How China turned the tide and fired its economy

Seventy years ago, India and China stood at the crossroads of change. Freed from the shackles of imperialism — British and Chinese — India in 1947 went the secular democracy way, while China in 1949 embarked on the road to Communism “with Chinese characteristics”. Now, China is a veritable superpower and has lifted a humongous 850 million people out of poverty. In contrast, India is still a rising middle-power that has made moderate but significant achievements in various development sectors.

The turning point for China came almost three decades after it declared itself People’s Republic of China. In 1978, the Indian and Chinese economies were roughly of the same sizes and both countries had similarly large populations. But since then, China has undergone a series of radical economic reforms which officially constitute the ‘initial stage of socialism’, and hence imply a transition from central planning to a mixed economy.

When Deng dumped Maoism

Mao Zedong might have led the might of Chinese communism, but it was Deng Xiaoping who oversaw the transformation of China into what it is today. He might have been just 5 feet 1 inch, but when one looks at the economic history of China it would appear that Deng is the tallest Chinese leader.

Mao had initially praised Deng Xiaoping for his organizational skills, but he fell out of favor with the party in the 1960s during the Cultural Revolution. Deng’s emphasis on individual self-interest did not augur well with Mao’s egalitarian policies. Deng was eventually stripped of all his posts and, with his family, exiled to the rural Jiangxi province to undergo training and re-education.

The Cultural Revolution was a decade-long sociopolitical movement launched by Mao in 1966 to preserve ‘true’ Communist ideology in the country by purging remnants of capitalist and “reintroduce” traditional elements from Chinese society and to re-impose Maoist thought as the dominant ideology within the party.

Millions of people were persecuted in violent struggles that ensued across the country, and suffered a wide range of abuses, including public humiliation, arbitrary imprisonment, torture, sustained harassment, and seizure of property.

A large segment of the population was forcibly displaced, most notably the transfer of urban youth to rural regions during the “Down to the Countryside Movement”. Historical relics and artifacts were either put into godown dumps or in some cases completely destroyed.

However, the movement paralyzed China politically and negatively affected the country’s economy and society to a significant degree.

After Mao’s death in 1977, the “Gang of Four” — Mao’s wife Jiang Qing and her associates, Wang Hongwen, Yao Wenyuan, and Zhang Chunqiao — was purged and Deng Xiaoping made a political comeback.

He downgraded Mao’s legacy, destroyed his opponents and banned “unofficial” organizations (the ones without which he could have never made his comeback in the first place) lest it be blamed as a reason for influencing the party and the government.

The Chinese economic reforms are referred to as “Socialism with Chinese characteristics” and “socialist market economy”

As his power solidified, Deng quickly instituted new economic policies opening China to international trade and investment. This led to a peace treaty with Japan, improved relations with the USSR, official recognition by the United States, and return of control over the British Colony of Hong Kong.

By the mid-80s, Deng had introduced economic reforms in agriculture and industry, providing for more local management, and instituted the radical “one child per couple” policy to control China’s burgeoning population.

In all these reforms, Deng insisted that China remain a socialist nation with central control. Reforms improved the quality of life for all but also created a huge inequality gap between the classes.

The reason Deng was considered as a great economic reformer was because he made a fair assessment and admitted to his people that they had got it wrong with Mao and China indeed needed a course correction. The first step in curing alcoholism for an alcoholic is to indeed accept that he has an alcohol problem. He admitted the fact and said the Cultural Revolution was a disaster and we must move forward.

To Mao’s motto “Make revolution not production” as part of the Cultural Revolution, Deng said “Make Production and Not Revolution” and the masses clearly got it this time and contended that “Poverty is not socialism. To be rich is glorious.” Get rich but there is a limit!

Faced with criticism at the committee meeting about his proposal at Sam-chan (Shenzen) where he was accused of letting in “capitalism” through the ‘Wicket Gate’, he replied, “It does not matter whether it is a black cat or white cat as long as it does its job of catching the mice.”

China needed jobs to be created to take its millions out of poverty and for this, he needed foreign capital and technology, but most importantly it was not anymore about the China of equality but the China of competitiveness.

Obviously it meant that people were exploited by foreign capital. “We support exploitation today in order to ban it tomorrow,” he then said.

Deng believed that foreign capital, foreign technology and foreign management were not about capitalism or socialism and that actually they were indeed ideologically neutral. They were in it for the money and China needed those jobs.

How coal fuelled China

China might be the world’s factory today, but it was largely run on coal. A key factor to its transformation was led by the change in policy on coal. China is the world’s largest producer of coal, and even today, it remains the most important energy source for the Chinese economy.

The Chinese coal industry was behind major economic, social and political changes that took place over more than a century in China. The country had in 1948 inherited a highly fragmented but a massive coal industry which faced huge productivity inefficiencies. The coal industry back then suffered from low levels of mechanisation, insufficient facilities for purification and lack of transport and delivery infrastructure besides the lack of national planning and policy support.

China’s management and expansion of the coal sector reflected various shifts in the industrial policy since 1949, from Soviet-style central planning to developing major state-owned mines in the 1950s.

After three decades, it changed to reforms involving privatisation, contract-responsibility systems and encouragement of small local mines under Deng.

The Deng Xiaoping era of reforms in the 1980s witnessed top most priority of the CPC in developing the China’s coal industry and thereby accelerating China’s modernisation through new market-driven incentives, accountability and decentralisation of decision-making.

Coal mining also was subject to experiments with marketisation and new ownership principles, including attempts to attract FDI into the coal sector.

Coal production grew rapidly as a result of the opening of many local mines, but still serious problems remained with regard to quality and transportation. China became the world’s largest coal producer in the mid-1990s.

The excess in coal led to a virtuous circle — cheap coal lead to abundance of power which in turn, with China’s huge labour market, ended up boosting the manufacturing sector.

Although the demand for coal eased towards the end of the ‘90s on account of the closure of loss making state-owned enterprises and due to the advent of renewable sources of energy, China has pulled out more than 850 million people out of poverty.

According to the World Bank, China’s poverty rate fell from 88 percent in 1981 to 0.7 percent in 2015, as measured by the percentage of people living on the equivalent of US$1.90 or less per day in 2011 purchasing price parity terms.

India and China

On the other hand, major economic reforms happened in India in 1991, a little more than a decade after it happened in China. Led by then-finance minister and later prime minister Manmohan Singh, a closed License Raj economy was opened to private and foreign investment. Reduction in taxes and tariffs improved investment and trade. Rationalisation of exchange of rupee led to making exports more competitive. After 28 years, India is a 2.7 trillion dollar economy, but with still a lot to be done.

China and India are two major emerging economies of the world. China is the second largest country of world on a nominal GDP basis. India is the 5th. On PPP basis of the GDP, China is at the 1st place and India 3rd.

India and China account for 19.46% and 27.18% of total global wealth in nominal and PPP terms. The two countries together contribute more than 60% of Asia’s GDP.

In 1987, the GDP (nominal) of both the countries was almost equal. But in 2019, China’s GDP is 4.78 times greater than India. On PPP basis, GDP of China is 2.38 times that of India. China crossed the $1 trillion mark in 1998 while India crossed nine year later in 2007.

Both countries have been neck-to-neck in GDP per capita terms. As per both the methods, India was richer than China in 1990. Now in 2019, China is almost 4.61 times richer than India in nominal method and 2.30 times richer as per PPP method. The per capita ranks of China and India are 72 and 145 as per nominal method and 75 and 126 as per the PPP method.