Iron rice bowl left behind in race to market

China's Economic Transformation. Second Edition

May 25, 2007

When Chairman Mao called to let a hundred flowers bloom and make a great leap forward, only turbulence followed, famine spread and China regressed into economic anarchy. Five decades later, Mao's legacy is gone.

But a new China has emerged. When Chinese products constantly flow into the West and Chinese students quietly invade foreign universities, who can dispute that flowers have indeed bloomed in Shanghai, though not exactly the way Mao meant.

For sheer scale and speed of transformation, the Chinese miracle will probably eclipse the other miracles of East Asia. Nowhere has poverty fallen so rapidly, and no other country has transformed itself in such a short time from an agricultural economy to a leading exporter of industrial goods. This unprecedented growth has generated tremendous interest among economics researchers. There are several UK journals devoted to China, and many universities offer specialised modules on the country's economy.

Gregory C. Chow's text is a timely contribution. First published in 2002, it was until recently the only textbook on the Chinese economy. But the country is changing so rapidly that a second edition was inevitable. There a few important additions: it is divided into five parts with 20 chapters, each completed with specific references and questions ideal for assignments and classroom discussions for both masters and undergraduate levels.

The book begins with China's ancient history and moves to the post-1949 era. This part provides a unique perspective on Chinese policymaking, for which Chow sometimes draws from his personal experience of working with the Chinese Government. We learn that Deng Xiao Peng's 1978 reform was not entirely a radical departure, but it was a return to the Communist Party's pre-Cultural Revolution promise to embark on economic modernisation. We also learn that farmers were secretly experimenting with private farming well before 1978. Deng made it official.

The second part of the book delves into a rigorous macroeconomic analysis, which still has enough for non-technical readers. For example, there is a discussion of total factor productivity, which is a standard way of identifying whether growth can be attributed to mere use of labour and capital or something beyond that, such as technical progress. Here, Chow reports from his own study that between 1952 and 1978 there was hardly any evidence of technical progress in the economy.

There are many other interesting analyses, such as the effects on gross domestic product of major political events such as the Great Leap Forward.

In the remaining three parts, Chow addresses some issues related to development, financial-sector reforms, and corruption and legal institutions. I enjoyed the chapters on human capital and on the behaviour of state-owned enterprises. Chow presents a long time series on student enrolment and schools from 1949 to 1981, then follows it with an earnings study based on a recent dataset. The estimated rate of return to schooling in China is found to be on the lower side than what is typically found for developing countries.

Chow helps us to understand why China's reform has been cautious and gradual, in contrast to Eastern Europe's big bang reform. Caution has helped China to manage the immediate adverse effects such as unemployment and lack of job security.

The book does not offer much on poverty and labour market reform. It only touches on the former, though the subject has been well researched. The labour market reform, famously known as the withering away of the "iron rice bowl", and the creation of a free labour market both played a critical role in China's rapid industrialisation. But labour reform involves new challenges, and benefits of such change may not be equitably shared.

Without understanding these trade-offs, we will not gain a comprehensive assessment of China's new economic policies.

China's Economic Transformation. Second Edition

Author - Gregory C. Chow
Publisher - Blackwell
Pages - 432
Price - £.99
ISBN - 9781405156240

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