Before the end of the First Five-Year Plan, the growing imbalance between industrial and agricultural growth
, dissatisfaction with inefficiency
, and lack of flexibility in the decision-making process
convinced the nation's leaders - particularly Mao Zedong - that the highly centralized, industry-biased Soviet model was not appropriate for China. A shift in policy occured.
2. Agriculture was regarded as the key focus
. "Great Leap" in production of all sectors was aimed at.
To overcome lack of capital for both industry and agriculture, vast irrigation and water control works were introduced, also employing huge teams of farmers whose labor was not being fully utilised. Small "backyard
"projects were to be introduced in the industry sector.
4. Mobilization of surplus rural labor
and further improvements in agriculture efficiency
were to aid in the "leap". Consequentially, the people's communes
were formed. 98% of the farm population was organized into comunes between April and September of 1958.
As it was found that the communes lacked in managerial and administrative functions, most production decisions were reverted back to the brigade and team levels.
During the Great Leap Forward, the industrial sector also was expected to discover and use slack labor and productive capacity to increase output beyond the levels previously considered feasible. Political zeal was to be the motive force, and to "put politics in command" enterprising party branches took over the direction of many factories. In addition, central planning was relegated to a minor role in favor of spontaneous, politically inspired production decisions from individual units.
. A severe economic crisis
hit the country.
Adverse weather conditions, improperly constructed water control projects, and other misallocations of resources that had occurred during the overly centralized communization movement resulted in disastrous declines in agricultural output. Output fell by around 14%
3. 14 million people died of starvation
. Reported births were 23 million fewer than under normal conditions.
The government, in order to control the situation, cancelled all orders for foreign technical imports and used the country's reserves judiciously. 5 million tons of grain a year was being imported.
the excessive strain on equipment and workers, the effects of the agricultural crisis, the lack of economic coordination, and, in the 1960s, the withdrawal of Soviet assistance caused industrial output to plummet by 38 percent in 1961
and by a further 16 percent in 1962
Remark: The Economy was evidently on a decline.
1961-1965 - (Agriculture First)
Top priority was given to restoring agricultural output
and expanding it at a rate that would meet the needs of the growing population.
Private plots, which had disappeared on some communes during the Great Leap Forward, were officially restored to farm families.
Agricultural taxes were reduced, and the prices paid for agricultural products were raised relative to the prices of industrial supplies for agriculture.
4. Planning rather than politics once again guided production decisions, and material rewards rather than revolutionary enthusiasm became the leading incentive for production.
Major imports of advanced foreign machinery, which had come to an abrupt halt with the withdrawal of Soviet assistance starting in 1960, were initiated with Japan and West European countries
1. Economic stability was restored.
2. Agriculture showed 9.6% growth while Industry showed 10.6% growth.
3. Small industries like coal mines, hydroelectric plants, fertilizer plants etc made profits.
The economic model that emerged in this period combined elements of the highly centralized, industrially oriented, Soviet-style system of the First Five-Year Plan with aspects of the decentralization of ownership and decision making that characterized the Great Leap Forward and with the strong emphasis on agricultural development and balanced growth of the "agriculture first
Remark : A stage of recovery and readjustment
1966-1976 - (Cultural Revolution & The Gang of Four)
The Cultural Revolution
was set in motion by Mao Zedong in 1966 and called to a halt in 1968, but the atmosphere of radical leftism persisted until Mao's death and the fall of the Gang of Four in 1976. During this period, there were several distinct phases of economic policy.
The Cultural Revolution, unlike the Great Leap Forward, was primarily a political upheaval and did not produce major changes in official economic policies or the basic economic model. Nonetheless, its influence was felt throughout urban society, and it profoundly affected the modern sector of the economy.
The most direct cause
of production halts was the political activity of students and workers
in the mines and factories. A second cause
was the extensive disruption of transportation
resulting from the requisitioning of trains and trucks to carry Chinese Red Guards
around the country. Output at many factories suffered from shortages of raw materials and other supplies. A third disruptive influence
was that the direction of factories was placed in the hands of revolutionary committees
, consisting of representatives from the party, the workers, and the Chinese People's Liberation Army
, whose members often had little knowledge of either management or the enterprise they were supposed to run.
Virtually all engineers, managers, scientists, technicians, and other professional personnel were "criticized," demoted, "sent down" to the countryside to "participate in labor," or even jailed, all of which resulted in their skills and knowledge being lost to the enterprise. The effect was a 14-percent decline in industrial production in 1967.
Imports of foreign equipment, required for technological advancement, were curtailed by rampant xenophobia. Probably the most serious and long-lasting effect on the economy was the dire shortage of highly educated personnel caused by the closing of the universities.
During the early and mid-1970s, the radical group later known as the Gang of Four attempted to dominate the power center through their network of supporters and, most important, through their control of the media.
Initiatives by Zhou Enlai
and Deng Xiaoping
were vehemently attacked in the press and in political campaigns as "poisonous weeds
." Using official news organs, the Gang of Four advocated the primacy of nonmaterial, political incentives, radical reduction of income differences, elimination of private farm plots, and a shift of the basic accounting unit up to the brigade level in agriculture. They opposed the strengthening of central planning and denounced the use of foreign technology.
The effects of the power struggle and policy disputes were compounded by the destruction resulting from the Tangshan earthquake in July 1976. Output for the year in both industry and agriculture showed no growth over 1975. The interlude of uncertainty finally ended when the Gang of Four was arrested in October--one month after Mao's death.
Administrators and economic decision makers at all levels were virtually paralyzed.
Economic activity slowed, and the incipient modernization program almost ground to a halt.
Uncertainty and instability were exacerbated by the death of Zhou Enlai
in January 1976 and the subsequent second purge of Deng Xiaoping in April.
The effects of the power struggle and policy disputes were compounded by the destruction resulting from the Tangshan earthquake
in July 1976. Output for the year in both industry and agriculture showed no growth over 1975. The interlude of uncertainty finally ended when the Gang of Four was arrested in October--one month after Mao's death.
Remark : The economic condition was deteriorating.
1977-1990s - (Reform and Readjustment)
1. After the fall of the Gang of Four, the leadership under Hua Guofeng--and by July 1977 the rehabilitated Deng Xiaoping-- reaffirmed the modernization program espoused by Zhou Enlai in 1975. They also set forth a battery of new policies for the purpose of accomplishing the Four Modernizations
2. The new policies strengthened the authority of managers and economic decision makers at the expense of party officials, stressed material incentives for workers, and called for expansion of the research and education systems. Foreign trade was to be increased, and exchanges of students and "foreign experts
" with developed countries were to be encouraged.
3. This new policy initiative was capped at the Fifth National People's Congress in February and March 1978, when Hua Guofeng presented the draft of an ambitious ten-year plan for the 1976-85 period
. The plan called for high rates of growth in both industry and agriculture and included 120 construction projects that would require massive and expensive imports of foreign technology. This plan was later discarded.
4. The major goals of the readjustment process were to expand exports
rapidly; overcome key deficiencies in transportation, communications, coal, iron, steel, building materials, and electric power; and redress the imbalance between light and heavy industry by increasing the growth rate of light industry and reducing investment in heavy industry. Agricultural production was stimulated in 1979 by an increase of over 22 percent
in the procurement prices paid for farm products.
5. The most successful reform policy, the contract responsibility system
of production in agriculture, was suggested by the government in 1979 as a way for poor rural units in mountainous or arid areas to increase their incomes. The responsibility system allowed individual farm families to work a piece of land for profit in return for delivering a set amount of produce to the collective at a given price. This arrangement created strong incentives for farmers to reduce production costs and increase productivity. Soon after its introduction the responsibility system was adopted by numerous farm units in all sorts of areas.
6. Individual enterprise--true capitalism
--also was allowed, after having virtually disappeared during the Cultural Revolution, and independent cobblers, tailors, tinkers, and vendors once again became common sights in the cities.
The most conspicuous symbols of the new status of foreign trade were the four coastal special economic zones, which were created in 1979 as enclaves where foreign investment could receive special treatment. Three of the four zones--the cities of Shenzhen, Zhuhai, and Shantou--were located in Guangdong
Province, close to Hong Kong. The fourth, Xiamen, in Fujian Province
, was directly across the strait from Taiwan. More significant for China's economic development was the designation in April 1984 of economic development zones in the fourteen largest coastal cities- -including Dalian, Tianjin, Shanghai, and Guangzhou
--all of which were major commercial and industrial centers. These zones were to create productive exchanges between foreign firms with advanced technology and major Chinese economic networks.
Although the reform program achieved impressive successes
, it also gave rise to several serious problems. One problem was the challenge to party authority presented by the principles of freemarket activity
and professional managerial autonomy
3. Another difficulty was a wave of crime, corruption
, and--in the minds of many older people--moral deterioration caused by the looser economic and political climate. The most fundamental tensions were those created by the widening income disparities between the people who were "getting rich
" and those who were not and by the pervasive threat of inflation
4. Following Hu's resignation, the leadership engaged in an intense debate over the future course of the reforms and how to balance the need for efficiency and market incentives with the need for government guidance and control.
Remark : The commitment to further reform was affirmed, but its pace, and the emphasis to be placed on macroeconomic and microeconomic levers, remained objects of caution.
1990-2009 - (A Super-Power?)
: Deng Xiaoping's Southern Tour
at the beginning of the year massively boosted foreign direct investment inflows into coastal areas and started a wave of government investment in Shanghai. Record trade and GDP growth and inflation followed.
2. 1993 : Zhu Rongji
appointed to rein in the overheating economy, this time more selectively than in 1989-91. Growth rates subsided gradually in subsequent years, producing a so-called "soft landing
". During the 1990s, living standards continued to rise, as evidenced by the proliferation of consumer durables, especially among the urban population. Continuing FDI
inflows helped boost foreign exchange reserves to record heights in the late 1990s.
Especially after the publication of the 1998 GDP figures, economists, both in China and abroad, have raised serious doubts about the quality of China's national accounts, which appeared in the late 1990s to overstate economic growth and are now suspected of understating growth. This may be because the statistical system tends to overestimate output at the trough of the cycle and underestimate output at the peak.
However, the country's first production census discovered at the end of 2005 that GDP has recently been grossly underestimated as a result of a failure to take into account the rapid growth of the services sector. As a result, growth rates for 2003-2005 are now recorded at around 10% per year
in real terms. Despite efforts to cool the overheating economy, the officially recorded GDP growth rate was 11.4% in 2007
In 2008 the global economic crisis began to reduce China's growth rate. In the face of forecasts that this might drop below the rate at which school leavers can be absorbed by the growing economy (7%-8%
) the government decided to pump Rmb 4 trillion
into the economy in the form of an economic stimulus package consisting largely of investment in fixed infrastucture and human capital.
In 2009 China's GDP growth rate, though lower than the double-digit average of recent years, has held up well, rising from 6.1% year-on-year
in the first quarter to 7.7%
in the first three quarters of the year. This means that year-on-year GDP growth was around 9%
in the second quarter. A similar rate of growth (9%
) is expected in the final quarter, ensuring a rate of over 8% for 2009
as a whole.
However, there are now serious fears that this robust growth may not be sustainable. As short-term credits fall due, they will have to be refinanced, and much of this refinancing may have to be done by taking out longer-term loans, raising the banks' non-performing loan ratios and threatening the long-term stability of the financial system. Infrastructure projects brought forward in the plan period will be completed early, leaving a gap while new ones are planned. And the US consumer is unlikely to come to the rescue of the Chinese economy when it slows further.
The USA has begun to fear the Chinese leap to glory.
Remark : We have to wait and see whether China can actually make it as a super-power. But they are definitely close.