Transcript Is China Relevant for Madagascar?

Enterprise Reform and Private
Sector Development
Some Possible Lessons from
China
Qimiao Fan, the World Bank
Presentation Outline
• Is China Relevant for Madagascar?
• China’s Enterprise Reform and PSD Experience
• Some Possible Lessons
Is China Relevant for Madagascar?
China and Madagascar
Value Added by Sectors, % of GDP
100%
100%
90%
90%
80%
80%
70%
70%
60%
60%
Services
50%
50%
Industry
40%
40%
Agriculture
30%
30%
20%
20%
10%
10%
0%
0%
China, 1980
China, 2001
Madagascar, 1980
Madagascar, 2001
China and Madagascar
Employment by Sectors, % of Total
100%
100%
90%
90%
80%
80%
70%
70%
60%
60%
Services
50%
50%
Industry
40%
40%
Agriculture
30%
30%
20%
20%
10%
10%
0%
0%
China, 1978
China, 1999
Madagascar, 1980
Madagascar, 2000
China and Madagascar
GDP per capita in US$
1,000
900
800
700
600
1980
500
2001
400
300
200
100
0
China GDP
Madagascar GDP
• Both China and Madagascar are low-income
developing countries
• Similar initial conditions in late 1970s and early
1980s with economy dominated by agriculture
and state-owned enterprises in the urban sector
• Despite similarities in initial conditions,
performance differed significantly in the past
two decades in the two countries
• Policies do matter
China’s Enterprise Reform and PSD
Experience
• Liberalization of the Agricultural Sector
• Encouraging the Growth of the Non-state Sector
Through Liberalization from the Start of
Reforms
Township and village enterprises (TVEs)
Special Economic Zones (SEZs) and Foreign-invested
enterprises
Encouraging the Growth of Small and Medium Enterprises
• Gradual but Progressive Reform of the Statedowned Enterprises (SOEs)
Management autonomy and responsibility
Dismantling central planning
Ownership reforms
• Liberalization of the Agricultural Sector
Started with one village by the villagers in Eastern China
in 1978
Rapidly extended to the rest of the country in 1979
Led to the decollectivization of the rural society
Individual household agriculture became the norm
Free market transactions for agricultural commodities
Eighty percent of population affected
Between 1979 and 1984, agriculture grew about 10% per
annum
Agricultural production increased 126%
Per capita consumption doubled in real terms
• Encouraging the Growth of the Non-state Sector
Through Liberalization from the Start of
Reforms
 Township and Village Enterprises (TVEs)
 Developed to initially support the agricultural production needs of
the rural population
 Owned by members of the township or village and/or governments
at the township/village level
 Operated completely outside state planning
 Strongly encouraged by the central government
 But lacked clear ownership and access to financing
 Contributed 25% to GDP growth between 1979 and 1994
 Share of total employment increased to 20% by 1999
 Share of exports increased to 45% by 1997
 TVEs provided significant competition to SOEs and also made
reform of SOEs much easier by demonstrating the benefits and
creating employment
 Special Economic Zones (SEZs) and Foreign-invested
Enterprises
 Important part of the open-door policy
 Set up in the coastal provinces to experiment with various reforms,
to attract FDI and to promote exports
 The key policies are liberalization allowing both foreign and
domestic private investors to invest in most sectors and fewer
regulatory barriers
 Local governments in the SEZs have significant autonomy over
policies, regulations and investment approval
 The SEZs set the standards and provide competition to the rest of
the enterprise sector including the SOEs
 Successful policies, experiences, best practices and managerial and
technical know-how quickly extended to the rest of the economy
 The coastal regions linked to the SEZs attracted over 90% of total
cumulative FDI as well as large amount of domestic investment
 Encouraging the Growth of Private Small and Medium
Enterprises
 Initially, individuals and private enterprises were allowed
into the service sector in the late 70s and early 1980s
 Private enterprises were then quickly allowed into many
industries in manufacturing and transport
 Individual enterprises were first mostly in the informal
sector with little regulation but as they grew, they quickly
moved into the formal sector
 Domestic private enterprises have been gradually
allowed into many other sectors including infrastructure
and recently financial services
 Some private enterprises have grown into large
conglomerates
• Gradual but Progressive Reform of SOEs
 SOEs dominated the urban economy and most sectors outside
agriculture
 SOEs burdened with social responsibilities and politically more
sensitive to reform because of ownership issues
 As a result, SOE reforms have been much more gradual but
progressive
 Started with contract responsibility system to increase managerial
autonomy and incentives in mid 1980s, followed by price
liberalization, gradual abolition of central planning and public
investment in competitive sectors in early 1990s
 Small and medium SOEs were privatized through sales and partial
ownership reform of large SOEs undertaken through stock listing
in both domestic and overseas markets in late 1990s
 Growth of the new non-state sector has been crucial for SOE
reforms as they demonstrated the benefits of reforms, created
employment to absorb layoffs from SOEs and provided
competition and pressure for SOEs to improve performance
• As a Result of the Reforms, New Private Enterprises
Contribute Increasingly More to GDP Growth
 In the early part of the
reforms, agriculture
contributed most of the
growth
 But starting in the mid 80s,
most of the growth came
from the non-state
industrial sector including
the TVEs, foreign funded
enterprises and private
domestic enterprises
 Contribution from the SOE
sector has declined steadily
Sector's Contribution to GDP Growth Rate
0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
Growth in 1979-1984
Growth in 1985-1993
Agriculture
Industrial Industrial NonSOEs
State
Possible Lessons from China
• Strong and Continued Political Commitment at
the Highest Level is Critical
Clear and formal statement of commitment (e.g., the
open-door policy and protection of private property
rights have been enshrined in the Communist Party
Charter and the country’s Constitution in China)
Commitments need to be reaffirmed whenever there is
doubt and uncertainty (e.g., when a new leadership
comes in or after major political events)
Clear and strong endorsement of new reform initiatives
that are consistent with the overall direction of reforms
(e.g., agricultural reform initiated by farmers in a village)
• The Reform Strategy Has to be Credible,
Consistent but Pragmatic
Reform strategy should set clear directions for overall
reforms
But should leave sufficient room for experimentation and
local initiatives
While slowdowns and pauses are sometimes inevitable,
reversals are costly, damage credibility and should be
avoided at all costs
• Political Economy Aspects of Reform Are Crucial Minimizing Resistance and Maximizing Support for
Reforms Through Careful Sequencing and Articulating
and Demonstrating Benefits
Starting with the most affected sectors or areas where the
benefits are likely to be large and visible and support is
strong (e.g., agriculture in China)
Training and educating the key stakeholders (e.g.,
government officials and SOE managers) will help
reduce resistance to and increase support for reforms
Articulating and demonstrating the benefits of reforms
through experimentation and pilots (e.g., China’s SEZs)
Quickly and decisively extend reforms and best practices
to the rest of the economy once proven successful
through formal legislation, regulation and training
• Encouraging the Growth of New Enterprises and
FDI is the Key to the Success of Reforms
Allowing the entry of new private firms into previously
closed sectors is usually easier than reforming the
existing SOEs
Growth of new private firms create employment and
increased tax revenue that will make reform of SOEs
much easier
Success of new private firms will provide demonstrations
on the benefits of reforms, help maximize support and
increase pressure for SOE reforms
Entry of new firms will also provide competition to
SOEs and help improve SOE performance