Mao believed that socialism was the best strategy for solving the economic problems that faced China in the 1950s (Lane 20-45). Thus, he focused on establishing communist relations of production that promoted the growth of heavy industry, centralized economic planning, and government intervention (Lin 60-130).
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However, after the Great Leap Forward (GLF), Mao failed to develop the forces of production in the following ways. First, one of the policies of the GLF was to establish modern capital-intensive industries that focused on large-scale production. The industries required technical expertise and use of advanced machines in production.
However, Mao over relied on technical aid and machines imported from the USSR instead of developing the capacity of the Chinese to manage the production processes. This strategy had a serious negative impact on productivity after the recall of USSR’s scientists, engineers, and technicians in 1960 (Riskin 114-145). For instance, the construction of several factories stopped immediately. In addition, several manufacturing plants suspended their operations due to lack of expertise and limited access to equipment.
Second, there was inadequate investment in agriculture and light industry, which had employed majority of the citizens under the commune system of production (Hart-Landsberg and Burkett 34-61). Initially, the GLF emphasized simultaneous development of the light and heavy industries. However, the heavy industry received significantly high resource allocations at the expense of the light industry and agriculture.
The GLF promoted increased production through small-scale industries that were managed by the communes. The main objective of the small industries was to modernize agriculture by producing its inputs and processing its outputs. However, much of the output of the industries satisfied the needs of the urban market rather than the agricultural sector. The resulting reduction in the supply of inputs discouraged production in the agricultural sector.
In addition, labour shifted from the agricultural to the industrial sector of the economy. As a result, there were severe food shortages, which in turn rendered central planning and production under the communist system untenable (Riskin 114-145). Moreover, underinvestment in agriculture and light industry obliterated the sectoral linkages that were expected to spur economic growth.
Specifically, the peasants received very low prices for their products. In addition, much of their products were transferred to the state to subsidize the heavy industry. As productivity reduced in the agricultural sector and light industry, the urban population that worked in the heavy industry could not access consumer goods. In this respect, lack of trade between the rural and the urban communities led to poor economic growth.
Third, achieving high productivity was difficult due to poor economic planning. The Mao regime failed to strengthen the central planning system to respond effectively to the needs of the complex economy. Certain goods and services were overproduced, whereas others were under produced.
This means that the production system could not match demand and supply. This problem was aggravated by the fact that the government failed to build adequate and efficient transportation infrastructure to link up the centers of production to the markets (Riskin 114-145).
In this respect, resources that were scattered in the countryside could not be harnessed and used for production. In addition, finished goods could not reach the market in time. As a result, there was a huge wastage of scarce resources. Moreover, inadequate investment in human capital led to poor product quality. Eventually, poor planning led to reduced productivity and the collapse of some industries.
Fourth, poor organization and inefficiency in the industrial sector discouraged rapid economic growth. The GLF introduced the 2-1-3 system of management to improve the operations of the country’s enterprises. The system led to decentralization of the management responsibilities of functional departments of state enterprises (Riskin 114-145).
Decentralization coupled with inadequate information concerning the operations of state enterprises led to poor coordination of production activities. This problem was exacerbated by the fact that workers had little opportunity to make production decisions and to restructure their enterprises.
As a result, most factory workers were engaged in unproductive activities. Workers had no incentive to increase their output since they had permanent employment contracts and their wages were fixed. The resulting decline in productivity forced the government to sustain the desired output level through increased investment spending and expansion of the labour force. These strategies worsened the problem of inefficiency at the factory level, thereby discouraging sustainable economic growth.
Major Imbalances in the Current Chinese Economy
The main components of the gross domestic product (GDP) are investment, consumption, and net exports. These components of GDP are not balanced in China (Lardy 43-64). Specifically, economic growth in China is mainly driven by high investment and increased net export of goods and services at the expense of consumption.
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From 2003 to 2010, investment accounted for nearly 54% of China’s GDP. This level of expansion of investment is considered much higher than the level achieved by most developed countries during their industrialization process. In this respect, China’s investment as a percentage of GDP is much higher than international standards. Net exports have more than doubled since 2005 (Lardy 43-64). In particular, net exports account for nearly 20% of China’s GDP, which is considered exceptionally high.
However, the contribution of consumption to the GDP has remained lower than international standards. From 2008 to 2010, consumption accounted for only 35% of the country’s GDP. This achievement is below the accomplishment of China’s peers such as the UK and India where consumption accounts for nearly 63% and 56% of the GDP respectively. In this respect, reduced consumption has led to low quality of life in China (Lardy 43-64).
The gradual decline in the share of agriculture in China’s GDP is consistent with international experiences (Lardy 43-64). However, the changes in the share of the country’s industry and services in GDP have been inconsistent with international standards. Specifically, the share of services in GDP is very low compared to those of countries that are at the same development stage as China.
For instance, in 2008 the services sector accounted for 54% of GDP in most emerging market economies, whereas in China it accounted for only 41.8% (Lardy 43-64). Given its slow growth rate, the employment rate in China’s services sector is exceptionally low. The share of industry in GDP has also remained above international standards due to increased production in the manufacturing sector.
The production imbalance has been attributed to undervaluation of China’s currency, which promoted productivity in the manufacturing sector at the expense of the services industry. The main consequence of the imbalance is increased unemployment rate since the services sector is more labor intensive than the manufacturing industry.
Labor compensation and the income accruing to corporations as a percentage of the national income fell by less than three percent in the last twenty years to 2009. However, household income as a percentage of GDP reduced by 9% between 1992 and 2008 (Lardy 43-64). On the other hand, the income accruing to the government (taxes) increased by nearly 15%. Thus, the main income imbalance in China is that the government’s share of national income has been increasing, whereas the household’s share has been declining significantly.
The huge decline in household disposable income is attributed to the reduction in the share of wage in GDP, property income as a percentage of GDP, and the share of net transfer payments to households in GDP. The income imbalance suggests that the reduction in consumption as a percentage of GDP was mainly due to the steady decline in household income rather than increased savings.
By 2008, China’s national savings rate had reached 53% of the national GDP (Lardy 43-64). From 2002 to 2008, the savings rate in China increased by 15%. The rate of investment, on the other hand, rose by only 6% over the same period (Lardy 43-64). These changes represent imbalances in two ways. First, both the increase in savings and investment are significantly higher than international standards.
Secondly, the increase in savings is much higher than the increase in investment. The government and households significantly increased their savings and reduced their investments, thereby widening the savings-investment imbalance. Given the imbalances in the Chinese economy, sustainable economic development and growth cannot be achieved with the current economic model. In this regard, new policies have to be implemented to eliminate the imbalances in the economy.
Hart-Landsberg, Martin and Paul Burkett. China and Socialism: Market Reforms and Class Struggle, New York: Monthly Review Press, 2005. Print.
Lane, David. The Capitalist Transformation of State Socialism, New York: Routledge, 2013. Print.
Lardy, Nicholas. Sustaining China’s Economic Growth After the Global Financial Crisis, New York: Peterson Institute Press, 2012. Print.
Lin, Chun. The Transformation of Chinese Socialism, Durham: Duke University Press, 2006. Print.
Riskin, Carl. China’s Political Economy: The Quest for Development Since 1949, Oxford: Oxford University Press, 1987. Print.