From: Dong-Ping Deng <deng@BUNNY.RHIC.BNL.GOV>
Subject:      [talk.politics.china] NEWS: Survey Article of Chinese Economy
Reply-To: Dong-Ping Deng <deng@BUNNY.RHIC.BNL.GOV>
Organization: Indiana University
Date: Mon, 14 Dec 1992 23:50:55 GMT
Comments: To: china-nt@uga.cc.uga.edu

------- Start of forwarded message -------
From: mte152s@vaxc.cc.monash.edu.au
Newsgroups: talk.politics.china,soc.culture.taiwan
Subject: NEWS: Survey Article of Chinese Economy
Date: 10 Dec 92 14:03:43 +1100
Organization: Computer Centre, Monash University, Australia

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The Titan Stirs

The Economist, November 28 -- December 4, 1992
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If China's economy grows as fast for the next 20 years as it has for the past 14
years, it will be the biggest economy on earth. Jim Rohwer explains why this
will probably happen.
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As far as anyone can guess, it was around 1500 that Europe overtook China as the
world's most advanced civilisation. For centuries - maybe always-- before then,
Chinese science and technology and Chinese productivity and incomes were the
world's best. Over the next 500 years, as the West grew rich and strong, China
first lay torpid and then, for most of this centry, was convulsed by revolutions
war, famine, Communist tyranny and a decade of anarchy called the cultural
revolution. It may therefore come as a surprise that, just a generation from now
, one of the world's weightiest questions may well be how to handle a
self-confident nuclear-armed China presiding over the biggest economy on earth.

The awakening of China that Napoleon warned the West to beware of ("let China
sleep", he advised) is sometimes traced to the dramatic moment on October 1st
1949 when a victorious Mao Zedong, proclaiming the People's Republic of China,
told a cheering crowd in Beijing's Tiananmen Square that "the 475m people of
China have now stood up." The real awakening came almost 30 years later, during
what sounds like a snoozer: the third plenary session of the 11th Central
Committee of the communist Party of China. This meeting was held in December
1978, two years after Mao's death. It agreed to the proposals of Deng Xiaoping,
Mao's long-time comrade-in-arms and recent ideological foe. He wanted the
Chinese economy, until then a slave to Stalinist principles of central planning,
state ownership and import substitution, to be reformed and opened up to the
outside world.

China's economic performance in the 14 years since then has brought about one
of the biggest improvements in human welfare at any time. Real GNP has grown by
an average of almost 9% percent a year. By 1994, China's economy is almost sure
to be four times bigger than it was in 1978; if China hits its targets, which
are reasonable, by 2002 the economy will be eight times bigger than it was in
1978. At that time, China will have matched the performance of Japan, Taiwan and
South Korea during their fastest quarter-centries of economic growth.

The overall figures mask a startling rise in living standards. Some 75% of
Chinese -- around 800m people today -- still live on land. Mr Deng's first
reforms concentrated on freeing farmers from the suffocation of commune system.
This increased farm production enormously: grain output grew by a third in six
years, cotton almost trebled, oil-bearing crops more than doubled, fruit
production went up by half. Real incomes in the countryside grew even more
spectacularly -- three-fold in eight years.

Trickle-down economics has little to appologize for in the case of China.
Guesses vary, but 200m-270m Chinese are thought to have been living in
"absolute poverty"(basicly, not even enough food) in 1978. The nubmer of
absolutely poor in 1985, when the farming reforms had largely been accomplished,
was 100m. A Japan, two Britains, or half of America: about that many people were
lifted out of poverty in China by the first six years of economic reform.

Not only the wretched had reason to be thankful. Between 1978 and 1991, grain
consumption of the average Chinese went up by 20%; seafood consumption two fold,
prok consumption 2.5 times; egg consumption more than three-fold; edible-oil
and poultry consumption four-fold. In 1981 each 100 urban households in China
averaged less than one colour television among them; ten years later it was 70.
In 1981 there were six washing machines for each 100 city households, in 1991
more than 80; in 1981, 0.2 refrigerater, ten years later almost 50.

A visitor to China this autumn -- provided he can secure a seat on the vastly
overbooked flights going there from HongKong or Tokyo -- greeted on arrival by
the world's biggest booming economic boom. Shops are clogged with people buying
consumer goods, often costly ones like western designer clothes. Factories,
offices and homes are being built as fast as round-the-clock construction crews
can put them up. China's economy will have grown by some 12% this year, with
industrial output by 20% or more. Despite the rich world's economic lethargy,
China's foreign trade will have grown to around $170 billion this year, up from
$135 billion in 1991 and from a mere $21 billion in 1978, the year the reforms
begin.

An Unseen Giant

These events would of great significance even without a glance beyond China's
borders. How could it be otherwise when the destiny of 1.2 billion people is at
stake ? Yet China impinges on the rest of the world far more than most people
realize. China is already the world's third -- or fourth -- biggest economy,
behind America, Japan and maybe Germany.

The official figures belie this. The world Bank says that Chinese GNP per head
was $370 in 1990; this year it might reach $380. That would make for a total
GNP of around $455 billion. That is smaller than the economy of Canada, with
27m people, and only twice the size of Swiss economy.

The official figure about China are gibberish. Even a casual visitor to the
place knows this. the cities in the coastal provinces along the southern and
eastern seaboard, from Guangzhou (ex-Canton) next to Hongkong, up through
Hangzhou, Shanghai, Nanjing, Tianjin and Beijing itself, are bursting with
obvious prosperity. The suburbs in these provinces, where China's farmers have
pushed to the hilt the opening given them by the reforms, are even richer than
cities.

The great industrial cities of the interior -- places like Chongqing and Wuhan,
practically unknown in the West even though they are big, respecitvely, as
greater Los Angeles and London -- are drab and dirty. But their streets, too,
are clogged with traffic, their shops full of goods and shoppers, their markets,
restaurants and night clubs buzzling with customers.

Yunnan in the south-west, on paper China's third-poorest province, is better off
in real life than the official figurers say -- in part, unhappyly, because of
a booming trade in heroin from next-door Myanmar. but drug dealers did not
build the smooth paved road two hours outside the provincial capital, Kunming,
nor do they tend the well-kept fields there or run the roadside restaurants
crowded with locals enjoying big meals of soup, fresh vegetables and roast duck
-- quite a treat for people whose net household incomes are supposed to be
$100 a year.

Even those who compile the official figures know they make no sense. The world
bank said China's GNP per head in 1976 was $410, roughly twice as high as India'
or Indenesia' and a bit ahead of Thailand's. After 7.5% annual growth in real
GNP per head in 1978-1990, China officially ended up with a lower nominal GNP
per head than it had in 1976. It is now, suppposedly, as poor as India, half as
well off as Indonesia and a Quarter as rich as Thailand, even though in 1978-90
China's real GNP per head has grew faster than that of any of these other
countries.

The explanation of this absurd results is that the fall of the yuan, China's
currency, from 1.7 to the dollar in 1978 to 5.5 now (and 7 or so on the freeish
spot market) has in dollar terms more than counterbalanced the entire growth of
China's economy over this period. A look a the real economy by Ma Guonan and
Ross Garnaut, two economists at the Australian National University, shows just
how misleading China's dollar GNP figure is.

The Australians multiplied China's physical output of basic commodities like
coal and grain by their world market prices; this alone yields a figure of more
than $160 per Chinese in 1990. Include the value-added output, again at world
prices, of pork, eggs, cement, televisions, bicycles, textiles, shoes, steel,
fertilizers and wood and the figure rises to more than $370: more than China's
theoretical GNP per head for that year, even though that list of products
prepresents only a fraction of Chinese output. Trade fugures indirectly confirm
the suspicion. China's exports of $85-90 billion this year - the world's 11th or
12th biggest -- will equal some 20% of official GNP. You would expect an economy
as big and diverse as China's to have, as Brazil and the US do, an exports-to-
GNP ratio of only about 7%. China's export figure is fairly accurate, which
implies that its GNP figure is badly under stated.

Comparing China's physical output and consumption with those of its East Asian
neighbours a generation ago drives home the point. Dwight Perkins, an economist
at Harvard, has calculated China's output per head of some basic industrial
products. He finds that China in 1991 was in most ways a bit more advanced than
South Korea was in 1970 -- a year when Korea's GNP per head (1991 dollars) was
$1,100, supposedly three times China's dollar GNP per head in 1991 (see table
on previous page). The Chinese are also eating as well as neighbours like
Taiwan, South Korea and even Japan did 20 - 25 years before (see Chart on
previous page). This helps explain why China's social indicators -- life
expectancy, literacy, concentration of doctors and calorie intake -- less like
those of the 25 poorest countries on earth (of which China is officially one)
than like those of middle-income countries with dollar GNP ps five times as
big (see table above).

If China, with more than a fifth of the world's population, really is a mere
generation behind the East Asian tigers, the implications are staggering. A
conservative estimate would be that the true output of the Chinese economy will
equal $1.4-1.5 trillion this year, a quarter th e size of America's. That
is conservative because of what happens when you see figures  based on
purchasing power parities", or actual living standard: according to Lawrence
Summerence, the World Bank's chief economist, PPP would make China's economy
around 45% the size of America's. Another recently PPP survey of China suggests
another ten or 15 percentage points on top of that.

Each year, on average, for the past 14 years China's real GNP has grown 6.5%
percentage points faster than America's. If that differnece persists, a little
after 2010 China will have the world's biggest economy. By Summers's reckoning,
if China had Taiwan's GDP per head today the Chinese economy would already  be
bigger than all the OECD economies put together. A China that continues to
follow in Taiwan's footsteps with a 25-year delay will be as rich as today's
Taiwan by around 2020, when its output should equal some 80% of the output of
the OECD then. So one question about stands out above all others, and this
survey's main aim is to try to answer it. Can China's economy go on doing what
it has done ever since Deng Xiaoping began unshackling it in 1978 ? If it does,
the world is in for the biggest change since the industrial revolution.

CROSSING THE RIVER BY FEELING THE STONES

That can happen only if China carries out two modernization at the same time.
Both are difficult, and the second immensely complicates the first. Nobody has
ever tried to escape from third-world poverty and communism at the same time.

At least China has a roadmap for getting out of poverty. The guide is provided
by China's East Asian neighbours, and the Chinese has studied it carefully. The
main features of the East Asian approach are a land reform that sharply raises
incomes in the countryside; a transfer of profits and labour from farming to
industry; high saving rates, which finance industrial investment; low taxes;
vigorous domestic competition; and an openness to foreign influence. The last
element can consist of foreign prices, goods, investment, technology or a
combination of all four: but the result must  be something that brings world
standards heavily to bear on the local economy.

One way or another, as the rest of this survey will show, China's reformers have
managed to implant versions of all these elements in the Chinese economy. The
risk is that the communist Party may eventually strangle them.

The biggest trouble with the party is not, as televisionviewers of the Tiananmen
Square killings of 1989 assume it must be, that China's Communists terrorise
people when their absolute monopoly of power is threatened. It is easier to
forget that now-democratic Taiwan and South Korea (and, farther afield, Chile)
had their share of police heavies, censors and even massacres in the 20-30 years
when their government were obsessed with fast economic growth and social order.
What these authoratarians did not have, however, was a political system rooted
in the idea that even smallish economic decisions can be taken on the sufference
of the rulling party.

All the signs are that China's industrial commissars--the party men still on
most companies' boards and on the factory floor-- are today as economically
savvy as the businessmen they work with. Yet the instruments of political
control are intact. When one western economist asked the political boss of a
state enterprise why the government did not simply pay the company's chief
executive a vastly higher (ie. market) salary instead of providing him with a
car, home and so on to compensate for the low pay, the answer was:"becasue we
can take the car away but couldn't take the salary away."

Such a system's inherent weaknesses--corruption, political interference and
the temptation to override market signals-- are so great that many people
believe it is impossible to reform a communist economy gradually. They point
to the experirence of past half-way reformers like Hungary and Yugoslavia,whose
gradualist efforts in 1970s and 1980s withered and eventually died. The radicals
say that only a headlong plunge into privitisation and free trade will bring
long-run success.

Plunges do not appeal to the Chinese, who call their method of reform "crossing
the river by the feeling the stones  underfoot". As early as the mid-1980s,
Chinese economists were arguing that quick wholesale reform has the same effect
as central planning:it requires the government to take too big decision
on qustions, such as the right sequence to reform or the right way to
 privatise,,
that it knows too little about. Far better to experient cautiously,letting
different companies try different things. if they work,extend them. If not,
bury them.

So far, the argument ois runnuing strongly China's way. The tides of history
may have given Russia and east Europe no choice but"big-bang" reform. But it is
Russia, not China,that is suffering from hyperinflation and 20%-a-year falls in
industral output and is asking for western hand-outs to make up for a collapes
in living standrds. What has made gradualism work in China?

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PS: this is the top article in a complete survey in THE ECONOMIST 1992.11.28
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