TRANSITION IN THE PEOPLES REPUBLIC OF CHINA

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TRANSITION IN THE PEOPLES REPUBLIC OF CHINA
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The Era of Reform1978 --

• Two decades of stability
• no cultural revolutions or great leaps
• Two decades of stellar growth
• Steady decentralization
• Combination of reform and transition
• dual-track approach
• Cao, Fan, and Woo (1997) Chinese Economic
  Reforms Past Successes and Future Challenges in
  Economies in Transition Comparing Asia and
  Eastern Europe, Woo, Parker, and Sachs (eds),
  MIT Press

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Dual-Track Reform/Transition

• 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

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• Ideal dual-track pattern
• opening free market while planned supply
  unchanged at set planned price
• adjust planned price up toward free price as
  planned supply quantity fixed or lowered
• meanwhile market supply is growing so fixed
  absolute planned supply gets smaller as
  proportion of total supply
• final elimination of planned price when planned
  supply becomes almost irrelevant

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Dual-Track in Agriculture

• Communes disbanded
• Land distributed to households as 15 year leases
• Lease holders required to produce a planned
  allotment at planned prices, but free to produce
  and market any amount beyond planned allotment
• 91 of agricultural output planned in 1978, only
  5 in 1993

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• Semi-ownership of land caused increase in labor
  productivity which released labor into
  small-scale entrepreneurship
• crafts
• services
• Released labor into township and village
  enterprises (TVE)

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Dual-Track in Industrial Ownership Structure

• Old track state owned enterprises (SOE) versus
  new track non-state owned enterprises
• Two types of new track ownership structures
• TVEs and purely private

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• TVEs formally owned and controlled by villages
  and local communities
• in most TVEs, communities actually involved very
  little in operation of the enterprises
• act essentially as private firms
• some really private but community agrees to
  register as TVE in return for bribes
• wearing the red cap in exchange for the tax
  breaks and lesser red tape enjoyed by TVEs over
  private firms

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• SOEs are unprofitable and a major drain on the
  state budget
• Most of the growth in China in non-state sector
• SOEs persist for two main reasons
• represent commanding heights
• they employ 18 of the work force
• they are a wonderful source of corruption
• a major challenge for the future is the phasing
  out of SOEs

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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

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• Twenty cities subsequently approved as Economic
  and Technological Development Districts (ETDD)
• SEZs and 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

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Coastal Growth
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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 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
• 1,200 commodities in China versus 25,000,000!
• good macroeconomic balance

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• 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

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• High saving rate
• Chinese saving rate high even by Asian standards
• saving rate in China is 23 of disposable income
• Japan 21
• Taiwan 18
• Germany 13
• US 8

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• Centralized control discredited
• Great Leap Forward and Cultural Revolution were
  disasters obvious to everyone
• allowed Deng Xiaoping to institute reforms
  without much resistance
• The Chinese Diaspora
• 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
• Hong Kong managers could easily commute

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Challenges

• Legal system/rule of law
• private property rights still lacking
• business cannot turn to legal system to enforce
  contracts
• self enforcement
• protection from political elite
• corruption
• Privatization
• giving up the commanding heights
• SOEs continue to be a huge drain on economy

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• Agricultural reform
• incomplete ownership of land
• disincentive to improve land
• reduces potential productivity of land
• Financial reform
• near monopoly of state on banking
• savings channeled to inefficient capital
  formation in SOEs

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• Trade relations
• joining WTO
• trying to improve trade relations
• with US
• MFN status
• with EU
• with Taiwan
• with other Asian countries
• International finance
• full convertibility

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• Social safety net
• current hodge-podge
• not as immediate need as in other transitional
  economies
• rural population to large extent self-sufficient
• continued support of SOEs reduces urban
  unemployment problem
• 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

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• Regional policy
• most growth from Special Economic Zones and
  Development Areas
• huge income differential between coastal and
  interior provinces
• Population policy
• slowing population growth
• slowing/preventing migration to cities
• Macroeconomic policy
• reform of tax structure
• stabilization

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