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
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 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.
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.
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 2 serves
as a comparison to show the distortion and its hangover (till the 1990s)
of the Chinese macroeconomic structure.
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.
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.
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.
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.
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
So, à 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
The London School of Economics and Political Science.