PART VI: EVALUATION OF CHINESE ECONOMIC PERFORMANCE
(Written 1989)
In evaluating economic performance, we shall consider the following questions: How well has the economy generated economic growth? How well has the economy generated static efficiency (referring to the productivity of its resources) and dynamic efficiency (referring to technological advances and new investment)? How well has the economy provided full employment and macroeconomic stability? What is the standard of living of the population? To what extent has the economy generated equality in the distribution of income? To what extent does the economy provide “social welfare”, including education, health care, and protection against starvation, illness, old age, etc.? To what extent does the economy provide economic freedom? We shall examine each of these questions in turn along with problems more specific to China, such as the problem of population growth.
Economic Growth
The table on the next page provides estimates of the growth of real GDP. These data are revisions of the Chinese data (the Chinese calculate Gross Material Product— a figure that excludes most services.). Based on these estimates, Real GDP grew at an average rate of 6.8% per year from l953 to 1986. This performance is below the rates of growth achieved by Japan, South Korea, or Taiwan; however, it is certainly a good growth performance by international standards. The tables also show the rather poor performance of Chinese agriculture from 1958 to 1978 and the significant improvement in agricultural performance from 1979 to 1986. The table also shows the very large rise in industrial production; in 1986, industrial production was more than twenty times what it had been in 1953. China had changed from a non-industrialized country to a semi-industrialized country. Finally, notice in these tables the instability of China’s growth, with large spurts followed by declines.
Efficiency
Between 1957 and 1976, nearly all of the economic growth that occurred was the result of increases in the number of workers or in the stock of capital. Almost none of this growth occurred because of increases in productivity. This process is called “extensive growth.” It is likely in this period that labor productivity grew very slowly and that capital productivity actually fell, so that total factor productivity (considering all factors together) changed very little. Falling capital productivity resulted from the incentives to increasingly expand investment described in Part III. China experienced a large number of uncompleted projects, poorly designed projects, unnecessary projects, etc. The tables below indicate that the limits of extensive growth were being reached by the middle 1970s. The reform proposals can then be understood as a way to shift to “intensive growth”, meaning that growth results because of increases in the productivity of
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RATE OF GROWTH OF REAL GDP, AGRICULTURAL PRODUCTION and INDUSTRIAL PRODUCTION
YEAR (% per year) (Index: 1957 = 100) (Index: 1957 = 100)
1953 5.5% 84 61
1954 4.4% 84 ( 0%) 70 (16.4%)
1955 10.1% 94 (11.9%) 73 ( 4.3%)
1956 6.9% 97 ( 3.2%) 88 (20.5%)
1957 6.3% 100 ( 3.1%) 100 (13.6%)
1958 18.5% 107 ( 7.0%) 142 (42.0%)
1959 - 5.0% 83 (-22.4%) 173 (21.8%)
1960 - 2.9% 74 (-10.8%) 181 ( 4.6%)
1961 -20.6% 78 ( 5.4%) 105 (-42.0%)
1962 9.2% 87 (11.5%) 111 ( 5.7%)
1963 12.6% 93 ( 6.9%) 134 (20.7%)
1964 11.2% 98 ( 5.4%) 161 (20.1%)
1965 12.8% 101 ( 3.1%) 199 (23.6%)
1966 13.4% 112 (10.9%) 232 (16.6%)
1967 - 3.9% 118 ( 5.4%) 202 (-12.9%)
1968 0.4% 110 (-6.8%) 221 ( 9.4%)
1969 11.3% 112 ( 1.8%) 266 (20.4%)
1970 16.3% 126 (12.5%) 316 (18.8%)
1971 7.0% 130 ( 3.2%) 349 (10.4%)
1972 4.6% 126 (-3.1%) 385 (10.3%)
1973 12.8% 142 (12.7%) 436 (13.2%)
1974 3.9% 146 ( 2.8%) 455 ( 4.4%)
1975 6.9% 148 ( 1.4%) 502 (10.3%)
1976 - .2% 148 ( 0.0%) 502 ( 0.0%)
1977 8.3% 144 (-2.7%) 574 (14.3%)
1978 11.5% 156 ( 8.3%) 651 (13.4%)
1979 6.4% 160 (2.6%) 703 (8.0%)
1980 6.3% 166 ( 3.9%) 764 (8.7%)
1981 4.9% 177 ( 6.6%) 795 (4.1%)
1982 8.3% 197 (11.1%) 856 (7.7%)
1983 9.8% 216 ( 9.6%) 946 (10.5%)
1984 13.5% 254 (17.6%) 1078 (14.0%)
1985 10.3% 290 (14.2%) 1272 (18.0%)
1986 7.5% 321 (10.8%) 1384 ( 8.8%)
1953-78 6.2%
1979-86 8.6%
1953-86 6.8%
( ) = annual percentage change
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the resources available. According to one estimate, about 40% of the growth experienced between 1976 and 1985 resulted from increases in productivity. Some of this productivity increase resulted from the agricultural reforms described in Part II. Some may have resulted from the industrial reforms, described in Part III. And some resulted from the growth of the urban collectives and the private sector. (Between 1978 and 1987, the share of industrial production done by medium and small state enterprises dropped from 35% to 18%, a 17 point decline. On the other hand, the share of small urban collectives rose 2 percentage points, the share of small rural collectives rose 8 percentage points, and the share of the very small private sector rose 5 percentage points.)
There is no data by which to measure dynamic efficiency (dynamic means “over time”). One indirect measure is the very high percent of GDP going to investment spending. Given the incentives built into the system, this should come as no surprise. The “accumulation rate” for China has been consistently higher than in Western countries. This was accomplished by maintaining high prices for industrial products and then plowing the resulting profits back into investment. However, as noted above, much of the investment has been excessive and unproductive. And the lack of a charge for the use of capital has encouraged enterprise directors to be wasteful with their capital. Both high investment rates and low productivity of capital have continued in the reform period. Thus, it is unlikely that high investment rates have made much contribution to dynamic efficiency.
As noted above, there have been only limited technological advances in Chinese agriculture (especially improved seed varieties). And Chinese industrial technology is at least twenty years behind the West. Research activities were virtually destroyed during the Cultural Revolution. China has tried to gain important foreign technologies, but with limited success. In summary, it appears that the Chinese economy has not succeeded well in generating either static efficiency or dynamic efficiency, although the performance with respect to static efficiency has been improving in the reform period.
FULL EMPLOYMENT AND MACROECONOMIC INSTABILITY
Officially in China there is no unemployment. Thus, there are no good statistics. As noted in Part III, however, China has clearly been a labor surplus economy. In 1982, unemployment in urban areas was 15% if only those with a permanent job are counted as employed and 6% if those with a temporary job are also counted as employed. “Temporary jobs are often sporadic; standing in for sick employees for one or a few days or supplementing the permanent workforce for urgent and irregular work.” In addition to the unemployed and those with temporary jobs, there is under-employment. Over-manning in state enterprises has been estimated at 20%. The labor surplus problem has been enhanced in recent years by the return to the cities of many of those sent forcibly to the countryside during the Cultural Revolution and by the entrance into the labor force
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of the “baby boom” generation of the 1960s. The labor surplus is one explanation for the political resistance to the possibility of dismissal from jobs in state enterprises proposed in the industrial reforms. (In addition, there may be 100 million surplus workers in agriculture.)
Inflation was discussed in Part IV. It is clear that inflation has become a serious problem. While officially there was no inflation during the 1960s and 1970s, there was, of course, repressed inflation (i.e., consistent shortages of goods). With the shift toward greater reliance on markets, the inflation has manifested itself more as rising prices. The inflation of 1988 generated severe political repercussions. In part, the inflation resulted from the bottlenecks that keep appearing as the government tries to expand investment - shortages of energy and transportation, shortages of foreign exchange, shortages of raw materials resulting from lagging agricultural production, etc. The recent inflation also resulted from the loss of control by the central government over investment and over bank loans.
As noted earlier, economic growth has been very unstable, with large spurts followed by retrenchment. In large part, this reflects the incentives to expand investment built into the system. In part, it reflects the persistent changes in policy as different political factions came into dominance.
In summary, it seems that the Chinese economy did not do well at generating a good job for workers at good pay. It is perhaps ironic that, in a “workers’ state”, wages have been low and a condition of labor surplus has been in existence. The Chinese economy did not do well at eliminating inflation, especially recently, nor at providing smooth, steady economic growth. This is also ironic, in that hyper-inflation was a main cause of the triumph of the Communist Party in the first place.
THE STANDARD OF LIVING IN CHINA
China is a very large, very poor country. In 1986, China had a Population of 1.054 billion, about one-fifth of all of the people on earth. According to one estimate, its GDP per capita in 1985 was about $500. Of the 120 countries studied by the World Bank, only 21 countries had a lower per capita GDP than China. In comparison, GDP per capita was $17,480 for the United States in 1986, $12,480 for Japan, $2,370 for South Korea, $1,860 for Mexico, and approximately $9,600 for the Soviet Union. China’s GDP per capita approximately tripled between 1953 and 1985, again illustrating rather good overall economic performance.
While GDP per capita in 1985 was approximately $500, national income per capita was lower. About 2/3 of national income went into consumption (with the other 1/3 going into savings and therefore into investment). Of this, 10% went to collective consumption (i.e., provided by the government) and only the other 57% or so went to private consumption. Thus, it is fair to assume that private consumption per capita was no more than $250 per year. In the pre-reform
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period, total consumption per capita rose slowly; by my calculations, it rose at an annual average of under 3% per year from 1958 to 1978. However, since the reforms began in 1979, consumption per capita has risen rapidly. By my calculations, between 1979 and 1985, total consumption per capita rose at an annual average rate of 12.5%. Most of this rise results from the rise in national income; part of it results from the slight rise in the percent of national income going to consumption.
One aspect of this limited consumption has been a severe housing shortage. As of 1978, the average residential area per person was 3.6 square meters. This was even lower than the average of 4.5 square meters that existed in 1952. Between 1952 and 1978, only 5.8% of China’s investment went into housing construction. By 1980, more than one-third of households in urban areas faced severe housing shortages. Nearly 2 million families were housed in warehouses, corridors, family workshops, offices, etc. Another nearly 2 million families had three generations sleeping in the same room. Probably more than half of urban housing was in need of major repair, in part because the low rents did not provide enough revenue to pay for the repairs. Beginning with the reform period, China has tried to shift resources toward housing construction. After 1980, between 20% and 25% of all investment has gone to housing construction. The amount of floor space produced per year has almost tripled. By 1982, however, this had only added 1.1 square meters to the average. The Chinese have set a goal of having an average of 8 square meters per person by the year 2000; this goal seems overoptimistic. (For reference, 8 square meters is about 70-75 square feet per person—about half the size of a small bedroom in the United States.)
As of 1980, about 31% of urban housing was owned and managed by municipal housing bureaus. Another 44% was owned by the enterprises. Only 25% was privately held; most of this was owner-occupied, but some was privately rented. Rents are held very low by government subsidy. In the 1980s, only between 1% and 2% of all urban household expenditures have gone for rents. This covered only about one-fourth of the cost of the housing; the other three-fourths of the cost was met by government subsidy. In recent years, there was a desire to raise rents to remove the burden from the government’s budget. Rents were raised to account for 8% of household expenditures by the 1990s. This was accompanied by an increase in urban incomes.
In the 1980s also, there was more commercialization of housing. In 1981, the National Housing Construction and Development Corporation (CHCDC) was established to build public housing and then sell it to urban households who repay with interest over a period up to 20 years. By 1985, this production for commercial sale accounted for about one-fifth of urban housing construction. The units are usually in large, high-rise apartment buildings and are typically twice the size of normal apartments. While the housing situation has improved, the shortages are still severe. Given the changes in the rural economy, and the resulting possibility that there will be large increases in the urban population, it is questionable whether