ME_Case Discussion_China Rural Leap

8/8/2019 ME_Case Discussion_China Rural Leap

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Group P

Priyanka de Noronha

Rishi Raj

Saumitra AmbegaokarSreya Ghose

Tejas Pradhan



Introduction

The Maoist Legacy

Reforms and Growth PotentialOrganization of Rural Sector

Township & Village EnterprisesIndustrial Policy & Performance



C hina s phenomenal economic

growth in 1980s and 1990s drivenby Townships & Village Enterprises(TVEs) which:

Rural industrial firms grew from 1.5million in 1978 to 19 million in 1991

Employed 96 million people in 1991

(an increase from 28 million in 1978)Increased output by an average of 30% per year throughout 1980s

Originated during the Maoist erabut took off during Deng Xiaoping stime



H ouseholds classified as urban orrural

Urban H ouseholdsRations for staple foods

Preferential access to education and

healthcareEmployment

Rural householdsExpected to deliver fixed quotas of foodgrains

Movement to cities restricted

Led to massive urban ruralinequalities



Second Five Year Plan 1958-63

Rural industrializationSmall scale, labor intensive, low techindustries developed in rural areasH eavy industries in urban areas

Township and village enterprisesformed

Engaged in both agricultural andindustrial productionIntended to produce local materials tomeet local needs

Serve large scale industries through

simple processing



Dual track approach to market liberalization

Less resistance to the reformEg. Price liberalization

Agricultural reformsProcurement prices raised by 22%

Decollectivization

Budget, Taxes and Provision for Public GoodsSubnational levels of governments were expectedto be self-financing

Provision for public goods

Shift of tax revenues from Central to LocalgovernmentsContracts between governments

C adre incentivesPerformance criteria specified by nationalguidelines



County

Township 2Township 1 Township 3

Village bVillage a Village dVillage c



Equivalent to a company

Village leaders Local residentsLed by Party Secretary andGovernment H ead

5 to 7 member village committee

Elected by village

Village

PartySecretary

GovernmentH ead

Operatingfactories andManagement

Decisions

AgriculturalMatters



Better performance by VillageBetter credit

Daquizhuang Village Leader: YuZuomin

Late 70 s beforeC

hinese ReformsStarted Steel Strip plant for RMB150,000Capital: Village 50,000 + Villagers10,000 + Saved 20,000 in bricks +County 37,000 (For irrigation) +33,000 from neighbouring villages

By 1990 profit 350 million yuan



Liaison between county and village

Party Secretary and Township head

State C adre not localImplementing County planC ollecting taxes

Provided loans



C ounty Magistrate and PartySecretary

Promote and growth of TVE

MonetaryInputs to villages

With reforms, the reliance onC ounties decreased

Bureaucratic powers still existed

Finance bureau, Tax bureau, Banks,Rural Enterprise Management



C ollective enterprises after the reformsC redit policies for Private firms very tight

hence only small scale developed

Loans given in 1985Township Enterprise: 20.1 billion Yuan

Village Enterprise: 5.9 billion Yuan

Private: 2.8 billion Yuan

Other Way:Workers had to deposit amount

If production quota met, they gotinterest and wagesIf production exceeded, they got anadditional bonus

C reated a sense of Responsibility



State Owned Enterprises(SOE)transferred technology at a lowcostH ire SOE employees asconsultants

Unauthorized copying, stealingplans, Reverse Engineeringfrom SOEs





C ounties sent targets to TVEs Notmandatory, but rewarded if followed

No subsidies post reformsC ounties took care of TVEs underthem, redistributing wealth to aide

enterprises creating jobsMutual dependency aided growth

Private entrepreneurs had noproperty right

Villages did not get tax share fromC entre, hence they encouragedTVEs



Management of Collectivelyowned enterprises contracted outC ontractor paid taxes, rent andsurcharge

Autonomy of contractor limited today to day functioningH is salary ranged from 120% to 3-4times that of highest paid workerC ontracts were renegotiable andnon-binding



C redit allocated by state

Under Mao Private banksprohibited, firms received capitalfrom govt.

1990 s Bad debt problemC redit cooperatives and Agriculturebanks at county level

Mid 80 s onwards credit ratingsystem



After 1983, private enterprisesexceeded other forms of ownershipH owever, collectively owned firmsremained dominant in early-1990s:

Share of output increased from 24%

35% from 1980 1995 (SOE outputdecreased from 76% - 28%)

Output increased approx. 500%(1985 1995)Productivity increased over 300%

Exports from rural firms increasedabout 65%

Due to: 1) domestic credit growthand 2) depreciation of yuan



Focus on output value led to:Expansion of productive capacitywithout efficiency or salability

This led to:

excess capacity in small firmscapacity utilization ratios below60% in major industrial units

Reason: C hina s decentralizedeconomic structure allowed eachregion to be operationally and

economically independent



To counter the issues faced and

provide economic impetus, localleaders became directly involved inthe market

Negative consequences faced:Pressured banks to grant loans

Overlooked disadvantages of projects undertakenForced participants to take onprojects

Result: After reaching a peak inearly 1990s, TVEs ran into deficitsof 4.2 billion yuan in 1995 (anincrease from 500 million yuan in1985)



Banks became more cautious whenlending to TVEs harder for TVEsto obtain creditIncreased competition from

product and labour markets diminishing margins

Nature of markets changed

Lost good managers to foreign andprivate firms

Labour costs increased



1980s: Localities benefited by

developing local economyEarly 1990s: Central treasury wasstrained as localities grew withlarge extrabudgetary fundrequirements

1994: Fiscal Reforms created toadapt to the new privatizationenvironment

Features:Reduced amount of extrabudgetaryfundsIncreased taxes on localities

Step towards rule-based systemwhich gave greater benefits to thecentre rather than the localities



Main issue: Features of the earliersystem continued to existbenefitting localities rather thanthe centre

Solution: Compensate localgovernments in the short run forpotential revenue losses



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ME_Case Discussion_China Rural Leap