Mon, Dec 06, 2004 - Page 8 News List

China's experiment had high cost

By Chang Jung-feng張榮豐

The People's Republic of China (PRC) was established in 1949. After three years of economic recovery, the first Five Year Plan was initiated.

The influence of Soviet economic thinking and support in the construction of 156 major facilities led China to make heavy industry the focus of its strategy for economic development.

Heavy industry, with its requirement for vast amounts of capital, was totally unsuited to China, which at the time had abundant labor but was short of capital.

When an economic development strategy runs contrary to the comparative advantage of a country, factor market equilibrium for production is lost.

When an economic strategy gives priority to a certain industrial sector (in this case heavy industry), creating an intense demand for a certain commodity (capital), a situation of excess demand is created, and demand will quickly outstrip supply.

At the same time, in sectors which have abundant resources (labor) but are a low priority (such as light industry), a state of excess supply emerges.

If China had a sound market system at this time, this would have led to an increased cost for capital and high interest rates, while the cost of labor would fall.

If China had allowed private ownership of the means of production, then the business community would quickly have turned to developing labor intensive industries such as light industry.

Even if this had been the case, this would have been contrary to the economic policy of Mao Zedong (毛澤東) and others, who gave priority to heavy industry.

So, a viable solution for China was to use administrative means to guarantee preferential interest rates for heavy industry.

What capital remained would be distributed among other industrial sectors, such as light industry and agriculture. The result would be that interest on capital in most sectors would be much higher than that for heavy industry, creating a two-tier rate system.

In the same way, all surplus production factors, such as energy, raw materials, imports of technology and foreign exchange all become subject to distribution by the administration, and as a result, a two-tier rate system also emerges in the factor market (if this even continues to exist).

On the other hand, we all know from the theory of economic equilibrium, that when the factor market loses equilibrium, the product market also loses equilibrium. The result is an insufficient supply of consumer products (created by labor intensive light industry), and the creation of massive excess demand.

Ultimately, it demands the use of various kinds of ration tickets (for grain, meat, tofu, cloth and so on) to distribute goods, and the products of heavy industry either pile up or are not distributed to where they are needed.

In this situation, the "shortage" of Janos Kornai's "economy of shortage" exists, but at the same time, so does a surplus that cannot be distributed. When a two-tier rate system exists, it is no surprise that people will buy low to make a profit.

It was such people who were targeted as "speculators" in the "three striking" and "five striking" campaigns of the 1950s.

Finally, to push it to the bitter end, the whole thing took place within the compass of a planned economy, and private ownership of business enterprises was no longer permitted to exist.

With the abolition of private ownership, China's state planned economy was complete.

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