Download China - Iowa State University Department of Economics

China
I. The Setting
1. China:
a) is very large (about the same size as Canada, 3.7 million sq
miles)
b) Population is huge and growing
• About 1.2 billion (more than 1/5 of the world's population)
• major policy problem
c) Much of its land is uninhabitable or costly to cultivate (only
10% of the land is suitable for cultivation)
• mountains and deserts
d) Much of its resource base undeveloped, e.g., large oil
reserves only starting to be exploited
e) A poor, developing country (2007—$ 5,400 PC income)
f) A rich and very long heritage
2. The Early Years (1949-1976)
• Mao Zedong proclaims People’s Republic in
1949
• Mao takes leadership as chief of state
• Initial tasks
– collectivization of land
– nationalization of industry
• Followed typical (Stalinist) planned socialist
model
– high priority to heavy industry, low priority to
agriculture
• aggregate investment 20% - 25% of
national product
• 85% industrial investment--heavy industry
• 8% state investment--agriculture
• by end of Mao period, industry share in
national output much higher than other
countries at similar level of development
Collectivization of Agriculture
• First step was redistribution of land from the landlords to the
peasants
• Major farming equipment provided by village authorities
• Collectivization involved organizing households into large prod
teams
• Led to the commune
The Rural People’s Commune
• Created during the Great Leap Forward (1958-1960)—a period of
massive resurgence of ideology that replaced rational decisions.
• Individual households organized into production teams
• Production teams combined to form brigades
• Brigades combined into a commune (thousands of households in
a commune)
• Communes were controlled by the county
• County played major role in implementing the plans of the
Ministry of Agriculture and Forestry
Organization of Agriculture Prior to the Reforms
Ministry of Agriculture and Forestry
County
Commune
Brigade
Production Team
Household
• Individual’s Incentives in the Commune
– Individuals assigned work for which they earned points as
shares of residual income (revenue minus expenses)
– Problems
• little incentive to work hard
• little incentive for individual initiative
• Impact
– Large reduction of agricultural production
Nationalization of Industry
• Slow and orderly transfer from private to state ownership
– by 1956, 68% value of output by state owned enterprises
(SOE) and 16% by jointly owned (state-private)
enterprises
• Planning mechanisms, priorities and enterprise management
are the same as Soviet Union
• Problems (poor quality, shortages, inefficiency, etc.)
Political and Economical Turmoil
• Hundred Flowers Campaign (1956-7)—a relatively liberal period
of open discussion of the econ and political system.
– Mao unhappy with the Communist Party leadership
– invites constructive criticism from intellectuals
– reveals deep hostility
• Great Leap Forward (1958-1960)—an econ and social plan to
rapidly transform China from a primarily agrarian economy
dominated by peasant farmers into a modern, industrialized
communist society.
– massive resurgence of ideology
– last vestiges of rural private property eliminated
– commune system established
– attempt to initiate rapid growth and industrialization
– the plan did not achieve the intended results; economic disaster
after years of solid growth (economy collapses and does not
recover to 1958 level until 1963)
Recovery from the Great Leap
• Recovery from Great Leap emphasizes
– less focus on output growth and more on quality and
efficiency
– more balanced economic development
– modernization of agriculture
– decentralization
The Cultural Revolution
• Mao’s struggle to retake supreme leadership culminates in the
Cultural Revolution
– peaks from 1966 to 1969
– more upheaval
– lost generation of leadership as universities closed and
students sent to the countryside
• No increase in GDP from 1965 to 1970
The End of the Stalinist Period
• Mao die in 1976
• Gang of Four Trial
– Mao’s wife and three others arrested and discredited
– Stalinist thinking repudiated
– political maneuverings end in 1978 with rise of Deng
Xiaoping
• reform period begins
II. Transition in China
1. The Era of Reform: 1978
–
–
–
•
•
More than two decades of stability and stellar growth
Steady decentralization
Combination of reform and transition
• “dual-track approach”
Dual Track Reform
Coexistence of a plan track and a market track
Two phases
– 1978-1984:
• liberalization of agriculture
• creation of township and village enterprises (TVE)
• spontaneous privatization of service sector
– 1984: dual-track applied to industry
Dual Track in Agriculture: Household Responsibility System (HRS)
• In 1978, a village in central province (Anhui) initiated HRS. It
soon gained popularity and thus official endorsement in 1981.
• Covered 98% of rural population within 3 years.
• Communes disbanded.
• Household is a principal unit of agricultural production.
• Land distributed to households as 15 year leases (after 1995, for
30 y)
• Lease holders required to produce a planned allotment at planned
(fixed) prices, but free to produce and market any amount beyond
planned allotment.
• 91% of agricultural output planned in 1978, only 5% in 1993
• Semi-ownership of land caused increase in labor productivity
which released labor into small-scale entrepreneurship, e.g. crafts,
services
• Released labor into township and village enterprises (TVE)
Dual-Track in Industrial Ownership Structure
• Old track state owned enterprises (SOE) vs new track non-SOEs
• Two types of new track ownership structures
– Township & Village Enterprises (TVEs) and purely private
– Most dynamic sector of the economy
• Owned or supervised by townships or villages (not state-owned)
• Can be collective enterprises, private firms, joint ventures.
• TVEs formally owned &controlled by villages &local communities
– in most TVEs, communities actually involved very little in operation of the
enterprises, TVEs act essentially as private firms
• SOEs are unprofitable and a major drain on the state budget (198510% unprofitable, 1990-28%, 1995-50%)
• Most of the growth in China in non-state sector
• SOEs persist for two main reasons
– SOEs represent “commanding heights”
– SOEs employ 18% of the work force
• SOE reform—in 1995 China initiated the “modern enterprise
system,” which aimed to transform the SOEs into modern
corporations; “corporatization”—state ownership & independent
management
Dual-Track Regional Development
• Certain places (mostly coastal) targeted for faster transition
• Begins in 1980 when four southern coastal sites were designated
Special Economic Zones (SEZ)--Shantou, Shenzhen, Xiamen,
Zhuhai, Hainan Island added in 1988
• Twenty cities subsequently approved as Economic and
Technological Development Districts (ETDD)
• SEZs&ETDDs exempted from most controls on foreign
investment and private ownership
• Result is much faster growth, especially in non-state sector
• Regional disparities a major problem
Economic Growth
Nation
Average annual growth
SOEgrowth
TVEgrowth
Foreign and joint ventures
9.3%
Guangdong Fujian
19.7%
10.1
19.5
58.6
17.3%
9.5
19.6
50
Zhejiang
18.9%
9
24
38.6
Jiangsu Shangdong
16.4%
9.1
17.8
42.3
16.3%
9.2
18.5
37.3
Comparison with other East Asian Countries —China’s growth since 1978 has been
high, but not as high as Japan’s or the Four Tigers
China, Japan, and the Four Tigers
800
China (Year 0=1978)
Japan (Year 0=1950)
South Korea (Year 0=1958)
Taiwan (Year 0=1950)
Hong Kong (Year 0=1958)
Singapore (Year 0=1965)
Index of Per Capita GDP (PPP)
700
600
Japan
500
Note: 1950 is five years after the end of WWII and is the first full year of the PRC
1958 is five years after the end of the Korean War and the UN embargo of PRC
1965 is the first year of Singapor's independence.
1978 is the year PRC begins transition
400
Taiwan
Singapore
Hong Kong
S. Korea
China
300
200
100
0
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15 16
Year
17
18
19
20
21
22
23
24
25
26
27
28
29
30
d) International trade—open door policy
•
International contacts between people (officials, tourists,
students, scholars, etc.)
•
Foreign trade and investment, especially in Special Economic
Zones.
2. Sources of Growth
•
Initial conditions
– in 1978, most labor (71%) agricultural
• marginal productivity was very low
• agricultural reforms caused large rise in productivity and
encouraged formation of TVEs from the freed-up labor
• movement of low-productivity labor into higher
productivity TVEs is the major source of growth
• opposite of Soviet Union, Central and Eastern Europe
where most labor was in SOEs which collapsed with
transition
– very little was planned in China at start of reform compared
to Soviet Union
b) Integration into global economy
–
–
–
exports gave ready employment for freed up agricultural labor in labor
intensive production in TVEs
allowed China to import modern technology
encouraged foreign direct investment which increased capital stock,
access to modern technology, and efficient western management
c) High saving rate
–
Chinese saving rate high even by Asian standards (China--23% of
disposable income, Japan: 21%, Taiwan: 18%, Germany: 13%, US: 8%)
d) Centralized control discredited
–
–
Great Leap Forward and Cultural Revolution were disasters obvious to
everyone
allowed Deng Xiaoping to institute reforms without much resistance
e) China is the largest recipient of foreign investment in Asia. Huge
investment from Hong Kong, Taiwan, and overseas Chinese
(labor intensive industries which were losing comparative
advantage in Hong Kong and Taiwan moved to mainland China)
3) The Chinese Economic System
a) Corporate Governance and Property Rights
– private property rights lacking (business cannot turn to legal
system to enforce contracts)
– relational contracting
– the ultimate guarantor for property rights is the Chinese
Communist party
– 2007 (March)—new property law adopted. The law covers the creation, transfer,
and ownership of property, and is a part of the ongoing effort to gradually develop a
civil code. Hu Jintao (President and Communist Party Leader, 2002) and Wen Jiabao
(Prime Minister, 2003) have taken a centrist position, protecting property rights for
the rising middle class and farmers, while promoting a "harmonious society" that
strives to distribute wealth more equitably, to increase social expenditures on health
and education, and to alleviate some of the excesses of pollution and corruption that
have accompanied rapid growth.
b) Capital Markets
– Companies receive funding thru banks, not thru stock markets
– Chinese companies operate with high debt burdens
c) Privatization
–
SOEs continue to be a huge drain on economy
d) Agriculture
–
–
incomplete ownership of land
disincentive to improve land (reduces potential productivity of land)
e) Finance
–
–
–
near monopoly of state on banking
savings channeled to inefficient capital formation in SOEs
China’s commercial banks have a high ratio of non-performing loans
(NPLs)
f) Trade relations
–
–
joining WTO—12/01
trade relations with the US (MFN status), EU, Taiwan, and other Asian
countries
g) International finance
–
full convertibility
h) Social safety net
– not as immediate need as in other transitional economies
•
•
•
–
–
–
–
–
rural population to large extent self-sufficient
continued support of SOEs reduces urban unemployment
lack of political reform prevents the poor from having a voice
as SOEs privatized, unemployment will soar
rural population has much lower income and access to health
care
high rate of savings and self- reliance and family support
the dramatic rise in inequality (Gini Coefficient, China 0.40,
USA 0.40, India, 0.38)
Human Capital Investment
•
•
•
Difference between rural and urban
Difference between developed and under-developed area
They are both potential source of inequality
Per Capita Income 1978 - 2001 (in RMB yuan)
7000
6860
6280
6000
5854
5425.1
5160.3
5000
4838.9
4283
4000
3496.2
3000
2577.4
2026.6
2000
1000
0
2366
2210.32253
2162
2090.1
1926.1
343.4
133.6
477.6
1700.6
1510.2
1375.7
1181.4
1002.2
899.6
784
739.1
686.3 708.6
601.5
544.9
397.6 423.8 462.6
1577.7
1221
921.6
191.3
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
rural
urban
Yucai Schools (Urban)
Poor Village Schools
i) Regional policy
– most growth from Special Economic Zones and
Development Areas
– huge income differential between coastal and interior
provinces
j) Population policy
– slowing population growth
– slowing/preventing migration to cities
4) Transition in China—Summary
– Strategy
•
•
•
•
From central planning to indicative planning
From indicative planning to market allocation of goods and services
Grow out of the plan” instead of ``shock therapy”
Transition and growth at the same time
– Transition
– Replacement of administrative allocation by market allocation
– Replacement of administered prices by market prices
– To achieve this objective China used the dual track approach,
which established autonomy and incentive.
– Reforms began smoothly and econ growth accelerated
– Nobody was made obviously worse and opponents were bought off
(Pareto Improvement)
– Interdependence between SOE & non-state sector
– The dual-track system of prices introduced in the mid-1980s to
facilitate the transition of China from a centrally planned to a
socialist market economy has essentially been phased out,
reducing to a single-track, market-based system, with the
following exceptions:
» In 2001/07, the remaining planned prices are to be abolished
with the exception of: the prices of natural gas, oil, edible
oils, grains, tobacco, water, salt, and products related to
national security
Phasing Out the Dual-Track
(percent of output value, selected years)
Plan
price
Guide
price
Market
price
1978
1985
1988
1991
1993
1995
1998
1999
2001
94.4
37.0
24.0
22.2
10.4
17.0
9.1
6.7
2.7
0.0
23.0
19.0
20.0
2.1
4.4
7.1
2.9
3.4
5.6
40.0
57.0
57.8
87.5
78.6
83.8
90.4
93.9
Source: Price Yearbook of China (various years)
Note: "Guide prices" are government-administered prices, but with reference to market
supply and demand
– China’s market transition is incomplete but in some sense
successful up until now
– Gradualism continues to guide experiments in advancing
reforms
– Agricultural reform:
• incomplete ownership of land
– disincentive to improve land
– reduces potential productivity of land