Lecture 05 the Socialist Experience

8/6/2019 Lecture 05 the Socialist Experience

1/19

The Socialist Experience

Lecture 5


2/19

Big Push Industrialization East Asian

Development with Chinese Characteristics

State-owned enterprises, no private sector

not like the rest of Asia (mostly)

Soviet strategy: Heavy industry first (did NOT

do what rest of East Asia did labor intensive

goods and services) not like the rest of Asia

For political control / ideology (Aukarky not a

trading nation) not like rest of East Asia State control of economy: Planning (resources

allocated on basis of preference of government)

not like rest of Asia


3/19

Economic Planning

Ex-ante coordination of planning is an

important aspect of plan production

As will be seen unless steps are takento simplify the plan, it becomes

ENORMOUSLY unwieldy


4/19

Full Planning Problem

X11 X12 X13 X14 X15 X61

X21 X22 X23 X24 X25 X26

X31 X32 X33 X34 X35 X36

X41 X42 X43 X44 X45 X46

X51 X52 X53 X54 X55 X56

X61 X62 X63 X64 X65 X66


5/19

Comprehensive plan

Each row is activity of ith agent (lists theflows from agent 4 to all other agents)

X41, X42, X43, X44, X45, X46

From computer chip factory #206 to (agent 4): Nintendo factory #67 (agent 1)

China NASA space program (agent 2)

Wolfenstein factory (agent 3)

Keep one for himself (agent 4)

Precision agricultural sector (agent 5)

Maos own playroom (agent 6)


6/19

planning

Each column is list of flows to agent 1 from

all other agents think of a production

function


7/19

Full Planning Problem

X11 X12 X13 X14 X15 X61

X21 X22 X23 X24 X25 X26

X31 X32 X33 X34 X35 X36

X41 X42 X43 X44 X45 X46

X51 X52 X53 X54 X55 X56

X61 X62 X63 X64 X65 X66

Agent 5 is food producer gets seed from agent 2, gets fertilizer from agent 3; chip

for tractor from agent 4 etc. he then send food (row 5 to other agents when he

is done [agent 6 could be a food producer, too] have to get chip factory somefood from food producer 5 and food producer 6


8/19

Reality is very complicated

How to take millions of firms and make them produceoutput that will be input for other firms and then createoutputs that will be for consumption and production

There are millions of goods

Each good has hundreds of parts

And require hundreds of thousands of machines

To ultimately provide for a billion consumers

How many planning nodes in complete problem:

100,000 x 10,000,000 x 100 x 100,000 x 1,000,000,000 = a lot!


9/19

Need to simplify:

method 1: planned subeconomyX11 X12 X13 X14 X1u

X21 X22 X23 X24 X2u

X31 X32 X33 X34 X2u

X41 X42 X43 X44 X2u

Xu1 Xu2 Xu3 Xu4

Row 2 is

fertilizer

Last column is

exports from

planned agents to

ALL unplanned

agentsColumn 1 is food from

unplanned sector to

chip factory

Row 4 is

chips

AIC

Grain bureau


10/19

Need to simplify:

method 2: compartmentalizationX11 X12 X1(B+u)

X21 X22 X2(B+u)

X(B+u)1 X(B+u)2

Compartment A

Compartment b and unplanned

economy think of compartment

as regions


11/19

Need to simplify:

method 3: consolidateX33 X34 X1(A+u)

X43 X44 X2(A+u)

X(A+u)1 X(A+u)2

Compartment B

Arrows now flows between

planned and unplanned AND flows

between regions


12/19

Need to simplify:

method 4: minimize interactionX33 X34 X1(A+u)

X43 X44 X2(A+u)

X(A+u)1 X(A+u)2

Compartment B

Because it is still hard to coordinate andin order to minimize need for investment in

transport (and to keep guerilla economy):

2 strategies:,

-- make areas as self-sufficient as possible

minimize flows between planned and

unplanned (2 residential permits)


13/19

Need to simplify:

method 4:danweior unitized system

X33 X34 X1(A+u)

X43 X44 X2(A+u)

X(A+u)1 X(A+u)2

Make unit (factory / university / governmentagency take care of as many roles as

possible therefore within a factorys

compound, you build:

Housing / school / hospital / even garden

plots

XA


14/19

Final simplified plan

XAu

XBu

Make unit (factory / university / governmentagency take care of as many roles as

possible therefore within a factorys

compound, you build:

Housing / school / hospital / even garden

plots

XB

XA

XBA

XAB

food

Someinputs

XUA XUB


15/19

Even after simplification, planning

is hard to coordinate Problem of timing (so stock inventory) Problem of quality (plan completion counted in

units shipped)

Still problem of coordination (in 1978 at height ofplanning, MOST materials got through non-planned channels with guanxi or connections)

OK for simple technologies (rice / raw steel) difficult for car [China had 1000s of

automobile plants, making car by hand maybe only 50 per year all parts were custommade and custom founded) / impossible formodern day car or Dell computer ..


16/19

Planning compromises, summary

Kept plan simple (review from above)

Large unplanned / decentralization / walkingon two legs / minimize flows / unitization

Reduced product innovation

Reduced consumer goods

Planning rallies

Rationing program (coupons foreverything)

Two tier system in 1970s


17/19

Other ways to help:

Government monopoly over banking

All profits of industry go through banks allpurchases come from banks

Control by party (party cell in EVERY factory /university / hospital / army unit / etcetera) make leader changes / monitoring / oversight ..

Redundant systems of control: Physical (planning commission) Financial (banks)

Personnel (party)


18/19

Consequences

Fast Growth in investment

Rising per capita GDP

Investment in basic health, education, housing.

But Little growth in income Slow growth in employment

Slow growth in productivity (most of growth from investment ofcapital into capital poor incentives)

Slow structural transformation (still highly agriculture)

Little integration (by design) Domestically (little regional specialization)

Closed door to the rest of the world (outdated technology)

And, poor information and control . look what happened in thecountryside

Needham puzzle 2 (revisited): would China have grown faster under

capitalism or socialism through the 1950s and 1960s

Especially in mid-

1950s China

was proud

growing fast

and infinitelybetter off than 10

years before


19/19

Figure III-1: China: Investment Rate (GDCF/GDP)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

52

54

56

58

60

62

64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

Up from almost 0 in the late

1930s and

1940s

Documents

Lecture 05 the Socialist Experience