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Chapter 18: Chinese Urban Industry (Written 1989; Revised 2006)
As with Chinese agriculture, there have been great reforms within Chinese industry
since 1978. China can be said to have gone though an “industrial revolution”. By 2000,
Chinese industrial production what ten times the amount it had been in 1980. This result
is truly remarkable. Rural industry was discussed in the previous chapter. So in this
chapter, we will focus on urban industry. We will first examine the Chinese enterprise
prior to the reform period that began in 1978. Then, we will examine the various reforms
that have taken place, including reforms of ownership, finance, and governance, and then
evaluate the results of these reforms. We will briefly examine one specific industrial
sector – high technology. After examining the Chinese industrial enterprise, we will look
at the growing urbanization of China and the problems that have resulted from the
increasing division in the standard of living between urban and rural areas. We will
conclude with some thoughts as to whether Chinese industry poses a threat to the United
States.
(1) The Chinese Industrial Enterprise Prior To 1978
As we saw in an earlier chapter, it is useful to examine the enterprise in terms of a
political model in which enterprise decisions result from the interaction of four
constituencies: the government, the enterprise director (management), the workers,
and the consumers of the product.
The Party/government in the 1950s and 1960s basically meant central government
officials and officials of the People’s Bank of China (the state bank). But for most (but
not all) companies, the importance of provincial (local) government officials
increased substantially after 1970 while that of the central government officials
declined. For most companies, quotas were assigned and materials were allocated by the
provincial government officials. Enterprise profits were totally remitted to the
governments - both central and provincial. The provincial governments would use these
revenues for investments, including investments in creating new enterprises. New
enterprises were especially important for provincial government officials as these
enterprises were completely under their control. The development of new enterprises
therefore enhanced their power. The provincial officials had an interest in having the
enterprise meets its production and profit quotas. The central government officials
also had an interest in the success of the enterprise, as enterprise profits represented
their main source of revenue.
Government officials tried to achieve enterprise success both by providing help and by
strict supervision. The “help” came in several ways. As one example, if the enterprise had
not been allocated enough resources to meet its production quotas, government officials
would often intervene to get it more resources. Also, government officials were very
tolerant of the enterprises procuring resources out-of-plan (usually through some form of
barter). As another example, the government officials would encourage investments,
either in new enterprises or in existing enterprises already under their control. If these
investments turned-out to be unprofitable, prices would be adjusted, taxes would be
adjusted, or subsidies would be provided. This came to be called the “soft-budget
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constraint”. Government officials assured that there were no penalties for unprofitable
projects. On the other hand, the “strict supervision” was also important. The state bank
monitored all enterprise transactions. And there were many government officials in the
enterprise for the purpose of surveillance. A study of one enterprise found that 25% of
employees were government officials. They usually interfered considerably in enterprise
decisions.
The enterprise director represented the “management”. The director was
appointed by the local government officials (that is, he was really appointed by the Party)
through the “nomenklatura” system. To keep his job and to be considered for promotion
in the government bureaucracy, he had to consistently meet his quotas. He also had to
meet the desires of the local government officials; for example, he had to contribute
funds and/or labor to local construction projects. He usually acted as a “team player”,
whose motivation was promotion and enhanced job security. He was continually
threatened by shortages of raw materials, spare parts, repairs, and so forth. Therefore, he
had a strong incentive to push for “vertical integration”, that is, to produce his own
parts, to have a machinery repair section, and so forth. And, like any bureaucrat, he
desired to increase his span of control. In China, the status of the enterprise, and thus
of the enterprise director, depended on the size of the enterprise. Therefore, the
enterprise director had a strong motivation to push for expansion of the enterprise.
In China, workers were usually hired directly from school. They were placed by labor
bureaus and could not be rejected by the enterprise. Commonly, jobs could be inherited
from parents. Once employed, workers would not quit and could not be fired; they
were employed for life. There was no labor market at all, unlike the situation in the
Soviet Union. This has been called the “iron rice bowl”. Although there was basically
full employment, workers’ power was limited by their inability to quit. Workers’ power
was also limited by the fact that they had no unions that would independently represent
their interests. However, workers who worked together over a lifetime, and who usually
lived together as well, developed very strong work norms. And, of course, workers have
considerable discretion over the intensity of their work. Therefore, the power of the
workers came from their ability to control the intensity of their work and to enforce
that control on all members through strong peer pressures. The strength of work
norms was enhanced in China by the absence of material incentives for workers. For
industrial workers, workers were categorized into eight grades with promotion largely by
seniority. In heavy industry, the top grade earned about three times that of the lowest
grade. In other industrial areas, the gap was smaller. Managers and technicians earned 1.6
times the pay of the highest grade. The wage bill was not particularly related to enterprise
performance. The bonus fund, for completion of the plan quotas, was 12% to 14% of
the wage bill; bonuses were generally distributed to workers equally. Another 10%
to 15% of the wage bill was contributed to the welfare fund. This money was used for
disability payments, some sick pay, pensions (a male worker could retire at age 60 with a
pension equal to 60% to 75% of his regular wage), housing, company-provided
education, and company-provided health care. From 1963 to 1976, wages were not raised
at all. In 1978, the average real wage in the state sector was only 88% of the average
real wage existing in 1957.
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Since both the bonus and the welfare fund were a fixed percent of the wage bill,
workers had an incentive to maximize the wage bill. Since wage rates were frozen,
this could be accomplished only by increasing the number of workers. Besides, with
more workers, it would be easier to meet the production quotas and thus to receive the
bonus. Therefore, the workers also were motivated by expansion; an expanding
enterprise would make it easier for the enterprise director and the workers to realize
their personal goals.
Prior to the reforms, China was largely a shortage economy, although less so than the
Soviet Union. As a result, consumers of products would not have much influence on
the decisions of enterprises. But the other “constituents” of the enterprise, the
government officials, the enterprise director, and the workers, all would have their
personal goals met by enterprise expansion. This “drive for expansion” is a common
motivation in bureaucracies.
(2) Reforms of the Chinese Industrial Enterprise Since 1978
(a) Ownership
Prior to the reforms, there were basically two types of enterprises in China. Stateowned enterprises produced 77% of all industrial production in 1978. And “collective
enterprises” produced the rest. Collective enterprises were technically owned by the
workers. In fact, decisions in collective enterprises were dominated by local government
officials. Urban collective enterprises produced 14% of all industrial production while
rural Township and Village Enterprises (covered in the previous chapter) produced the
other 9%.
During the period 1978 to 1996, there was a great growth of the collective enterprises.
By 1996, the Township and Village Enterprises had raised their share of all industrial
production from 9% to 28%, as noted in the previous chapter. Overall, the share of
industrial production produced by the collective enterprises had risen from 23% to
36%. The share of industrial production produced by the state-owned enterprises had
declined from 78% to only 33%. The rest of the production had come from new private
enterprises that had sprung up (19%) and from foreign-owned enterprises (12%).
A new Company Law was adopted in 1994. Under this new law, the state-owned
enterprises were converted into the legal form of a corporation. Shares of stock were sold
to the public (although the government maintained a controlling interest). This began a
downsizing of the state-owned enterprises and the collective enterprises. The
number of workers on the state-owned enterprises declined 40% in the middle 1990s
while the number of workers in the collective enterprises declines by 2/3. Those
enterprises still owned by the central government were limited to energy, natural
resources, and a few other sectors. As we saw in the previous chapter, as the number of
enterprises increased, the collective enterprises became less profitable for the local
governments to operate. Local governments, in many cases, chose to privatize these
collective enterprises. In the table on the next page, notice the increased share of
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production of the joint stock (private) companies and the decline in the share of
production of the state-owned enterprises and the collective enterprises.
Share of Industrial Production by Ownership
1998
State-Owned Enterprises
49.6%
Joint Stock Companies
6.4
Foreign-Owned Enterprises
24.7
Collective Enterprises
19.6
2004
38.0%
42.1
30.8
5.3
Most of the new private enterprises were very small. By 2004, there were over 6 million
family businesses and private companies in China. (Private businesses employ 8 or more
workers. Family businesses employ less than this.) These enterprises employed almost
60 million workers (an average of less than ten workers per enterprise). Though they
were small, they produced 23% of all of China’s industrial production.
(b) Finance
The main source of revenue for the central government had been the profits of the
state-owned enterprises. In 1978, these profits totaled 14% of China’s GDP. These
revenues had been the source of money to pay for investments in the enterprises. As we
have mentioned, the number of enterprises increased dramatically after 1978. More
enterprises meant more competition and therefore lower profits. By 1996, these profits
totaled only about 1% of China’s GDP. This meant that the state-owned enterprises
could not rely on money from the central government to pay for their investments. As a
result, these enterprises turned to the banks to finance their investments in new capital
goods. Borrowing from banks increased greatly. More than 80% of the funds for
enterprise investment have come from the banks. By 1994, the ratio of total enterprise
debt to equity (the value of the enterprise to its owners) came to 211%, making Chinese
enterprises among the most indebted in the world. Many enterprises became so heavily
indebted that they could not pay their loans. These enterprises were closed in the mid1990s and the loans had to be written-off by the banks. By 2004, the ratio of total
enterprise debt to equity had declined to 146%, a ratio that is still much higher than
would be found in the United States or in many other countries.
The increased importance of the commercial banks is the most important
development in Chinese finance to date. The increased importance of the commercial
banks has been facilitated by the large increase in household savings. In 1978, household
savings deposits in commercial banks equaled only 2% to 3% of GDP. By 2005, these
household savings deposits in commercial banks equaled about 60% of GDP.
In China at the present time, there are four main state-owned commercial banks.
These are descendents of the banks that existed prior to the reforms. They owned slightly
more than half of all bank assets as of 2005. There is also a central bank, called the
People’s Bank of China, modeled on the American Federal Reserve System. In addition
to the state-owned commercial banks, there are 11 joint-stock commercial banks.
These have been created only in the past 20 years and account for 15% of total bank
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assets (2005). (There are a large variety of banks that own the rest of the bank assets.) In
2005, the Chinese government, for the first time, granted permission to start private
banks. And as of December of 2006, foreign-owned banks were allowed for the first time
to do business in China without government restrictions.
As mentioned above, many of China’s banks got into serious financial trouble in the
1990s. First, they were required to make loans to enterprises that were performing
poorly. By the late 1990s, about 40% of the loans the banks had made were
considered “bad loans”. Secondly, they kept increasing the interest rate they paid to
depositors to keep the depositors ahead of inflation. At times, the banks were paying
higher interest rates than they were charging. The Chinese government responded by
selling bonds and using the proceeds to inject money into the banks. At least $300 billion
has been injected into the Big 4 banks alone. A government agency (called an Asset
Management Company) bought the bad loans from the banks at face value (1.4 trillion
yuan or 17% of GDP). It tried to recover as much of the loans as it could but managed to
recover only 13% of the amount owed (by the end of 2005). The rest of the loans had to
be written off, with the loss taken by the Chinese government. By the end of 2005, only
about 15% of the loans still held by the banks were considered “bad loans”. But Chinese
banks are still inefficient by international standards. Improving the performance of the
banks is a task of considerable importance for Chinese policy makers. Some of this
improvement is likely to result as foreign owned banks are now able to do a complete
banking business in China in Chinese money (as of December, 2006).
China has also been developing a stock market. As mentioned earlier, the stateowned enterprises were converted into joint stock companies. Stock could now be sold
to raise funds to pay for new capital goods. As of 2004, almost 1,400 Chinese companies
were listed on a Chinese stock market. But most of these are still government controlled
(the shares for sales represent only a minority ownership share, never more than 1/3).
Private shareholders can benefit from the profits of the company but never have the
possibility of controlling the decisions of the company. Until recently, disclosure
standards were weak. So buyers of stock really did not know the value of the company
they were buying. Since 2001, there have been attempts at improvement. But the Chinese
stock markets have already seen several market manipulation scandals.
Bond markets in China are also very limited. Bond sales by companies are rare.
And bond sales by the government are also small in relation to the size of the economy.
Financial markets are important to the development of an economy. China has come a
long way in the short space of 20 years in developing financial markets. But it is obvious
that it has a considerable way to go.
(C) Governance
1. The First Period of Reform: 1978 to 1994
We can divide the reforms of the enterprise into two periods. In the first period (1979
to 1994), the organization of the enterprise was not changed significantly. The most
significant aspect of this period of reform was an attempt to enhance the autonomy of the
enterprise. One part of this enhanced enterprise autonomy was profit-retention. As we
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saw, prior to 1979, all enterprise profits in the state sector had been remitted to the central
or local government. After 1979, various profit-retention schemes were introduced. The
retained profits were used by the enterprise for worker bonuses, for collective
consumption (housing, recreation facilities, etc.), or for investment. In 1979, enterprises
were simply allowed to keep a certain percent of profits (usually around 15%). In 1981,
this was changed to “profit-contracting”, in which enterprises would contract to deliver a
certain amount of profit to the government officials. Of the profit earned above this
amount, a high portion (usually around 40%) could be retained by the enterprise. This
system provided a greater incentive to the enterprise to earn profits. In 1983, this system
was changed into a “tax-for-profit” system. In this case, enterprises were charged a sales
tax, a 55% income tax, and charges for the use of natural resources and capital. In
addition, there was an “adjustment tax” which was designed to keep the profit rate in line
with some subjective definition of “fairness”; thus the importance of bargaining was not
diminished. (The capital charge was never fully implemented.) In 1985, the “tax-forprofit” system was replaced by another version of the “profit-contracting” system.
But this time, the contracts were of a longer duration (three to five years), and covered
profits, production, investment, and so forth. Through all of these changes, it is clear that
the enterprise had more discretion over the use of resources than it did before 1979.
Another part of enhanced enterprise autonomy has been noted in Chapter 16.
Enterprises were given the right to sell above-plan production in markets at what
were basically free-market prices. Wholesale markets were developed in many cities
for this purpose. The state kept the plan quotas basically fixed; therefore, all growth in
production occurred outside of the plan. About 60% of production was occurring
outside of the plan by 1984. This change also allowed enterprises to obtain inputs in
markets, enhancing their independence from government officials. In addition, Chinese
enterprises now had more ability to import, and even to export, outside of the plan.
Besides the powers described above, in May of 1984, the enterprise director was
given more power over matters within the enterprise. The goal was to shift power
within the enterprise from the local Party Secretary to the enterprise director.
Government and Party officials were to be restricted to general policy guidance rather
than concrete management. To facilitate this change, the status of the enterprise director
was upgraded. Directors were now required to pass examinations to obtain their
positions. Besides having more control over resources and more power over enterprise
decisions, enterprises were to have to take more responsibility for their decisions. In
1986, a bankruptcy law was passed. This indicated a desire to eliminate the “softbudget constraint”. But in reality, little use was made of this law.
Other reforms in the 1980s led to the growth of urban and rural collectives and
private enterprises. (Rural collective enterprises were discussed in the previous
chapter.) By 1984, these were handling about half of the country’s retail sales. In theory,
collectives were owned by their workers who were responsible for decision-making.
They were independent units who retained their profits (after paying taxes) and who sold
in markets independent of the plan. In practice, there was substantial government control
over their decisions. As noted above, they were usually small and were often found in
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handicrafts, light industry, and commerce. Collectives were supported by the government
because they were labor-intensive (their ability to create employment was important in
the labor surplus that existed in China), because of a desire by policy-makers to improve
urban services, and because there was a desire to enhance market competition now that
markets were gaining a greater importance.
In the 1980s, the growth of private enterprises occurred mainly in the rural areas and
in urban services. The “New China” was filled with hundreds of thousands of new shops,
restaurants, individual peddlers, and so forth. By the late 1980s, these new private
businesses employed about 30 million people.
A final important feature of the enterprise reforms of the 1980s involved the workers.
Under the changes, hiring was left to the enterprises themselves. The importance of direct
placing of workers by labor bureaus and inheritance of jobs was reduced. Also significant
was an attempt to end the “iron rice bowl”. Workers hired after October of 1985 no
longer officially had guaranteed employment for life. Instead they now had fixed labor
contracts. They could now be dismissed by the director, although only with the approval
of the union. Enterprise directors gained more discretion over promotions, the structure of
wages, and the allocation of bonuses. However, the new laws were not implemented very
much. Few workers were fired. Promotion was still done primarily by seniority. Bonus
funds were still basically distributed equally.
Of special importance for the workers, the wages and bonus funds were raised
significantly. From 1978 to 1984, real wages for workers in state enterprises rose over
30%, after falling between 1957 and 1978. Add to this the reduction in the number of
people supported per wage earner (from 2.06 in 1978 to 1.71 in 1983), the improvement
in the insurance, welfare, and pension funds (which rose from 14.3% of the wage bill in
1978 to 22.4% in 1983), and the improvement in housing, and it is estimated that the real
disposable income of an average urban family rose 61% between 1978 and 1984.
2. The Second Period of Reform: 1995 to the Present
In the mid-1990s, a new program of state-owned enterprise reform was enacted.
This is the second period of reform. Poorly performing state-owned enterprises were
simply eliminated (the number of state-owned enterprises declined from about 120,000 to
about 30,000.). As mentioned earlier, the remaining state-owned enterprises were
converted into joint stock companies. Under this new law, the managers of the enterprise
were to be accountable only to a Board of Directors. This Board of Directors is
appointed by the government (the major owner of these enterprises) and by any other
private owners of the enterprise. The Board is to have a single goal on which it is to be
evaluated – profits. As of this writing, the new law has not been well implemented. Most
state-owned enterprises still do not have functioning Boards of Directors. China still
faces the problem of effective monitoring and control over enterprise managers. As
mentioned earlier, Chinese enterprises rely greatly on bank financing. But unlike the
case in Germany and in Japan, Chinese banks do not have good ways to either monitor
enterprise managers nor to influence the decisions of these managers. And as we have
seen, the stock market is small and has yet to provide effective ways to control
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managerial decision-making. So as of this writing, Chinese enterprise managers have
a very high degree of independence to pursue their own interests.
Privatization also became significant beginning in the mid-1990s. Some stateowned enterprises as well as most urban and rural collectives have been privatized. Most
commonly, the privatization occurred by selling stock in the enterprise to the managers
and workers, typically at low prices. Managers got shares at least twenty times the
number available to the ordinary workers. After one year, workers were allowed to sell
their shares. So, most of these privatized enterprises are still dominated by their
managers. (In addition, the tax reforms discussed above (profit sharing and profit
contracting) were eliminated. Replacing them was a type of sales tax (known as the
value-added tax) and a profits tax.)
(3) Results of the Enterprise Reforms
The first period of enterprise reform must be considered a success. The entire
structure of the command economy was gradually dismantled without precipitating
economic decline. Industrial production accelerated to a growth rate of about 15%
between 1983 and 1988. As mentioned above, industrial production in China today is ten
times the amount it was in 1980. About 40% of this growth can be accounted for by
rising productivity. This growth meant a significant increase in the standard of living in
both rural and urban areas. In addition, there was a shift from a sellers’ market to more
of a buyers’ market. This has enhanced the role of the consumer as a “constituent” in
enterprise decision-making. (The extent of a buyers’ or sellers’ market is measured by the
Kornai Index: the ratio of input inventories to output inventories. The higher the
number the more of a sellers’ market exists. By 1985, the Index for China had dropped to
3.8. In comparison, the Index was 1.2 for the United States in the same year.)
There were problems generated by the first period of reform as well. First, the
decentralization of resources to the enterprise led to an explosion of investment. The
results of this investment explosion were to impose serious strains and inflationary
pressures on the economy and to waste resources on duplicative, inefficient, small-scale
local investments. Second, decentralization of authority to the enterprise had
occurred before there was a major price reform. As a result, enterprises increased
production of some goods, such as watches and bicycles, because irrational prices made
them very profitable. And they reduced production of other goods, such as chemical
fertilizer and cement, because irrational prices made them artificially unprofitable. Third,
reform created the potential for greater inequality to exist, not only between people
but also between regions of the country. This urban – rural divide will be considered
below.
The second period of reform has shown less success. Although industrial
production has continued to increase, only a few Chinese companies would presently be
considered as among the better governed companies in the world (the computer company
Lenovo would be one of these). The goal of becoming a market economy based on
private ownership is a considerable way from being realized at this time.
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But the second period of reform also saw a significant structural change. In the
first period of reform, the greatest growth had been in light, labor-intensive
manufacturing. In the second period of reform, the share of production from products
like food, textiles, garments, and leather goods declined. The share of production from
higher-technology products like electronics and telecommunications equipment more
than doubled (1995 to 2004). Let us briefly examine high-technology in China.
(4) High Technology
Despite the shift into production of electronics and telecommunications equipment,
China is still well behind the West in terms of technological sophistication. China has
very few enterprises with leading-edge technologies. As of 2003, only 1.1% of China’s
GDP was spent on Research and Development. This contrasts with 2.6% of GDP for
the United States and 3.2% of GDP for Japan. (With one-fourth of the population, the
United States spends ten times the amount China spends on Research and Development.)
Throughout the reform period, China has been unable to afford much spending on
Research and Development. In 1994, for example, China was spending only 0.6% of its
GDP on Research and Development. The increase in its spending (to the 1.1%) came
only after 2000. Most of this Research and Development is carried out by the
government. Research and Development activities by enterprises and by universities are
still small.
How is China to gain access to high-technology? One possibility is to buy it from
other countries. But when the oil prices fell in the 1990s, China lost the means to pay for
this high-technology. Most of China’s imports of high-technology today involve
licensing intellectual property. Very little importing of high-technology equipment takes
place. A second possibility is to open its market to foreign multi-national corporations in
exchange for access to their technology. This possibility is discussed in the next chapter.
Foreign Direct Investment has become the main way that technology enters China.
A third possibility is for China to develop its own high-technology. As noted in the
previous paragraph, China spends relatively little on Research and Development. Of the
few technologically sophisticated enterprises in China, many were spun off from
government research institutes. An example is China’s most prominent high-technology
company: Lenovo. Lenovo was originally spun-off from a government institute to be a
commercial company distributing foreign desktop computers. It then developed an
ability to manufacture and produced labor-intensive motherboards and video cards. By
1995, it was an assembler of personal computers to sell in China. The company has
desired to move into high-technology manufacturing. In 2004, Lenovo bought IBM’s
personal computer division.
At present, China does not now have the skilled workers to support a significant hightechnology industry. For every 1,000 employed people in China, only 1.2 people work as
researchers. This contrasts with 9.3 in the United States and 10.4 in Japan. In a country of
1.3 billion people, only about 1.2 million people were engaged in Research and
Development in 2005, of which 920,000 were scientists or engineers. However, these
numbers have been growing. If growth continues at the current rate, China will have
more scientists and engineers engaged in Research and Development than any other
country by 2015. Scientists and engineers are now almost half of all Chinese college
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graduates. However, the standards for training of scientists and engineers are low
(compared to the West). Because of this, a large number of Chinese students study
abroad. But less than one-fourth of these students return to China after their studies are
completed.
Although the technological capacity of Chinese industry must be seen as very limited
as of today, it needs to be noted that the Chinese government is making a major effort to
enhance this technological capacity. Tax breaks have been initiated that tend to make
spending on Research and Development almost free for the enterprise. Credit to pay for
Research and Development is subsidized. Domestic high-technology enterprises are
given preference in procurement by the Chinese government. And the Chinese
government has been trying to see that Chinese standards replace global standards in
order to give domestic companies an advantage in the Chinese market. (This means that,
for example, DVDs produced outside of China would not play on Chinese DVD players.)
China has also been trying to upgrade its educational system. It is not unreasonable to
conceive of China as a major producer of high-technology products in the not-too-distant
future.
(5) Urbanization and the Urban – Rural Divide
After a long period of forcing people to stay in the rural areas, China is now in a
period of rapid urbanization. The majority of Chinese people still live in rural areas;
however, China is now 43% urban (compared to only 18% in 1978). In the past decade,
the urban population of China has increased by 200 million people – 2/3 of the
population of the United States. The 43% is projected to increase to 60% by 2020. The
number of small towns that have an urban-style government has risen from 2,660 in 1982
to over 20,000 in 2001. Two completely new cities have been developed – Shenzhen and
Dongguan. Interestingly, more than 10% of the Chinese total population is living in
an urban area without an urban residence permit, especially in the southern coastal
regions. Most of these are reminiscent of Mexican and Central American undocumented
migrants to the United States. They sleep in substandard housing and work long hours at
relatively low wages. Most see themselves as someday returning to the rural areas from
which they came. As with migrants in other country, these migrants are young (16 to 20)
and mostly male.
The rapid growth of cities has led to many of the problems found typically in cities in
developing countries. For example, few of China’s cities have any municipal sewage
treatment. Many of them are among the most polluted cities in the world. And there is a
great difficulty finding employment for all the new urban residents; the urban
unemployment rate is likely to be 11% to 12% (representing about 25 million people).
However, it should be noted that Chinese cities do not have the urban slums that one
might find in cities in Latin America or parts of Asia.
In the period of reform, the urban – rural divide has widened. An average urban
household earns about 3.2 times the amount earned by an average rural household
today. In 1985, this would have been 1.9 times. (See the data on Page 15 of the previous
chapter.) A main reason for this gap is that urban households are very likely to have two
wage earners. Urban employment has expanded the hiring of young women so that now
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nearly all young urban women are in the labor force. As result of this urban – rural
divide, there have been several social disruptions. These have worried the Chinese
leaders and caused them to undertake policies to try to raise the incomes in rural areas.
(6) Conclusion
It is clear that Chinese industry has been drastically reformed over the past 25 years.
It is also clear that, on the whole, the reforms have been very successful. Chinese
industry is producing ten times the amount it was producing at the beginning of the
reform period. In contrast to many of the reforms of Eastern Europe, the Chinese reforms
were relatively gradual. For the first seventeen years of the reform period (1978 to
1995), the reforms were done so that no group would suffer losses. This has been called
the period of “reform without losers”. Having a long period of reform without losers
allowed the government to set many reforms in motion without political opposition. In
contrast, the second period of reform (since 1995) has had many losers, especially in the
state-owned enterprises. To date, this period of reform has been less successful than the
first, although industrial production has continued to increase. And this second period of
reform has engendered considerable opposition. The number of reported strikes, sit-ins,
demonstrations, building seizures, and traffic blocking incidents has increased from 8,700
in 1993 to 87,000 in 2005. In early 2005, there were 341 large, organized mass protests.
Of these, 17 involved more than 10,000 people. So opposition to the reforms in China is
considerable.
Is China an economic threat to the United States? The answer at the present time
has to be “not yet”. China is still a poor country by Western standards. (In 2005, per
capita GDP in China was $1,700 compared to about $42,000 in the United States.) The
productivity of its workers is also low by Western standards. Its exports are mainly
goods that can be produced with large amounts of low-skilled labor (especially textiles
and garments) and goods in high technology that can be routinely manufactured (such as
video cards and motherboards). The technological sophistication of Chinese companies
is still low by Western standards. Training of scientists and engineers in China is also
below Western standards. However, China is making a major push to become an
important high technology country. It has been expanding education and upgrading its
educational standards. It has been exchanging access to the Chinese market for modern
technology from the Western companies located in China. Given its great size, China
could certainly become a country of great economic importance in the not-too-distant
future.
The Chinese reforms have increased the standard of living greatly. But they have also
brought major economic problems. Corruption has increased greatly. There is a large
population of (“undocumented”) rural migrants crowding into the cities. China’s
population is aging while it has not developed a satisfactory pension system. Health care
provision has deteriorated significantly. Income inequality has increased. And China is
experiencing major environmental problems. All of these will be discussed in more
detail in Chapter 20.
Is China a market economy? The answer at this time, once again, has to be “not
yet”. China has moved greatly in the direction of becoming a market economy. The
structure of the old command economy has been dismantled. But China is still lacking
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many of the institutions of a market economy including a system of laws, a stock and
bond market, private ownership of companies with ownership being widely dispersed,
and full-fledged financial system, and so forth. The process of industrial reform in China
is nowhere near over. As we will see, the same story holds for China’s international
trade: great reforms have taken place, but more is to be done. That is the story of
Chapter 19.