise of Deng Xiaoping. --- return of the pragmatists

5. Brief History of Reform Since 1978 a. Goal has been purely one of economic development b. Restructure agriculture and eliminate the communes (more later today) 1. Today, we will discuss the household responsibility system c. Much greater importance of markets 1. Growth of TVEs d. Decentralization of Decision Making e. Integration into the world economy (join the WTO in 2001)

6. Agriculture a. once had ¾ of the population; now still has ½ of the population – subsistence for many + small landholdings scattered + etc. b. Functions of Agriculture in Economic Development 1. to provide food and an industrial raw material (cotton) 2. to provide labor for the industrial sector 3. to provide savings to finance capital in industry 4. to provide an export product to earn foreign exchange

c. relied mainly on organizational changes 1. land reform of 1949 – plot received averaged 1/3 acre 2. collectivization --- fast (Mao) or slow (pragmatists)? a. Mutual Aid Teams b. Evolved into Elementary Producers’ Cooperatives and then into Advanced Producers’ Cooperatives c. People’s Communes (completed rapidly by 1958) – average 5,000 households 1. facilitates more multi-cropping 2. frees labor for construction work in off-season + new rural industry 3. emphasis on the 5 small rural industries 4. effects on the family structure? 5. sabotage, incompetent management, lack of work incentives 6. severe famine from 1958 to 1961 (30 million die) d. 1960s – decentralize with the production team becoming the main unit for production and distribution e. Cultural Revolution – end of private plots; revolutionary committees put in charge; Dazhai System f. The commune had the function of a local government! 3. By 1980: 54,000 communes, averaging 15,000 people, 4,300 acres, and 6 enterprises. a. Below was the production brigade – about 13 per commune. Functions P4 3

b. Below was the production team – 8 per brigade and 104 per commune. The team was responsible for farming and also for distribution. 1. relied heavily on material incentives c. private plots – 5% of land and 30% of household income d. Evaluation 1. Agriculture was part of the system of central planning – quotas 2. Form military reasons, every region had to be self-sufficient 3. Strengths of the Commune System – PowerPoint P.3 a. Better use of workers b. Modernized rural industries – avoiding excessive urbanization – P5 c. Creation of a safety net – the 5 guarantees (relatively high life expectancy) d. Greater equality 4. Problems of the Commune System – PowerPoint Page 4 a. Leadership was poorly prepared b. Inadequate incentives c. excessive reliance on grains despite differences in regions d. Grain production per capita grew very little – mostly due to more labor Low level of peasant incomes e. Food prices had to be kept low by imports and by subsidizing f. Very little shift of the labor force into industry (what industry there was came to the rural areas) 1. strict control on population movements g. Extraction from agriculture was small. Also little was put back into agriculture as investment 1. agricultural taxes 2. profit on consumer goods sold in rural areas 3. purchase agric. Products at below market prices and resell at higher prices h. China’s agricultural sector was basically distinct from its industrial sector i. China was a net grain importer

e. Reforms a. Raise prices. Fix quotas so that any increase in production could be sold at above quota, higher prices. Farmers could negotiate higher prices with the government. All in all, prices received rose about 50%. 1. end of 1984: end compulsory deliveries. 2. The rise in prices increased farm production and farm incomes. (Transfer Resources TO agriculture and FROM industry) 3. retail food prices did not rise as much --- required state subsidies b. Household responsibility system 1. Land would be assigned to households who could farm the land but not own it. (6-8 parcels of non-contiguous land) 2. Government sets targets and negotiates contracts with the households (requiring the price to be near the free market price) 3. Provides incentives similar to private plots 4

c. Increase in rural free markets + private ownership of trucks 1. Growth of sideline income 2. --- growth of production of rural industry d. Diversify the rural economy – can specialize in crops other than grain + more choice over the combination of factors of production e. Abolish the communes in 1985. New village governments were created. 1. eliminate the jobs of about 1/3 of local government officials f. large growth of rural credit cooperatives

f. Results of the Reforms a. large increase in agricultural production -- data b. shift away from grain production c. rise in agricultural productivity (although it is still low), rural income, and rural consumption – adequate nutrition 1. dramatic fall in rural poverty 2. But agric still does require ½ of the labor force and plots are too small d. greater agric exports and lower imports e. Some of the functions of the commune have not been adequately taken over 1. Investment (as household incomes rose, consumption rose). There needs to be more mechanization a. Low due to insecure property rights + cannot use land as collateral 2. Social Services a. Young people dropping out of school b. lower life expectancy and higher infant mortality f. Urban – Rural gap has widened since 1985 – incentives to relocate to cities g. also increased inequality in rural areas – polarization and violence h. entrance into the WTO (lower tariffs) will shift China’s production to areas of comparative advantage

g. Studies compare private plots to responsibility land 1. Private plots have higher yields and use more inputs – data from LI/Rozelle P3

7. Central Planning a. Government ownership of industry by 1956 – took over from the Japanese b. Began as similar to the USSR c. Much more highly aggregated, with fewer materials balances (256 products) d. More decentralized than the USSR, with most companies under the control of local governments. Much of the profits went to local governments. Much of investment was funded by the local governments. e. Outside of plan procurement to get inputs was more accepted in China than in the USSR. And the Chinese plan was easily fulfilled and even over-fulfilled, unlike the USSR. f. Despite growth of industrial production, the growth of productivity was low. Food, energy, and transportation remained bottlenecks. Technologically, China was 20 years behind the West. 5

g. Reforms of planning 1. Enterprises allowed to keep more of their profits. This gave central planners less control over production and investment decisions. With more enterprise control, there was a large, unplanned rise in investment. 2. Decentralization of materials allocation. Keep the plan quota fixed. Any additional production could be sold outside of the plan. Wholesale markets developed. Grow out of the plan. BY 1984, 60% of all production occurred outside of the plan. 3. Move to Guidance Planning --- guide by control over fuel and power.

8. The Enterprise (Political Model) a. four constituencies – government, directors, workers, consumers b. Government --- much greater role for local officials who got much of the revenues and used them for investment and to start new enterprises. Officials had an interest in the success of the enterprise. 1. Soft Budget Constraint c. Enterprise Director – motivation to expand the enterprise. d. Workers – employed for life (the iron rice bowl). There was no labor market at all. Power came from their ability to control the intensity of their work. 1. Absence of material incentives made group norms more important 2. How wages were determined – Page 6 3. Goal was to maximize the wage bill – push to increase the number of workers e. Reforms 1. Profit retention – for worker bonuses, collective consumption, investment a. Profit contracting 2. See above plan production at free market prices + fixed quotas 3. Could import and export more outside of the plan 4. Enterprise director was given more power 5. Growth of urban and rural collectives (owned by workers who are responsible) a. Very labor intensive (create employment) b. Serve to enhance market competition 6. Township and Village Enterprises (TVEs) se Qian Article 7. Growth of Private Enterprises 8. Fixed labor contracts to replace employment for life a. Chinas still has a large labor surplus – few have been fired b. Wages and bonuses have been raised f. Results 1. Helped effect an significant increase in productivity 2. shift from a sellers market to a buyers market 3. Explosion of investment spending – duplicative and inefficient – led to high inflation rates 4. did not have a sufficient price reform --- production was distorted 5. Greater inequality 6. Greater dependence on world trade 7. corruption and nepotism g. Subsidies still occur. Workers are still hard to fire. The legal system is very inadequate. Prices are irrational.