CLAIRE NGUYEN, B.A. A THESIS Submitted to the Graduate Faculty

THE RISE, FALL AND REBIRTH OF

THE CHINESE ECONOMY

by

CLAIRE NGUYEN, B.A.

A THESIS

IN

ECONOMICS

Submitted to the Graduate Faculty

of Texas Tech University in

Partial Fulfillment of

the Requirements for

the Degree of

MASTER OF ARTS

Approved

Masha Rahnama Chairperson of the Committee

Terry Von Ende

Accepted

Fred Hartmeister

Dean of the Graduate School

May, 2009

COPYRIGHT

by

CLAIRE NGUYEN

May, 2009

Texas Tech University, Claire Nguyen, May 2009

ii

ACKNOWLEDGMENTS

I would like to thank the entire faculty and staff of the Department of Economics

and Geography. Also, I would like to extend a special thanks to my family and friends,

whose support was invaluable during this long process.


iii

TABLE OF CONTENTS

ACKNOWLEDGMENTS ii LIST OF TABLES v LIST OF FIGURES vii PREFACE ix CHAPTER

I. THE FOUR GREAT INVENTIONS 1

1.1 Paper and Printing 2 1.2 Gunpowder 12 1.3 Compass 19 1.4 Conclusion 21

II. CHINA AND THE INDUSTRIAL REVOLUTION 22

2.1 Failure of Demand for Technology 23 2.2 Failure of Supply for Technology 29 2.3 Confucianism 31 2.4 Conclusion 34

III. THE EFFECT OF MAO ON CHINA’S ECONOMY 36

3.1 The Great Leap Forward (1957-1960) 37 3.2 The Great Proletarian Cultural Revolution (1966-1976) 43 3.3 Impacts on the Economy 50 3.4 Conclusion 51

IV. CHANGES TO CHINA’S ECONOMY BY DENG XIAOPENG 52

4.1 Four Modernizations 52 4.1.1 Industrial Industry 53 4.1.2 Agricultural Industry 54 4.1.3 Scientific Industry 55 4.1.4 National Defense 55

4.2 Introduction of the Market System 56 4.3 Open-Door Policy 57 4.4 Impacts of Reforms on the Economy 59 4.5 Conclusion 68

V. FUTURE OF CHINESE ECONOMY AND ITS AFFECT ON THE UNITED STATES 70

5.1 Comparison of the United States’ and Chinese Economies 70


iv

5.2 Is China Growing at the Expense of the U.S.? 73 5.3 Some Criticisms of Trading with China 79

VI. SUMMARY AND CONCLUSION 82

BIBLIOGRAPHY 83


v

LIST OF TABLES

1. Per Capita Acreage of Cultivated Land A.D. 2-1887, Chao, Kang, Man and Land in Chinese History: An Economic Analysis, Stanford University Press, at 89.

2. Civil Service Examination in the Qing Period, at http://mmtaylor.net/Literacy_Book/DOCS/10.htm.

3. Employment figures, 1957-1966, Roderick MacFarquhar, The Origins of the Cultural Revolution, Volume 3: The Coming of the Cataclysm 1961-1966, 34 (1997).

4. Number of communes and their sub-units, Roderick MacFarquhar, The

Origins of the Cultural Revolution, Volume 3: The Coming of the Cataclysm 1961-1966, 67 (1997).

5. Per capita consumption of major food items, 1957-1960, Roderick

MacFarquhar, The Origins of the Cultural Revolution, Volume 3: The Coming of the Cataclysm 1961-1966, 14 (1997).

6. National Income and Capital Accumulation (In Billion Yuan), Gregory C.

Chow, The Chinese Economy, 199 (1987). 7. Growth of National Income, China in the Era of Deng Xiaoping: A

Decade of Reform, 159 (Michael Y. Kau et al. eds., 1995). 8. Sectoral Growth Rates and Shares of National Income, China in the Era

of Deng Xiaoping: A Decade of Reform, 159 (Michael Y. Kau et al. eds., 1995).

9. Structure of Employment, China in the Era of Deng Xiaoping: A Decade

of Reform, 163 (Michael Y. Kau et al. eds., 1995). 10. Savings and Investments, China in the Era of Deng Xiaoping: A Decade of

Reform, 164 (Michael Y. Kau et al. eds., 1995). 11. Foreign Trade Participation Ration, China in the Era of Deng Xiaoping:

A Decade of Reform, 168 (Michael Y. Kau et al. eds., 1995). 12. Standard of Living, China in the Era of Deng Xiaoping: A Decade of

Reform, 174 (Michael Y. Kau et al. eds., 1995).


vi

13. Per Capita Housing Space and Savings, China in the Era of Deng Xiaoping: A Decade of Reform, 175 (Michael Y. Kau et al. eds., 1995).

14. Historical Comparison of United States’ and China’s GDP (Millions of

U.S Dollars, CRS Report RL33604, Is China a Threat to the U.S. Economy?, by Craig K. Elwell, March Labonte and Wayne M. Morrison Table 6.

15. Estimates of U.S., Japanese, and Chinese GDP and Per Capita GDP in

Nominal U.S. Dollars and PPP, 2006, CRS Report RL33604, Is China a Threat to the U.S. Economy?, by Craig K. Elwell, March Labonte and Wayne M. Morrison Table 7.

16. Global Insight Projections of U.S. and Chinese GDP and Per Capita

Income, CRS Report RL33604, Is China a Threat to the U.S. Economy?, by Craig K. Elwell, March Labonte and Wayne M. Morrison Table 8.

17. U.S. Merchandise Exports to Major Trading Partners in 2001, 2005, and

January-November 2006, CRS Report RL33604, Is China a Threat to the U.S. Economy?, by Craig K. Elwell, March Labonte and Wayne M. Morrison Table 11.

18. U.S. Trade with China in Advanced Technology Products: 2000 and 2005,

CRS Report RL33604, Is China a Threat to the U.S. Economy?, by Craig K. Elwell, March Labonte and Wayne M. Morrison Table 14.

19. Leading Foreign Suppliers of U.S. Computer Equipment Imports: 2000-

2005, CRS Report RL33604, Is China a Threat to the U.S. Economy?, by Craig K. Elwell, March Labonte and Wayne M. Morrison Table 13.


vii

LIST OF FIGURES

1. Paper-making Process, Tsien Tsuen-Hsuin, Paper and Printing, in

Science and Civilisation in China 65 (1985). 2. Paper-making Process, Tsien Tsuen-Hsuin, Paper and Printing, in

Science and Civilisation in China 65 (1985). 3. Paper Mould, Tsien Tsuen-Hsuin, Paper and Printing, in Science and

Civilisation in China 65-67 (1985). 4. Finished Paper, Tsien Tsuen-Hsuin, Paper and Printing, in Science and

Civilisation in China 65-67 (1985). 5. A page from the Diamond Sutra, the oldest known printed book in the

world, printed in the 9th year of Xiantong Era of the Tang Dynasty, i.e. 868 CE., at http://upload.wikimedia.org/wikipedia/en/d/d2/Jingangjing.jpg.

6. Calligraphy of Orchids and Bamboo by Cheng Hsieh (1693-1765). Tsien

Tsuen-Hsuin, Paper and Printing, in Science and Civilisation in China 364 (1985).

7. The “Magic-Fire Meteoric Bomb That Goes Against The Wind”, HLC, pt.

1, ch. 2. p. 7a. 8. Early Chinese Firepower, Jack Kelly, Gunpowder: Alchemy Bombards,

of Pyrotechnics: The History of the Explosive that Changed the World, 2 (2004).

9. Floating Fish, at http://www.fengshuicorner.com/?pg=articles&res=8.

10. Some of the Earliest Chinese Compasses, at http://www.fengshuicorner.com/?pg=articles&res=8

11. Population Growth of China, Wolfram Eberhard, A History of China, 273

(1969). 12. Population Growth of China, Wolfram Eberhard, A History of China, 274

(1969). 13. Portrait of Qianlong Emperor in Court Dress, at

http://upload.wikimedia.org/wikipedia/commons/thumb/5/59/Portrait_of_t


viii

he_Qianlong_Emperor_in_Court_Dress.jpg/454pxPortrait_of_the_Qianlong_Emperor_in_Court_Dress.jpg.

14. Lord Macartney’s Embassy to China, 1793, at

http://upload.wikimedia.org/wikipedia/commons/thumb/e/e4/LordMacartneyEmbassyToChina1793.jpg/800pxLordMacartneyEmbassyToChina1793.jpg.

15. The Chinese Character “Li”, at

http://www.aarweb.org/syllabus/syllabi/g/gier/308/308terms.htm. 16. Mao Zedong, Yong Yap & Arthur Cotterell, Chinese Civilization: From

Ming Revival to Chairman Mao, 159 (1977). 17. Large Poster of Mao, Yong Yap & Arthur Cotterell, Chinese Civilization:

From Ming Revival to Chairman Mao, 205 (1977). 18. Large Department Store in Peking with Mao “Signs”, Yong Yap & Arthur

Cotterell, Chinese Civilization: From Ming Revival to Chairman Mao, 191 (1977).


ix

PREFACE

The story of the rise of modern China from relatively isolated and unknown

country to the next potential world super-power is astonishing. Many factors have

influenced this change, including the nation’s rich history and civilization that spans over

four thousand years. Interestingly, for the large part of the last thousand years, China had

one of the world's largest economies. However, this began to change for the worst during

the middle of the nineteenth century. During the twentieth century, under the leadership

of Mao Zedong, the People's Republic of China underwent numerous social movements,

such as the Great Leap Forward and the Cultural Revolution, which greatly wounded the

China’s economy. Since 1979, China has opened itself to the outside world by

implementing Deng Xiaoping’s economic reforms. Only then has China once again

proven to be a rising world's economic power, with an average annual growth rate of 9.7

percent real GDP.

This study provides an analysis of the fascinating Chinese economic history from

ancient to modern China. It attempts to explain how China has gone from the world's

largest economy to a desperately poor nation and finally resurrected to the second-largest

economy in modern times. Also, this study examines how the rise of the Chinese

economy will affect the United States. Chapter one highlights the four great inventions

of ancient China and how its affluent culture enabled China to be the world's economic

super power. With its many great inventions, it is surprising that China did not benefit

from the Industrial Revolution of the nineteenth century. Chapter 2 attempts to answer

the famous paradox: why did China fall back during the Industrial Revolution? Chapter 3


x

discusses the dysfunction of Mao Zedong's economy and why during this period, China

was one of the poorest countries in the world. Chapter 4 presents China's economic

reforms and how these reforms forever changed the fate of China's economic position in

world history. Chapter 5 expands on how China's dramatic economic growth after the

reforms has affected the world's economy, specifically that of the Unites States. Finally,

the conclusion will review the study with some reflections and concluding remarks.


1

CHAPTER I

THE FOUR GREAT INVENTIONS

With the dazzling fireworks, flashing lanterns, and intricate precision, the four

hour Beijing Olympic Games Opening Ceremony was simply awe-inspiring. There were

billions of people watching this opening ceremony for the 2008 Summer Olympics,

which was held in the newly built National Stadium, also known as the Bird's Nest. It

was not only an opening ceremony for an international sporting competition, but also an

indicator that China is quickly ascending in the world hierarchy in the twenty-first

century. It is very hard to imagine that just a few decades ago; China was still an

impoverished, stagnant country. Hosting the 2008 Olympics was a chance for China to

flaunt its new world-class status, its extremely impressive four thousand years of

continuous civilization, and its hospitality to the world. To highlight the country’s

technological ingenuity, the opening ceremony featured the four great ancient Chinese

inventions: paper, printing, the compass, and gunpowder. Among the four great

inventions, both papermaking and printing contributed significantly to the spread of

human civilization by permeating the daily lives of almost every other civilization.

This chapter will be divided into three sections. The first section discusses the

origins and applications of paper and printing. The second section looks at gunpowder,

one of the most powerful inventions in the history of mankind. Finally, the last section

examines the development of another great invention, the compass, which enabled man to


2

travel great distances on open water. These four great inventions demonstrate China’s

capability for great technological progress.

1.1 Paper and Printing

The invention of paper in China, one of the great building-blocks for the existence

of the modern world today, first appeared in the Western Han Dynasty (206BC - 23AD).1

Around the second century, Tshai Lun, a court official, invented the paper-making

process which involved water evaporation from a felted sheet of fibers.2 The three main

elements for the production of paper are fibers, water, and a mould. The ancient Chinese

chose plants that were cheap in cost and rich in cellulose, such as bast plants (hemp, jute,

flax), tree bark (paper mulberry), grasses (bamboo), and fibers (cotton) as raw materials.

Among these, hemp and cotton produce the highest yield of fibers and were used mainly

for the textile industry; thus, mulberry and bamboo were the main raw materials used for

the production of paper in China.3

After preparing the raw materials and soaking them in water for a period of time,

a mould was used to lift the floating fibers and form a thin layer of these fibers. The idea

of lifting up the disentangled fibers while allowing the water to escape is the very essence

of paper-making. The tool that enabled this key step is the mould, which could have been 1 “Four Great Inventions of China- Paper.” ChinaCulture.org.http://www.chinaculture.org/gb/en_aboutchina/2003-09/24/content_26514.htm. 2 Tsuen-Hsuin, Paper and Printing, 1-2.

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countries. A famous artistic work that used paper as a decorative tool was a set of forty

six pictures of the Keng Chih Thu. Additionally, Chinese artists weaved very thin paper

strips in black and white, or in color, into a sheet that was accompanied by Emperor

Khang-Hsi handwritten-poems.7 Paper was also used as a substitute for furnishings,

household articles, and festival objects. The use of paper kept progressing until today,

where it is widely used in media, business, and numerous household activities.8 It is

doubtful that paper could have found its way into everyday life without the invention of

printing for efficient reproduction.

The Chinese had practiced printing from woodblocks since around the eighth

century.9 Printing became popular during the Sung dynasty (960-1279 AD), when the

Buddhists began printing the Tripitaka and the Chinese government sponsored a major

project of printing the Confucian classics.10 Printing continued to develop into an

advanced art, producing traditional works in classics, history, religion and literature until

the Ming dynasty (1368-1644 AD).11 The Ming dynasty expanded the use of printing in

society by adding other printing subjects such as novels, music, industrial arts, travel

accounts, and scientific treatises. During the nineteenth century, photolithography first

7 ibid., 90-91.

8 ibid., 84-85.

9 ibid., 1.

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11 ibid., 159-72.


7

made its appearance in China by the Catholic Thu-se-wei Press in Shanghai. In 1897, the

Commercial Press was founded in Shanghai, and later became the largest printing house

in Asia. The founding of the Commercial Press marked a new age for Chinese

intellectuals and educators.12

While the many techniques and uses of paper-making were prevalent, it is

difficult to find information regarding woodblock printing in Chinese literature. Wood

from a variety of trees such as pear, apple, and apricot were used for printing blocks. The

most common method to prepare blocks from wood is to cut with the grain with a straight

or irregular edge. Then, a professional calligrapher would transcribe the manuscript on

thin sheets of paper to prepare for engraving and printing. After the calligrapher proof-

read the carving, the printer used a round inking brush, which was dipped in the ink, and

brushed on the elevated edge of the carved block. Immediately following the application

of the ink, a sheet of paper was placed on top of it and a rubbing pad brushed lightly over

the paper transferring the characters or pictures onto the paper.13 An example of a

finished book is shown in figure 5.

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Metallic movable type enabled the Ching dynasty to engage in many gigantic

printing projects, such as the production of 250,000 bronze characters to print sixty-six

copies of the Grand Encyclopedia Thu Shu Chi Cheng in 1725. There were also a few

private printers who undertook the bronze movable printing method. One of the most

notable private printers was Lin Chun-Chi, who spent 200,000 silver taels for a period of

twenty-one years from 1825 to 1846, on cutting some 400,000 Chinese characters. His

work invented a font known as Fu Thien Shu Hai, which was then used widely in many

books on phonology, medicine, and military strategy.14

The invention of paper and printing in China was a milestone in the history of

human civilization. Besides making the process of recording human ideas and creativity

easier, paper also has had many other uses in everyday life. Also, logically paper was

the precursor for printing, which plays a significant role in many facets of human life,

such as politics, economics, entertainment and art. We have witnessed the impact of

these two inventions during the transformation of Europe in the fifteenth century from

medieval times to the modern age.15

In general, paper and printing had the same applications in the West as in China,

but it had different influences upon each culture. Paper seems to have served more

purposes in China than writing and documents. It was used for wrapping, for medical

purposes, and for making many other everyday articles. In the ninth century, paper

became a medium of exchange and business transactions. All of this occurred before

14 ibid., 201-17.

15ibid., 360.


10

paper was first introduced to the Europeans. In China, paper had another significantly

important impact on the culture. It was a medium in Chinese fine art, chiefly for

calligraphy and painting. An example of this calligraphy is presented in figure 6. This is

the main difference in the contribution of paper between the West and China.16

16 ibid., 360-63.

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Printing had a similar purpose for book reproduction in the West and China, but it

had a larger impact in European society than in China. It was a catalyst for the European

transition from the Medieval Age to the Renaissance and for the Reformation. Almost

everything in the development of the modern age, such as the establishment of national

language and indigenous literature, the encouragement of nationalism, an educated

population, social mobility and the spread literacy could be traced back to the advent of

printing in the West. Therefore, the Western printing press gradually became

mechanized and more sophisticated, eventually giving birth to a new but powerful

industry: mass production and distribution of publication.17 On the other hand, in China,

printing carried strong traditional moral implications and thus remained as a handicraft to

disseminate knowledge without enough incentive to improve the process with

technological changes.18

1.2 Gunpowder

The differences in paper and printing reflect the distinctive attitude in Western

and Chinese culture. There is a sense of ever-changing life and a thirst for intellectual

development in the West. In contrast, China tends to preserve the tradition that

emphasized proper human relationships and social order by studying the moral teachings

17 ibid., 367-69.

18 ibid., 377-80.


13

found in the Confucian doctrine. Such different mentalities could also explain why the

Chinese invented gunpowder but failed to adequately develop their invention.

It is widely recognized that the invention of gunpowder was one of the greatest

discoveries of medieval China. Many historical accounts indicate that gunpowder was

first introduced sometime at the end of the Thang dynasty in the ninth century. Sometime

in 850 AD, the first reference to the mixture of saltpeter (niter), sulfur, and carbon was

first found in a Taoist book.19 It is interesting to note that the Taoist alchemists were

actually looking for life-prolonging elixirs and material immortality when they happened

to discover the first formula for gunpowder. This formula was first mentioned in

Western publications in 1044 AD, two hundred years after the first mention in the Taoist

book.20 The Chinese called this mixture huo yao, "fire drug."21

The essential element for "fire drug" is saltpeter (niter), which was abundant in

China as a white crust on certain soils. Chinese alchemists observed that normal salt

broke down when exposed to heat of 335 centigrade, letting lose virgin oxygen that

would burn any surrounding fuel, such as sulfur. After a period of trial and error, the

Chinese discovered an ideal proportion of saltpeter in the mixture to produce "fire drug."

Besides sulfur, these alchemists added another carbonaceous fuel into the mixture which

had long been used for heating in daily life: charcoal. Saltpeter functions as a burning

substance that creates an amount of gas that takes up more space than sulfur and charcoal. 19 Needham, Military Technology; The Gunpowder Epic, 1-2.

20 ibid., 7-8.

21 Kelly, Gunpowder: Alchemy Bombards, of Pyrotechnics: The History of the Explosive that Changed the World, 2.


14

When this mixture of gunpowder ignites, it generates an enormous amount of gas in

combination with extreme high heat. This process created all of the effects of

gunpowder.22

The ancient Chinese have been known for their famous toxic smokes and smoke-

greens since the fourth century BC.23 The invention of gunpowder in the ninth century

AD further transformed China's military history. Almost as soon as the Sung dynasty

began in 960 AD, "fire drug" became an indispensible part of the Chinese military.

During this era, China enjoyed a flourishing culture, with a capital city population three

times that of Rome and new inventions including the creation of movable type and the

magnetic compass. However, their military achievements were not on par with their

cultural and technical achievements. Thus, when the Sung dynasty felt threatened by

tribes from the interior of Asia, such as the Jurchens, there was a pressing need to apply

the new invention of gunpowder into the military.

In 969 AD, a Chinese general, Yo I-fang, presented a new model of fire arrows.

The emperor rewarded this invention with a gift of fine silk. The next discovery among

many military possibilities of gunpowder is the explosive bomb, consisting of a higher

gunpowder proportion, encased in bamboo or paper. The Chinese called it the

"thunderclap bomb," due to its ability to cause a loud sound when detonated.

Interestingly, the bomb was more suitable to frighten the enemy, rather than cause serious

injury. Regardless of the Sung dynasty's effort to empower their military, the Jurchens 22 ibid., 5-6.

23 Needham, Military Technology; The Gunpowder Epic, 2.


15

successfully captured the Sung's capital in early 1127 AD, establishing the Chin dynasty.

This dynasty came to the end of its reign in 1231, when the rising Mongolian tribe

attacked their land. For over one hundred years of their rule of China, the Chin

developed a new bomb called the "heaven-shaking thunder crash bomb", which was used

against the Mongols. Because of its richer mix of saltpeter, this bomb surpassed the

"thunderclap bomb" causing damage as large as an area of forty square yards. Another

development during the Mongolian war was the "flying-fire spear," which was a regular

spear that was packed with gunpowder. As inventive as these two weapons were, they

were only powerful enough to temporarily scare the Mongols away; the Mongols

ultimately prevailed, establishing the Mongol empire after defeating the remnants of the

Sung Chinese in southern China.24

The Mongols acquired gunpowder technology from the Chinese and continued to

develop it through the thirteenth and the fourteenth centuries. By this time, Chinese

engineers and technicians had developed several new bombs with fearsome names such

as the "Dropping from Heaven bomb." 25 It consisted of dozens of incendiary packets in

a metal case that was about the size of a bushel. Figure 7 shows an illustration of one of

these bombs. The Chinese used to launch it in the middle of the night onto the enemy’s

camp, causing mass confusion and even turning the enemy to attack each other.26

24 Kelly, Gunpowder: Alchemy Bombards, of Pyrotechnics: The History of the Explosive that Changed the World, 9-13. 25 ibid., 14.

26 Needham, Military Technology; The Gunpowder Epic, 183.

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opening in the center of the powder to deliver hot gases for more power. This invention

was one of the most sophisticated technologies in the history of China's firearms.27

In the late thirteenth century, the Chinese invented the world's first gun. As early

as the tenth century, the Chinese had been using "fire lances", which were made from

bamboo tubes. The fire lances had evolved over the years in size and utility. At one

point, the fire lances were so big that the Chinese war technicians had to put them on

wheeled carriages. They were used to fire rockets. This piece of technology was called

"erupters" or cannons.28 Some examples of this technology are shown in figure 8.

27 Kelly, Gunpowder: Alchemy Bombards, of Pyrotechnics: The History of the Explosive that Changed the World, 14-15. 28 ibid., 16.

Figure 8-

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Nguyen, Mayy 2009


19

Eventually, the Chinese realized the effectiveness of a weapon depends largely on

its projectile. The fire lances gradually evolved with metal tubes that emitted projectiles.

This was the first true gun in the history of human civilization. While the first gun

appeared in China in the late 1200s, it is interesting to note that an account of the gun

appeared in European literature in the early 1300s. It is believed that within such a short

period of one hundred years, guns must have been carried to Europe by travelers to the

East and copied thereafter. 29 The Chinese were also responsible for one of the most

important tools of modern navigation.

1.3 Compass

The Chinese were credited for one of the greatest scientific inventions, the

compass, which revolutionized open water traveling by providing accurate navigation.

The Chinese had discovered the effect of the loadstone in the fourth century. However,

it was widely used in China for a branch of fortune-telling called feng shui, rather than

for navigation. Feng shui is a practice of positioning objects in certain direction that

would bring good fortune to the owner. Thus, the Chinese used the compass to arrange

household objects such as doors, windows, beds, furniture and so on according to feng

shui guidelines. Five centuries later, the use of the compass for navigation was

distinctively recorded during the Han Dynasty. One of the earliest mentions of the

compass in Chinese literature was made in 83 AD under the name "south pointer." The

29 Glick et al. eds. Medieval Science, Technology, and Medicine: An Encyclopedia, 211.

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21

By 600 AD, the Chinese learned that magnetized iron brushing against loadstone

worked as well as the original one, except it is even more durable. Not until around 800

AD, did the Chinese take their compass aboard ships and use it for navigation for trips as

far as India. Among the many elongated trips, one of the ship’s captains observed that

iron needles floated more easily in oil than water. The modern compass was invented

soon after, when another Chinese inventor combined oil, a wood chip, and compass

needle in a ceramic jar with a glass top. The spread of the compass did not reach Europe

until 1150 AD, which made extended open-sea travel possible.30

1.4 Conclusion

Ancient China was the paragon of technological vibrant civilizations. Beginning

with paper and printing, which revolutionized the way that the world communicated,

China was at the forefront of developing new technology. Interestingly, while many

associate the Chinese with the creation of gunpowder, they were also able to develop the

world’s first true gun. Also, the Chinese invented the compass, which allowed for

civilizations to interact and trade over long and vast distances. Arguably, China was the

most advanced civilization for much of ancient history. With this in mind, one cannot

help but ask how a civilization that was so advanced with the “Four Great Inventions” not

transition to the Industrial Revolution in the eighteenth century? The next chapter

explores this interesting quandary.

30 Haven, 100 Greatest Science Inventions of All Time, 15-16.


22

CHAPTER II

CHINA AND THE INDUSTRIAL REVOLUTION

The examination of ancient China’s past technological advances raises one of the most

perplexing questions in economic history. Why did the Industrial Revolution fail to take

place in China during the eighteenth century? After all, China had been a leader in

technological innovation in the previous centuries with the four great inventions. An

attempt to solve this question is particularly important now because the United States is

arguably at its apex as a highly developed civilization. By studying the causes of China’s

failure to industrialize, America can learn from a past great civilization’s mistakes in

order avoid the possible demise of its own highly developed civilization. The following

discussion contends that the Industrial Revolution failed to take place in China because of

lack in both demand for and supply of technology combined with the Confucian

philosophical system. This chapter examines the question from three different

perspectives. The first section of the chapter reviews the failure in technological demand.

The second section will provide an alternative argument, that China’s failure to

industrialize stems from a lack of supply for technology. Finally, the third section

attempts to explain how Confucianism held China back from industrialization in the

eighteenth century. Working together, these three factors likely contribute to China’s

failure to industrialize in the eighteenth century.


23

2.1 Failure of Demand for Technology

Author Mark Elvin proposes the theory of “high-level equilibrium trap” to explain

China’s economic decline.31 In later traditional China, with an ample pool of laborers,

exceptional farming inventions and transportation systems, but limited resources and

capital, there was almost no incentive to develop labor-saving technologies.32 In the

eighteenth century, population growth made labor-saving technologies unnecessary in

China. Figures 11 and 12 show charts measuring China’s population growth. This

population growth occurred for many reasons, one of which was the Confucian system.

In Confucianism, the head of the family is the male, which causes an obsession in

Chinese families to produce male heirs. This led to early marriage and a high fertility

rate, which resulted in an unchecked expansion of population.33

31 Elvin, The Pattern of the Chinese Past, 298.

32 ibid., 314.

33 Lin, The Needham Puzzle: Why the Industrial Revolution Did Not Originate in China, 271.

Figure 11- P

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In addition to a lack of capital, transportation reached a “technological

discontinuity” stage in China at the same time. Transportation acts as the circulatory

system for a healthy economy, but China’s water transportation was so extensive that it

would not have had made much difference to improve traditional land transportation.

Moreover, early farming inventions allowed yields per acre at the highest possible rate.36

Clearly, these economic forces made it irrational for Chinese farmers and merchants to

develop any breakthroughs in labor-saving technologies. Not only did the Chinese not

have an incentive to invent; they also did not have an incentive to learn from their

European peers.

In the eighteenth century, China’s indifference toward European science, due to

pride and ignorance, caused China to miss the opportunity to stay in line with European

technological achievements. As its name, “the Middle Kingdom”, suggests, China

considered itself to be the center of the world and believed that all non-Chinese people

were barbarians subject to the emperor – the “son of heaven.”37 This attitude can be

summed up in Qianlong’s haughty imperial edict to King George III in response to the

Macartney expedition: “Nevertheless we have never valued ingenious articles, nor do we

have the slightest need of your country’s manufacturers.”38 Figure 13 shows a portrait of

the Qianlong Emperor, and figure 14 show Lord Macartney at the Emperor’s Court.

36 Elvin, The Pattern of the Chinese Past, 306.

37 Landes, Why Europe and the West? Why Not China?, 3, 10.

38 Peyrefitte, The Collision of Two Civilization, 291.

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29

make modern guns.41 During his expedition, Macartney had tried to impress the emperor

Qianlong with a demonstration of modern guns inside the Chinese imperial garden,

known as Yuanming Yuan. However, the emperor seemed oblivious of the potential of

this invention. As a matter of fact, when the Anglo-French military occupied Yuanming

Yuan in 1860, the guns Macartney had presented to the emperor had been stored in the

same place as other tributary goods, such as jade and jars.42 Consequently, these

xenophobic attitudes made China miss an important opportunity to learn from the first

industrialized nation on earth – Great Britain. China did not have any demand for

technological innovation within itself, nor did they have a demand to import outside

technology. Furthermore, China also lacked another ingredient for industrial revolution:

the supply-side of technology.

2.2 Failure of Supply for Technology

Ironically, the factor that contributed to China’s lack of technological innovation

in later years, its large population, initially proved advantageous for technological

development. In the eighteenth century, when technology shifted in Europe from

experience-based invention to science-based invention, China failed to adjust and was

consequently left behind by Europe.43 In pre-modern times, the major source of

41 ibid., 13.

42 Wong, A Paradise Lost: The Imperial Garden Yuanming Yuan, 85.

43 Lin, The Needham Puzzle: Why the Industrial Revolution Did Not Originate in China, 276.


30

technological invention was experience. A large population was the important element in

determining the rate of experience-based invention, which was China’s comparative

advantage at this time. A larger population implied a larger pool of talented people that

could contribute to the technological development process.44 After the fourteenth

century, technological innovations were so fully exploited that there was no room for

anymore large breakthroughs. China was experiencing a diminishing marginal rate of

returns to the probability of technological innovation.45 In the meantime, there was a

shift from experience-based to science-based technological invention in Europe. The

scientific method removed the limitations of population size on technological invention,

because it enabled inventors to perform numerous focused experiments. This was in

contrast to relying on the time-consuming innovation of mere human experience.

Furthermore, technology continued to shift to science-based invention with the

combination of science and technology.46 One of the factors that hindered China’s shift

to science-based technological invention was its bureaucratic system. In the eighteenth

century, the Chinese state was totalitarian, where the state controlled everything,

including private initiative, public expression, and education. As a result, it created an

atmosphere of routines, rituals, and suspicion of innovation.47 This led to a failure of

combining scientific theories to technological method. In addition, as merchants were at 44 ibid., 279.

45 ibid., 280.

46 ibid., 281.

47 Landes, Why Europe and the West? Why Not China?, 7-8.


31

the bottom of the Chinese social scale, mercantilist values were repressed. Therefore,

China was incapable of integrating the methods of the artisans or farmers with the

theories of mathematical and rational reasoning from scholars.48 In the end, China did

not have a scientific revolution in the fourteenth century, which could have paved the

path for the industrial revolution in the eighteenth century.

2.3 Confucianism

Confucianism, with its ever-present principal tenets, has made a great impact on

every aspect of Chinese society, including economics. For many reasons, it is often

criticized as a force that keeps China from modernization. One of the reasons for the

criticism was the failure of the civil examinations system to produce critical thinkers

during imperial China. Table 2 presents the success rate of some the civil examinations.

The core of the examination is based on the study of Confucianism: the Four Books and

the Five Classics. The materials in these Books and Classics do not contain practical

knowledge of how to run the country but philosophical tenets. Scholarship was awarded

based on pure memorization of those books, and the ability to recite passages from these.

One of the most important components of the exam was the Eight-Legged Essay that

required the students to follow a rigid set of rules in order to have a high score. This

requirement discouraged the examiners from thinking “outside the box”, because they

48 Lin, The Needham Puzzle: Why the Industrial Revolution Did Not Originate in China, 282-283.

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34

to preserve peace. There is no need to change or question the way things are. This

viewpoint would appear to stifle creative and innovated minds. On the other hand, the

industrial revolution is based on a thirst of human civilization for a better life through

change and development. This progression requires a breakthrough from old traditions.

Unfortunately, the tradition-based Confucian society slowed China’s ability to adapt to

changing circumstances.

2.4 Conclusion

During the Industrial Revolution, while much of the Western world enjoyed a

meteoric economic rise, China remained stagnant. Importantly, the reason for this

stagnation is not a lack of technological skill. In fact, China has been credited for many

of the world’s most important inventions. There were a number of factors that hindered

China’s ability to participate in the Industrial Revolution in the eighteenth century. There

was a lack of demand for increased technological innovation. Most of ancient China’s

technology was sufficient to sustain the agricultural economy. China’s large population

was an advantage which enabled the country to maintain a stable society. However, this

approach was not conducive for innovation. Also, in the West the rise of the scientific

method lessened the importance of a large population for technological advancement.

The Chinese relied on the “experience method”, which allows for slow progress though

the passing down of techniques. The scientific method allowed people to focus on a

specific objective and conduct repetitive tests to develop the most efficient method of

production. Another important factor was Confucianism. The emphasis on tradition and


35

stability dissuaded Chinese from trying novel concepts. This conservative social

viewpoint acted to suppress technological advancement. All of these factors influenced

China’s stagnant economic growth, while much of the Western world enjoyed

unprecedented growth. The next chapter examines the effect of Mao’s radical policies on

mainland China’s economy during the twentieth century.


36

CHAPTER III

THE EFFECT OF MAO ON CHINA’S ECONOMY

This chapter examines how Mao Zedong's political philosophy influenced the

economic events in China in the 1950s and 1960s. Specifically, the chapter examines the

unsuccessful Chinese economic development program: the Great Leap Forward.

Moreover, it examines other brutal social movement launched by Mao from 1966 to1976.

Mao is pictured in figure 28. This chapter also analyzes the lives of characters in the

famous Chinese film To Live, directed by Zhang Yimou. This film successfully portrays

the everyday life and the struggle of the Chinese people from the civil war to the

traumatic Maoist period.

This chapter is divided into two parts. Part one focuses on the Great Leap

Forward movement carefully by discussing the politico-ideological foundation of the

movement, its implementation, and its aftermath. Part two addresses the violent Great

Proletarian Cultural Revolution in detail. The chapter analyzes the forces and situations

giving rise to the revolution, its political theory, and how it affects China. Also, this

chapter provides examples of the personal tragedies from the film to enable people to

experience the impact of Mao's revolution on Chinese people’s lives.


37

3.1 The Great Leap Forward (1957-1960)

The Great Leap Forward was the testament to Mao's belief in the mass line, his

willingness to try new ideas and his political savvy. It originated from the political

theories of "mind over matter" and superstructure, which manifested in the program “Red

over Expert.”52 The theory of "mind over matter" emphasizes the notion of using human

capital instead of investing in machines, since human capital is the least expensive and

most plentiful form of labor production in country. Mao envisioned that the mass

population would make the most out of the technology provided from the state to

generate surplus.53 Mao is shown in figure 16. It is a self-help strategy in the sense that

by giving them the technology they need, through the enthusiasm in the "mind," they

would generate surplus.

52 Baum, “Red and Expert”: The Politico-Ideological Foundations of China’s Great Leap Forward, 1048.

53 Chang, Return of the Dragon, 145.

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39

contradictions, China must rely on the theory of permanent revolution. If there is not a

constant attack on the superstructure, the “bourgeoisie” class could emerge and destroy

revolution at anytime.54

In 1957, the result of the convergence of the two political ideas "mind over

matter" and superstructure was the Great Leap Forward. It was an unrealistic economic

and social reconstruction plan whose goal was to bypass the United States and Britain in

fifteen years, and become the world economic leader.55 The first step was to carry out a

mass social mobilization from the city to the countryside. This would alleviate the

problem of urban unemployment inherited from the nationalist government. As a result,

specific programs, such as the organization of people's communes, were carried out to

monitor where people lived and work. Tables 3 and 4 show these employment numbers

and the number of communes. The communes became an old feudal manner where the

lord lived in a large house, serfs worked around the land generating surplus for the lord

and leaving enough for serfs to survive. In this context, the administrator collected

surplus, which was passed on to the central government in Beijing. By setting production

targets, the administrators did not want to disappoint Beijing, thus they were lying about

how much they could produce. In order to fulfill inflated quotas, virtually all food was

collected and then sent to Beijing leaving no food left for the peasants.56

54 Baum, “Red and Expert”: The Politico-Ideological Foundations of China’s Great Leap Forward, 1049-50. 55 Yap, Chinese Civilization: From Ming Revival to Chairman Mao, 188.


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As a result, the economic development was chaotic.57 One of the programs was the

“Backyard Furnace” that was portrayed in the film, To Live. The film’s protagonist,

Fugui, and his family were donating their everyday tools, including kitchen sets, to make

iron. When his wife asked how they would cook when there were no kitchen tools left,

the communist leader responded that they could go to the communal kitchen and eat the

same food with everyone else. The leader even wanted to get the metal from Fugui's old

wooden crest to make steel. This characterizes one of the many flaws of the “Backyard

Furnace” program: people tried to collect all steel without knowing what would be most

useful for society. The people lacked the expertise to understand where to get proper

steel from.

Ultimately, people realized that nothing was changing, their attitude shifted from

support to resentment. At this point, the program was falling apart. The production level

declined to pre-revolutionary production levels. China was back to where it began. The

period between 1958 and 1962 was regarded as a period of great famine in China that

affected millions of Chinese people. It was one of the greatest tragedies of the twentieth

century that cost fifteen to forty-six million Chinese lives.58 There was an another

economic crisis in China from 1960 to 1962, characterized by severe shortages in food

and textiles; isolation from international trade in addition with large-scale grain import;

57 Baum, “Red and Expert”: The Politico-Ideological Foundations of China’s Great Leap Forward, 1050-55. 58 Teiwes, China’s Road to Disaster: Mao, Central Politicians, and Provincial Leaders in the Unfolding of the Great Leap Forward 1955-1959, 5.


42

and on top of that, high urban unemployment.59 The per capita consumption of food is

shown in Table 5, and China’s national income is presented in table 6.

Table 5- Per capita consumption of major food items, 1957 and 1960 (in catties)

59 Eckstein, China’s Economic Revolution, 203.

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Communist movement.60 Mao believed intellectuals were revisionists who were disloyal

to China. He also thought that they were the most intellectually ignorant, and that the

best ideas come from the educated youth, because they had passion and enthusiasm.

Mao was disturbed by the fact that Chinese art, culture, and literature were not "Marxist"

enough. Therefore, he wanted to push the idea of socialist culture through the Cultural

Revolution. The notion of cultural purification ties to the political-ideology of

superstructure: class contradictions and permanent revolution.61 All of these radical

movements were part of Mao's strategy to regain power.

Mao began to attack anyone who exhibited capitalist beliefs because he

considered them to be the people's "enemy." Besides the antagonistic method to deal

with philosophical contradictions, even more popular was Mao’s non-antagonistic

method. There was a broad classification used to describe common enemies of China.

This classification was known as the "five black elements." Landlords, rich peasants,

reactionary capitalist, counterrevolutionaries, criminal offenders, and rightists were often

considered to be one of the “black elements.” This allowed Mao the license to purge

anyone he did not like because the category was so broad and vague.62 The extensive

imprisonments led to the death of millions of Chinese citizens.63

60 Yap, Chinese Civilization: From Ming Revival to Chairman Mao, 184-87.

61 ibid., 189-90.

62 Muhlhahn, “Remembering a Bitter Past” The Trauma of China’s Labor Camps, 1949-1978, 7.

63 ibid., 1.


45

In his autobiographical trilogy, Hunger, Wang Ruowang described how hunger

was used as an instrument to punish and inflict pain and suffering on the so-called

counterrevolutionaries. To supplement their meals, prisoners had to hunt toads or mix

rice with toothpaste. They barely survived and many suffered to the point of committing

suicide.64 Zhang Xialing, another victim of Mao, wrote about his imprisonment in the

Chinese laogai (reform through labor) institution, where he was forced to become

accustomed to death. It was a terrifying experience that left many victims with severe

physical and psychological wounds. For example, even the smell of the meager yellow-

soybean meals that the prisoners were fed in the labor camps could instantly bring back

the memories of past suffering to Zhang Xialing.65

Another key program of the Cultural Revolution was the creation of the Red

Guard, whose mission was to carry out the movement from Beijing to provinces and

villages. The heart of this program was based on the same political theory that was used

during the Great Leap Forward: permanent revolution, red over expertise, and let politics

take control. The members of the Red Guard were enthusiastic youngsters from around

thirteen to college age. Mao gave them authority and freedom to deliver his teachings to

the people. They were the new ideological army who bypassed the existing party

machinery. These groups were loyal to only Mao with a goal to eliminate the Four Olds:

old idea, old culture, old customs, and old habits. Mao empowered his Red Guard army

to the point that they went out of control. In carrying out Mao's instructions, they

64 ibid., 9-10.

65 ibid., 12-13.


46

attacked everything. They burned millions of books, destroyed libraries, and killed

librarians. Schools were also closed down for teaching the "old habits." Teachers were

accused of being influenced by Western thought; therefore, they were arrested, sent down

to the countryside or executed. During this time, many national artistic pieces and relics

of China were destroyed. At the peak of this violent revolution, people were often

attacked for seemingly random reasons, such as having a modern haircut, wearing

Western clothes, or reading inappropriate literature.66 Figure 17 shows a poster of Mao

used for propaganda.

66 Jiang, Burden and Legacy: From the Chinese Cultural Revolution to Contemporary Art, 3-4.

Figure 1

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47

17 Large Po

s Tech Univer

ster of Mao

rsity, Claire NNguyen, Mayy 2009


48

According to the political theory of permanent revolution, the bourgeoisie could

emerge again to destroy revolution if there was not a constant attack on the

superstructure. The Red Guard had an additional goal to bring in the Four Big Rights:

speaking out freely, hearing freely, holding great debate, and big character posters. It

targeted eliminating bourgeois attitudes and individualism. As a result, the job of every

Chinese citizen was to memorize the Little Red Book - a collection of Mao's thoughts,

without questioning its content.67 This transformed China into a giant political

classroom. Figure 18 show “Mao” signs in the store.

In the meantime, the Red Guard started to increase in size and was given

permission to carry weapons. They turned their energy against whomever they did not

like. They took Mao's teaching of anti-intellectualism to the next extreme by pushing out

all of the experts and replacing them with Red Guard members.

67 Kaid et al. eds. Encyclopedia of Political Communication, 100-01.

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50

The film also successfully portrays how Mao was deified. During Fengxia's

wedding, instead of singing a happy wedding song, they sang a Maoist song. Also,

instead of taking a family picture, they took a picture holding Mao's Little Red Book.

Instead of bowing to Heaven and Earth and ancestors, they bowed to Mao. Even the

wedding gift was a framed picture of Chairman Mao. Apparently, Mao and his political

philosophies had penetrated deeply into every aspect of the Chinese lives. The language

in the party changed from Marxism to Maoism.

3.3 Impacts on the Economy

Even though the Cultural Revolution was Mao's political move to regain power in

the party, it certainly had some negative impacts on the economy of China. The severity

of these impacts varied among different sectors. While the agricultural sector did not

experience major destructive effects, the transportation sector was significantly affected.

Since most freight space was reserved for the Red Guards to travel around the country,

there was no space left to transport raw materials and equipment. As a result, many

factories cut down on their level of productions due to lack of supply. In addition to

work disruptions and armed struggles between 1967 and 1968, resources were

misallocated to revolutionary activities of the Red Guards.68

68 Eckstein, China’s Economic Revolution, 204-05.


51

3.4 Conclusion

It is impossible to discuss the history of China without examining Mao. His

influence left a lasting imprint on their society. While his philosophy was draped in

socialist clothing, it appears that Mao was most concerned with maintaining power.

Also, the Cultural Revolution led to a stifling of free-thought, which had a direct effect

on the economy. The rampant anti-expertise bias led to a society where people died of

easily preventable maladies. The stress of the revolution on the infrastructure nearly

halted economic progression. However, after the death of Mao, China began the slow

process of economic reforms.


52

CHAPTER IV

CHANGES TO CHINA’S ECONOMY BY DENG XIAOPENG

In 1976, Mao's death marked the end of China's isolation and the beginning of an

open-door policy. After his twenty-seven year reign, China's economy was left in turmoil,

with a per-capita GNP of 253 dollars in 1978, making China one of the poorest countries

in the world. In 1979, twenty-seven percent of the Chinese population still lived at

marginal subsistence. When Deng Xiaoping reassumed his position in the Chinese

political picture, he quickly realized that China needed to undergo major economic

reforms in order to save China's economy from turmoil.69

4.1 Four Modernizations

One of Deng Xiaoping's greatest achievements was shifting the focus of the

Chinese Communist Party from the "permanent revolution" of class struggle to the

modernization of China. In 1978, Deng announced his policy of the four modernizations

in the four economic sectors: agriculture, industry, science, and national defense. The

policy of the four modernizations had first been articulated by Zhou Enlai in 1964, and

69 Chang, Return of the Dragon, 149-51.


53

was finally realized in 1978, when Chairman Hua Guofeng announced a ten-year

modernization program for 1976-1985.70

4.1.1 Industrial Industry

The Chinese government invested 400 billion dollars in the industrial industry. This

investment is estimated to have surpassed the combined investments from the previous

twenty-eight years. Due to the investment, the industry experienced an annual growth rate

of ten percent. The goal was to exceed the industrial output of other capitalist countries

by the end of the century. In the steel sector, the Great Leap Forward caused production

to fall back from 18.67 million tons in 1960, to 8 million tons in 1961. Steel production

enjoyed a brief period of recovery in 1973, reaching 25.5 million tons at its peak. During

the Cultural Revolution, under leadership of the Gang of Four, steel production fell again

to 21 million tons in 1976. With an aim to increase steel production to 60 million tons by

1985 and 180 million tons by 1999, the Chinese government allowed domestic firms to

contract with foreign firms in Germany and Japan at the cost of 2 to 14 billion dollars. It

was one of the first signs of China's open-door policy after a long period of isolation.

The Chinese government also allocated 60 billion dollars to the oil sector for the

construction of ten new oil and gas fields. Moreover, the coal sector also received

investments for eight new mines, along with the renovation of old mines. However, the

weakest sector in the modernization plan was the electrical sector. The construction of

70 Hsu, China Without Mao: The Search for a New Order, 92.


54

thirty new power stations, twenty of which were hydropower, only increased production

by 6 to 8 million kilowatts per year, which fell short of the estimated ten percent annual

growth rate.

4.1.2 Agricultural Industry

Agriculture played a major role in China's economy, supplying seventy percent of

the country's industrial raw materials, sixty percent of its exports, and eighty percent of

its national consumption. The ten-year plan called for an investment of 33 billion dollars

to modernize agriculture through mechanization, electrification, irrigation, and higher

usage of chemical fertilizers. Some of the targets included: an increase of gross

agricultural products by four to five percent per year and of food production to 400

million tons by 1985, mechanization of eighty-five percent of farming tasks, expansion of

water works, and development of twelve commodity and food-based areas in the country.

One of the important side effects of agricultural modernization was the release of 100

million farmers to other industries in the economy. To encourage productivity, the

government implemented a new rural economic policy of "more pay for more work and

less pay for less work." Moreover, commune workers were allowed to have "sideline

production" which made up twenty-five percent of total agricultural production. The

ultimate goal was to produce enough agricultural products to support other industries and

to export to the rest of the world.71

71 Hsu, China Without Mao: The Search for a New Order, 92-98.


55

4.1.3 Scientific Industry

The aftermath of the Cultural Revolution led to a serious shortage of trained

technical experts. During the Cultural Revolution, many schools were closed for

extended periods of time, the examination system was abolished, and politics were

emphasized instead of knowledge. Consequently, this period created a lost intellectual

generation in China.72 In 1978, science and technology enjoyed their revival with the

reactivation of the National Science and Technology Commission. There was a change

of attitude in the party: experts over "redness." Western educated intellectuals enjoyed a

new respect that led to the re-establishment of the education system. Young and talented

students were sent to Western universities, serving as a bridge between China and foreign

scientific circles.73

4.1.4 National Defense

There was enormous spending on national defense that accounted for seven to ten

percent of the GNP, or about thirty-five billion dollars. However compared to the West,

China's military technology remained far inferior. In addition, Mao's idea of mind over

weapons in the previous twenty-seven years pushed Chinese technology further behind

its Western counterparts. Instead of modernizing the military, Mao believed that he could

72 Michael, China Through the Ages, 234.

73 Hsu, China Without Mao: The Search for a New Order, 99.


56

drive away invaders with a politically-motivated army. Under the new regime, the ten-

year plan called for the modernization of China's military, which would cost China a

huge amount of about 300 billion dollars. Since it was impossible for China to afford

such expenditure, the modernization of the military would not be a priority.74

4.2 Introduction of the Market System

For China to fully modernize, Deng realized that the Communist Party needed to

adopt a more efficient economic system rather than the Soviet command economy. He

believed that the command economy was incompatible with the Chinese economy of

large-scale production. In addition, the command model failed to allocate resources

efficiently due to its irrational pricing system, wherein the government determined all

prices. Inefficient pricing system created disparity between purchasing and selling

prices, thus, the state had to take up the burden by providing subsidies in billions of yuan.

Those subsidies could have been used to invest in other sectors such as education, or

science and culture, which are imperative for economic modernization.75

Deng realized the need to rationalize these capitalist market mechanisms in a

country controlled by a communist party. He justified the implementation of these

mechanisms into China's economy by arguing that socialism did not mean a planned

economy. What differentiated socialism and capitalism was not what kind of economy

74 ibid., 100-01.



57

they were. For China to become modernized, they would have to adopt some features of

capitalism, particularly, capitalist market mechanisms. As a result, the Chinese

Communist Party introduced these mechanisms into China to increase productivity and

allocate resources efficiently. Power was decentralized to the local governments and

state-owned enterprise managers.76

4.3 Open-Door Policy

Another key institutional change advocated by Deng was the open-door policy to

trade, investment, and other contacts with foreign countries. This expansion was aimed

especially toward the West and Japan. Deng was convinced that the attribution to

China’s backwardness was the isolation during centuries of royal rule, worsened by

Mao's radical policies in the twentieth century. For China to catch up and surpass other

advanced industrial countries, China had to open up its door to other countries and learn

from them.77

In the two coastal areas of Guangdong and Fujian, the Chinese government set up

Special Economic Zones to attract foreign investment and foreign enterprises by offering

them favorable terms and conditions. This model soon spread to other coastal regions in

1984 and 1985. Effectively, these coastal provinces converted into a zone that had greater

degree of freedom in economic transactions internationally and domestically. As a result,

76 ibid.

77 ibid., 159.


58

there was a rapid increase in foreign trade. As local governments carried out investment

projects, the generated demand increased, as did imports to fill in the gap when the

demand was not met by domestic suppliers. In the meantime, the government increased

exports to pay for their imports. During the period from1979 to 1989, total trade

increased at 16.5 percent per year on average and 12.7 percent from 1981 to 1989.

Import growth was slightly higher than export growth at 16.6 percent comparing to 16.5

percent. The difference between imports and exports was small, but China still incurred a

huge annual trade deficit with the rest of the world.78

Deng also advocated the importance of science and technology by expanding

international academic exchanges and scientific cooperation. He realized that

technological advancement is one of the key factors to economic development.

Education and scientific research were the priorities for China to invest in. According to

Deng, "We have already wasted 20 years….If we paid no attention to education, science

and technology, we would waste another twenty years, and the consequences would be

dreadful to contemplate."79

The heavy trade deficits in the 1980s quickly transformed into surpluses from

1990 onward due to further opening up the Chinese economy. By removing trade

barriers, it was easier for domestic goods to reach foreign markets and for foreign direct

investment to flow to China. Another incentive for China to open up its economy was to

fulfill one of the crucial conditions to join the GATT and the WTO. The first step of

78 Cheng, China in the Post-Deng Era, 282-84.



59

China's open-door policy was to establish more open-zones for the implementation of

more liberated domestic and trading policies. Significantly, the open-zones now included

large cities in the interior provinces and whole urban areas. For instance, in 1990,

Pudong in Shanghai became a major destination for liberalized domestic and trade

policies, a privilege that had only been given to special economic zones.

The second step of the open-door policy was to implement radical liberalization in

the foreign trade system instead of the slight liberalization of the 1980s. Specifically, the

Communist Party removed direct subsidies to exports and regional privileges in the

retention of earnings from exports. Moreover, the government reduced its influence on

import and export decisions. More importantly, limited current account convertibility of

the Chinese dollar was introduced for the first time in the Chinese economic system.80

4.4 Impacts of Reforms on the Economy

One of the most common indicators of the impact of an economic reform is the

rate of growth. By looking at the annual growth rate since the post-Mao era, the data

indicate that the economic reforms have left a great positive impact on China's economic

performance. During the period of 1979-1986, the average national income growth rate

was 12.6 percent at current prices and 8.7 percent in comparable prices—prices after

removing the effects of inflation. Table 7 shows the growth of national income.

80 Cheng, China in the Post-Deng Era, 159.

in

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63

national income in 1978, and 72 percent of their savings went to investments in fixed

assets , such as state enterprises, and production facilities. The post-Mao government

tried to promote "consumerism" and reduce the investment rate. As a result, the

accumulation rates successfully dropped to 28.3 percent in 1981. However, as a result of

the decentralization policy, more local-level enterprises engaged in out -of-plan

investment with their own funds, the accumulation rate grew again to 35.3 percent in

1985. In the end, the Chinese economy still remained savings-oriented. The only major

difference with the economic reforms in this area was a huge reduction of investment

financed by "forced savings." By 1985, investment in state-owned enterprises only

accounted for two -thirds of the total investment in fixed assets, and about three-fourths

of this investment was financed by either self-funds, loans, or foreign investment.

Nonproductive investments in housing and infrastructure also started to gain a larger

share in total savings.81 Table 10 presents savings and investments.

81 Kau et al. eds. China in the Era of Deng Xiaoping: A Decade of Reform, 158-63.

w

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66

Because of the impoverished decades under Mao's leadership, highlighted in the

Great Famine in 1957, a better indicator for the Chinese level of welfare is the average

per capita consumption of basic foodstuffs. There was a shift in the pattern of grain

consumption from poorer grains to richer grains in the Chinese diet between 1978 and

1985. In addition, there was an increase of per capita grain consumption by 3.8 percent

per year. By 1988, per capita grain consumption was 25 percent more than that of 1978.

Table 12 and 13 show these standard of living indicators.

Table 12- S

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tandard of L

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Texas

67

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68

Overall, the economic reforms were more favorable to the peasants rather than

urban dwellers. Since the allowance of "side line production," the peasants could use their

extra income to increase their standard of living. For instance, their living space had risen

by 8.9 percent per year in the period of 1978 and 1985 as compared to 6.9 percent per

year for urban residents. Moreover, the peasants' real capita consumption increased 50

percent faster when compared to that of nonagricultural members between 1978 and

1985. Therefore, it is obvious to see that these economic reforms did not only increase

the welfare of the Chinese but also changed the distribution of income across China as

well.83

4.5 Conclusion

After the failure of Mao’s Great Leap Forward and the Cultural Revolution to

bring any real tangible results, the Chinese government realized that their approach must

change. Deng Xiaoping introduced the Four Modernizations in order to jumpstart the

dormant Chinese economy and allowed the nation to have the ability to compete with

other world powers. The Four Modernizations focused on revamping the policies and

infrastructure of the isolationist and socialist system espoused by Mao. While the

country remained a socialist republic, the Chinese government slowly allowed the spread

of some capitalist policies in certain areas. For example, the introduction of the Open

Door Policy was another leap forward in China’s ascension to a healthy economy. These

83 ibid., 171-73.


69

new policies showed positive results and have helped China become one of the emerging

world superpowers. The final chapter will examine the relationship of the Chinese

economy compared to the world’s economic leader: the United States.


70

CHAPTER V

FUTURE OF CHINESE ECONOMY AND ITS AFFECT ON THE UNITED STATES

5.1 Comparison of the United States’ and Chinese Economies

Looking back at the history of China's contribution to the world’s GDP, from

1500 to 1988, China was the world's largest contributor. During the Qing dynasty, which

ended in 1820, China comprised almost one-third of the world's GDP, eighteen times the

share of the United States. However, after the fall of the Qing dynasty and many years of

civil war, China's share of the world GDP was only one-fifth of that of the United States

and remained low during the period of 1950 and 1973. After implementing the economic

reforms in 1978, the size of the Chinese economy grew rapidly to 11.5 percent of the

world’s GDP—more than half the share of the United States.84 A comparison of China’s

and the United States GDP are presented in table 14.

84 CRS Report RL33604, Is China a Threat to the U.S. Economy?, 5-7.

S

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Texas

71

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74

change in world economic power was when the U.S. overtook Western Europe in 1913,

becoming the world leader with output twice the size of its rival.88

The growth of the U.S. economy brought some positive effects to other countries

between 1820 and 1913. Not only did the average income grow quickly in the U.S., but it

also did in other Western European countries. Trade flowed easily across nations,

bringing consumers more goods, services, capital and ideas. There was an easy exchange

of innovations across nations. For instance, in the spring of 1876, the telephone was

invented by Alexander Graham Bell, a U.S. innovation that was quickly adopted in

Western Europe two years later. Similarly, the invention of the internal combustion

engine in Western Europe was quickly picked up in the U.S. These innovations resulted

with income per capita in America rising at an average of 1.5 percent annually, and

Western Europe's income per capita rose at about 1.1 percent to 1.3 percent annually.89

Yet, the situation changed after 1913 because the political and financial turmoil in

Europe was not favorable for economic growth. The two most important events that

ruined the European economy were the World War I and II. Although not as devastating

as the two wars were, high tariffs and post-war hostilities between European nations only

worsened the economic situation. Thus, Western Europe failed to adopt new U.S.

technologies such as Henry Ford's assembly lines for automobiles. Consequently,

Western European income per capita fell significantly post-1913. By 1950, the U.S.

88 ibid., 13-16.

89 ibid.


75

income per capita was nearly forty percent higher compared to that of Western European

countries.

The remaining question is whether the emergence of China as a new economic

superpower would also affect the U.S. economy positively like the case between the U.S.

and Western Europe. The data from the Bureau of Labor Statistics indicate that real

wage rate in the U.S. increases because inexpensive goods from China helped to

compensate for an inflation rate of six percent in 2000.90 On the high-skill level, despite

some jobs transferring from the information- technology industry, the real wage rate still

rose at a 5.1 per cent rate for managers and professionals. On the lower-skill level, real

wage rate increased at a 4.1 percent rate for white-collar workers and 6.7 percent for

blue-collar workers.91

Over the past few years, China has become one of the top U.S. export

destinations. As shown in table 17, during the period of 2001 to 2005, China constituted

11.8 percent of U.S. export, and up by 33.0 percent between January to November

2006.92 These figures suggest that China could take over Japan as the third largest U.S.

export destination by 2007. Since China still has to modernize its obsolete infrastructure

and industries, there should be a huge demand for goods and services from the U.S.

Moreover, rapid economic growth has empowered purchasing power of China’s large

population. A study by Global Insight predicts that U.S. merchandise exports to China

90 Mandel, Does it Matter if China Catches Up to the U.S., 2-3.

91 ibid.


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79

developed financial system that is favorable for investment from other countries.

However, it is important that the U.S. learns the Western European lesson: political and

financial instability could lead to an interruption of free flow of goods, services and

innovations.99

5.3 Some Criticisms in Trading with China

The growing U.S. trade deficit with China has brought many criticisms of trading

with China as a potential harm to the U.S. economy. This section attempts to bring some

of these criticisms to light by analyzing the pros and cons of trade with China. One of the

most popular criticisms is trade with China can take away jobs in the U.S. industries that

produce identical products. However, economic studies show that the creation of new

jobs has been more than off-setting the job loss due to imports. For instance, in the 2004

labor market, the gross job losses per quarter was about 7.4 million, while the gross job

gains were about 7.8 million per quarter in the same time period. As a result, there was

an increase in total employment in 2004.100

Moreover, the U.S. has to pay for imports by selling U.S. goods, services or U.S.

assets such as stocks and bonds. An increase in imports will likely generate an increase

in exports as means of payment for imported goods. Consequently, there will be an

increase in the demand for labor in the U.S. to produce more U.S. exported goods. This

99 Mandel, Does it Matter if China Catches Up to the U.S., 3.



80

will help to offset the magnitude of job loss due to imports from foreign countries,

including China.101

Some analysts argue that trade with China drives domestic wages down by

placing domestic workers in competition with a large number of low-wage foreign labor

markets. This phenomenon is called the "race to the bottom" between American and

foreign labors. History says it is not the case.

The U.S. real wage rate rose in the booming Clinton economy of the 1990s.102 It

has came to a stop since the recession in 2001, and have remained flat regardless the fact

that the rising level of trade with China. Economic theory offers a few explanations for

this phenomenon. First, the determination of the real wage rate is based on worker

productivity. U.S. workers are more productive compared to the workers of China or

other low-wage economies; hence, wages are higher in the U.S.103 Thus, a better

indicator of differences in production cost between the U.S. and low-wage economies is

the unit labor cost - the wage per hour divided by output per hour. Based on this

indicator, a few studies found that Chinese worker’s productivity is only seventy-five

percent to eighty percent of that of the U.S. So why does the U.S. trade with China when

the U.S. has the absolute advantage in production. This leads the second fundamental

economic theory in international trade.104 101 ibid.

102 ibid., 30.

103 ibid.

104 ibid., 30-32.


81

The basis to determine whether it is beneficial to trade with other countries is

comparative advantage, instead of absolute advantage. While the U.S. has the absolute

advantage in production, it does not imply it has the comparative advantage - lower

opportunity cost, in the production of all goods and services. The reason for this is

because different countries have different endowments of the factors of production, e.g.

land or labor. A country's comparative advantage is found in those activities that utilize

intensively the abundant factors of production. If the U.S. is endowed with high-skill

labor, the U.S. is better off specializing in producing goods that use high-skilled labor,

and trade with other countries, such as China. Since China is relatively abundant in low-

skilled labor, China should specialize in producing goods that use low-skilled labor to

import to the U.S. in exchange for high-skilled labor goods.

Such specialization and trade would expand each countries consumption

possibility frontier of traded goods and thereby raises its economic welfare. The

economic welfare pie is bigger, but the slice will be distributed differently among

individuals. When trade occurs, there will be an increase in wage for high-skill American

labors as the demand for them goes up. At the same time, there is a decrease in wage for

low-skill American labors as the demand of them goes down. Ultimately, the effect of

trading with low-wage economies is a change in income distribution between high and

low-skilled in the U.S. In addition, there would be an increase in overall economic well-

being for the U.S.105

105 ibid.


82

CHAPTER VI

SUMMARY AND CONCLUSION

This comprehensive study of China’s economic history uncovers a number of

interesting discoveries. China has long been a leader in technological advancements,

starting with the Four Great Inventions. The intellectual capacity of the Chinese cannot

be questioned. Instead, other factors were to blame for the sluggish progress during

much of recent history. Confucianism and conservative philosophy retarded economical

growth. Also, China’s isolation from the rest of the world led to a lack of free exchange

of ideas, which often leads to a vibrant economy. During the rise of Mao and the

Cultural Revolution, these tradition ideals were reinforced. Again, during this period

there was no significant growth, and in fact many people suffered under the hard line

regime. After Mao, the Chinese government finally realized that they would have to

adopt some Western ideas in order to grow. Soon, China began to grow, and now is

considered the next great world superpower. The recent 2008 Olympic Games in Beijing

show the raw power of the rising country. Understandingly, people in the United States

fear the rise of a potential adversary. In fact, this could be an opportunity to have great

prosperity between the two nations.


83

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