Download Session Three: Market economy vs. planned economy: how China is

Session Three: Market
economy vs. planned
economy: how China is
transforming
Questions
• What is market economy? What is
centrally planned economy?
• Is market economy better than centrally
planned economy? Why?
• How to transit from a centrally planned
economy to a market economy?
• How China has done and is still doing?
Market economy vs. planned
economy: different reforms
• Market economy vs. planned economy
• Ways and components of economic
reforms
• Radical reforms in Russia
• Gradual reforms in China
Market economy vs.
planned economy
• How is an economy organized to produce
goods and services? There are three key
issues:
• Who owns the means of production?
• Who makes decisions?
• How are the prices determined?
Market vs. planned economy
• Market economy (private enterprise economy/
free market economy/capitalism):
– Under this economic system, the means of production
are privately held by individuals and firms. Economic
decision-making is highly decentralized, with
resources being allocated through a large number of
goods and services markets. The market
synchronizes the decisions of buyers and sellers and,
by establishing an equilibrium price, determines how
much of a good will be produced and sold.
Market vs. planned economy
• Centrally planned economy (command
economy/collectivism):
– Under this economic system, economic decisionmaking is centralized in the hands of the state with
collective ownership of the means of production
(except labor). It is the state that decides what goods
and services are to be produced in accordance with
its centralized national plan. Resources are allocated
between producing units, and final outputs between
customers by the use of physical quotas.
Market vs. planned economy
• Mixed economy:
– Under this economic system, some goods
and services are supplied by private
enterprise and others, typically, basic
infrastructure goods and services such as
electricity, postal services and water supply,
are provided by the state.
Market vs. planned economy
• Arguments for market economy:
– Advocates of free enterprise argue that a
decentralized, market-based system leads to a more
efficient allocation of productive resources in line with
the demands of buyers and that in pursuit of
individual self-interest (the profit motive) it will
produce economic results (lower costs and prices,
innovative new products) that are beneficial to society
as a whole.
Market vs. planned economy
• Arguments against market economy:
– Critics argue that market-based economies may not
fully respond to the demands of buyers where supply
is in the hands of powerful suppliers (monopoly), that
it cannot ensure the provision of collective products
for which no market exists, that it can generate
pollution and other externalities and that it leads to
gross inequalities in income distribution.
Market vs. planned economy
• Arguments for centrally planned economy:
– The main argument is that the collective ownership of the means
of production “by the people for the people” is preferable to a
situation in which the ownership of the means of production is in
the hands of the “capitalist class” who are able to exploit their
elite position to the detriment of the populace at large. State
control of industry enables the economy as a whole to be
organized in accordance with some central plan, which by
interlocking and synchronizing the input-output requirements of
industry is able to secure an efficient allocation of productive
resources.
Market vs. planned economy
• Arguments against centrally planned economy:
– Critics argue that in practice they tend to be “captured
and corrupted” by powerful state officials, and that
their top-heavy bureaucratic structures result in a
highly inefficient organization of production and
insensitivity to what customers actually want.
Market vs. planned economy
• General phenomenon in market economy:
surplus
• General phenomenon in centrally planned
economy: shortage
• Both economies cannot always reach
equilibrium!
Market vs. planned economy
• After the WWII, almost all the developing
countries (not to say socialist countries like
China) undertook national planning, influenced
theoretically by structuralist and neo-Marxist
thinking, and practically by the success of the
former Soviet Union.
• Even many developed countries adopted
national planning, becoming so-called mixed
economies.
Market vs. planned economy
• Reasons for government intervention and
planning: market is supposed to allocate
resources efficiently, however, there are market
failures.
• In the 1950s, 60s and 70s, government
intervention and planning allocation were
extensive in developing countries. However,
since the 1980s, there is a tendency to turn back
to rely more on market forces.
Market vs. planned economy
• The reality is that market economy (or
somewhat mixed economy) is better than
centrally planned economy, so by 1990s,
almost all the centrally planned
economies have transformed or are
transforming to market economies.
Ways and components of
economic reforms
(1) Different ways of reforms
• Gradual vs. radical reforms
• Partial vs. overall reforms
• Incremental vs. destructive reforms
Ways and components of
economic reforms
(2) The components of reforms
• Macroeconomic stabilization (prerequisites):
Reducing inflation and stabilizing exchange rate,
etc.
• Microeconomic liberalization (price mechanism):
Eliminating price controls, reducing market
restrictions, removing trade barriers, establishing
currency convertibility, etc.
Ways and components of
economic reforms
• Institutional reform (ownership):
privatization, property rights and legal
system, Tax system and government
administration, financial system, social
safety net, etc.
Radical (big bang) reform: Russia
(1) Gorbachev’s reform
• Greater openness, political democratization, economic
reform
• Reform measures: enacting new laws, reducing
restrictions on private enterprises, reducing controls on
prices, wage and employment, increasing government
expenditure
• Results: economic growth slowed down; government
deficit increased; wage increased (implicit inflation);
foreign debt increased
Radical (big bang) reform: Russia
(2) Yeltsin’s reform: “big-bang” reform
• Macroeconomic stabilization: reducing
expenditure on subsidies, arms procurement,
etc.; tax reform to increase revenue; trade
liberalization
• Price liberalization: liberalizing price controls and
wage control
• Enterprise reform: privatization
Radical (big bang) reform: Russia
• Results:
– Weakened political control;
– Macroeconomic deterioration;
– Limited success in privatization;
– Social unrest.
Radical (big bang) reform: Russia
(3) Evaluation of the reform: failure or success?
• Problems in the reform
– Wrong order of reform?
– Lack of political support?
– Limited Western financial support
– Lack of food
– No good way of privatization
– No sound market environment
– No social safety net
– No entrepreneurs
Radical (big bang) reform: Russia
• The reasons for fast development since
the end of 1990
– Market economic system has been
established
– Higher level of economic development
– Higher education level
– Rich resources
– Relatively good infrastructure, etc.
Gradual reform: China
(1) Compare China with Russia at the
starting point of reform
•
Much backward
•
More population
•
Lack of resources
•
Relatively shorter period of planning economy,
but long history of central control
•
Different cultural tradition
Gradual reform: China
(2) The process of China’s reform
• Rural reform: household contract responsibility
system
• Urban reform: price reform (dual-track) and
enterprise reform
• Other reforms: tax reform, financial reform, trade
reform, social safety net, etc.
Gradual reform: China
(3) The achievements
• Rapid economic growth
• Upgrade of industries
• Fast development of foreign trade
• Improvement of people’s living standard
• Enhancement of China’s international status
Gradual reform: China
(4) Problems facing China
• Business environment
• Uneven development and Income distribution
• Rural problems
• Social problems: housing, education, social safety net
etc.
• Population problems
• Environmental problems
• Corruption