Economic Systems

Ohio Wesleyan University

Goran Skosples

17. China

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China

Population: 1.35 billion (July 2014 est.)Size: 9,596,960 sq km (slightly smaller than US) GDP per capita: $9,800 (PPP 2013)Exchange rate: 1 USD = 6.2 CNY (Yuan Renminbi)

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Chinese socialismThe first decade

Mao Zedong proclaims PRC in 1949

imitation of the Soviet model• nationalization of industry

- investments into the heavy industry – capital-intensive

• collectivization of land- land redistributed to peasants- creation of communes

difficulties with central planning:• China is large• Warlordism

poor communication with the center

a history of regional self-sufficiency

The agricultural sector was not sacrificed to the same

degree as in the Soviet Union large and poor

rural population

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Chinese socialism

The Great Leap Forward (1958-62)

a plan to rapidly transform the primarily agrarian economy dominated by peasants into a modern, industrial communist society

human capital and investments poured into heavy industry (steel) – agriculture sacrificed

an economic disaster

• output initially grew but quickly stalled

• famine

• environmental disaster

Labor- and capital- intensive technologies

“walking on two legs”

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Chinese socialismThe Cultural Revolution (1966-70)

Mao’s attempt to retake supreme leadership of the Communist party

Mao thought that the only way that China (Asia) could be self-reliant is to completely reject the western influence

lost generation of leadership as universities closed and students sent to countryside

bureaucrats and planners stripped of authority and sent to the countryside for “political reeducation”

poor economic performance during that time

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The Reform

Deng Xiaoping takes power in 1978

initiated a gradualist reform that is still in progress

a combination of reform and transition

“dual-track approach”

• coexistence of a plan track and a market track

• two phases:- 1978-1984:

– reforms in the agricultural sector – liberalization

– creation of township and enterprise village (TVE)

– service sector slowly privatized

- 1984: dual-track approach in industry

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Dual-track approach transition from central planning to free markets

necessarily creates winners and losers

opening free markets while planned supply unchanged at set planned prices

adjust planned prices up toward free prices as planned supply quantity fixed or lowered

meanwhile market supply is growing so fixed planned supply gets smaller as a proportion of total supply

final elimination of planned prices when planned supply becomes almost irrelevant

dual track approach can

minimize this cost

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Agriculture communes abandoned

household responsibility system (HRS)

• land leasing to families (15 years)

• improving incentives

• each plot had a production quota at set prices

• the rest sold in the market at whatever prices

• a sharp increase in agricultural productivity- higher standard of living in rural area

- portion of labor force could move into entrepreneurship

- creation of TVEs

• 1971: 91% of agricultural output planned

• 1993: 5%

to increase productivity

PLAN

MARKET

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Industry

moving away from the Soviet-style gross-value indicators to profits, quality, and marketing

enterprises allowed to retain profits and reinvest

• less focus on budget-financed projects

4 types of enterprises:

• state-owned enterprises (SOEs)

• corporatized state enterprises

• township-village enterprises (TVEs)

• joint (foreign) ventures

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Township Village Enterprises (TVEs)

Characteristics

face hard budget constraints

fall outside planning more freedom

had to identify demand & supply and work on quality and product development

not burdened by social expenditure

more flexible with hiring/firing workers

retained profits investments

• expansion of employment• political support to the gov’t• provision of social services

• housing• education• health insurance• pensions

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Township Village Enterprises (TVEs)

Why TVEs?• light industry neglected by the state sector• large labor reserves in rural areas• growth incentives to develop local economy

between 1980 and 1996, the number of TVEs increased from a few to 23.3 million and employing 135 million workers (20%)

were able to absorb excess labor

recently TVEs begin privatized: joint-stock companies, proprietorships and partnerships• emerging problems for rural employment

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State-owned Enterprises (SOEs) inefficient, unprofitable (SBC), corrupt

why not close them?• employ a large portion of the labor force• “important sectors” – “commanding heights”• arbitrage/rent source of income for

bureaucracy (corruption)

contract responsibility system (CRS)• dual track, just like in agriculture• incentives to ↓ quota and ↑ inputs

managers lacking the power to reward key personnel

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Corporatized State Enterprises

“retain large SOEs and release small ones”

a transfer of state ownership from direct state supervision and management to state “shareholding” operated by “independent” managers corporatization of SOEs

the idea is to operate these SOEs as corporations in industrialized market economies

have not performed better than regular SOEs

lack of clear property rights and shareholders’ monitoring capacity

non-commanding heights enterprises

“shareholding enterprises”

Soviet-style

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Building institutions

Property rights and the rule of law

• neither is clearly defined

• relational contracting

Financial system

• central bank: The People’s Bank of China (PBC)

• commercial banks: the Big Four

• reliance on banks equity markets small

• directed credit dictated by the plan

• opened up to foreign banks in December 2006

• high proportion of non-performing loans

• exceptionally high savings rate around 25%

protects inefficient SOEs

still a lot of restrictions on movement of capital

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Foreign Trade and Investment

world’s top recipient of foreign direct investment (FDI)

1990s: 40% of capital formation financed with FDI

a large trade surplus vis-à-vis the rest of the world

What is the other mode of foreign

investment?

China's Trade

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Special Economic Zones started in 1979 mostly south coastal region

“workaround” weak property rights and inefficient courts

preferential tax treatment

economic reasoning for SEZs1. absorbing unemployment2. economies of scale3. technological spillovers4. limit geographical activity

- environment- testing policies before applying to the whole

country (experimentation)

created regional disparities

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Coastal growth

Nation Guangdong Fujian Zhejiang Jiangsu Shangdong

Annual growth 9.3% 19.7% 17.3% 18.9% 16.4% 16.3%SOE growth 10.1 9.5 9 9.1 9.2TVE growth 19.5 19.6 24 17.8 18.5Foreign & joint ventures 58.6 50 38.6 42.3 37.3

Special Economic Zones

large and growing income inequality

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Transition in China gradualist

• dual-track reform• policy experimentation

decentralization of decision-making

• regional autonomy

the economy did not contract with the onset of transition

• economy less reliant on directed trade• the agricultural sector did not depend on a

complex set of markets and suppliers as in the SU

econ. liberalization w/o political democratization