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J. Bradford DeLong
University of California at Berkeley and NBER
South Korea and Other Dragons:
No one watching South Korea in the 1950s anticipated that it would become one of the world's fastest-growing economies. It has been devastated by a bitter war that had seen its capital and major industrial center, Seoul, change hands four times. Its savings rate was low. Its exports were low. More than half of imports in the late 1950s were paid for by U.S. assistance, either foreign aid or the expenditures to support the U.S. military presence in South Korea.
The government of Syngman Rhee sought to control the flow of foreign affairs and imports. They overvalued their currency (so as to charge the U.S. as much as possible for support of its military), they imposed high tariffs and they imposed stringent quantitative import restrictions as well. The result was slow and erratic growth, and continued dependence on the flow of resources from the U.S.
With the takeover of the government by Chung Hee Park in 1961, everything changed. Chung Hee Park was a somewhat brutal (although quite ordinarily so by the standards of the twentieth century) but remarkable leader who shifted Korea's development strategy to one of export-led industrialization, rather than import-substitution. The consequences were astounding. The growth rate of income per capita averaged more than 7 percent of GDP for the three decades after 1960. Exports grew from three percent of GDP to forty percent of GDP.
The Era of Deng Xiaoping:
Mao Zedong's reconquest of power and dominance over the Chinese Communist Party was an extraordinary political accomplishment, but a disaster for China. Higher education nearly ceased for a decade--with a concommitant delay in establishing the human capital infrastructure needed for industrial development. Mao's principal lieutenant in the launching of the Cultural Revolution, Lin Piao, was assassinated--probably by Mao--under mysterious circumstances at the beginning of the 1970s.
The factions of the Chinese Communist Party were unable to coexist after Mao's death. The "left" wing--Chiang Ching, Chen Pota, (those who were soon to be reviled as the "gang of fou"--demanded that Hua Guofeng, the compromise party chairman appointed by Mao, purge Deng Xiaoping once again. The Canton military district, in which Deng had taken refuge, professed to be unable to find him for shipment to Beijing and a subsequent show trial. China came very close to Civil War.
By December 1978 Deng Xiaoping had sufficient control to begin dismantling the Maoist central planning apparatus. Per capita grain production at the end of the 1970s was the same as in the mid-1950s. By contrast, all of China's immediate capitalist neighbors had leaped ahead.
As Dwight Perkins has written:
Where Deng Xiaoping differed from his successors was in the strength of his desire to turn China into a wealthy and powerful state, and his lack of interest in Maoist ideas of a new kind of society, where such things as material incentives would play little or no role.
By luck China stumbled on a strategy for moving away from a command economy that has proved extraordinarily successful--both for the country, and for the Communist Party. Economic growth in GDP per capita appears to have averaged some 7.0% per year since the beginnings of reform in 1978. By contrast, output per capita over 1952-78 grew by at most 2.5% per year.
Chinese Economic Growth Rates (Percent per Year) Since the Beginning of Reform
GDP per Capita
In the countryside the agricultural collecties were dismantled. In the late 1950s nearly all chinese agriculture had been gathered into people's communes and people's production teams of some fifty people. But within five years after the beginning of reform, household agriculture was once again the rule in China.
Up until 1985 the state maintained and effective monopoly over "key" agricultural commodities like grain. Peter Timmer estimates that only some eight percent of agricultural output was sold on an open market in 1978; some eighty percent was traded on relatively free markets by 1990. The response of agricultural production to the end of collective farms and to the use of the market to allocate agricultural productivity was enormous. Agricultural output doubled between 1978 and 1992, with most of the gain coming in the first six years.
Karl Marx had, in his economics, inherited a previous distinction between "productive" labor--which made things--and "unproductive" labor: the service sector, including not just services as final outputs but distribution as well. The Soviet Union and then China inherited this distinction: private restaurants and personal services were suppressed, made illegal, before 1978. After 1978, the service sector grew by leaps and bounds.
The proportion of the labor force employed in agriculture dropped from 71 percent in 1978 to 54 percent in 1994. The proportion of real GDP exported rose from 5 percent in 1978 to 23 percent in 1994. And the proportion of non-agricultural commodity output produced by the command economy's government-run enterprise dropped from four-fifths to one-third.
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