It has been over 30 years since the People’s Republic of China (PRC) started its First Five Year Plan in 1953. During this time-frame, 1979 stands out as a dividing-line which can be used to split the period into two sections. Before 1979, though there were several quite different political policy trends, the major policies of the PRC were consistently geared towards resource accumulation and economic development. However, in 1979, things changed when Teng Hsiao-p’ing adopted wide-ranging economic-reform policies. Most of the reforms tried to make up for the disadvantages inherent in the policies prior to 1979.
The main purpose of this paper is to study the pre-1979 policies and their influence on the economy so as to provide knowledge for the further study of the post-1979 economic reforms in the PRC.
Like other developing countries, the first difficult issue that Mainland China had to deal with was the shortage of savings under its overall economic development plan: Being a densely populated, labor-surplus country, most of the resources of the PRC are, and have been, consumed by the general public; therefore, efficiently dealing with the savings-gap was, and is, very challenging. Also, given the centrally planned Communist economic system, the government interfered with resource allocation. Under these two conditions, the accumulation of resources methodology used by the PRC was very special.
The methodology mentioned above consists of industrial and income policies. The former were primarily influenced by the economic growth theories of Karl Marx and those adopted by the USSR to accumulate material resources prior to its development of heavy industry. By definition, savings (S) is the total accumulated resource value in the economy which equals national production (Y) minus consumption (C), that is, S=Y-C. This methodology primarily is concerned with the development of heavy industry whose output is used in other production processes rather than consumption. This helps control the level of savings in the economy. As the statistical data shows, the percentage of intermediate inputs in the value of total industrial production increased from 26.4% in 1949 to 48.3% in 1957 and to 62% in 1974. These figures obviously show the methodology used by the PRC to accumulate resources. Once the country began to accumulate resources, income policy was chosen to control the level of consumer demand to avoid disequilibrium or inflation from occurring in the commodity market.
The PRC’s income policy was made up of two parts: maintaining a balance of trade between the agricultural and industrial sectors to remove any surplus from the agricultural sector and controlling the total wages of the industrial sector to increase profit in the industrial sector. The fundamental tool to accomplish the former was, and is, the centralized buying and selling system for agricultural produce, that is, the selling of agricultural produce to government enterprises at the prices and quantities that are set by the government. In this study, the author uses the theory of monopsony to analyze the pre-1979 policies. It was shown that in 1978 the agricultural surplus was drawn out of the system only as a result of the centralized buying of grains and vegetable oil for consumption–11.836 billion yuan. Although excluded, the biggest centralized buying item-cotton–accounted for 10.69% of the agricultural communities’ total revenue. The agricultural products, bought at low prices, were sold to the non-agricultural sector (especially the industrial sector) also at a low price. This kind of centrally controlled system of buying and selling guaranteed a basic standard of living to the workers in the industrial sector and suppressed wages.
In this paper, the author uses Euler’s theorem to estimate the wage ratio, that is, the ratio of the nominal to the real wage. In such an instance, the workers were greatly exploited. At the same time, however, light industry in the PRC was favored as their costs were decreased since they could buy materials at low cost from the agricultural sector. . From 1952 to 1978, the efficient resource allocation system created a national savings rate of 27.8% and economic development served the government’s cause rather than improve the welfare of the people. The author also uses Engel’s Law to analyze the relationship between Engel’s index (constant-utility price index) and national income and finds that the Engel’s index does not decrease. Workers only receive 46% to 54% of the wages that they deserve. Given that the commodity market was in disequilibrium, there are methods (feedback systems) by which to return to a state of equilibrium. In short, the government forced people to save whereby forcing prices to climb, increasing the supply of commodities, and controlling national income.
Unbalanced growth was the result of policies geared to developing the mining, machinery, electricity generation and coal industries along with the agricultural sector. Theoretically, for there to be economic development, the following three conditions must be satisfied:
1) demand and supply in the key sectors must be balanced
2) grain production must keep up with economic development
3) manpower must be efficient distributed
First, using the 1956 and 1979 input-output tables of the PRC, the author proves that the first condition was satisfied. Second, using the Fei-Ranis model of labor distribution, it was discovered that labor was not distributed efficiently because the nonagricultural sector over-utilized capital. Lastly, using regression analysis, the author tests conditions 2 and 3. Since the regression analysis indicates that grain production was a disturbance factor, conditions 2 and 3 were not satisfied. This explains the poor level of economic performance in the PRC and the reason why the economic reforms occurred later.
