China and the Global Economy Since 1840

China’s burgeoning presence in the global economy over the last two decades has been drawing attention from the world economic and political community. Indeed, according to almost every major indicator, China’s economy has expanded considerably since the initial reforms in 1978. The country’s real GNP growth rate is nearly 10 per cent annually. The overall standard of living has been on the rise, as demonstrated in the improvements in diets, clothing, housing, transportation and telecommunications, as well as in the greater access to modern consumer goods among both urban and rural residents. However, what impresses the world more is the rapid advance in China’s foreign trade. Since 1978, the level of foreign trade has climbed more quickly than has GNP. This has led to a jump by a factor of three in China’s share in international merchandise trade. China appears to have become an important player in the world market.

By the time the Europeans launched an intensive drive to incorporate China at the beginning of the 1840s, the capitalist world economy was already completing the incorporation of other major new zones into its division of labour, most importantly, the Indian subcontinent, the Ottoman empire, the Russian empire, and West Africa. In the case of the Indian subcontinent and West Africa, incorporation went hand-in-hand with colonialization, while the Ottoman empire and the Russian empire were drawn into the world system without formal colonization, although with different results: while the Ottoman empire was fragmented, the boundaries of Russia remained relatively unchanged (Wallerstein, 1989).

The Opium War initiated a period during which, under the pressure of armed conflict, diplomatic manoeuvring and political and military blackmail, China was locked into an iron-clad treaty system, from which it was not freed until 1943, a little more than 100 years later. The treaties were signed by the Chinese government and individual countries, but the privileges acquired by any Western country through a single treaty were automatically conferred on other Western countries because of the most-favoured-nation clause.

Foreign investment followed in the footsteps of foreign trade. At first, the involvement of foreign capital in China took the form of bank loans. Between 1861 and 1894, the Qing government borrowed money to meet military needs, pay war indemnities and cover government spending on projects such as palace construction and river conservation. Before the Sino-Japanese War in 1894, government borrowing was on a limited scale, and direct foreign investment remained officially illegal. The Treaty of Shimonoseki, signed by the Japanese and Chinese governments in 1895 after the war, granted Japanese nationals the right to establish factories and engage in manufacturing in China.¹ The right acquired by the Japanese to establish factories was automatically extended to all other treaty powers in accordance with the most-favoured-nation clause, a step that formally legalized foreign direct investment in China.

The incorporation of China represented an important step in the final stage of the geographic expansion of the world economy. After China, there was no other ‘external arena’, and the world economy can be said to have encompassed the entire world, for no country or region remained that was able to operate independently of the world market and world capital.

After a protracted period of war and social turmoil, China found itself, at the end of the 1940s, mired in economic backwardness. Living standards were extremely low, and poverty was everywhere. Mao Zedong once described this poor China, bare of modern industry and material wealth, as ‘a clean sheet of paper’. However, for him, this condition of naked poverty was not entirely negative. He actually considered it a good thing because it could be a source of strength and inspiration. Determination, extreme effort and innovative action were required to change it. On this clean piece of paper, he insisted, the most modern and beautiful essays could be written, and the most modern and beautiful pictures could be painted.¹

Industrialization was a dream of generations of Chinese who wished to see a powerful China rise again and witness an end to the country’s ‘humiliation’ at the hands of the industrialized world. For the post-1949 government, industrialization was viewed as a central concern in the planning for the nation’s long-term development, as well as a task of considerable urgency, given the confrontational atmosphere of the Cold War. Thus, the goal became not simply to industrialize, but to industrialize within the shortest possible time. Rapid industrialization seemed to be the key both to meeting the immediate need of defending national independence and to narrowing the huge gap with the advanced countries. Aware of the success of Soviet industrialization, the Chinese leadership was convinced that an economically backward country like China could industrialize rapidly if the proper methods were chosen.

From 1949 to the early 1970s, China’s participation in the world market was conditioned by certain fundamental constraints. Not long after the establishment of the People’s Republic, the US-led capitalist West broke ‘normal’ trade relations with China. These were not taken up again until around two decades later. Partly in response, China adopted the strategy of delinking and self-reliance. In retrospect, the Chinese government may appear to have overreacted. Yet, the West certainly did not welcome the victory of the Communists in mainland China, and its apprehension quickly escalated into an openly confrontational stance. The US sent the Seventh Fleet to ‘neutralize’ the Taiwan Straits, and China’s territorial unification was left incomplete.¹ China’s entry into the Korean War checked the US ‘march to the Yalu’. Political and military conflict led to economic blockade, and China, called a ‘hostile nation’ by the US government, was banned from the markets of the major Western countries. China’s trade with nations allied with the West, though still possible, became extremely restricted.

In assessing the socioeconomic performance of the People’s Republic during the first 30 years of its existence, we employ some of the commonly accepted indicators, such as the economic growth rate and the human development index. In doing so, moreover, we evaluate specific development strategies in terms of their success or failure in achieving the goals they were designed to achieve. Catching up to the West, industrialization and national independence were the major objectives of the development strategies in China after 1949. From this perspective, the results appear mixed.

After the ten-year-long Cultural Revolution, the state leadership realized that, despite tremendous effort and heavy cost, the goal of catching up to the West still remained distant. It was, therefore, determined that a fresh attempt had to be made. An endeavour was briefly undertaken after the Cultural Revolution to strengthen the central planning system so as to energize the economy. However, due to the lack of immediate success, the endeavour was quickly abandoned.

The new wave of modernization in the name of economic reform has introduced significant change in Chinese society and the economy. The move towards an outward-looking, market-driven economy has involved micro- and macroeconomic reform measures, including the decollectivization of agriculture, the decentralization of economic decisionmaking, encouragement for the growth of the non-state sector, enhancement of the incentives for profitmaking among enterprises, and the adoption of liberal economic and fiscal policies. The measures have been implemented in a piecemeal, yet consistent fashion. ‘Shock therapy’ has not been applied, but new initiatives are constantly being undertaken. The reform process has proved to be protracted: nearly 20 years have passed since the onset of reform. Yet, as has been officially recognized, much remains to be done. The transition from the central planning system has turned out to be much longer than the transition to the central planning system.

Studies of the latecomers to industrialization, especially the Asian NIEs, have emphasized the crucial role of a strong interventionist state (cf. Amsden, 1989; Wade, 1990). Examining the historical decline of China from one of the most advanced countries to one of the poorest countries, Perkins (1997, p. 29) concludes that ‘the core problem for China’s development was the issue of governance’. If its lack of industrialization, more than anything else, was China’s weakness relative to the capitalist West, then the lack of a strong state was the primary reason for China’s inability to industrialize. This situation changed drastically following the rise to power of the Communists in 1949. As if to prove the point, the state immediately undertook full-fledged industrialization and made tremendous progress within a relatively short time.

Measured in terms of growth in trade and foreign capital investment, China’s outward economic reorientation during the 20 years of reform has been quite successful. The ‘success’, however, cannot be adequately understood unless it is viewed in the context of Asia as a region. The overseas Chinese capitalist diaspora, particularly Hong Kong and increasingly Taiwan, as well as overseas Chinese businesses located throughout East and Southeast Asia, have been important in the process.¹ Moreover, the Asian economy has evolved into a structure which is favourable for the economic integration of China into the region.

Since the onset of reform, the Chinese economy has enjoyed unusually rapid growth. Some observers are even talking of another Asian ‘economic miracle’ in the making. The high GDP growth rate over a period of nearly 20 years reflects a tremendous level of sustained industrial expansion. Unlike most other transition economies, China has not been plagued by a lack of growth. On the contrary, it has sometimes had difficulty coping with the speed of growth. Several times, the government has had to take measures to allow the economy to cool down.

Over the past century and a half China has passed through three distinct phases in its response to the challenge posed by the West. These phases have been marked by three separate ‘packages’ of development strategies: ‘Westernization’ (whether a formal ‘movement’ or otherwise), ‘delinking and self-reliance’ and ‘reintegration’. These strategies have been as much the products of domestic and international circumstances as the subjective choices of the respective governments. They have to a large extent shaped domestic economic and social structures and, at the same time, owing to China’s size and its historical importance in East Asia, contributed to an East Asian regional development pattern.