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China
• Impressive growth since 1978
• Contrasting experience relative to Russia
• Inequality and poverty has fallen
– Absolute poverty fell from 250 million to 50 million in two decades
– Life expectancy has increased from 64.37 in the 1970s to 70.80 in 1996,
(68.71 for men and 73.04 for women), today it is 71.13 for men and 74.82
for women
– Infant mortality fell from over 50 per thousand in the 1970s to less than
30 per thousand in the 1990s (today it is 22.12)
– At PPP, China's share of global output has risen from close to 11 percent
in 2000 to a shade over 13 percent in 2004.
– On that basis it dwarfs Canada---and France, Italy and the UK; and is
almost twice as big as Japan. Indeed, on the ppp basis it is the third
largest economy if we count the euro area as a single economy.
• China looks different from other transition countries
GDP by Sector
Special Economic Zones
Population Density
Agricultural Regions
Ethnolinguistic Groups
Differing Experience
Figure 1: Russian and Chinese Gross Domestic Product*
800
700
China
US $ billions
600
500
400
Russian
Federation
300
200
100
0
1989
1990
1991
1992
1993
1994
1995
*Measured in constant 1987 US$.
Source: Statistical Information and Management Analysis (SIMA) database.
1996
1997
Real GDP, China vs Russia
1992 = 100
500
450
400
1992 = 100
350
300
250
200
150
100
50
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
China
Russia
China vs. Russia Per-capita GDP (PPP)
11000
Dollars
9000
7000
5000
3000
1000
1991
1992
1993
1994
1995
1996
1997
China
1998
Russia
1999
2000
2001
2002
2003
Per-Capita GDP, 1000-2001
Per-Capita GDP 1990 dollars
20000
15000
10000
5000
0
1000
1500
1600
1700
1820
China
Western
Europe
1870
Japan
1913
India
1950
1973
2001
China versus India
Ratio of Chinese and Indian to US GDP
(m easured in PPP prices)
0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 199
China and India, GDP per-capita
3500
3000
2500
2000
1500
1000
500
0
1700
1820
1870
1913
India
China
1950
1973
1998
Regional Disparities
World GDP
World GDP at PPP
Income Distribution
Household income
or consumption
share
Lowest 10%
Household income
or consumption
share
Highest 10%
Gini Coefficient
China
1.8
33.1
44 (2002)
Russia
1.7
38.7
40.5 (2005)
United States
1.8
48.5
45 (2004)
Brief Background
•
•
•
•
Soviet Advisers
Great Leap Forward
Cultural Revolution
Household Responsibility System
Collective Farms
• end-1955 = 500 advanced cooperatives,
• by 1957 there were 700,000 cooperatives, with 119
million members.
• Early collectivization was successful: from 1952-1958
gross output rose by 27.8% while population rose by
14.8%.
• In 1958 cooperatives were amalgamated into the
Peoples communes, about 24,000.
• Prior to 1958 participation voluntary
• In 1958 exit eliminated
– What happened?
Collapse in Productivity
Why did productivity collapse?
• More than the Great Leap, persisted till 1978
• Simple model with shirking
– Agents choose high or low effort
– As the collective is large an agent can shirk without having
an effect on his share of output this period, so y  y
– But if agents shirk then next period agents leave and output
goes to y
, and agents have to supply high effort, as
they are on their own.
– trigger strategy: if agents defect from the cooperative
outcome we revert to the bad outcome in all future periods
Game
• We have three possible outcomes
• One-time gain from shirking
• Future loss
Outcomes
• Agent chooses high effort if G < L, or
• Shirking more likely if
– Output loss is small
– Future is discounted heavily
– Effort is costly
• Graphically
• If L > G then trigger strategy supports high effort
– This is the situation before 1958
– After 1958 no possibility to play the strategy till 1978
Gains and Losses with Trigger Strategy
Area L with beta = 0.8 (r = .25)
Area L with Beta = 0.95
Great Leap Forward
• In 1958 Mao launched GLF
– “Ten thousand years are too long, seize the day, seize the hour!”
• Huge increase in output targets
– People's Daily proclaimed that the GLF would propel China to surpass UK in
industrial production in 15 years and the US in 20 or 30 years.
• Result
– National grain output plunged by 15 percent in 1959 and by another 16
percent in the following two years.
– Demographers estimate the total number of premature deaths during the
GLF famine at between 16.5 and 30 million
• How? Why?
"Take steel as the key link, leap forward in all
fields"
"Long live the General direction! Long live the Great Leap
Forward! Long live the People's Commune!"
GLF
• Official explanation: 3 years of bad calamities
• Real explanation
– Maoist system made subordinates feel pressure to fulfill and overfulfill
targets
• CPC created a new rat race for local cadres by exhorting them to “overcome
reactionary conservatism”
– Initial reports signaled huge increase in output
• A initial tally of the 1958 grain output after the fall harvest pegged it at 525 million
metric tons (MMTs), up by nearly 170% from 1957
– As a result, government raised agricultural taxes and started backyard
furnaces
– Since the agricultural problem was now solved it made sense to divert
output and labor to industrialization
• 16.4 million peasants, about twice the size of the industrial labor force (in
1957) were relocated to cities between in 1958
• more than 100 million peasants were mobilized in the winter of 1957–58 to
undertake large irrigation and land reclamation projects, and to operate
millions of small “backyard iron furnaces
GLF
• Actually, output fell, harvest closer to 200 mmt’s
– Grain retained in rural areas fell sharply from 273 kg per capita in 1957 to 193 kg
in 1959, and further down to 182 kg in 1960
– This meant nutrition fell => productivity fell as economy was near
subsistence => future output fell
• To see this suppose that grain output given by
Qt  af ct  Lt
– where a is productivity parameter, c is consumption and L is labor
allocated to agriculture,
• af(c) measures the contribution of nutrition to the labor productivity of an
average worker
– function f(c) relates production to consumption, capturing the nutrition
effect – “S” shape
– Consumption next period depends on productivity and procurements, p
ct 1  af (ct )  pt
S-shape
y
f ( c)
c
GLF
• Mao thought a had risen, so he raised p and
reduced L
• But a had fallen, so ct+1 really falls
• But this reduces output next period even more
– Malnutrition and famine result
• We get a downward spiral till p is reduced and L
is restored
Reforms
• Early reforms were in agriculture, HRS
– HRS meant that peasants could keep fruit of extra effort, so
work effort and output increased
– Freed labor for other tasks
– Relaxation of local self-sufficiency led to crop specialization
(return to old crop patterns) and led to large efficiency gains
• Diversification into animal husbandry as well
– Led to growth of non-farm self employment and family
businesses
– Early success in agriculture spurred reform to industry
• When initial situation is real bad, moderate
improvement in incentives can have a very large effect
Dual Track
• Combine two tracks in reform strategy
– Plan and market
• Chinese reform has the character of experiment: the slogan is
moshitou guohe
– ”crossing the river by stepping from stone to stone”
• The essential idea of dual track is to liberalize at the
margin.
• In agriculture peasants could lease land (15 years) and
sell above quota sales
– Reminiscent of partial reform in Russia
• But different outcome
Dual Track
• Dual track requires enforcement
• Suppose
and that supply and rationing is
efficient
– Efficient supply means that planned supplies are delivered
by producers with the lowest marginal cost, and efficient
rationing means that the planned quota is delivered to
buyers with the highest willingness to pay.
• Further suppose that
• Dual Track means that above-quota output is sold in
markets
Dual Track Liberalization
Dual Track Outcomes
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•
•
•
Dual track is Pareto improving
Consumers get area A
Consumers also get area C
Under liberalization area C goes to producers
– Compensation needed
– With dual track rents are preserved but outcomes are
efficient at the margin
– Requires enforcement to prevent arbitrage
Dual Track:
Corruption but growing out of the plan
• Firms lobby government for higher input quotas with
no increase in plan output
– They then sell the inputs at market price
– Windfall gains
– Problem is lack of enforcement of plan track
• This partial and gradual liberalization of pricing opened
the door to “growing out of the plan.”
– directing incremental output toward market allocation
gradually reduced the importance of the plan sector without
a political struggle
Dual Track
• Quota enforcement key
– Market prices exceed plan prices
– If no enforcement we go to BB equilibrium
• Supply diversion
– So state power is key
• Notice that system is ripe for corruption
– Arbitrage opportunities widespread
– Corrupt officials can get rich
Dual Track Success
Comparison with Big Bang
• Simple model with labor supply depending on real wage
(availability of consumer goods)
– Planners set final goods price to maximize government surplus
– Labor used to produce intermediate and final goods
• Central planner equates marginal increase in labor supply to
marginal cost of producing consumption goods
• Planner maintains integrated monopoly to maximize surplus
• G maximized at some level of final goods, D*
– D > D* marginal increase in labor supply smaller than marginal cost
of producing consumer goods
Output under Central Planning
G
G*
S
D*
D
Big Bang Reform
• Under Big Bang intermediate producers become
monopolists
– No restructuring immediately
• Under BB, intermediate producers raise price reduce
output
– This raises cost of final output
– Labor supply falls as does government surplus
• The reason is that the enterprises do not consider the consequences
of their price increases on the profits of the other enterprises.
• Since there is less left over for consumers, it is equivalent to a
decrease in real wages, and hence labor supply falls.
Dual Track
• Under Dual Track intermediate producers still fulfill quotas
– No pecuniary externality
• Additional sales do not lower the planned price on quota output, the
enterprise has an incentive to produce beyond the quota.
• This means that the reform raises output in every enterprise.
– Above plan output must raise total output
• Additional output sold at lower price
• Additional intermediate output means more final output
– More output means lower final goods price
– Implies higher real wage or more D
– So government surplus must rise
• So output under Dual Track is higher than under central
planning
Comparison of Two Reforms
Dual Track Reform
• Firm is able to price discriminate
– Efficient, since untapped residual demand is met
r
s
• Since pi  pi the real wage rises, and aggregate profits necessarily
increase
• One could think of this as a tax reform
– Before, lump-sum tax on quota output and 100% marginal tax rate on
above quota output
– Dual track reduces marginal tax rate on above quota output
– As a result, enterprises increase production and labor demand; the
consumer is offered a higher real wage rate (or more consumption) and
hence supplies more labor. The reform, therefore, leads to an increase in
aggregate economic activity.
• Notice that efficiency gain is split between government and public
– So fiscal situation does not deteriorate
Dual Track Equilibrium
China vs EEFSU
• China much more rural when reforms started
– China began reforms (1978) with 71% of employment in agriculture and 15% in
industry.
– By comparison, Russia had only 14% of employment in agriculture in 1985,
whereas 32% of employment was in industry
• Understates difference due to kolkhozy
• Deeper state roots in EEFSU
– Chinese state enterprises accounted for 18.6% of employment in 1978, whereas
collective agriculture accounted for 72.0% of employment; by 1991 these figures
were 18.3% and 63.9% respectively.
– Compare this with 93.1% versus 6.0% in Russia in 1985
• Shows up in different welfare systems
• When reform began in China 80% of the labor force was outside the state
sector.
• In the EEFSU practically the entire labor force was in the state sector.
• Important, because state sector is the subsidized sector at start of reforms
Simple Model
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•
•
•
Let Li be employment in sector i
Three sectors, a, n, s
Output in sector i given by
Total labor distributed across sectors
• Let
, note this was 0 for n prior to reforms
• Productivity is highest in new private sector,
More simple model
•
•
•
•
•
•
•
Assume prices given by world market
Wage in state sector includes subsidy,
Total subsidies given by
financed by taxes
Taxes levied on all labor,
This implies tax rate given by
Wages in other sectors given by
So all workers bear cost of subsidies to industrial
workers
Difficulties with reform
• Efficiency requires
• Suppose that
– Then disposable income in the state sector will be higher
than in the private sector:
– Thus workers in the state sector are unwilling to
voluntarily leave despite higher productivity in n
• If state sector is large (like EEFSU) then
More difficulties
• This implies that
– the last inequality follows since
• Using the determination of the tax rate we write,
• Which implies
• Thus state workers are better off with no subsidies, but refuse to leave the
state sector if they are not removed
– Small cuts in subsidies may not change inequality, only large cuts will work
– But in China state sector is small, so sector a can be the source of labor in
sector n
Implications
• Large state sector implies large legacy costs
• In China state sector is smaller burden
– Subsidies can be maintained and private sector can
grow by drawing on agricultural labor
– Taxes to support subsidies are a small tax on other
sectors because of small share of state sector
– So less drag on sector n’s growth
• Thus, China could expand sector n without
dealing with sector s
TVE’s
• Organizational innovation
• Come in three types
– ”wearing the red cap”: actually private, but register as TVE to avoid
discrimination.
• This is less important since 1992 when regulations against private ownership were
relaxed.
– Zhejiang model: TVE’s have a financial commitment to the local
government, but autonomy over decisionmaking.
• The town may be a shareholder, but it does not interfere in decisions.
– Jiangsu model: involves tight control over the enterprise.
• This is popular with authorities because it seems closer to socialism.
• TVE’s differ from SOE’s if for no other reason than this is
localized socialism rather than centralized socialism.
More TVE’s
• TVE’s have harder budget constraints than state firms
• Mix private and public ownership
– Yet do very well in terms of performance
– Managerial control has developed without the rule of law
– Creation of a local market for management control as a solution to the
principal-agent problem
• Principal is local government
• Managers get flexible contracts, public officials get share of revenues for local
governments
– The key point is that this system seems to create an interest on behalf of
local officials to expand capitalism, since arrangements with TVEs
become increasingly important to the local economy
Ownership Complex
• Ownership boundaries are complex in China
– Best to focus on control
• SOE’s concentrated in capital-intensive sectors
– Compare GDP shares to employment
• SOE’s concentrated in rust-belt
• Important, but trend is downward
– Between 1995 and 2003 25-30 million workers in
SOE’s lost jobs
Complex Structure
Ownership Shares by GDP
Ownership Shares by Labor Force
State Ownership by Region
By Industry
By Sector
Trending Down
Gradual Marketization
• Dual Track has led to growth in market pricing
• Dual Track has led to hardening of budget
constraints
Growing Role of the Market
Budget Constraints Hardening
Federalism Compared
• Russia and China both federal states
– In China, regions support local enterprise
– In Russia, regions choke local enterprise
– Why the difference?
• Two important differences
– initial rent holders weaker in China — related to level of
development
– strength of central government in China — no collapse of
party
• Center can punish governments that predate
Sources of China’s Growth
• Reallocation of factors
• Growth in productivity
• Factor accumulation
– Exhaustible resource problem with labor the
resource
Role of Capital Accumulation
Growth in Output per Worker
Savings Rates are very high
Output per Worker, by sector
Value Added and Employment by sector
Annual Growth in Exports
China’s Share of World Manufacturing Exports
China’s Relative Labor Costs
vis-à-vis US
China’s Relative Labor Costs
vis-à-vis US
China’s Aging Population
100%
80%
60%
40%
20%
19
80
19
90
19
95
20
00
20
05
20
10
20
20
20
50
0%
0 to 14
15 to 64
65 and over
Per-Capita GDP and the Elderly
Population Pyramid, 2000
Population Pyramid, 2025
Population Pyramid, 2050
http://www.census.gov/ipc/www/idbpyr.html
In Lieu of Conclusions
• Great Divide
– Is it geography, history, or legacies?
• Institutions versus initial conditions
– Legacies matter
• Distributional problems are manifest
– Transition is about winners and losers
• Lack of compensation
– Political economy
Great Divide
• Long-term institutional differences
– Key puzzle: cannot be traced to policy differences
• Policies differed more among the successful CEE’s than
relative to FSU countries
• Institutional convergence despite different policy paths
– Is this the EU effect?
– Specific Soviet legacy?
• But what about Baltics?
– Initial conditions?