Tuesday, December 20, 2011

Chinese Economy Driven by the End of Communism

By Tianlun Jian

The Chinese regime has always taken its high gross domestic product (GDP) growth rates as evidence of its success. Sure, GDP growth rate is one of the indices to measure a country’s economic development, and government policies can indeed affect a country’s economic development and its growth rate. But what role has the Chinese communist regime played in the economic development of China?

Let’s look at China’s economic development over the past 60 years, during which time the current regime has reigned over mainland China. In the first approximately 30 years of its rule (1949–1978), China’s economic development was very slow. In the last roughly 30 years (1979–2008), the economic reform accelerated growth in marked contrast to the preceding years.

Since it came to power, the Chinese communist regime has taken a so-called socialist road—an ownership system totally controlled by the state, with basically no private ownership. During the first 30 years, more than 95 percent of the economy was owned and controlled by the state, which was labeled as “public ownership.”

Since the economic reform of 1979, the ownership paradigm has shifted. By 2008, enterprises solely owned by private capital accounted for more than two-thirds of the economy. There are now other types of ownership as well, such as collective ownership, joined ventures, and mixed ownership—enterprises jointly owned by private and collectively owned entities. So, the weight of purely public ownership is now rather small.

The huge differences in the GDP growth rates between the first and the last 30 years show that the high economic growth has been associated with the increase of private ownership and the decline of public ownership. This growth is associated with the process of giving up communist ideology and a planned economy. Thus, it is associated with the movement away from socialism and communism.

In the words of the Chinese authorities, during the last 30 years, China has moved from a “socialist planned economy,” to a “socialist-market planned economy,” and then to a “socialist market economy.” Now we should probably call it a “semi-socialist market economy.” However, one should not make the mistake of thinking that China is practicing capitalism as in the United States, Japan, or other Western economies.

China’s economy is best described as a “semi-market economy with China’s characteristics.” Explaining such characteristics and their evolution is beyond the scope of this article, however. In short, China’s high growth during the past 30 years has been driven by the end of communism in China.

In fact, during the first 30 years of the communist state, there was too much government intervention. The economy was completely handcuffed, with no way for the Chinese people to bring forth their productivity and creativity.

In contrast, the reform during the past 30 years loosened up some of this control so that economic development sped up. In particular, private companies have grown, driven by the market mechanism, while foreign investments have poured in.

China, Japan, South Korea, and Taiwan have close ties and similar cultural backgrounds. However, while the other three countries are developed countries, with the GDP per capita well above US$10,000, China remains a rather poor country. The GDP per capita in mainland China was about US$3,259 in 2008, which is equivalent to the 1987 value in South Korea, the 1984 value in Taiwan, and an even earlier value in Japan. The GDP per capita in Taiwan had reached US$3,233 in early 1984.

Nowadays, the GDP per capita has reached about US$10,000 in Korea, Japan, and Taiwan. Actually, Japan reached the level of US$10,000 more than 30 years ago. However, back in 1949, Taiwan and South Korea were not much richer than China. In particular, Taiwan’s living standards were very similar to those of the mainland at that time. What has contributed to the difference?

From 1949 to 1978, the economy of China grew rather slowly. Consequently, it fell far behind Taiwan and South Korea, not to mention Japan.

The world’s economy developed very fast after World War II. The highest average annual growth for the developed economies, such as that of the United States, the European countries, Japan, South Korea, and Taiwan, occurred in the 1950s, 1960s, and 1970s.

However, mainland China shut its doors to the world, adopting a centrally planned socialist system during that time. The private sector was basically eliminated; farmers were not even allowed to grow vegetables on their own private lots. The communist concept of absolute equality led the Chinese people to be equally poor.

Under such ideology and a socialist system, the Chinese economic development was greatly suppressed. Had the economic reform taken place 30 years earlier, mainland China would not still be a lower-middle-income economy. Its standard of living would probably be similar to that of Taiwan, or even close to the level of Japan. In other words, Chinese economic growth has been delayed for 30 years, missing the opportunities of the high growth in world development.

Some argue that when he left mainland China for the island in 1949, Chiang Kaishek brought enough treasures and bank reserves to make Taiwan rich. If it were true, that money could have only affected the economic growth for the first one or two years.

Taiwan’s economy had the highest growth rates in the 1960s and 1970s and an average annual growth rate of 9 percent for almost four decades between the 1950s and the 1980s. So any money brought over from the mainland would have been very little in proportion to the total economy of Taiwan and too insignificant to make any long-term impact.

Taiwan and mainland China share the same culture and language. The only difference between them is in their governments: One embraced capitalism and the other, socialism. Taiwan developed very fast, much faster than mainland China. Even after accounting for the fast growth period of the last 30 years, the mainland’s economy still falls way behind Taiwan’s.

The current GDP per capita in mainland China is equivalent to one-eighth of that in Taiwan. The income gap is mainly due to the different social systems adopted by the two governments, and it has narrowed since China began to move away from socialism to capitalism.
Tianlun Jian, who holds a doctorate in economics, writes regularly on the Chinese economy.

This article was first published on The Epoch Times on Nov. 23, 2009