Great Leaps Backward: Poverty Under Mao
Kent Deng


Editors Introduction
Kent DengWhen Mao Zedong seized power in 1949, his first and most powerful instinct was to resort to the policies of his revered role model Josef Stalin. Kent Deng (right) argues that Mao's insistence on replicating Stalin's economic strategies and structures was to have disastrous consequences for China.

In a country heavily biased toward agriculture, he promoted heavy industry; the returns from this were ploughed right back into heavy industry, creating a pattern of growth that completely bypassed the subsistence needs of the populace. This illusion of growth masked desperate poverty and a drastic decline in living standards.

In the wake of a torrential era of invasion and civil war between 1840 and 1949, the establishment of Mao's new China, the People's Republic, was commonly viewed as a turning point in modern Chinese history, heralding newfound peace, political stability and economic prosperity. Even today, Mao's era, 1949-78 (begun with the establishment of the republic and ending with his short-lived successor Hua Guofeng), is taken as a period of fast growth regardless of the periodic political purges masterminded by those at the very top.

However, a close examination of the growth performance during Mao's era leads to a rather different picture, a picture of political coercion, economic exploitation and widespread poverty. This removes much of the mystique surrounding the raison d'etre for market reform under the leadership of Deng Xiaoping from 1978: ruined and deeply unpopular, Mao's socioeconomic system needed to be replaced.

Mao's copycat policies
Mao's first act after seizing state power in 1949 was a bid to reconstruct China's society and economy. Mao, a radical anti-traditionalist, abandoned China's timeless, functional economic structure together with its cluster of well-established institutions. This system was labelled by Mao as feudal, backward and reactionary. While he was categorically market-phobic and xenophobic (as much a result of his ideological commitment as of his ignorance), Mao and his aides religiously replicated Stalin's political and economic structure, strategy and, inevitably, mistakes to the full. There were four nails in the coffin.

First, the extreme Soviet policy of import substitution strategy for industrialisation (ISI) was adopted, a strategy proposed by Lenin in his fantasy of "building socialism in one country" in total economic and technological isolation. This led to an embargo against foreign inputs during Mao's era. This embargo was as much self-imposed as it was externally implemented by the West and by the post-Stalin Soviet Union.

Second, the centrally planned Soviet command economy was taken as a system far superior to the market economy in facilitating growth, especially the illusion that "public ownership" would free the otherwise stifled "productive forces" for good. This in turn created a fantasy that an economic miracle of "super-industrialisation" could be achieved, which would allow China to surpass the capitalist prowess of the United States and Great Britain. This formed the rationale for the disastrous "Great Leap Forward" a decade after Mao assumed power.

Third, Stalin's proletarian dictatorship was copied, resulting in unprecedented political control over all aspects of the life of individuals: production, consumption and distribution. Private property rights were banned, and any resistance to the state's expropriation, commandeering and requisition of land, capital and labour were ruthlessly crushed. Systematic brainwashing helped smooth the acquisition of resources by the state.

Last, the state and its economic target became completely alienated from the interest of the general public, and this in turn created widespread economic disincentives as people became increasingly disillusioned by a harsh everyday economic reality with poverty at its centre.

Distorted growth
An "unbalanced growth" strategy that supported heavy industry and the arms industry was inspired by Stalinist thinking. This is reflected in the data from Table 1. By 1978, some 17 percent of China's labour force was employed in the industrial sector, which claimed about half of China's total gross domestic product (GDP). The high GDP shares for the industrial sector in both sectoral total and per capita terms confirm that the need for modernisation in the agricultural sector was ignored. This is not to mention the deliberate inflation of GDP share as a result of the state-controlled terms of trade between the agricultural and industrial sectors, an issue that will be dealt with later.
Table 1: China's Economic Structure (at 1978)

Table 2 serves as a comparison to show the distortion and its hangover (till the 1990s) of the Chinese macroeconomic structure.
Table 2: Economic Structure in Comparison

Within the industrial sector, much emphasis was put on heavy industry, unmistakably of the Stalinist type, as revealed by Table 3. This structural distortion inevitably led to a "famine of consumer goods" as disproportionate resources were employed to produce capital goods, of which a large proportion was indeed for heavy industry's own service.
Table 3: China's Industrial Structure

Not surprisingly, the agricultural sector fell behind the industrial sector in relative terms. Taking China's population into account, Table 4 shows how the agricultural sector suffered complete stagnation during Mao's years. It began to catch up with industry only after the end of Mao's era, as shown in the data in Table 5. But the damage was already done.
Table 4: Grain Output vs. Population

 

Table 5: China's Sectoral Output Growth, 1952-78 vs. 1978-83

Both agriculture and light industry (which was also responsible for the supply of consumer goods) experienced negative growth. As stagnation reduced the surplus margin for the agricultural sector, such negative growth caused a nationwide famine from 1959-61 known as the "Three-Year Long Great Disaster," in which 30 million died of starvation. As the climate for farming was nothing out of the ordinary the disaster was almost certainly man-made.

Table 6: Negative Growth in Consumer Goods Production

Although the industrial sector was continuously given priority with generous funding and all-round protection, and although official statistics for the sector's growth were always rosy, Maoist ISI was deep in crisis. Since the 1979 reforms to replace economic planning with market forces, as much as two-thirds of state-owned enterprises have been operating in the red. Today, in most cases, when a state-owned enterprise bids for a joint venture with a foreign business partner, a high discount rate (often over 50 percent) is applied to its capital stock. This is just one indicator of the gap between Communist artificial value and the market value of the same capital stock. Thus, the industrial growth during Mao's era was by and large a false economy, with pseudo-fast growth supported by systematic economy-wide distortion. It was wasteful and unsustainable.

Financing the distorted economy
Wherever the import substitution strategy of industrialisation is implemented, the economy faces budget constraints. Mao's China was certainly no exception. Given that China was cripplingly impoverished after three consecutive major wars from the 1930s to the early 1950s (the Counter-Japanese Invasion, the Communist-Nationalist Civil War and the Korean War), the budget constraints were even more severe than those faced by the Soviet Union in the interwar years of 1920-40. The only way for the state to overcome these constraints was to impose ruthlessly forced savings on the masses. For a die-hard teleologist like Mao, this was not a problem, as the notion of "powerful state but poor people" was popular among Stalinist leaders.

So, la Stalin, Mao's regime simply scraped up funds from ordinary people's basic needs. Table 7 reveals how forced savings in terms of "accumulation" were made from the economy as a whole for capital formation. Based on the information in Tables 1-3, much of the new capital just ended up feeding heavy industry.
Table 7: Accumulation Rate vs. Consumption Rate in Total Output

Much of the forced savings were also made through strict wage control. Consequently, the Chinese urban wage rate was at best frozen; this is clear from Table 8. This was compatible with the underlying practice of Maoist economic management: the subsistence wage was used as the only parameter for labour cost in economic planning.
Table 8: Frozen Wage in the State Sector, 1957-1984

Forced savings also took the form of taxation. Under Mao, direct taxes were heavy. The industrial tax rate averaged 86 per cent of the "net national product" (physical output minus physical inputs), one of the highest in the world in 1980. However, since the industrial tax revenue was constantly ploughed back to the industrial sector, it did little harm to further capital formation and production.

The agricultural tax was set up from 1958 onwards at a rate of 15.5 per cent of the total physical output. Thus, in real terms, it taxed the physical inputs (now embodied in the total output) as well. This rate of 15.5 per cent was much higher than China's pre-modern norm of 6-10 per cent. The total revenue from agricultural tax from 1958 to 1978 totalled 341 billion yuan, or 17.1 billion yuan per year. It is known that the total asset of the agricultural sector (excluding land) was only 15 billion yuan (as in 1978), and that resources in the agricultural sector were overdrawn.

Given that the agricultural tax revenue was taken away from the agricultural sector to finance industrialisation, the Chinese farmers saw no returns from what they had to pay to the Maoist state. Especially considering that the surplus margin of the ailing agricultural sector was already very small, heavy taxation further harmed capital formation and production in the sector, creating a vicious circle.

Mao's forced savings also took the form of indirect taxes, among which the most damaging was associated with "scissors pricing," a persistent policy of Stalin's regime. The thinking behind this practice is that since the peasantry is dependant on state-controlled industrial and service sectors, and since the state is able to monopolise inter-sectoral exchange, the state is also able to distort the terms of trade between the agricultural and industrial/services sectors in order to extract a profit. It is a type of arbitrage on an economy-wide scale. For the agricultural sector this was a systematic rip-off. Notoriously, this arbitrage was justified as "socialist primitive accumulation of capital," although it completely contradicted Socialist/Communist ideology. Table 9 shows how the terms of trade between the sectors were manipulated. Evidently, the price gap increased further in the 1960s and '70s.
Table 9: Economy-Wide Arbitrage by the State

This economy-wide arbitrage institutionalised the income gap between the urban and rural communities. In the early 1990s, analysts suggested that even after several attempts to narrow the gap the price level for grain had to be increased five times before the income differentiation between agricultural and non-agricultural sectors was equalised.

To show just how effective this arbitrage was, between 1958 and 1978 the total profit from state arbitrage amounted to an astonishing sum of more than 600 billion yuan, more than the total investment by the state in capital stock (500 billion yuan) of the same period (not to mention the 341 billion yuan tax revenue from agriculture). Thus, it is no exaggeration to say that Mao's ISI was completely financed by the agricultural sector. Judging by the Maoist false economy in industrial growth, much of the resources extracted from the agricultural sector went to waste.

Selfish growth
When we put all the mechanisms and behaviour of Maoist economy together, widespread poverty in China was inevitable. First, standards of living among the Chinese population were kept at subsistence level. This is supported by the persistently high Engel's coefficients (i.e., the proportion of the total income to be spent on food). Table 10 reveals the "hand-to-mouth" existence of the Chinese population during Mao's era.
Table 10: Poverty Reflected by Engel's Coefficient

Second, the dependent-supporting capacity of one full-time wage deteriorated by some 50 per cent (see Table 11). Together with the high Engel's coefficients, a reduced dependent-supporting capacity of the worker's wage implies that the urban population lived on less food of poorer quality.

Table 12: Real Income Measured by Dependent-Supporting Capacity per Wage Urban Worker

Economic historians generally agree that standards of living in China as recently as the eighteenth and nineteenth centuries were still comparable with those in Western Europe. Given that China has been ranked at the very bottom of the world income league table even today, the Maoist regime did practically nothing to improve ordinary people's lives. Even worse, the regime deliberately institutionalised and reinforced poverty (not to mention its responsibility for the great famine in 1959-61) in the name of Communism. Last but not the least, there is a general illusion that Mao's China was poor but equal. Evidence suggests the opposite: inequality increased under Mao as measured by Gini coefficient, and it was the post-Mao reform that was able to reset the clock.

Table 13: Trend in Inequality Seen From Gini Coefficient

Conclusion
Mao's regime created a false economy with pseudo-fast growth primarily through systematic distortion by the state. Such growth was fuelled by a ruthless exploitation of the general public through deliberately lowering their standards of living at the subsistence level. This was the origin and the cause of poverty in Mao's China. Not surprisingly, then, as poverty prevailed in society the knell of Maoism tolled soon after the tyrant's death.

Copyright The London School of Economics and Political Science.