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Ma Debin: When did Chinese economy begin to fall behind?

 

Thank you. It is a valuable opportunity for me. Firstly, I want to thank you for inviting me to make the speech of “To View China’s Economic Growth from Historical Perspective”. Chinese economic history is increasingly concerned from an unpopular subject. Therefore, I would like to take this opportunity and tell you that the economic history will become an important part of Chinese economic research. In projects about Chinese economic history of economic research, Chinese scholars have stronger comparative advantages and say. Chinese economic history is universal and unique. Not only in China, mainstream economics and economic history magazines worldwide are gradually accepting the subject of economic history. However, in the development of Chinese economic history, building evaluating system is more important. This is very important and shall be recorded in the form of English publication with the assistance of Chinese media. I mention this is because I think it echoes with the goal of NEF. To build its own evaluating system is the key to allow Chinese economics to make its say.

 

Economic history is of great significance as it provides great subjects for natural science, enriches economic theory and facilitates empirical research. It is critical for us to understand the reality. In recent years, Professor Gong, Professor Chen of Yale University and Hong Kong University and me are committed to cooperating with domestic institutions on promoting economic history research. In Shanghai, Dean Tian Guoqiang of Shanghai University of Finance and Economics and Professor Wei Sen of Fudan University have been supporting the research on economic history and history of economic thought for a long time. In addition, I know the two award winning scholars are very interested in this as well.

 

I think the biggest question in Chinese and world economic history is when did Chinese economy begin to fall behind? I clearly remember when Deng Xiaoping implemented Reform and Opening Up when he visited southern China in 1992, he said China has fallen behind for 1000 years and it is time to reform. Please think about this question, when did Chinese economy begin to fall behind? The question was much complicated than we thought when we formally researched on this. When defined the time of being falling behind, what is more difficult is to explain the reason. I will talk about the related research and my personal thoughts here. By doing so, we can see that using new economic and global perspectives to view the research on economic history will offer us with some enlightenments on the reality and the future. This will even force us to rethink about the existing conclusions or explanations in the textbook.

 

A pure theoretical economist can take the Industrial Revolution that began in the UK at the 18th century as a divergence. Before the Industrial Revolution, the incomes of different countries were at the same level. However, the gap between rich and poor countries were widened after that and formed today’s landscape. The Industrial Revolution generated Great Divergence. What will real historical data tell us?

 

Let’s talk about the research on European economic history. The scholars represented by Professor Robert Allen of Oxford University tried to measure the living standard between 1450 and 1913 using the real wages of non-skilled workers in main cities of Europe. The scale of such research has been enlarging and many cities, even the Istanbul of Turkey (used to be the Ottoman Empire) were included. An important fact that they found was the wage level of British and the Netherlands before the Industrial Revolution surpassed that of the other areas in Europe as well as Istanbul. Some call it small divergence before the Industrial Revolution.

 

What about China? In other words, when did China begin to fall behind? When we began to research, we found it interesting that Adam Smith wrote in The Wealth of Nations that even though China had a lower price level, its nominal wages were even lower and China’s real wages (living standards) were lower than UK’s at the time. As we all know, The Wealth of Nations was written at the end of 18th century, which was before the UK’s Industrial Revolution. Adam Smith only thought about economic growth generated by the social division of labor and ignored the great potential of revolution in technology and industry. What he mentioned about wages was only a pure assumption in his sofa. What we are trying to do is to prove his assumption using real historical data. From historical files and other documents, we gathered the data about the nominal wages of non-skilled workers of three major cities, Beijing, Suzhou/Shanghai and Guangzhou in China between the 18th and 20th century. Then, we construct the price index with international comparativeness. Last but not least, we had a series of real wages that could be compared internationally. I have to emphasis that this research involves the authenticity of a series of historical data and the complicated technical issues of practicability of being internationally comparative. We made detailed discussion in our paper.

 

The findings coincide with Smith’s assumption. Firstly, the real wages of non-skilled workers in three Chinese cities were fallen behind before the Industrial Revolution and reached one third of London or Netherlands. In the comparison, we also took wages of non-skilled workers in other European or Asian countries like Japan and India into consideration and we found that their wage levels were similar to that of China which were lower than that of the UK and Netherlands. If we convert the real wages of Chinese workers of underclass that we calculated in the end into calorie and protein that we live on, these workers were of mere subsistence. Secondly, the gaps in wage levels between China and other advanced countries were widened. More importantly, some used to be descended European countries like Germany and Asian countries like Japan participated in the Industrial Revolution just in time. The real wages level of workers sharply increased between the 19th and 20th century and surpassed China which was comparatively stagnated. Thus, there are two divergences in living standards of China and advanced countries between the 18th and 20th century; one is before the Industrial Revolution and the other is after this revolution.

 

In addition to the wage, the research also involves other indexes. GDP is the most comprehensive one but it has a very high requirement on the historical data which results in many issues. Other research that we done used the series of data of long term human height that are frequently used in Western economic history. This might sound hilarious to you. However, the practicability of height has been and discussed and applied for a long time in the Western economic history. We used materials of Chinese who migrated from Fujian Province and Guangdong Province to Australia, Southeast Asia and the US. Their height data can be dated back from 1815 to after 1930. We find that people who born in the period of Taiping Heavenly Kingdom were generally shorter in height. The average height of Chinese in the late Qing Dynasty who born in 1880s was decreasing. In the period of Beiyang Government, the average height increased. It is interesting that the heights of Japanese are constantly increasing even though the average height was low as the living standard was improved by Meiji Restoration.

 

A big question here is how to measure the long term human capital of China, especially the level of literacy and numeracy. There is a kind of research that uses age-heaping as the index. Let’s assume that one person tends to use integer when asked about age, like he might say at the age of 20, 25 or 30 instead of using the actual number if he is not good at numeracy. Chinese numeracy is much better than that of Turkey and India which had similar living standards, and even approaching to the level of advanced European countries.

 

In addition, the historical database that built by Professor Chen Zhiwu and his team needs to be mentioned here. For example, they deduced the homicide rate of different places in China between the 18th and 19th century using a great amount of criminal records. They found that the homicide rate of China at that period was much lower than that in the Europe. The data of interest that they collected for a long time was much higher than the advanced European countries. Chinese capital market was under developed for a long time. All these long term quantitative research can show a landscape of Chinese economy before the Opium War. That was a comparatively stable society with normal people achieving basic subsistence, a certain level of human capital basis but lack of capital.

 

Our research should have important enlightenments on many discussions on history. For example, we often hear that China’s GDP ranked first in the 18th century and the development in recent decades or in the future is only the recurrence of the Kang-Qian Flourishing Age from some perspectives. This is a wrong saying. China’s GDP in the 18th century ranked first because of its great population and the similar income level of different countries before the Industrial Revolution. Therefore, the development now and in the future is not aiming to achieve the level at the period of being cut off from the outside world. The world today is different from the one in the 18th century. Of course, we can’t say that China has been a poor country for 1,000 years. Many scholars believe that China at the Song Dynasty was the most advanced country in the world especially when Europe was struggling at the Middle Ages.

 

Why did China fall behind? This is complicated. There are differences in geographical resources between China and Western countries, the oversea colonization of western countries and China’s cutting off from the outside world, the emergence of science in the Western world and the imperial examination system. There are many sayings in the history and it is barely possible to have a conclusion. Today, I want to talk about the research on how did China’s ideology and political system influence the long term economic development. The most distinct features of China’s system are the absolute monarchy, the rise and evolution of the system of prefectures and counties and unification. These systems have posed important influences on the formation of property, laws, market, financial system, human capital, etc. and the research on these issues has important practical meaning. Mr. Xu Chenggang who is with us today has been concerned about the connection between history and reality. When researching on the evolution of political system, we can begin with empirical ones. The system of prefectures and counties and the imperial examination system, which replaced the aristocracy, was the most important part of Chinese absolute monarchy. We have conducted many quantitative research on this system using existing historical data. The elements of geographical culture, the close relationship between agriculture and bureaucracy, the historical cycle of the conflicts and integrations of agricultural ethnic and nomadic people have played key roles in the strengthening of the united system.

 

Only rely on statistical analysis is not enough. Theoretical framework is needed for the final explanation. By comparing China with Western countries, we can better understand our history. Let’s go back to the Qing Dynasty in the 18th century. We found that the Qing Dynasty allowed the integration of agricultural and nomadic culture while the emperor had unlimited power nominally. However, by empirical comparison, we found that the formal taxation of the Qing Dynasty was very low which was far less than that of Netherlands and the UK which imperial power was limited by the constitutionalism. At the same time, unlike Western countries like Netherlands and the UK, China didn’t have well-developed financial market, especially the government bond system and market. The important fact that generated by the Glorious Revolution in the UK at 1688 was the restriction that parliament had on the imperial power. The most important thing was the issuing of government bonds must be regulated by the law and market rather than government implementation. Thus, 100 years before the UK Industrial Revolution, there was already a fiscal and financial revolution. While the Qing Dynasty in the 18th century entered a contradicted equilibrium route. We tried to explain this by a Game Theory model in another research. In the Qing Dynasty, the limited and semi-legal low tax, harsh duties and corruption which were were rational institution design to a great extent in terms of maintaining the political stability of great unification. Although, it might inhibit the possibility of the bottom up institutional changes.

 

We can review the economic history of the Late Qing Dynasty and the Republic of China. Did Chinese economy grow in that period? In which period? Was it the period of Self-Strengthening Movement, the period of Beiyang Government or the period of Nanjing Government? If yes, what was the driving forces? The economic data at that period also faced with many problems. However, something was clear. The economic development at the period of Self-Strengthening Movement was stagnated. China’s industrial revolution began at the First Sino-Japanese War and continued in the period of Nanjing Government. To view de GDP data between 1910s and 1930s, the growth was not significant. This was due to the strong regionalism and industry features, especially in industries like machine-made cotton yarn, modern mining industry, international trade and investment. In these industries, some even achieved annual double digit growth. Similarly, industries like modern railway, transport and education also had fundamental changes in the period of Beiyang Government. There is another question, why did the economy grow when the political environment was relatively stable in the Late Qing Dynasty but not in the period when political environment was quite unstable? Sometimes we positively evaluate the golden ten years of Nanjing Government but we seem to ignore the contributions made in the period of Beiyang Government. As we had some research on this, I will talk about two of the most important phenomena today, i.e. the rapid development in the modern finance and government bond market. We know that modern finance is most sensitive to laws and contracts, why did it develop so well in the period of Beiyang Government that lack of a stable political environment? Similarly, why government bond market could develop when Beiyang Government was merely bankrupted?

 

The development in the period of Beiyang Government was closely related to the important ideology and political revolution. However, another key was the foreign settlements in China, especially those in Shanghai. Settlements were generated by semi-colony and had issues of colonialism. However, the Municipal Council that governed the settlements in Shanghai was also the self-government of Western elite businessmen, in which legal system and market discipline were two most significant lines. Because of this, settlements attracted bank industry and financial industry, even include banks of Chinese national capital. A famous event was that the Shanghai Branch of Bank of China successfully boycotted the Order of Suspensing of Specie Payment that implemented by Duan Qirui Government aiming for fiscal benefit in 1916 using the court of settlements, which laid the foundation for the independent and development of the China’s national bank. Another related institution was the custom. Customs were controlled by foreigners after the Self-Strengthening Movement. To be more specific, they were outsourced to foreigners by the Qing Government. Thus, the customs were with the highly independent, honest and upright and institutionalized system. The central and local governments rarely intervened customs, making the tariff of customs became the most stable source of tax in the period of Beiyang Government. More importantly, they are the most credible collateral for the Beiyang Government’s bonds. The custom directly sent the special taxation of government loans repayment to Hong Kong and Shanghai Banking Corporation (HSBC) and then to the Bank of China. The government bonds management in the period of Beiyang Government also had institutional innovations. For example, it set up organizations like independent committee that consists of head of customs, bankers and government officials and bond-holder association to supervise or even implement the repay of national debt. The institutions that independent from the central government helped the bonds of Beiyang Government earn credits. The maintaining and changing of these institutions will directly be reflected through the bond prices in the bond market at the second level.

 

As government bonds can be used as the collateral of issuing paper money, the financial revolution that led by the private banks in this period began. Between 1917 and 1937, the average annual growth rate of China’s monetary reached 5% while the growth rate of paper money exceeded 9%, much higher than the annual GDP growth rate of below 2% in the same period. The price level was stable as well. The main reason was no government monopoly and money issued by strong private banks. In order to survive in a highly competitive environment, their own reputation was very important. Bank became the largest holder of government bonds. Thus, Chinese bankers were able to negotiate with the government as they need to maintain a stable financial market. Some of our research also found that the domestic monetary market that represented by Shanghai and Tianjin gradually integrated even though there was political clevarage after the Revolution of 1911. When the grand unification collapsed in the period of Beiyang Government, China completed a bottom up financial and fiscal revolution that led by the civil force. The economic growth in the period of Nanjing Government was also a representation of this revolution. However, in the mid 1930s, Nanjing Government implemented the nationalization of banks and monopoly of issuance of money. These might have positive influences in the short term but they later led to the bureaucrat capitalism of the Kuomintang and severe inflation in 1940s.

The research on economic history might not provide a perfect answer for the current issues that we are faced with. However, when reviewing what Mr. Deng Xiaoping said when he visited the southern China, we believe that understanding history could be important for us to realize the history and present time of China as well as building a better future.

Thank you!

 

 




◆please indicate the source if authorized: National Economics Foundation

◆photo:National Economics Foundation