
Economists vs. historians

The traditional economy

Beginnings of industrialization, 1912-37

War and civil war, 1937-49

Legacies of pre-1949 economy

1949 seems to be a divide in China’s history

Not only is form of government radically different China has grown rapidly since 1949 – despite
some disastrous policies under Mao

Prior to 1949, China never exhibited modern
economic growth

Historians view 1949 as turning point, while
economists believe China was actually successful
in early part of 20th century, i.e., it would likely have
grown without the socialist revolution
* See Myers (1991)

Economists stress role of economic continuity,
i.e., favorable conditions either side of 1949; also,
witness growth of Hong Kong and Taiwan after
1950s

Historians stress different social conditions
either side of 1949 – prior to revolution:
- unfair distribution of land/other assets
- corrupt political power preventing growth
- increased population pressure on limited
resources
Acceleration of growth due to new set of
conditions after 1949, i.e., revolution provided
way to solve problems


Traditional Agriculture:
- China very rural – 90% living in countryside
- farm technology consisted of selected seeds (rice),
organic fertilizer (human and animal), and irrigation
- required large and intensive application of labor – first
in Lower Yangtze, spread to other areas where irrigation
was feasible
- supported growing population – 72 million (1400) to 381
million (1820) – 36% of world population
- China accounted for ~ 30% of global GDP in 1820

Commercialized Countryside:
- densely populated countryside supported network of
markets, especially Lower Yangtze and Pearl River
deltas
- regions tied together by water transport along major
rivers, plus Grand Canal between Lower Yangtze and
North China Plain
- supported commercialized pre-modern economy with
some sophisticated institutions, and competitive
markets based on small-scale households “bottomheavy” (Rawski, 1987)
(i) Institutions – paper money, written contracts, banks,
legal resolution of disputes
(ii) Markets – competitive in goods and inputs
(iii) Real social mobility despite inequality – no castes
or aristocracy defined by birth
(iv) Small-Scale – household-based economy, with
agricultural and non-agricultural production on smallscale, but linked to different markets
- household/small-firm specialization common, e.g., silk
production split into separate tasks vertically
- chains of small processors and middlemen linked
household producers, merchants and consumers

Crisis of Traditional Economy:
- by end of 18th Century, most cultivatable land farmed, few
opportunities for investment - despite income of elite
- Qing dynasty in decline – public food reserves declined after
1790s; poor maintenance of key irrigation systems – famines
due to floods/droughts
- social stresses fell disproportionately on poor - land
distribution not unequal, but income inequality significant
“The Chinese peasant is like a man standing on tiptoe up to
his nose in water – the slightest ripple is enough to drown
him” (Tawney, 1964)
- China entered century-long decline just as Europe grew

Failed Response to West and Japan:
- foreign encroachment on China occurred at a time of
dynastic weakness and economic crisis
- China had long run a trade surplus with world (silk, tea
and porcelain), paid for with silver
- by early-1800s, Britain becoming dominant power,
sought a commodity to redress trade imbalance
- opium, grown in India, exported through Hong Kong –
China faced economic (falling supply of monetary
metals) and social (addiction) problems

Failed Response to West and Japan:
- attempts to stop opium led to war with Britain in 1839,
defeat resulting in Treaty of Nanking, 1842 – Hong Kong
ceded to Britain, 5 Treaty Ports opened under foreign
control
- China lost four more foreign wars, notably Sino-Japanese
war of 1895, resulting in seizure of Taiwan
- 1895 Treaty of Shimonoseki resulted in opening up of China
to foreign investment, concentrated in Treaty Ports, e.g.,
Shanghai, governed by foreign powers
- Qing government eventually collapsed in 1911 following
foreign occupation of Beijing and 1901 Boxer Protocol –
control over tax revenues ceded to foreign powers

Failed Response to West and Japan:
- China’s opening to outside world coincided with long
period of national humiliation
- Beginnings of modern industry in China date to 1895
- Foreign investment concentrated in Treaty Ports, not
subject to Chinese jurisdiction – 80 at their peak,
Shanghai most important
- Extra-territoriality (exemption from domestic law) and
control of Treaty Ports politically very controversial –
even influences attitudes in modern China

Economic Decline by 1913:
- China’s population of 437 million had fallen to 25% of
world’s population
- China’s GDP had fallen to 9% of global GDP, and
GDP/capita had fallen to 40% of world average from
90% in 1820
- from being a center of civilized world, China had fallen
to position of underdevelopment and backwardness
- impact of West highly traumatic in terms of decline,
predatory nature of colonialism, and failure of Chinese
government to deal with challenge

After 1911 - period of warlord domination,
fragmentation and civil war, until unification by the
Nationalist Party in 1927

1927-37, the “Nanjing decade”, China had relative
peace

Industrial development began, along with modern
transportation and communication links

Nationalist government invested in education and
agricultural extension

Modern factory production
producing 2% of GDP by 1933
grew
8-9%,
1912-36,

Two patterns to industrial growth:
(i) Treaty Port industrialization: modern industrial enclaves
developed in ports, e.g., 42% of output in textiles, with 70%
produced in Shanghai, Tianjin and Qingdao
Industrialization started by foreigners, but Chinese
capitalists became key actors – by 1930s, 78% of value of
factory output from Chinese-owned firms
(ii) Manchurian industrialization: investment in heavy
industry, mining, and railroads by Japanese government objective to produce raw materials for their domestic
industries, but little local skill-transfer
China proper
Manchuria
Market
Domestic China
Japanese industry
Ownership
Chinese, foreign
Foreign
Structure
Light, consumer
goods, e.g., textiles
Heavy, mining,
producer goods, e.g.,
steel (Anshan)
Skill formation
Steady accumulation
Little skill transfer
Linkages
Backward
Few or none

Modern sector did grow in 1920-30s, but unclear
what impact was on traditional sectors
- Rawski (1989) argues positive impact of growing
demand from industry, cities and trade on
agriculture, handicrafts, and transport
- beyond areas around coastal cities, most farmers
continued to operate at subsistence level

Industrialization started, but had not yet begun to
fundamentally change structure of Chinese
economy

Japanese influence in Manchuria increased and
extended 1905 to 1931, followed by Japanese
invasion of China proper in 1937

China then involved in almost unbroken period of
warfare until the Communist victory in 1949

Japanese
invasion
weakened
Nationalist
government, and Communist guerillas gained
legitimacy fighting Japanese

End of Pacific war in 1945 laid stage for civil war
between Nationalists and Communists

War obscured important changes over this period:
(i) Rise and fall of Japan-centered East Asian economy: Japan
at center (manufacturing and services); inner circle of
Taiwan and Korea (food producers); middle circle of
Manchuria (intermediate input supplier); outer circle of
China proper (sites for investment) – collapsed in 1945
(ii) Rise of Manchuria: building of industrial economy by
Japanese had long-term impact on China – by 1949,
accounted for majority of its industrial capacity
(iii) State intervention: 66% of industry state-run by 1947
(iv) Inflation: Nationalists printed money to finance war –
severe macroeconomic imbalances

Immediate legacy for Socialist era (1949-78):

- disruption/damage to economic infrastructure
- financial chaos with hyperinflation
- China still very poor
Experiences aided transition to socialism:
-
strong aversion to foreign influence – adoption
of inward-looking socialist development
-
Nationalists considered incompetent
-
willingness to accept repression
-
inherited heavy industry developed in Manchuria

Benefits for post-1978 economy:
- experience of household-based economy critical to
meeting market needs
- rapid growth of “township and village enterprises”
(TVEs)
in
densely
populated
commercialized
countryside – met needs neglected under socialism
- Lower Yangtze region regained prominence, and
Northeast receded in importance
- SEZs echoed Treaty Ports, but under Chinese
jurisdiction, part of “dual track” approach, and helped
re-establish links between Hong Kong, Taiwan and PRC

China’s current economy, and its development,
show a rediscovery of the traditional system

Did the traditional economy fail? Only in the sense
that it was repressed as a result of war and civil
war, and socialism making it seem irrelevant

Traditional economy has rebounded, with
commercial/entrepreneurial
networks
proving
relevant again as economic reforms have
proceeded