Where Did Mao Go Wrong?

As many of us know, it was not all that long ago that China was a fully qualified communist country. It was between the years of 1949 and 1978, under the leadership of the venerable Mao Zedong, that they took a shot at this whole planned-economy thing. Here are some of the salient features of the Chinese industrial world during this time:

-       -State and local governments owned virtually all of the enterprises within the country. The transfer of ownership happened mostly during the ten years following the revolution in 1949; the government bought out private factories in installments, until by the early sixties, they basically owned everything.

-       -Managers were appointed by the government and responsible to the government.

-       -The government only invested in industries as informed by social concerns, not business concerns for a particular SOE (State-Owned Enterprise).

-       -SOE’s assumed two roles: production, and providing welfare for their employees

-       -Production was strictly controlled by the state plan; products did not go to the market directly

-       The state provided grants to enterprises, and enterprises submitted profits to the government

After some years the centrally planned economy brought along the following five general consequences:

-       1. Stagnation of industrial production and a shortage of industrial products

-       2. Waste in resources

-       3. Widespread market failure (planning an economy for a billion people is hard!)

-       4. Broadly speaking, SOE’s were sluggish, ineffective, and inefficient.

-       5. The automotive, machinery, and steel industries in particular could not take full advantage of economies of scale, seeing as their only source of funding was a tightly stretched government. This prevented them from becoming competitive globally.

The decrepit and backwards economy China found itself with after Mao’s death in 1976 set the stage perfectly for Deng Xiaoping, the economic savior of China, to swoop in to the rescue. Reforms implemented on his watch led to the explosion of growth in the Middle Kingdom (Chinese word for China, “Zhong-guo”) that is continuing through today. My next post will touch on what exactly that smart guy did.

(Source: Professor Mao Zhongming)