Highlights

The Stages of China’s Economic Development and Its Evolution- A New Perspective for Historic Analysis of the Planned Economy

ZHAO Nong

I. Proposition of the Problem

By far, China is a developing country and a transitional country. This determines that the general theories on stages of economic development do not apply to China. Therefore, we need to extract and develop a new theory to investigate and summarize the stages of China’s economic development.

Now we limit the object to the economic stages since 1949. Several severe transformations have been witnessed since 1949 in regards to the society and economy of China, and the economic developments went hand in hand with these transformations. The problem we need to ask is whether there are characteristic stages. If the answer is affirmative, then, the questions lies in how these stages evolve, and how these stages are interconnected.

The explanatory theory of economic development always come from investigation and analysis of the historic facts, and the criterion to test whether the theory stands is its predictability. Therefore, a hypothesis or theory on the economic development stages should be able to review the past and foresee the future. In fact, the understanding of the history and its value lie more on its influence on the solution to the present problems and its forecast of the future.

In this article, what I’d like to address is the three stages of factor formation, optimization of factor allocation, and the innovations of factors of the evolution of national economy since 1949. China has passed the stage of factor formation(which is 1949-1978), and now China is almost approaching the end of the second stage of optimization of factor allocation. And now, China has come to a critical point before entering the new stage of factor innovation. The three stages are proposed in order to indicate the main intrinsic features of the different periods of economic development. This does not mean in certain stages(for example, the stage of factor formation) features of other stages (for example, stage of the optimization of factor allocation, and stage of factor innovation) will not exist. The features of different stages of economic development are not mutually exclusive. On the other hand, in certain stage of economic development in some countries(for example, the US in the turn of the 20th century), the features of the three stages coexisted and were all significant. And in some other countries and regions(for example, South Korea and Taiwan in the 1950s to 1970s), the formation of factors took an incremental path in the condition of the optimization of factor allocation. This difference is the concretely shown by the time sequence, dynamics, and evolutionary nature of historic development.

The unique feature of the different development stages in China is fundamentally attributed to certain historic conditions and the subjective choices people made under these conditions. If we take a dynamic evolutionary point of view, we would find: the current results of the choices under the given condition will be the factors and conditions that influence of the choices of the next stage. To be specific, as the administration after 1949 made certain choices to make “the socialist ownership of productivity materials the sole economic basis for the state and the society”, it led to the formation of a planned economy that featured with optimized ability to mobilize resources, which established the feature of the factor formation stage for China’s economic development. As the total amount of factors increased over time, the national economy- as a “big factory”- and its scale effective of economy(i.e., the marginal efficiency of the factor formation) will decrease. And when it decreased to a certain point from a marginal perspective, the efficiency of productivity factors optimized allocation will overtake the efficiency of factor formation in general. At that point, “the reform and opening-up”- in nature as the stage of “optimization of factor allocation” that follows the stage of “factor formation”- will come naturally. Therefore, the design of China’s early economic development path determined the features of the different stages of “factor formation” and the “optimization of factor allocation”.

II. The Separation between the Stages of Factor Formation and the Optimization of Factor Allocation

The path for industrialisation, i.e., to “transform the less developed agricultural China into a developed industrialised China”, was a main strategy for many less developed countries in the mid-20th century. Besides, it was not rare to see under the market economic structure, there was government intervention and guidance, especially in the areas of heavy and chemical industries where state-owned economy dominated investment and management, even in self-claimed capitalist developing countries. Therefore, the aim of nationalisation in the industrialisation strategy proposed by the Chinese Communist Party was the real unique feature of the choice of development path for China(and the former member states of Soviet Union). (To read the full article)

ZHAO Nong, Vice Chairman of Unirule Academic Committee

Source: FT Chinese and China-Review

Current Events

The 12th UCERC Saloon Held in Beijing

 October 25th, the 12th UCERC Saloon and the seminar on “Improving Entrepreneurs' Survival Environment: Abolishing Death Penalties in Relation to Fund-Raising Cases in China” was held in Beijing. Present at the meeting were Professor HUANG Zhen, Director of Institute of Financial Laws of Central University of Finance and Economics; Professor XU Xin, from Law School of Beijing Institute of Technology; Professor GAO Yan, Deputy Director of Unirule; and Mr. TANG Dajie, Secretary General of China Enterprise Institute.(To read more)

Unirule Saloon for Young Scholars(VII) Held in Beijing

 Unirule Saloon for Young Scholars was proud to present Professor WANG Ning, Senior Research at Ronald Coase Institute and Editor-in-Chief of Man and Economy.

This session was held on the evening of October 27th at 1898 Café in Beijing. Professor WANG Ning spoke on “Chinese Traditions and the Future of Chinese Market Economy”. He briefly went through the evolution of economics and thought it could be divided into two stages, the constructive economics and the evolutionary economics. He pointed out that Chinese traditions were hard to define, the history was something real. People acquired traditions and experience from history yet history was never linear, therefore, everybody created history to their will. Professor WANG Ning also suggested that there was misunderstanding in the traditions of Chinese culture, especially with the understanding of the feudal system. China has achieved economic miracle in regard with GDP growth, but the future of China depends on the how Chinese people manage and make use of the past and the historic experience. (To read more)

Unirule Master Thoughts Class(2014) First Session Held in Beijing

November 8th to 9th, the first session of “Unirule Master Thoughts Class(2014)” was held in Beijing. This session was gracefully joined by Professor ZHANG Weiying from Peking University, and Professor QIN Hui from Tsinghua University.(To read more)

News

Unirule 10-D Spatial Simulation Planning Model (SSPM)

The Unirule 10-D Spatial Simulation Planning Model (SSPM) is a mathematical and computational model based on economics. It is developed by a Unirule research team led by Professor SHENG Hong. SSPM is designed to simulate the development scale, economic density, industry distribution, resource constraints, ecological preservation, institutional influence, policy effect, and the evolution process in the next ten to twenty years or even longer period for a region. SSPM provides reference for the regional economic development strategy making, which can be directly adopted in the planning on regional economic development, population, land use, industry development, townships, water and ecology.

So far, SSPM has been adopted in the industry planning of Qianhai Area, Shenzhen, and the economic development planning of Yangcheng County, Shanxi Province.

Learn more about the SSPM

China’s Economy Back to Stabilization with Increase of the Tertiary Industry and Correction of Dependence on Policy Still Needed - Analysis on Quarter 1 Macroeconomics 2014

July 22nd, Macroeconomic Analysis on Quarter 2, 2014 was released at Unirule office in Beijing. Professor ZHANG Shuguang, Chairman of Unirule Academic Committee hosted the meeting and took questions from the audience.

Here is the abstract of the Analysis.
China’s economy stabilized due to intensive stimulus policies. In the first half of 2014, the GDP growth was 7.4% with the industrial added value increasing by 8.8%. Economic indicators look more promising than in the first quarter with the weight of the tertiary industry increasing, which shows improvement in the economic structure. In the meantime, a dependence on policy comes into existence. Adjustment and control of the real estate industry and the monetary policy are faced with great difficulty, and efforts should be taken to manage the reserves against deposit. As there is opportunity cost for any policy and government conduct, the administration needs to judge and weigh the task of guaranteeing short and long term economic growth and the task of promoting reforms and restructuring.

Current Researches/ Consulting

Business Ethics Declaration of Chinese Entrepreneurs

Over the last three decades, China’s economy has been embracing rapid growth with entrepreneurs being a key drive. The biggest and most significant structural change is the rise of entrepreneurs who constitute the pillar of the society nowadays. Today, the biggest, and the youngest group of entrepreneurs are going international, bridging China and the world.

However, because of the abnormal political, social and ideological environment of China for the last five decades, Chinese entrepreneurs happen to be widely confused and for the last thirty years, the emerging group of entrepreneurs has been suffering from severe anxiety over identity:

Firstly, due to the long time anti-market ideological propaganda by the authorities, many entrepreneurs believe they have the “original sin”. They are led to believe that their profits are based on exploiting the workers, which further leads to their confusion and anxiety over the ethical justification of their fortune and profits.

Secondly, this anti-market ideology also affects the public; leading the public to envy the fortune of entrepreneurs while disrespect them since their deeds are “unethical” and “dishonest”. This public opinion, in return, affects entrepreneurs’ self-identity. They, therefore, can’t convince themselves of the contributions they make to the society, or identify themselves within the social hierarchy.

Thirdly, Chinese entrepreneurs, especially those whose enterprises have gone international, are bothered with this severe identification anxiety. Chinese people stand out in entrepreneurship, so do Chinese enterprises. But what are the driving forces behind? Thanks to the long time culture break-up from the traditions, and the anti-tradition propaganda, Chinese entrepreneurs find it hard to comprehend and identify their cultural and social roles. This leads to the chaotic and restless mental state of entrepreneurs. This also results in the lack of a cultural supportive pillar for enterprise management in China.

“Business Ethics Declaration of Chinese Entrepreneurs” aims to provide answers to the anxiety over identity for Chinese entrepreneurs, to re-identify them by providing authentic and orthodoxical conceptions, to help them mature their thoughts and corporate social responsibilities.

This research project is committed to establishing a value system for Chinese entrepreneurs. To confront the anxiety over identity for Chinese entrepreneurs, this project provides answers to the three questions below:

1.Do Chinese entrepreneurs have the “original sin”?
2.What do Chinese entrepreneurs contribute to the society?
3.How do Chinese entrepreneurs gain respect?

Improving Entrepreneurs' Survival Environment: Abolishing Death Penalties in Relation to Fund-Raising Cases in China

In recent years, environment for private enterprises has been taking a deteriorating turn, which attracts attention from the media and the academia. The causes are complex and multi-faceted, including: 1, the abuse of powers by government officials as the government powers expand; 2, “the private-owned deteriorating with the state-owned advancing”(guojin mintui) worsens the picture where the survival environment for private enterprises gets more and more squeezed; 3, external demands of enterprises decrease while internal cost increases; 4, financial suppression escalates with the industrial restructuring and updating lagging behind; and 5, the fluctuation of macroeconomic policies by the government poses uncertainty for production and investment. Moreover, many innocent entrepreneurs were labeled and persecuted for their “gangster behaviors” by the policy and law enforcements in Chongqing city, which was just a glimpse of similar occasional “gangster crashing” movements in the country. Many entrepreneurs are suppressed and sanctioned in the name of “illegal fund-raising”. According to active law, the court can sentence entrepreneurs to death penalty with this charge.

Unirule Institute of Economics is planning to undertake research on the problems of the crime of “illegal fund-raising” and specific method to abolish this charge.

It is fit for Unirule to carry out this research project. Unirule Institute of Economics is a non-profit, non-governmental organization, which focuses on institutional economics with expertise in economics, laws, and politics. It has been dedicated to independent research on China’s institutional reforms and public policies as well as the reform of private finance. In 2003, 2011, and 2013, Unirule held seminars on the cases of Mr. SUN Dawu, Ms. WU Ying, and Mr. ZENG Chengjie. These seminars have been very influential before and after the close of the cases.

Unirule Institute of Economics has undertaken research projects in corporate finance and private finance in recent years. Over the years, Professor FENG Xingyuan has been carrying out pioneering research on private finance and private enterprises. He has gained rich experience and published many publications and papers on relevant topics, including Report on the Freedom of China’s Corporate Capitals, Report on the Survival Environment of China’s Private Enterprises 2012, Research on the Risks of Private Finance, etc. In August 2013, Professor FENG Xingyuan and his research team completed and released the Report on Private Enterprise Fund-Raiding in West Hunan and the Case of Mr. ZENG Chengjie, which analyzed and assessed the process, nature, problems, and causes of a series of events and proposed policy recommendations concerning the fund-raising activities in West Hunan and the case of Mr. ZENG Chengjie. Besides, Professor MAO Yushi, Honorary President and celebrated economist of Unirule Institute of Economics, is also an expert in private finance as Professor FENG Xingyuan.

Theoretical Research and Reforming Solution on Opening the Markets of Crude Oil and Petroleum Products

The present system of petroleum industry in China generally has 3 characteristics —— it focuses on state-owned business, price control and restricted access. Thus China’s petroleum industry shows a highly administrative monopoly. A few enterprises have completely monopolized the supply lines from its exploration, mining, refining, wholesale and retail, even to its imports and exports. The research intends to break the administrative monopoly of petroleum industry, stating its objective for the reform and meanwhile figuring out feasible reforming solutions to further liberate the markets of crude oil and product oil.

Strategy of Developing Areas and Planning Studies on Urban Industrialization For Yangcheng County in Jincheng City of Shanxi Province

On the basis of rethinking the strategy of development, the transformation of urban functions and the adjustment to industrial structure for Yangcheng County, Unirule Institute of Economics has developed a unique space-institution mathematical economic model, which can reunite three-dimensional space-time of cities and regions, their industries and institutions, and their economic policy analysis. The Unirule Institute will put the strategy into practice. Meanwhile, such mathematical model will be used to simulate market mechanism, to predict the final size for the long-term developing balance of cities and regions, the space distribution of population density and other economic density, the development time and process of cities and regions, the industrial distribution and its development track, and to test the flexibility of economic systems and policies. Thus the model can be used for the spatial planning of urban and rural areas in Yangcheng County.

Fairness and Efficiency of Financial Resource Allocation

The first scale problem of the fairness and efficiency of financial resource allocation is whether the overall tax bearing standard falls within the optimal interval, whether the design of tax kinds and the mechanism will harm the development of the economy. The second scale problem is whether the expenditure structure of the existing financial resource allocation, especially transfer payment, obeys the principal of justice, and the efficiency of financial expenditure especially the general administrative costs.

Unirule Institute of Economics is going to undertake research on the fairness and efficiency of financial resource allocation with the emphasis on the second scale problem. In order to fulfill the ideal of justice in a society, the involvement of financial resource allocation is one of the methods, and a universal one. A state can promote justice by implying financial expenditure in two ways: the direct and the indirect way. When applying the direct way of implying financial expenditure measures to promote justice, financial expenditure is directly distributed to individuals to fill the gap of incomes between individuals.

Among the financial expenditure items of China are pensions and relief funds for social welfare, rural relief funds as well as social insurance funds. The indirect way is by governments' increase in expenditure used for supporting agriculture and villagers, construction of infrastructure, education and medical treatments. This research is on the justice of financial resource allocation and it deals mainly with whether the transfer payment of financial resources obeys the second rule of Rawls's theory of justice, which states that when violation to the first rule has to be made, resource allocation can be towards the poorest group of people. Besides the justice issue, efficiency is also involved in the financial resource allocation. The administrative costs of China have long been above the average standard of other countries in the world, therefore, a big amount of public financial resources are wasted (trillions of RMB per year as estimated). In regard with the efficiency issue of the financial resource allocation, this research deals mainly with the change of ratio of administrative costs by government agencies (in addition to other costs, such as medical treatments of government officials covered by public budgets, and housing subsidies) of financial income. The reform of the fiscal and taxation system is one of the core issues in China's on-going reforms. This research aims not at a comprehensive examination of the fiscal and taxation system, but a specific aspect which is the "fairness and efficiency of financial resource allocation", and evaluating the status quo of China's financial resource allocation.

Research on China's Urbanization on the Local Level

Urbanization is one of the most essential economic and social policies of the new administration. The emphasis of this policy is posed on medium and small cities as well as townships. As noticed, there are thousands of industrialized townships in China with their social governance lagging far behind their economic development.

Firstly, a big population is located in between the urban and rural level, which can't transform into citizens. Hundreds of millions of people have left their villages and moved to commercialized and industrialized towns. They are in industrial and commercial occupations and it is highly unlikely that they would go back to their villages. However, they are not entitled to local Hukou registration, which further leads to the deprivation of various rights, for example, the right of education.

Secondly, public governance in such industrialized and commercialized towns, in general, is at a rudimentary level. The number of officially budgeted posts is asymmetric with the population governed, which leads to the employment of a large number of unofficially budgeted staff and unjustified power to govern. There is a lack of financial resources for the local government to carry out infrastructure construction or to provide public goods sufficiently. Thirdly, the urbanization results in imbalanced development of the structure of society. Since the industrialized and commercialized townships are unable to complete urbanization, urbanization in China has basically become mega-urbanization which is dominated by administrative power. Local governments centralize periphery resources with administrative power and construct cities artificially, which impedes townships and villages from evolving into cities by spontaneous order. Fourthly, industry upgrading can't be undertaken in those industrialized and commercialized townships and the capacity for future economic development is greatly limited. The industry upgrading is, in essence, the upgrading of people. Enterprises ought to draw and maintain technicians, researchers, and investors, to meet their needs for living standards, which cannot be satisfied by townships. Similarly, the lagging urbanization reversely sets back the cultivation and development of the service industry, especially the medium and high-end services.

Unirule Institute of Economics is going to carry out research on urbanization of China on the local level, aiming at improving public governance of the industrialized townships, optimizing the urbanization methodologies, and improving the "citizenization" of migrant workers, therefore further pushing social governance towards self-governance and democracy.

Research on the Public Governance Index of Provincial Capitals

At the beginning of the year 2013, Unirule conducted field survey, including more than 10 thousands of households in 30 local capital cities. According to the field survey, the Public Governance Index was derived. The main conclusions of the PGI report as below:

Three statements summarize the status quo of public governance in provincial capitals. Firstly, public services have generally just gotten a pass. Secondly, protection to civil rights is disturbing. Finally, governance methodologies need improvements. These statements point out the solution: the structure of the society needs to be altered from that with a government monopoly to a civil society with diverse governance subjects. The ranking of provincial capitals in the public governance assessment from the top to the bottom is as follows: Hangzhou, Nanjing, Urumqi, Tianjin, Chengdu, Shanghai, Beijing, Nanchang, Xi'an, Xining, Shijiazhuang, Wuhan, Guangzhou, Yinchuan, Hohhot, Chongqing, Shenyang, Changsha, Jinan, Kunming, Nanning, Haikou, Fuzhou, Guiyang, Harbin, Hefei, Changchun, Zhengzhou, Taiyuan and Lanzhou.

Generally speaking, all provincial capitals are graded comparatively low in the three public governance assessments from 2008 to 2012. Even those that ranked the highest in performance have just barely passed the bar of 60 points. Few provincial capitals with poor public governance got over 50 points.

There is a certain amount of correlation between the changes of ranking and improvements in public governance in provincial capitals. In the short term, should the capital cities be willing to raise their rankings, they can achieve this by increasing transparency in government information and civil servants selection, encouraging local non-governmental organizations, or promoting wider participation in local affairs. There is but a weak correlation between public governance and the local GDP level. However, a strong correlation exists between the rankings and the equity of local fiscal transfer payment. That is to say, a region gets a higher ranking in public governance if subsidies to local social security, medical care, education and housing are distributed more to the poorest residents in that region. On the contrary, a region's ranking falls if such resources are distributed with prejudice to the groups with high incomes. This phenomenon shows that equity is of significance in the assessment of the government by the people.

When residents are not satisfied with medical care, elderly support system, water supply and electricity supply, the situation can be improved when they complain to the government. But when similar situations take place in public transportation, environment greening, heating systems, and garbage management, whether by collective actions or filing complaints to government agencies, residents can hardly be satisfied with what the government does.

According to the three public governance assessments carried out from 2008 to2012, we discovered that the Gini coefficient of residents in provincial capitals was decreasing and the income fluidity was improving. From 2010 to 2012, citizens' comments on protection of civil rights are deteriorating, especially in terms of property and personal security. The request for freedom of speech is also increasing. For the moment, citizens in provincial capitals have a low evaluation on the cleanness and honesty of local governments.

Research on Disclosure of Government Information

Room for reforms is getting narrower as the opening-up and reforms deepen. It also leads to a more stabilized vertical mobilization of the demographic structure with the conflicts in the distribution of interests exacerbating. A collaborative system centering the political and law system and involving close cooperation between the police, courts, petition offices, and the city guards (Chengguan) is developed to deal with social unrest. This system is operated by local governments and finalized as a system of maintaining stability (Weiwen). There have been Internet spats over the amount of Weiwen funds. It is unsustainable to maintain such a Weiwen system, and the disclosure of government information is the most significant approach for this end. The essence of public governance is to dissolute conflicts instead of hiding and neglecting them. And one way to achieve this is by sufficient communication. Public and transparent appraisement and supervision cannot be achieved without transparent government information, otherwise the result will be the exclusion of citizens from public governance.

Unirule Institute of Economics has been undertaking research on the disclosure of government information since 2011. This research is carried out not only from the perspective of the regulations for the disclosure of government information which evaluates whether governments of various levels are obeying the regulations and their performances, but also by examining information disclosure laws in developed countries while looking at the status quo in China. There are seven aspects where government information disclosure can be improved, namely, information disclosure of government officials, transparency of finance, transparency in the decision-making mechanism, transparency in administration, transparency in public services, transparency of enterprises owned by local governments, and transparency in civil rights protection.

Upcoming Events

Unirule Master Thoughts Class(2014)

Unirule Biweekly Symposiums

Unirule's Biweekly Symposiums are known in China and throughout the world for their long history of open and in-depth discussions and exchanges of ideas in economics and other social sciences. Over 380 sessions have been held and over 15,000 scholars, policy makers, and students, as well as countless readers on the web, have directly and indirectly, and participated in the Biweekly Symposium for close to 20 years.

Biweekly Symposiums begin at 2 p.m. every other Friday and are free and open to the public.

Schedule

Biweekly Symposium No. 514: 5th December, 2014
Biweekly Symposium No. 515: 19th December, 2014

Previous Biweekly Symposiums

Biweekly Symposium No. 509: Status Quo of China’s Civil Society
Time: September 12th, 2014
Lecturer: Professor LI Fan
Host: Professor ZHANG Shuguang
Commentators:JIA Xijin, HU Xingdou, ZHANG Lifan, XU Xin, GAN De’an

After defining the civil society, Professor LI Fan pointed out that there were there ways to form a civil society, namely, the European way, the American Way, and the post-colonial way. He briefly introduced the three ways. In retrospect, Professor LI thought China took the European way to form a civil society.

Professor LI thought there were two reasons why China formed a civil society. Firstly, the economic development enabled the emerging and expansion of China’s self-governing society. Secondly, as the emergence of the awareness of civic rights, more conflicts between citizens and the public powers came into being. And non-governmental organizations, with the help of Internet, sprung up with the middle and lower class of the society getting more and more radical. Professor LI also proposed that there were two stages of the development of civil society in China. The first stage was when the society asked the government for room to develop; and the second state was when the society denied the government when conflicts became more and more frequent.

Professor LI also reviewed the relation between state and society in the context of civil society on the basis of the status quo, and analyzed the challenges posed for China’s politics by civil society.

Editor: MA Junjie
Revisor: Hannah Luftensteiner