The Inflationary Spiral: The Experience in China, 1939-1950

By Kia-Ngau Chang | Go to book overview
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Chapter 10
Aggregate Supply


Domestic Production

Several paradoxical developments were noticeable in the economy of prewar China: the backwardness of agricultural production along with the growing habit of consuming and using imported modern manufactured goods; the concentration of light modern industry in the coastal Treaty Ports with apparent disregard for their sources of raw materials and the market of their products, both of which were predominantly in the interior; emphasis on railway construction in a relatively small coastal area, with hardly any mileage built in the much larger area of the country's interior, and a simultaneous lack of other modern transportation facilities in interior regions. Other noticeable factors were the neglect of flood control and irrigation in spite of China's dependence on agriculture; the lack of active export promotion despite the strong need for imports; and the failure to develop heavy industry despite the large-scale defense expenditures. All this helped to set the stage for frequent shortages of food and agricultural staples and the consequent need for emergency imports. Furthermore, the interior depended on the Treaty Ports for its manufactured consumption goods; all heavy industrial goods had to be imported; all heavy ammunitions and war equipment, and most minor strategic materials, likewise, were imported; the trade balance was chronically adverse; distribution of goods was difficult, slow, and costly.

Foreign investment and overseas Chinese remittances filled the foreign trade gap in peacetime and permitted a higher level of imports than China's exports earned. The Treaty Ports, which imported foreign capital goods and raw materials whenever these were locally


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