Transcript Session 6 China Miracle

Session 6 China Miracle
A Successful Transition Economy
China before Reform
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Communists took over China in 1949.
Agriculture 70%, Industry 30%.
Great-Leap strategy for development.
People’s Communes in agriculture.
State-Owned Enterprises (SOEs) aimed at
developing heavy industry under
economic embargo of Western countries.
Shortcut impossible!
China before Reform 2
• China exported not labor-intensive but
capital-intensive goods (barter trade to
balance out left-over), restricting import
only to absolute necessities.
• Measures of import restriction : tariffs,
quotas, licensing requirements, import
substitution lists, a system of registration
for selected imports, and commodity
inspection requirements.
China before Reform 3
• China’s share of world trade dropped
from 1.5 percent in 1953 to only 0.6
percent in 1977.
• Exchange rate was fixed at over-valued
level to implicitly subsidize the import of
high priority capital goods.
China before Reform 4
• Import from the Western countries
needed foreign exchanges
• Excess demand for foreign exchanges
called for rigid control
-entire foreign exchange earnings of
export to be surrendered to government;
-individuals may hold foreign currency
only under state approval;
-strict controls on the capital outflow.
Performance After Reform
• GDP grew from US$261.3 billions in 1979
to US$7.3 trillions in 2011, surpassing
Japan’s US$5.9 trillions and chasing US
US$17.6 trillions. (World’s total GDP was
US$69.9 trillions in 2011.)
• Per capita GDP grew from US$100.- in
1978 to US$5,449.- in 2011,
demonstrating annual growth rate 12.9%
for 1978-2011.
Economic Reform in 1978
• The Third Plenary Session of the 11th
Chinese Communist Party Congress in
December 1978.
- Enterprises and farmers were given more
autonomy in management and
production.
- Resource-allocation (commanding)system
and macro-policy were adapted to
accommodate this augmented autonomy.
Key Content of Reform
• Agricultural sector shifted away from
collective system to household
responsibility system as of 1979,
encouraging the growth of township-village
enterprises (TVEs).
• Government allowed private business, and
directed the state-owned enterprises (SOEs)
to exercise some autonomy in management
and to hold some portion of profit.
Household Responsibility System
• The Decision on Certain Issues
Concerning the Acceleration of
Agriculture Development in September
1979. The Central Committee of the
Chinese Communist Party, stipulated that
production contract with household was
not to be allowed, with the exception of
the special needs of some sideline
productions and isolated households.
HRS 2
• Commune allocated farming land to
farmers on the condition that each
farmer was to turn in a fixed amount of
agricultural product after harvest.
• This fixed amount covered the state
procurement and the Commune’s use,
set at the level same as before.
• Farmers became residual claimants.
HRS 3
• Some People’s Communes adopted
responsibility contracts with households,
even before Reform, whenever
agriculture ran into difficulty.
• But the practice was illegal as it was not
ideologically consistent with Communism.
• The Decision was the first official
legalization of the practice of HRS.
Performance of HRS
• Agricultural production increased at
average annual rate 6.05% during 19781984, which was the highest since 1949.
• HRS contributed for 46.89% of increase.
• China succeeded in feeding 20% of the
world population with the grain crops
produced from less than 10% of the
world arable acreage.
Agricultural Production
78
State
47.8
Procurement
79
54.0
80
50.2
81
82
83
84
85
86
52.1
56.2
91.2
102.4
59.6
53.3
87
56.9
88
50.5
Total
304.8 332.1 320.6 325.0 354.5 387.3 407.3 379.1 391.5 403.0 394.1
production
Ratio (%)
16
16
Units: million tons, %
16
16
16
24
25
16
14
14
13
Dual Pricing System
• Agricultural surplus in private hands
increased substantially, as residual
earning was added to official income.
• Private market transaction expanded
under law of demand and supply.
• Dual pricing system consisted of planned
price for government procurement and
distribution, and market price.
Township and Village Enterprises
• Cooperative type of organizations
voluntarily emerged to handle product
and surplus that HRS made available.
• HRS freed some of land and labor from
planned agricultural activity.
• TVEs that initially produced what rural
sector needed, began to produce
commodities for profit.
SOEs Reform
• Workers had been paid by seniority, and
government had been solely responsible
for profit and expenditure of SOEs
before reform.
• A test program to share management
power and profit between government
and SOEs was implemented on fourteen
selected SOEs.
SOEs Reform 2
• Each SOE retained decision making on
pay to workers and profit retention.
• Central government delegated fiscal
authority and resource allocation
autonomy on SOE to corresponding local
government.
• This contract responsibility system
showed improvement in efficiency and
was expanded to more than 6,000 SOEs.
Unclear Property Right
• Managers, who used to have close connection
with the Party, abused delegated power to retain
as much profit as possible, leaving too small
portion to state.
• Under no well-functioning official external
governance, managers often embezzled state
property.
• Managers paid too much working incentives in
order to increase their pies.
• Unclear boundary of autonomy and loopholes
counteracted much of efficiency gains.
Second Round of SOE Reform
• System of stock company was introduced,
and poor governance only fortified
managerial autonomy and corruption.
• Tax reform replaced profit remittance by
corporate tax.
• Manager-responsibility system was
introduced to make SOEs respond more
resiliently in competition against TVEs for
input materials.
• State mandatory plan was phased out to
reduce state control in resource allocation.
The Role of SOEs
• The visible state sector—SOEs and
entities directly controlled by SOEs,
accounted for more than 40 percent of
China’s nonagricultural GDP.
• SOEs and their subsidiaries benefit from
- preferred access to bank capital,
- below‐market interest rates on loans
from state‐owned banks,
The Role of SOEs 2
- favorable tax treatment,
- policies that create a favorable
competitive environment for SOEs
relative to other firms, and
- large capital injections when needed.
• Further, Chinese SOEs also appear to
dominate China’s expanding government
procurement market.
The Role of SOEs 3
• The government uses SOEs to facilitate
structural change in the Chinese
economy, to acquire technology from
foreign firms, and to secure raw material
sources from abroad.
• Economic base for the Party and leaders.
• Sporadic corruption scandals under
domination of political power.
The Economist, October 6, 2012
• The dark truth is that bamboo capitalists are increasingly getting
squeezed by the state. …For years from the late 1990s stateowned enterprises (SOEs) appeared to be in retreat. Their
numbers declined (to around 114,000 in 2010, some 100 of them
centrally controlled national champions), and their share of
employment dropped. But now, even while the number of private
companies has grown, the retreat of the state has slowed and, in
some industries, reversed. ….
• Though fewer in number, today’s SOEs are more powerful than
ever. Their shrinking number is the result of a concerted effort to
consolidate disparate SOEs into national champions in a range of
“strategic industries”, which range from telecoms to shipbuilding.
• Liberal reforms got a boost with China’s WTO entry in 2001—but
slowed after 2006, and then, argue critics, went into reverse as
the stimulus spending of the past few years flowed to SOE coffers.
Reality behind the Muscular
Appearance
• SOEs are monopolists in domestic
market, and their share of export had
fallen from 25.7% (1998) to 9.8% (2000).
• SOEs accounts for only 35% of patent
registration, 25% of technological
innovation, and 20% of developing new
commodities, while commanding 81.9%
of net profit and 90.4% of assets.
• Giants depending upon dwarfs?
Trade Liberalization
• Trade with West shifted China’s trade
away from barter to the one based on
comparative advantage.
• Measures for import and foreign
exchange control were repealed as China
entered the WTO in 2001.
• Average statutory tariff was reduced
from 56 % in 1982 to 15 % by 2001.
Trade Liberalization 2
• The Chinese comparative advantage
promoted export of light manufactured
goods first, getting rid of foreign exchanges
gap.
• Expatriate high-tech manpower returned
home to work for upgrading Chinese
industry, and demonstrated rapid catch-up
in advanced technology.
• China stood up as a gigantic factory of the
world.
China’s Trade
• China is the largest exporter and the
second largest importer in the world.
• Trade/GDP ratio was 50.1% in 2011.
Export/GDP=26.1%, Import/GDP=24%.
cf. Trade/GDP ratio = 38.5% (2001),
51.9% (2003), 67% (2006)
• The same ratio is around 30% for USA,
Japan, India, Brazil, below 50% for France,
UK, Italy, Russia, and above 50% for Canada
and Germany, 100% for South Korea.
Investment from Abroad
• Reform opened the China market to
foreign capital.
• Capital from Hong Kong, Taiwan,
Singapore and other overseas Chinese
flew in first to reduce savings investment
gap .
• And then other countries like Japan,
Korea, USA, and Europe expanded
investment.
Dual Track Liberalization
• Liberalization did not intrude upon
traditional planned sector and the latter
tolerated the former.
• State stimulated farmers incentive
successfully, while controlling the same
size of agricultural surplus, under
household responsibility system,
although its counter-part was less
effective in corporate reform.
What Next?
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Rural discontent.
Corruption in ruling class.
One party dictatorship.
SOE problems.
Collapsed world market; US, Europe,
Japan….