Chapter 20: Evaluation of Chinese Economic Performance

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Chapter 20: Evaluation of Chinese Economic Performance (Written 1989; Revised 2007)
To evaluate Chinese economic performance, we consider the goals that were discussed in Chapter 1. So we will ask the following questions: How well has the Chinese economy generated economic growth? How well has the Chinese economy generated productive efficiency (referring to the productivity of its resources), allocative efficiency (producing the right quantities of each good or service), and dynamic efficiency (referring to technological advances and new investment)? To what extent has the economy generated equality in the distribution of income? What is the standard of living of the Chinese population? How well has the Chinese economy provided full employment and macroeconomic stability? To what extent does the Chinese economy provide “social welfare”, including education, health care, and security against starvation, illness, old age, and so forth? To what extent does the Chinese economy provide environmental quality? And to what extent does the Chinese economy promote economic freedom? We will examine each of these questions along with problems more specific to China, such as the problem of population growth. Finally, we will draw some overall conclusions about the current Chinese economy.
(1) Economic Growth
As mentioned in previous chapters, China’s economic growth record since reform began is one of the most remarkable on record. If we take the period prior to reform as a whole (1952 to 1978), GDP in China grew at an average annual rate of 6% per year. Since the population was growing at 1.9% per year, this means that GDP per capita was increasing at an average annual rate of 4.1%. This is a very good performance; at 4.1% annual growth, GDP per capita will double roughly every 18 years. However, in this period, the growth rates in Japan, Korea, and Taiwan were higher. But if we take the period since reform began (1978 to 2005), GDP grew at an average annual rate of 9.6%. Since the population was only growing at 1.1% per year during this period, this means that GDP per capita increased at an average annual rate of 8.5%. No country in history has experienced growth rates of per capita GDP this high over such a long time period. At 8.5% per year growth, GDP per capita will double roughly every 8 ½ years. These numbers are derived from official Chinese data that may be overstated. But no inaccuracies would change the overall conclusion about the growth of Chinese GDP per capita. The chart on the next page illustrates the amazingly rapid growth of China’s GDP since 1978.

Examination of the details of Chinese GDP growth would show the poor performance of Chinese agriculture from 1958 to 1978 and the significant improvement in agricultural performance after 1978. It would also show a very large increase in industrial production. By the mid-1980s, China had changed from a non-industrialized country to a semi-industrialized country. In addition, examination of the details of Chinese GDP growth would show considerable instability. There were four spurts in GDP growth in the reform period: 1981 to 1984, 1986 to 1987, 1990 to 1992, and 1999 to 2005. Each growth spurt caused inflation as well as bottlenecks in certain sectors. Each growth spurt had to be followed by retrenchment – a period of slower growth. The chart on Page 4 illustrates the instability of Chinese GDP growth.

Finally, examination of the details of Chinese GDP growth would show the importance of investment spending (buying of capital goods) and the lesser importance of consumer spending. In the 1980s, buying of capital goods was about 30% of Chinese GDP. By the 1990s, it had increased to 35% of Chinese GDP. By 2005, buying of capital goods exceeded 40% of Chinese GDP. In contrast, the rate for Taiwan has rarely exceeded 30%. While the relation between buying of capital goods and economic growth is complex, there is no doubt that the high rate of spending on capital goods is a major factor in China’s high rates of economic growth.
(2) 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 the factors together) changed very little. Falling capital productivity resulted from the incentives to constantly expand investment. China experienced a large number of uncompleted projects, poorly designed projects, unnecessary projects, and so forth. 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 the resources available. This shift has been successful so that most of the growth experienced since 1978 has resulted from increases in productive efficiency. From 1978 to 2001, overall productivity in China increased at an annual rate of 6.6%. From 2001 to 2005, it increased at an annual rate of 8.7% (more than double the rate for India). One study demonstrated that about 70% of the growth of Chinese GDP and about 80% of the growth of Chinese income per person has been caused by increases in productivity. Some of this productivity increase resulted from the agricultural reforms described in Chapter 18, as agricultural productivity grew at an annual rate of 4.7% per year between 1978 and 2000. More of it resulted from the industrial reforms described in Chapter 19. If we take the average productivity in all of China, the productivity of agricultural workers is only about 30% of this average while the productivity of industrial workers is some 230% of the average. So agricultural productivity is still lagging.

One reason for this increased productive efficiency has been “industrial clustering”. This means that most enterprises in an industry’s supply chain are located close to each other (similar to Detroit for automobiles). China has several “supply chain cities” each focusing on a single product. This form of industrial location reduces transportation costs and allows information to be widely and quickly disseminated.

One way of evaluating allocative efficiency (whether China is producing the right goods and services) is to look at inventories. The accumulation of excessive inventories is wasteful. In market economies, inventories usually equal about 1% of GDP. Prior to 1978, inventories in China amounted to some 5% of GDP. This resulted because companies would accumulate worthless, low-quality products that no one would buy. High levels of inventories continued into the 1990s. But after that, inventories fell to less than 1% of GDP. This is an indication of improved allocative efficiency in the Chinese economy.

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, as mentioned above. The importation of technology from the advanced countries would also indicate that Chinese production is becoming more efficient over time. As of the present time, there have been only limited technological advances in Chinese agriculture (especially improved seed varieties). Chinese industrial technology is still years behind the West. But there is no doubt that the economy has become more efficient and more productive since the reforms began.

(3) The Distribution of Income in China
Following the completion of the land reform in the early 1950s, China was characterized by a relatively equal distribution of income. Both within the rural areas and within cities, the equality of the distribution of income changed little in the decades of the 1960s and 1970s. The distribution of income in China was at its most equal level in the early 1980s. The largest source of inequality in China prior to the reforms was the difference between urban and rural incomes; as we saw earlier, rural incomes were only about 40% of urban incomes.

The reforms have had great effects on the distribution of income. Since the early 1980s, inequality in China has increased greatly. As we saw earlier, inequality is measure by the Gini Index. All you need to know about this index is that it is a number between 0 and 1. The smaller the number, the more equal is the distribution. The larger the number, the more unequal is the distribution. In 1983, the Gini Index for China was 0.28. This was one of the most equal distributions in the world, similar to the distributions of Sweden, Japan, and Germany. By 2001, the Gini Index for China has reached 0.447. This represents less inequality than the very unequal countries of Latin America. But it represents greater inequality than the other Asian emerging nations, such as India, Indonesia, Taiwan, or Korea. Inequality in China has become similar to that of the most unequal Asian nations, such as Thailand and the Philippines. And inequality in China has come to exceed inequality in the United States (the American Gini Index for the same year was 0.408). This is a remarkable change.

The increased inequality in China is partially a result of the widening urban – rural gap, as we saw earlier. On average, rural incomes are only 1/3 of urban incomes today, as compared to about 40% in 1978. But there has also been increased inequality within rural areas. In rural areas, the Gini Index increased from about 0.25 in 1978 to about 0.32 in 2001. First, the end of forced specialization in grain has benefited those regions that are not well endowed to produce grains. Their ability to shift to other products increased their incomes over other regions. Second, the reform measures benefited those households who were able to go into “sideline occupations” or to be part of a Township and Village Enterprise at the expense of those who had to stay as farmers.

Inequality has also increased within urban areas. For urban residents, the Gini Index has increased from 0.19 in 1978 to about 0.28 in 2001. This is still quite equal, albeit less equal than previously. First, some people were better able than other to take advantage of the industrial reforms. They were able to increase their incomes considerably in private enterprises or in collectives. Some people were also better able than others to benefit financially from the increase in corruption. Second, the fact that wages are based more on enterprise performance also has benefited some people more than others. Finally, the policies attracting foreign direct investment through special export zones benefited the coastal regions but not the interior regions.

This increase in inequality has had serious political repercussions within China. By the end of the 1990s, the central government began to respond with policies to offset the inequalities. The best known of these policies is the Western Development Initiative, a series of programs designed to develop the western areas of China that had not experienced much economic growth over the past two decades. There is some evidence that inequality within rural areas is indeed being reduced slightly in recent years. For example, more than one quarter of rural households now report some off-farm income compared to only 5% as recently as 1995. Inequality within urban areas may have been reduced as well due to an increase in some social safety net programs available to the poor. But overall inequality within China has not changed much; the increased equality within urban areas and within rural areas has been offset by the widening inequality between urban and rural areas. This presents a major problem for the Chinese leadership. It also illustrates a theme we have seen with other countries: reducing the influence of government in the direct management of the economy seems to necessitate an increase in government spending in other areas, notably those related to the Welfare State.

(4) The Standard of Living in China
China is a very large developing country. According to one estimate, its GDP per capita in 2003 (at purchasing power parity) was about $5,788. This would allow China to be categorized as a middle-income country. Its GDP per capita is below developing countries such as Mexico, Brazil, Thailand, and Colombia. But its per capita GDP is above developing countries like the Philippines, India, Indonesia, and Vietnam. Of course, China’s per capita GDP is well below that of the United States (at about $44,000). As noted above, China’s per capita GDP grew at an annual rate of almost 10% per year from 1978 to 2005, the fastest growth over this long of a period ever recorded.

The growth of per capita GDP has also meant a rapid growth in incomes. In 2004, in both rural and urban areas, disposable income (income available for spending) was six times the level it had achieved in 1978. Therefore, the growth of production has also translated into growth of the standard of living of the people.

A major achievement of the growth in Chinese incomes has been the reduction in poverty, especially rural poverty. The Chinese official poverty line is very low. Using this low official poverty line, the number of Chinese who were officially poor declined from 250 million in 1978 to 26 million in 2004. The World Bank uses a poverty line of the equivalent of $1 per day. By this higher standard, the number of poor people in China in 2004 was 114 million. This represented 8% of the total Chinese population. But by this standard, there had been over 500 million people in poverty in 1978. So by the World Bank standard, the decline in poverty has been even greater than the Chinese claim. Unlike most developing countries, virtually all of the poverty in China occurs in rural areas. While 8% of the total Chinese population lives in poverty, only 0.5% of the urban population lives in this condition.
Since the reforms began in 1979, consumption per capita has risen rapidly. Most of this rise results from the rise in national income. But part of it results from the slight rise in the percent of national income going to consumption. One aspect of this consumption is housing. Before the reform period, there had been a severe housing crisis. As of 1978, the average residential area per person was only 3.6 square meters. (This number was even less than the average of 4.5 square meters that had 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, and so forth. Another nearly 2 million families had three generations sleeping in the same room. About one-fourth of residents had a living space of less than 43 square feet. 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 shifted resources toward housing construction. Since 1980, about one fourth of all investment has gone to housing construction. The amount of floor space produced per year has almost tripled. By 2002, the average floor space per person in urban areas had risen to almost 23 square meters and the average floor space per person in rural areas had risen to 26.5 square meters. Most new housing units (mostly apartments and condominiums) have the full range of amenities – water, electricity, telecommunications, and so forth. In 1980, about a third of urban housing was owned and managed by municipal housing bureaus. Another 44% was owned by the enterprises. Only 25% was privately held. Rents were held very low by government subsidy – amounting to between 1% and 2% of all urban household expenditures. In 1999, the government and the state-owned enterprises stopped their provision of housing. The existing housing was then sold to tenants. At this time, private developers were allowed to build residential housing. A secondary market (used market) in housing was also allowed for the first time. Beginning in the late 1980s, China first allowed mortgage financing. But this did not begin to grow rapidly until 1998. By 2005, mortgages represented close to 10% of all bank lending in China. In 2007, a private property law was passed. A full housing market should be able to develop as a result of this law. China has done much over the past twenty years to improve the housing of its people and to move to a private housing market.

Related to the increase in incomes and in consumption, there has been a large increase in national saving (and especially household savings) in China. Savings now total more than 25% of GDP. Partly the increase in savings reflects the rapid increase in incomes. Partly it reflects the increase in investment opportunities available to households. But partly it reflects the increased insecurity people now feel in their lives – especially the insecurity of old age. The increase in savings has financed much of the investment spending that has been such a major cause of China’s rapid rate of economic growth.
Another important aspect of consumption involves diet. As of 1983, food comprised almost 60% of urban household expenditures, despite state subsidies (compared to less than 15% in the United States). Nearly all calories came from grains. Since 1978, as we saw, there has been a large increase in food production. Rice production rose 160% between 1960 and 2000, wheat production rose 480%, and pig meat production increased 990%. The number of calories taken in by the average person every day has risen (a more than 1,200 calorie per person increase between 1960 and 2000). By the late 1990s, this number of calories (at nearly 3,000) was about 80% of the daily calories taken in by an average American. Of these calories, 17% now come from animal products (compared to 28% in the United States). But there are still some fundamental differences between the typical Chinese and American diets. As of 2002, a typical Chinese person got 1,646 calories per day from grain. A typical American got only 848 calories per day from grain. In that year, a typical Chinese person consumed 110 pounds of meat. Most of this was pork. A typical American consumed 269 pounds of meat. The American consumed much more poultry and beef products. The typical American got some 677 calories per day from sweeteners and another 597 calories per day from vegetable oil in 2002. In contrast, the typical Chinese person got only 64 calories per day from sweeteners and only 187 calories per day from vegetable oil. The Chinese diet is surely healthier than the American diet. But in cities, the Chinese are beginning to eat more like Americans. Some 60 million Chinese people (out of a population of 1,300 million) are now considered obese. This comprises about 12% of all adults who live in cities and 8% of urban children.
The obesity issue has been exacerbated by the shift in transportation from bicycle and mass transport to automobiles. As of 2004, there were over 28 million vehicles in China. This number is 90 times the number that existed in 1990. The number of motor vehicles in China has been rising at rates of 15% to 20% per year. The demand for motor vehicles is so great as a result of increasing population, increasing incomes, and a very low price of gasoline. It has been predicted that by the year 2030, China could have more motor vehicles than the United States.
In summary, China is a middle income country. In the communist period, consumption had been held-down as a deliberate matter of policy. But in the reform period, consumption has grown significantly in total and as a percent of total spending. The housing situation has been greatly improved. The diet is much better than it was. Official poverty and malnutrition have been greatly reduced. More automobiles and consumer appliances are available to the population. There seems little doubt that the Chinese people live much better than they did at the beginning of the reform period.
(5) Full Employment and Macroeconomic Instability
Officially in China there is little unemployment. Official statistics showed an overall unemployment rate in China of 3% as of the end of 2002. But as noted earlier, China has been a labor surplus economy. Many workers work temporary jobs. “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.” Many workers work in the informal sector -- the sector that includes small, privately-owned, unlicensed businesses in cities. Between 1996 and 2004, the number of workers in the informal sector almost quadrupled. And many workers are under-employed. As we saw, over-manning in state enterprises was very high until the mid-1990s. Then, the state-owned enterprises laid-off more than 28 million workers between 1993 and 2003. Many of these laid-off workers found jobs in the informal sector. Adjusting the statistics, it has been estimated that China’s unemployment rate was perhaps as high as 10% in 2002 before declining somewhat. Projections indicate that China will have a serious problem of unemployment or under-employment at least through 2015.
Inflation was a problem as well. While officially there was no inflation during the 1960s and 1970s, there was, of course, repressed inflation (that is, a persistent shortages of goods). With the shift toward greater reliance on markets, the inflation manifested itself more as rising prices. An inflationary crisis occurred in 1988, generating severe political repercussions. Another inflationary crisis came in 1993-1994. Overall price stability was finally achieved by 1997. Since 1997, there has not been inflation in China. Between 1998 and 2002, there was deflation. From 1997 to the end of 2002, prices declined 1.5%. Then there was another round of inflation; prices rose rapidly in 2004 before falling back in 2004. The inflation problem in China is shown in the chart below.

As noted earlier, economic growth in China has been very unstable, with large spurts followed by retrenchment. In large part, this reflects the incentives to expand investment built into the system. When the government would decentralize decision-making and when it would relax its supervision, the economy would enter an expansionary phase. But this would also lead to inflation as well as to trade deficits. The inflation was often the result of bottlenecks in transportation or in energy. That is, the expansion would create a desire to use the transportation system and a desire to use energy well beyond the capacity of China to supply either one. As a result of these problems, the Chinese government would resume control and would reduce total spending in China (called “retrenchment”). This would lead to slow economic growth, until the next period of reform and the next expansion. The cycle is shown in the chart on Page 11.

(6) Social Welfare
Social welfare refers to education, health care, and overall economic security. In the area of education, China seemed like a country much richer than it actually is. The percent of the Chinese population who are literate rose from about 20% in 1949 to over 70% by 1978. By the mid-1970s, nearly all those eligible were going to elementary school and also to lower-middle school, compared to only 25% in 1949. Of those who went to lower-middle school, about 60% went on to the upper-middle school (basically similar to an American high school). But only a small portion went on to higher education.

In the pre-reform period, the quality of the education was questionable. China devoted a relatively small amount of its GDP to education (less than 3%). Families bore a high burden of the cost of education. Teacher-student ratios were high (over 40 students per teacher), buildings were of poor quality, and teaching often emphasized rote memory. At various times, the education system was used mainly to inculcate certain political values. This was most significant during the Cultural Revolution when the schools were closed (for secondary schools, they were closed from 1966 to 1968, for universities, they were closed from 1966 to 1970). When the universities re-opened, admission required recommendation from one’s enterprise or commune; such recommendations were based mainly on one’s political “correctness” and on one’s class background. Entrance examinations were abolished; many teachers were purged.

In the reform period, the quality of the education improved. Examinations now determine university entrance. Political study and physical labor have been considerably reduced in importance. But the number of people involved in education changed dramatically, especially in the rural areas. Of those, who start elementary school, only about two-thirds now go on to the lower-middle school. Of those who finish the lower-middle school, only 40% go on to the upper-middle school. These are sharp declines from the pre-reform period. This decline has occurred for two main reasons. First, the dissolution of the commune left no adequate funding mechanism for education in the countryside. Second, the shift to the household responsibility system made children more economically valuable, causing many rural households to withdraw their children from school (especially girls) so that they can work. Today, China devotes about 3% of its GDP to education, the same low percent as it did in the reform period.

While the number of people involved in secondary education has fallen greatly, the number of people involved in higher education has risen greatly. This results from much greater state funding for universities. Indeed, the government has focused its resources on universities. Most university training is scientific and technical. The rate of return to education has been rising in China since the 1990s. By 2001, it has been estimated that every additional year of schooling adds about 10% to the income of an urban Chinese worker and decreases the likelihood of being laid off by one percentage point. Foreign-owned companies, in particular, are bidding up the wages of more educated workers. As a result, the number of university graduates tripled between 2001 and 2005, from about one million to about three million people.

Today, it is estimated that the literacy rate in China is now 91%. This is a typical rate for a middle-income country. Yet even this high rate of literacy leaves 145 million illiterate adults in China (mostly in the older age groups). Overall education attainment is still quite low, although it has been rising. As you can see in the table below, as of 2000, only 19% of the Chinese population age 15 and up had more than a ninth grade education. (By 2004, this was 22%.) The group without formal education at all is mostly female.

Population Age 15 and Up 2000 2004

Above 12th Grade 4.7% 6.7%

9th to 12th Grade 14.4 15.6

6th to 9th Grade 39.1

Up to 6th Grade 32.9

No Formal Schooling 9.0

China has major plans to address its deficiencies in education. Free universal primary education is to be in place by 2015. Meeting this goal will require more government funding than has been forthcoming in the past.

Prior to the reform period, the improvement in health care in China, especially in rural areas, was unprecedented among low-income countries. Life expectancy, which had been only 41 years in the early 1950s, rose to 71 in 2000. Infant mortality was reduced to less than one-third of its 1949 level. The official death rate fell from about 27 per 1000 population in the 1930s to less than 7 per 1000 population in 1986.

There are several factors in this striking achievement. First, nutrition levels improved and food was distributed very equally. While there was still some serious malnutrition, there was little of the starvation commonly found in very poor countries (except in 1961-62). Second, there were “patriotic health campaigns” in the 1950s to mobilize the rural population to have smallpox and TB vaccinations and to significantly reduce the number of flies and mosquitoes. Third, there was the orientation toward Western-style medicine. In 1949, China had only 80,000 hospital beds, and only 10% of them were in rural areas. By 1982, China had over two million hospital beds, and 60% of them were in rural areas. By 1982, there were ten times as many Western-style doctors and fifteen times as many nurses as there had been in 1950. Fourth, there was the focus on preventative, traditional Chinese medicine using the “barefoot doctors” and midwives. “Barefoot doctors” are similar to paramedics. There were about one and a half million of these by the mid-1970s. They received a short training program. They came from the commune, having been chosen by the commune to receive the training. Because they were native to the commune, there was more trust in them than there would have been in outsiders. Commune health centers were available all over China; they offered their services basically free. Some 80% of rural residents were covered by some form of cooperative health care.

The reform period has negatively affected China’s health care system. With the elimination of the commune, no other agency took-over the health care function in rural areas. The number of doctors and nurses in the countryside fell by nearly one-fourth. The number of “barefoot doctors” fell by over three-fourths as there was no commune to pay them. The number of hospital beds per 1,000 rural people fell from 1.5 in 1985 to 0.72 in 2003. The use of health insurance declined dramatically. In rural areas, about 80% of the people now have no health insurance at all. When health insurance is provided at all, it is mainly paid for by individual premiums. Only 1/3 of the cost comes from any government. So China has gone from a situation in which most people received some form of health care provision to a situation in which few people have any access to health care (other than to pay for it themselves out-of-pocket). Even within urban areas, about 1/3 of people have no health insurance at all and the rest have to pay for it out of their wages. Despite the problems with the provision of health care, the chart on the following page show that there has been no decline in the death rate.

Public welfare provision for the elderly has been small in China. In the rural areas prior to reform, the communes were concerned less with providing assistance than with minimizing the numbers needing assistance. This was done especially by maintaining the importance of family obligations (which are specified in various laws including the 1982 constitution). The elderly are expected to live with their grown-up sons (or daughters, if they have no sons). Today, some 91% of rural people age 60 and up live in multi-generational households. Old-age pensions were rare. Because of the importance of family obligations, the number of people supported by rural collectives was estimated at only 0.3% of the rural population in 1982. On the other hand, in the urban areas, workers did receive a pension. This was typically paid by the enterprise for which they had worked. In the urban state-owned enterprises, retirement occurred at age 60 for men (age 55 for women). The full pension was 70% of regular earnings.

China has been facing major problems related to retirement pensions. The population is aging. In a few decades, the number of retirement-age people will grow very rapidly. The state-owned enterprises that provided most of the pensions to urban workers have been reduced in importance. Many of the state-owned enterprises have downsized, forcing people to retire at a younger age than the traditional 60. Many new enterprises operate in highly competitive markets and therefore do not have the profits to pay for pensions for their workers. In rural areas, as people have fewer children, the burden of caring for aging parents has become more and more difficult.

Faced with the potential problems of retirement, China has been attempting to create a national social security system. Part of this social security system is based on mandatory contributions by enterprises and by urban employees. Generally, workers must contribute 2% to 5% of their wages (depending on the region) and enterprises must contribute the rest (bringing the total contribution up to 10% to 20% of wages). In the few years of its existence, the total number of retirees covered by the social security system has risen rapidly. As of 2004, there were 47 million people retired and receiving benefits. On average, each person received about 75% of the average government wage, a generous replacement rate. But so far, this social security system covers only urban formal sector workers. (Some 116 million Chinese workers are covered in this system.) But urban workers in the informal sector (peddlers etc.) and rural workers are not covered. Finally, in the few years of its existence, the new social security system has been plagued with scandals. Enterprises have been unwilling or unable to pay into the system the amount they are obligated to pay. The pension system often has not been able to meet its obligations to current retirees and has not begun to develop reserves to pay for future retirees. Social security in China has a long way to go to properly be able to secure people against the problems of old age.
While the reforms have not affected the provision for the elderly in rural areas, they have affected the provision for the poor. Poverty in China’s rural areas has declined dramatically. The poverty that still exists is usually the result of a reduction in the family labor force (due to illness, disability, or death) or to a large number of children. Under the system of distribution within the commune prior to reforms, such families had a claim on enough food to survive. Under the new system, where income goes directly to households, the system of redistribution has been seriously weakened. (In those areas with the largest number of poor households, mechanisms to effect transfers from the richer households have been hardest to implement.) The Chinese government has still not discovered an organizational form to replace the commune in acting to aid the poor.
In summary, prior to reform, China was indeed remarkable among low-income countries in raising the educational standard of the population, providing for health care and adequate nutrition, and eliminating poverty and malnutrition. Yet it seems that these achievements have been somewhat reversed by the economic reforms. The Chinese government is trying to deal with these reversals. How well it will succeed remains to be seen.
(7) Control of Population Growth
The Chinese population has grown rapidly to some 1.3 billion people (about 1/5 of all of the people on earth). In 1953, there were some 594 million Chinese people. Prior to the mid-1970s, the rapid population growth was not seen as a problem by Chinese leaders; in fact, it was often seen as an economic benefit. But with a limited amount of cultivable area, the population growth has lessened the ability to feed the population. High growth of population has also contributed to the problem of labor surplus in both rural and urban areas. Since the 1970s, the government has undertaken policies designed to reduce the birth rate. The chart on Page 14 shows how successful it has been. The birth rate has fallen to about half the rate of the early 1950s. Once the typical female had more than six children; now she has fewer than 2 (2.2 is the replacement level). Most of the decline is due to the family planning programs: had no programs been in place, it is estimated that the Chinese population might have grown to 1.6 billion by 2000 and 2.4 billion by 2050.

Family planning programs began in 1971 with the later-longer-fewer campaign. Later marriage was to be encouraged, meaning 28 for men and 25 for women in the cities (and 25 and 23 respectively in the countryside). Longer spacing between children meant four years at least in the cities (three years in the countryside). Fewer children came to mean two per couple. The Marriage Law of 1980 set a legal age for marriage (22 for men and 20 for women) and required all couples to practice birth control. The number of births per woman fell from 5.8 in 1970 and 2.7 in 1978, almost exclusively a result of a reduced number of 3rd and 4th children.

In 1980, China adopted the single-child family campaign. The desirability of one child per family began with an educational/propaganda campaign. While the policy applied to the entire country, there was no problem in the cities. Birth rates in the cities are low, constrained by inadequate housing and inadequate child care facilities. The real focus of the single-child family campaign has been in the countryside, where birth rates have traditionally been high. Each area is autonomous in setting its policy. Usually there are incentives for a couple to have only one child. These incentives include wage supplements, improved housing, priority in schooling and medical care, and so forth. There are usually severe penalties for the third child. These can include fines totaling more than a year’s income. Since rural government officials are often rewarded for the number of one-child families in their area, there are great pressures brought to bear on couples, including force. However, sterilizations and forced abortions have not been allowed.

The single-child family policy met with considerable resistance in the rural areas. Partly this resistance resulted because male children provide old-age security in rural areas, as well as extend the family line. Families continue to have children until a male is born. Partly the resistance resulted from the economic reforms. The household responsibility system and the opening to sideline activities have increased the economic value of children, encouraging families to have more. The greater incomes in the rural areas following the reforms reduced the influence of penalties that could be imposed on couples with more than one child. And the elimination of the commune reduced the ability of the collective to apply group pressure on the couple.

The single-child family program created much interest and also some socially undesirable behaviors. Researchers wondered about personal development in a world with no siblings, no uncles or aunts, etc. Others wondered about the age structure of the population, which would get considerably older if each family had only one child. How would the elderly be supported? Still others wondered about the household as an economic unit, since large families often have the flexibility to respond well to changes in market conditions. And others have noted the abnormal sex ratio. In 2000, there were 121 boys for every 100 girls in the age group 0 to 4. Could this cause a future “bachelor problem”? Socially undesirable behaviors included female infanticide, increasing divorce (to increase the chances of having a male child), physical abuse of wives who bore daughters, and so forth.

The single-child family contributed significantly to the lowering of the birth rate. But, as noted, it met with considerable resistance. In 1985, the policy was relaxed considerably; so far, the birth rate has continued its slow decline. The growth in the standard of living will bring incentives for the Chinese to have fewer children, as it has in all developed countries. But given China’s already enormous population, one wonders if natural forces will be too slow for China’s needs.

At present, the age distribution of China’s population serves its economy well. As of 2005, only 28% of Chinese are children and another 12% are seniors. So these 40% are dependents on people who are economically active. This is a low number of dependents. The low number of dependents makes it easier for the Chinese to save and also increases the Chinese labor force. However, this will change. By 2050, it is estimated that 45% of Chinese will be seniors and 25% will be children (the number of Chinese over age 60 will almost triple between 2000 and 2030). This very high dependency rate (nearly 70%) could act to retard Chinese economic development.

(8) Environmental Quality
In many parts of China, rapid economic growth has been accompanied by severe environmental damage. For one example, China’s air is very polluted. The air in China has been polluted because of China’s great reliance on coal for energy. As the problem became more severe, China acted to reduce the use of coal. In the cities, most of the people now use natural gas for cooking instead of the traditional use of coal. However, in rural areas, half of the people still cook using coal and wood. Most electricity is still generated from coal; however, the electricity generating plants have become more efficient in recent years. But as pollution from coal has been reduced, pollution from vehicles has increased. In 1990, China had only 5.5 million vehicles of any kind. By 2005, this number had risen to 43 million. Until 1999, the gasoline that powered these vehicles still contained lead.

China’s water is also very polluted. In cities, less than half of all sewage is treated at all. In rural areas, agriculture pours fertilizers and pesticides into the water supply. According to a 2003 study, some 20% of China’s water is extremely toxic – unsafe for human contact or for agricultural use. In the northern part of China, only about 1/3 of river water meets the standard for human use. Because water has also become scarce, local water agencies keep the water dammed up so that it can be used locally. The dammed water traps all kinds of pollutants. When the dam gates are opened, the highly polluted water is sent into the major rivers.

According to a World Bank study from 1997, air and water pollution cost China the equivalent of 8% of its GDP. According to this study, if China could meet its own air pollution standards, it would avoid some 178,000 premature deaths every year. It would also avoid the 4.5 million person-work-years lost because of illnesses. Another 111,000 premature deaths are caused by indoor air pollution --- mainly indoor coal use. The Chinese government has been making an effort at reducing pollution. Most of the spending has gone for sewage treatment and for pollution control equipment for factories. But China has more than 5,000 brown fields (chemical or solid waste dump sites). None of these has been cleaned up.

As in most countries, the main use of water is irrigation. Wheat farmers are highly subsidized --- they pay a little more than 1/3 of the cost of supplying them water. Wheat is greatly dependent on irrigation as it requires water all year. Given the need and the low cost, Chinese wheat farmers have overexploited groundwater. Predictably, the groundwater table has become lower and lower.
China is also a major cause of global warming. China is estimated to cause about 15% of all global carbon emissions, second only to the 23% emitted by the United States. China is expected to pass the United States as a cause of global warming sometime between 2015 and 2020. Much of this results because of China’s dependence on coal as the source of generation of electricity.

China also faces an enormous problem of the sustainability of its economic growth. Pollution is one of the causes of the degradation of farm land. In western China, seasonal rainfall combined with insufficient ground cover has been causing a serious problem of land erosion. Grass lands and forest lands have been overexploited. Lands have been overgrazed. A major result of this overexploitation and over grazing is that the desert has been growing in size. China has responded with a “grain for green’ program. Chinese farmers are given compensation for up to eight years when they take land out of grain production and covert it to forest land. To date, this policy has taken some 5% of Chinese cropland out of production. Forest cover has been increasing in China as a result of this policy --- from about 5% of all Chinese land in 1962 to about 18% of all Chinese land today.

In summary, there is no question that China faces major environmental problems. In the five year plan of 2006 to 2010, the government announced a reorientation toward more sustainable growth. Economic growth is to occur with less environmental damage. It remains to be seen whether China can maintain a high rate of economic growth while causing less environmental damage. It also remains to be seen whether Chinese attention to its environment will affect the high rates of economic growth China has been experiencing.

(9) Economic Freedom
Defining economic freedom is not easy. If it is defined as the freedom to buy what one wishes, to produce as one wishes, and to work where one wishes, then China clearly did not possess economic freedom. Freedom to buy was constrained by rationing of food and housing and by the lack of other consumer goods. Freedom to produce was constrained by government policy. There was little freedom to work, as workers were assigned to jobs for life.

But since the 1980s, there has been greater freedom in China. There are more consumer goods available and a greater proportion of them are sold in free markets. Enterprise directors have more autonomy in production decisions. There are more opportunities to begin private enterprises. There are also significantly fewer restraints on production decisions of peasant households. However, it is still relatively hard to choose one’s job or to leave one’s place of employment. And despite legal changes, workers have no real say in enterprise decisions. Workers’ freedoms are also inhibited by the general condition of labor surplus and by the control over migration of the population. Clearly, the freedoms of consumers, workers, and peasants are limited greatly by the absence of political democracy.

To supporters of the paradigm of liberal market capitalism, freedom means the absence of governmental restrictions. To supporters of Marxian paradigms, freedom requires “empowerment” so that each person has the necessary power to make decisions on matters affecting his or her life. By either definition, China does not possess economic freedom as yet although there is considerably more freedom than there was before 1978.

(10) Conclusion
Prior to the reform period, China was able to achieve a reasonable rate of economic growth by international standards, although the rate of growth did not meet Chinese goals. The growth was basically extensive growth, achieved in large part by a very high investment rate. Through its policies, China was able to achieve a very equal distribution of income and very high standards of educational attainment, health, and reduction of poverty for such a poor country. However, China’s performance in relation to productivity and efficiency were poor. Its standard of living was very low, especially in terms of consumption. And it faced considerable problems of under-employment and macro-economic instability.

The reforms involved basically a decentralization of economic activity and a significantly increased role for markets. In the reform period, economic growth rates rose at record rates. This new growth was based on a much improved productivity performance. At least some of the improved productivity was due to the changed incentives facing producers. The economic growth led to a great rise in incomes and in consumption. Poverty has been reduced. Housing has improved. The diet has improved. Consumption of consumer durables, such as automobiles, has increased. China has become a middle-income country. However, China began to experience much greater inequality. Educational attainment, health care, and welfare have all deteriorated. In agriculture, no new institution arose to replace the commune in providing investment or in providing economic security. The problem of labor surplus has become worse than before. China is currently facing an environmental crisis that makes it likely that its high rates of economic growth are not sustainable. So there have been great successes and great problems with the Chinese reforms.

Thus far, the reforms seem to have generated a momentum of their own, going well beyond what was originally intended. As incomes rise, the diet will shift toward more fruits, vegetables, and especially meats. This shift will require a wholesale change in the system of agricultural production. As foreign trade has expanded, domestic industries have been affected, leading to a wholesale change in the system of industrial production. As this is being written, China is in a state of turmoil. While political democracy is not on the horizon, there have been public protests on a relatively large scale. The current Chinese government has stated the goal of moving even more toward a market economy while trying to rectify some of the problems that have occurred. How well it will succeed will be an interesting story.

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