External Environment

1. When Deng Xiaoping became the leader of China in December 1978, China was still in chaos from the Cultural Revolution. Per capita annual income was less than US$ 100. In the same year Deng introduced significant economic reforms aimed at introducing market socialism. Deng Xiaoping has a famous quote: “it doesn’t matter whether a cat is white or black, as long as it catches mice.” What does this mean? (Explain your answer in relation to the three economic systems we discussed in class.

The quote, “It doesn’t matter whether a cat is white or black, as long as it catches mice”was made by Deng Xiaoping in response to allegations that his ideas were capitalistic (free market). This response was meant to say that it does not matter if his ideas were capitalistic (Free market Economy) or communistic (Command Economy) as long as it works.

To get a better understanding of this, one needs to have a brief understanding of the economic situation of China prior to December 1978. It is worth noting that in the 1930’s China developed a modern industrial sector, which stimulated modest but significant economic growth. Shanghai was not hard hit by the great depression and it recorded growth throughout most of the 30s with the exception of the Japanese attack and the Yangtse flood.

The economy was further disrupted by the Chinese Civil war which saw the victorious communists come into power and installed a planned economy. After this the Chinese economy largely stagnated and was later hard hit by the Great leap forward famine which killed close to 40 million people as if that was not bad enough, the purges of the Cultural Revolution disrupted the economy even further. In other words, the economic performance of the People’s Republic of China was poor compared to other nations from the East Asian region like The Republic of Korea and Japan. The Chinese economy was riddled with huge inefficiencies. However the death of Mao ushered in the rise of Deng Xiaoping which saw...