China History

1. Introduction

Since 1978, China has undertaken the transition from a socialist centrally planned economy to a system, which the Chinese leadership refers to as the "socialist market economy". Over the period of market-oriented economic reform, China has accomplished rapid economic growth. Between 1980 and 2006, the Chinese economy grew at an average annual rate of 9.5 percent. Measured by purchasing power parity, China is now the world's second largest economy and, if the current trend continues, China could overtake the U.S. to become the world's largest economy in the next decade or so.

Despite these impressive achievements, the development process in China has been characterized by serious social, environmental, and economic imbalances. These imbalances, if not addressed effectively and timely, could evolve into major crises in the coming years.

Back to the early 1980s, China was one of the most egalitarian countries in Asia. Since then, China has experienced substantial worsening of income and wealth distribution, as well as growing tensions between different social classes and groups (Khan and Riskin 2001; Zhang and Wan 2006). Economic liberalization and the dismantling of state-owned enterprises have led to substantial urban unemployment, increasing gender disparities, and declines of living standards for large sections of the population (Berik, Dong, and Summerfield 2007).

China's economic growth has been highly energy and resources intensive, and has led to serious environmental degradation. China has now among the world's worst air and water pollution problems. Land degradation is taking place at alarming rates. China's massive resources demand contributes to the rapid depletion of the world's remaining nonrenewable resources, and China has already become a major contributor to the global greenhouse gas emissions (Tisdell 2001; Wen and Li 2006).

At the macroeconomic level, China's economic growth has been primarily driven by investment and exports, whereas consumption has steadily declined as a share of China's economic output. As the U.S. economy moves into recession and the US current account deficit starts to correct, China can no longer rely upon rapid growth of exports as a major engine of growth and China's excessively high level of investment cannot be sustained for long without leading to major macroeconomic difficulties.

Thus, China's current model of development cannot be sustained for social, ecological, and macroeconomic reasons. This paper argues that China's current model of development is characterized by serious social, ecological, and macroeconomic imbalances. For China's development to be sustained, China needs to undertake major transformations that restructure the Chinese economy in accordance with equitable and ecologically sustainable principles. We propose a progressive economic program that would allow China to take the initial steps to move in such a direction.

Section 2 reviews the structural and institutional evolution that led to the emergence of China's current model of development. Section 3 discusses the social and environmental consequences of China's market-oriented economic reform and economic growth. Section 4 examines the macroeconomic structure of the Chinese economy, and argues that rapid expansion of exports can no longer serve as a major engine for China's future economic growth. Section 5 argues that China's current level of investment is excessively high, and provides an estimate of the likely sustainable level of investment. Section 6 proposes a progressive economic program, which is designed to transform China's macroeconomic structure so that the future economic growth is to be led by domestic consumption rather than investment and exports. The macroeconomic transformation is to take place in such a manner that it simultaneously advances the goals of social equity and ecological sustainability.

2. The Structural and Institutional Evolution towards the Current Model of Development

Economic reforms began in China with the Third Plenum of the Eleventh Congress of the Chinese Communist Party in late 1978. Initially, the official goal of economic reform was to build a "socialist commodity economy with planning". State and collective ownership were to remain dominant, and central planning would continue to play a prominent role in resources allocation and capital formation.

The economic reform began in the rural-agricultural sector with the dismantling of the people's communes and the adoption of the "household responsibility system", which represented a de facto privatization of agricultural production in China. The return to family farming was followed by a period of rapid growth of agricultural output. The infrastructure built during Mao's era, rapid increases in the use of chemical fertilizers, and higher state procurement prices for agricultural goods also made important contributions to the agricultural growth in this period.

During the 1970s, rural collective enterprises known as "communes and brigade enterprises" emerged and started to grow rapidly. These became the institutional roots for the later well known "town and village enterprises" at the onset of the reforms. The town and village enterprises remained collectively owned throughout the 1980s and were considered by many as constituting China's most dynamic economic sector (Riskin 1987; Lin 1988; McMillan, Whalley, and Zhu 1989; Naughton 1995).

Incremental reforms were applied to the urban industrial sector. In contrast to the reform strategy pursued in agriculture, in the 1980s no state owned enterprise was privatized. Until 1990, the state owned enterprises and the collective owned enterprises combined stilled accounted for 90 percent of the industrial output (NBS 1992). The initial restructuring of the industrial sector focused on the managerial system. State enterprise managers were given more autonomy in price and output decisions, and firms were allowed to retain a portion of the profits.

A more radical step in this direction was undertaken in 1987 when the "contract responsibility system" was introduced in all state owned enterprises. Under the contract responsibility system, managers were given the exclusive power to determine workers' compensation and duration of employment. Until the early 1990s, managers rarely exercised the power to dismiss workers. The new system, however, represented a break with the historical socialist commitment to equality and employment security. The balance of power within the state owned enterprises started to change to the workers' disfavor.

With respect to international trade and