The Second Phase of SOE

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Chapter 6

• The Second Phase of SOE
• Reform
• 1984-1988

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Main Themes

• New reform strategy
• Seventh Five Year Plan
• Details of major reforms
• Assessment

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Zhao Ziyangs New Reform Strategy in 1984

• Goal to convert Chinas economy to a market
  economy by the end of 1980s
• How to do it?
• Expand market forces by limiting the scope of
  planning, fostering entry, and improving
  incentives and autonomy for SOEs
• A dual track (plan and market) economy
• Previously, very cautious and uneven adoption of
  this strategy
• Now push for a coherent and broad implementation
  of marketization

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The Reform Package Had Two Concrete Measures

• (1) Enterprise reform
• Renewal and radicalization of incentives to
  expand enterprise autonomy
• (2) Consolidation and expansion of the dual track
  plan and market system
• Outside-plan transactions were guided by market
  prices

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May 1984 Enterprise Bill of Rights Gave More
Autonomy

• Right to sell above-plan output
• Right to price above-plan output at market prices
  (up to - 20 of plan prices)
• Right to name own management team (subject to
  approval)
• Right to promote 3 of workers annually

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In 1985, Zhao Ziyangs Suggestions for 7th Five
Year Plan

• State management of SOEs should be gradually
  converted from direct to indirect control by
  employing economic and legal measures
• Prices of consumer goods with few exceptions will
  be gradually decontrolled.
• For producer goods, the central control on prices
  should be progressively shrunk.
• Will gradually adjust planned prices -- to close
  the gap between plan and market prices.

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Notables

• Key was expansion of the scope of the market
  endorsed by the Communist Party Congress
• For the first time, the official description of
  the reform was reasonably concrete and realistic
• Again it was based on projection not set-target

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October 1987 13th Party Congress

• Hu Yaobang was ousted no more political
  liberalization or bourgeois liberalization
• Zhao Ziyang (First Party Secretary) pushed for
  the social market system and stressed indirect
  management
• He reported to the Congress Planning must be
  based on commodity exchange and the law of value

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Progress of the Reform

• 1984 A renewed commitment
• 1984-1985 Reorientation of policy at the top of
  the political system
• 1985-1988 Progressively implemented at the
  enterprise level

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What Were Major Enterprise Reforms During This
Period?

• Managerial reform
• Labor reform
• Wages and bonuses
• Wage determination within the factory
• Contract labor system
• Cutting redundant workers
• Financial reforms

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Enterprise Bill of Rights (May 1984) Contained
Specific Measures for Enterprise Reform

• Factory manger responsibility system
• Authority to draw production plan
• System for linking total wage bill to profit
• Long-term contracting over profit remittances
  between factories and superiors

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Managerial Reform

• Pushed by Deng Xiaoping
• Restricted partys control of Nomenkalutura
• Removed the party secretarys involvement in
  decision making
• Controversial -- resistant and worry about the
  loss of worker right and there was corruption
• Not a smooth ride, but steady progress until
  Tiananmen Square Incidence

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Some Notables on Labor Reform
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Notables on Financial Reform

• Adoption of long-term profit contracting
  (Chengbao)

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Financial Reform (continued)--Ownership Reforms

• Experimentation privatization was not
  permitted, but local governments were able to
  sell enterprises , e.g., in Guangdong and Hebei
• Like state firms sold to collectives
• Leasing or contracting of enterprises
• Stock system

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Stock System was Much Discussed in 1980s
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Some Notables on the Dual-Track System

• The plan portion was fixed gt Growing Out of the
  Plan!
• The system was particularly apparent for raw
  material and intermediate good sectors such as
  steel and energy
• Shortages of energy and raw materials made state
  controls necessary
• See Figures 6.2 and 6.3 and Table 6.1

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Problems with the Dual-Track System

• Slowed down the tax and price reforms
• Corruption
• Nearly every good had more than one price.
• Income can be made by transforming the status of
  a good.
• One can purchase a good at low state-set price
  and resell at higher market price
• Example in 1985, a standard truck sold for a
  plan price of 20,000 yuan, but a market price of
  35,000 yuan.

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Overall Assessment of Second Phase

• The dual-track economic system was embraced.
• Progress in reform was identified.
• Second-stage reforms were internally consistent,
  and achieved substantial success,
• Premier Zhao Ziyang tended toward a piecemeal
  approach, but pushed for adoption of quite
  radical reforms.

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Questions/Comments