Explain why urban-industrialization in China during the central planning period deprived the rural sector.

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Guy Harding

Explain why urban-industrialization in China during the central planning period deprived the rural sector.

In 1949 following the Chinese Civil War, the country’s’ leadership was determined. The Guomindang (KMD) fled to Taiwan whilst the Communist Party of China (CPP) took power in Beijing. A new political and economic order modelled on the Soviet example was quickly installed; this was the birth of the central planning period.

The CPP leadership moved with haste and quickly began to involve themselves within some of the underlying crises, many existing as a result of the civil war. Their main concerns included low levels of gross domestic output, high rates of inflation, and high levels of urban unemployment. In order to sustain public confidence within the party, the CPP recognized that these problems would have to be tackled quickly and effectively.  

The economic relationships between urban areas and their rural counterparts (in LEDC economies) stem from the following; the terms of trade between the two sectors with regard to the exchange of commodities and manufactured products, the inter-sectoral transfer of both labour and savings, the relative wages of labour in the two sectors, the relative sectoral contributions to tax revenue and benefits accrued from public expenditure, and finally the extent to which government policies benefit one sector disproportionately more than the other.  Knight and Song (1999) identified at least three theoretical frameworks for the analysis of these relationships;  

  1. the Lewis model of economic growth with surplus rural labour
  2. the ‘coercive’ or ‘price scissors’ model of economic growth financed by extracting a rural surplus
  3. the notion that economic policy is subject to urban bias

The Lewis model is a structural change model that describes how labour is transferred in an economy with dualistic characteristics. Arthur Lewis advocated to the concept that economic growth is driven primarily via the industrial sector.

The Lewis model states that economic growth requires structural change in the economy whereby the surplus workers who exercise a low or zero marginal product of labour are allowed and encouraged to migrate to the modern industrial sector where the marginal product of labour is high and rising. This is to say that each additional worker adds more value in the industrial sector than he would have had had he remained in agriculture in rural china. The Chinese government endorsed Lewis’s concept and the resulting migration was so extensive that the government was later forced to retaliate in the form of migration controls and the Hukou system, in order to prevent and limit increasing urban unemployment and the drawbacks that ensue from this, something that I will discuss in greater depth later.  

Migration allows output to increase and with this wages begin to rise, prompting a sharp increase in the standards of living.

As the supply curve of labour becomes more inelastic due to an improved rural marginal product of labour, relative agricultural prices begin to rise ultimately resulting in an improvement of the rural urban terms of trade. This is obviously just a model; however, the events described above were mirrored to an extent in 1950’s china.

The price scissors model helps to explain how the government; by artificially influencing the terms of trade are able to generate a surplus which can be invested in the urban industrial sector. The government, through the means of, state monopolization and monopsonization are able to control the prices of agricultural commodities. The Chinese state relied upon coercion rather than incentives to secure the harvest. Mao endorsed compulsory procurement of peasant output at low prices, and it enforced collectivisation to attain greater control over the surplus. ‘The compulsory procurement of food reduces the welfare of rural people but makes possible the extraction of an investible surplus without necessarily reducing urban welfare.’  The price scissors policy kept down agricultural prices in relation to industrial prices allowing lower industrial wages and higher surpluses in the state-owned industrial sector.

Urban bias theory tries to explain why the state is more inclined to respond to urban needs over rural ones. Although the urban population tends to compromise a minority of the population of less economically developed countries; ‘urban dwellers exercise an influence on government policy which is disproportionate to their numbers’

This is because of many reasons. The urban population are more politically aware and benefit from better information owing to a better infrastructure. The urban population also have a greater opportunity to vote and will also tend to agree with government policy, the ‘iron rice bowl’ for example provided secure jobs giving urban dwellers an increased incentive to vote.  Urban bias promotes a better standard of living in the cities relative to the countryside.

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In 1950 officially defined ‘poor peasants’ accounted for 52% of the population, yet they only owned 14% of the land, whereas the landlords and ‘rich peasants’ who accounted for just 9% of the population had in their possession 52% of the land, this large inequality meant that the wealthy 9% were able to keep the majority; the poor peasants, in a state of deprivation and the structure of the system pre-Mao meant that the poor were trapped in this state of poverty with no means of escaping.

Through the progressive socialization of Chinese agriculture (making ownership of land collective, not ...

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