ECON 4690 PRELIM 2 REVIEW NOTE

3-2-10
Unplanned Economy
- Majority of economic agents unplanned
- Commune
o All the productive resources are collectively owned and are collectively controlled
in the commune administration
o All individuals on commune received income from commune
o Rural people completely collectivied
!o mar"ets #y 1$%&
o 'hat system failed( commune of 1$)1 was completely reformed
*+treme of collectiviation was a#andoned( commune of 1$%&-1$)1
dismantled
o Commune su#sumes all rural china
o Commune has three levels
Commune
,rigade
'eam
o -mportant term in commune is ,A./ #asic accounting unit(
.nit deploys and compensates la#or
'eam is the ,A.
-n 1$0$( 'here are over % million teams
'here were on average 31 households per team
,asic accounting unit that determines income is a#out 31
households( less than 100 wor"ers
As you wor"( you2re earning wor" points( it represents the
distri#ution of income amongst these 31 households
- !on-agricultural enterprises in rural china
1
o More su#stantial ones run #y communes and #rigades
13% million enterprises( employing 30 million people
o 'eams also have enterprises #ut they are counted as toward agricultural activity
- 'he state provides very little su#sidies to the countryside
- 'hose who live in the countryside are second class citiens
o !o guaranteed wages
o !o welfare provisions
o !o housing
o !one of the #enefits to ur#an employees given to the those in the countryside
- Activities have appropiate level in three level system
o Commune 4evel
5ual role
*conomic and governmental organiation
o 5oes not engage directly in field agriculture
o *conomic activities focus primarily on investing and non-
agricultural activities
o -n order to #uild and maintain irrigation systems and road
o Commune industries include a wide range of activities(
such as processing agricultural goods(
grain processing( edi#le oil production
o #uilding materials
o specialied industries
dairy industry( small mines
o in 1$00s/ 6ive small industries
fertilier( cement( iron and steel( machinery( and
energy 7coal or hydro8
2
commune industries move upscale into producer
good industries supporting local construction and
inputs to local agriculture
these are sophisticated industries
'a"es over all governmental activity
o 'a+ collection( maintaining order( mar"et control(
collecting statistics( passing down government policy 7from
county8( overseeing local militia
o 9ould #e the e:uivalent of the township government
Activities that have su#stantial activity( such as #uilding high
school( would #e on commune level
o ,rigade 4evel
Administrative entity that lin"s the teams with the commune
Receives procurement :uotas from the #rigades and parcels the
re:uisitions out to the teams to do the actual production
'he teams receive some farmland construction
'hese are small projects compared to communes
'he industry is commune and #rigade industry
o ;rocessing agricultural goods( things li"e oil pressing(
repairing farm e:uipment( regional specialties( ma"ing
dofu( things li"e that(
,rigades are not involved in field agriculture(
4ivestoc"
6ishing #oats
<rchards
=ervice responsi#ilities
>ealth stations
o 'oo small for clinics or hospital
;rimary school
3
4east important level
o 'eam level
Most teams are #asic accounting units( most #asic accounting units are
teams
'he team( day #y day( has agriculture and enterprises
9hen you thin" team( you thin" specifically of farming( you thin"
compensating rural la#or
'he higher levels do have some directly productive activity( #ut they are
mostly engaged in non-agriculture and support services
;rivate activity
4arge households in commune system
o 'here is a private sector in rural china( and it is :uite
su#stantial
o =mall plots
-t was temporarily a#olished in 1$%&(
Reintroduced in 1$)1
=mall plots were ?*R@ productive
Aept energy for private plots(
thought to have produced 20B of agriculture( #ut
only %B of land
counted in #asic value( no value add
o reeds grown to ma"e #as"ets( #as"ets
considered agricultural production
- >ow do people get incomeC
o 9or" points persist until end of commune
=ystem where#y( as you wor" over the course of the year( you earn wor"
points( not income
9or"points were allocated #y a num#er of different methods( time rate or
piecewor" or #oth(
1
-n some periods( if you were an enthusiastic period of the collective( if you
showed a little attitude to the criteria( you still received the same wor"
points if you showed up
=imply notations in the account #oo" in the #asic accounting unit
At end of year
,A. ta"es gross income and su#tracts e+penses( net income a#out
)%B left
<f net income( ta+es( %B ta"en
Collectives too" 11B of income
Collective income
5istri#ution to mem#ers
,A. would have some cash income from compulsory procurement
'he team is the unit that pays
o Additional income from private plot
o Additional income from remittances
o May also have mem#er of family that is amongst the 30 million people that have
rural enterprise
@ou remain a mem#er of your team
Commune enterprise more li"ely to pay your team
;eople want to #e part of #rigade or enterprise #ecause rice paddy wor"
distasteful
- 4iving
o >ousing private
o =chooling has some cost
o !o welfare provisions e+cept for those una#le to wor"
o 4oo"ing over commune system as a whole( it is collective( it is not state owned(
and it did last for :uite some time
- 5id last until 1$)1( a#olished in 1$&1
o 9or"ed( no one starved
%
o ,ut( it was a#andoned
o Reasons/
Commune system was very inefficient
;eople put energy in private fields
!o incentive to wor" on collective fields
=uppose you wor" hard( if you earn more wor" points( it goes into
collective pool
;eople have propensity to shir" responsi#ility #ecause of a lac" of
incentives
o -t is impossi#le to monitor these people
o -t is impossi#le to get individuals to wor" hard
Management pro#lems
!o guarantee that those #est managers are those running collective
farms
Marginal ta+ rate on private activity is ero
Allocation pro#lems #etween collective farms
*ach commune too" care of itself
o !o trade
!o la#or mo#ility
o =ystem was wor"a#le( #ut it was grossly wasting resources( it was collapsing
under its gross inefficiencies
o ?ery little trade amongst( for e+ample( communes
Communes were largely self-contained entities
=ome lin"s to the counties a#ove them
'hey received allocations of consumer goods( of producer materials( #ut
very little transfer amongst communes themselves
Communes were not allowed to invest freely(
- ;rivate sector/
)
o households given private plots
o larger economy/ the Dsecond economyE
some is hidden #ecause it is illegal or discouraged
much is out in open
o more generally( the private sector produces goods and services
o ;rivate sector/
4ivestoc"
Fovernment failed to effectively collectivie livestoc"( never
wor"ed
<rwell/ D;igs don2t li"e #eing collectiviedE
4ivestoc" raising perfect for private activity( very difficult to move out of
sector
5id not wor" with collective sector
?egeta#les
Most of vegeta#les were produced and consumed in gardens(
people have preferences for what they want to eat
Foods that are made to order
Activities that people could not s:uelch
4egitimate employment consideration
;eople( on farms( do not have enough farm wor" to do
;eople who are engaging in some activity need something to do(
there are reasons that private activity( even though it may have
#een distasteful( was permitted
o >andicraft
o Retailing
o Claims that there were significant underground factories(
.nderground factories that procured material and sold goods for
households
0
-nteresting stories/ 4ittle red #oo"( :uotations of chairman Mao( which
had plastic covers( were re used to produce plastic goods(
o .nli"e soviet union( there was very little in the way of professions operating
privately
- Fovernment does not want &00 million agents in china running around uncontrolled
o .nplanned( does not mean out of control(
o *ven though government does not issue orders to farmers( they have numerous
methods to control
- Controlling unplanned entities
o ,etween Communes and state plans( there is a firewall
@ou do not want to see state planned activities siphoned off for
underground activities
Agents are not entitled to planned outputs unless they receive allocation
from system
o 9hy don2t people move to citiesC
China( since 1$)0s( has a strict household registration system
*veryone is stuc" in a particular place
9hy don2t they just say to hell with it and move to the cityC
o ;eople who move to the city and not registered into the city
could not legally #uy food
o Rural-ur#an migration was not a significant factor until
1$&0s
o .nplanned portion of economy
5oesn2t use a flurry of commands
;rocurement :uotas
=tate has to ma"e sure collective farms are producing enough food
for the city people as well as themselves
-f there is one thing you must do( you must fulfill your procurement target
'his is an important concern( this is how people from the state are
getting fed
&
-n addition to the threat of violence for not fulfilling procurement( state
can appoint local personnel
'eam leaders local mem#ers( may not even #e part of the party
Commune leaders and party mem#ers are one in the same
o ;ower of appointment e+tends to commune system( to
commune and #rigade levels
o 9henever county wants( it can spend inspection teams into
county level
;olicy o#jectives
;est control( for instance(
o *veryone in rural china would #e mo#ilied to carry out
o#jectives
,irth control( major campaign in 1$00s
o Another means when state sends outsiders to pursue policy
o#jectives
o <utside plan does not mean you are outside of government control( you are not
receiving instructions( whatever you do( you have to sell us the grain you have
#een allocated
o Communications issue
Runners needed to communicate the government2s will
-t was not possi#le to run rural china in the same way to run state-run
enterprises
3-1-10
Commune/
- A generic name for rural organiation in china
o Also dou#les for highest level of organiation
o Also could mean the dot( the point on the map
- Rural economy is unplanned
o 'o manipulate economy( procurement :uotas( state appointment( periodic
mo#iliation campaign
$
o .nplanned is in no way out of government control
- -nteractions #etween unplanned and planned
o Communes are not entitled to materials
o >ousehold registration prevents people from moving to city since it does not
allow for grain procurement
Chna!" Economc #e$elopmen% Th&ou'h La%e (9)0"
- China sees modern economy as ,rittan( .= or =oviet .nion
o =mo"e stac" economy( #uilding heavy industry
- Rural moderniation does not move in until reform era3
- ;rior to the 1$&0s( industrial policy centered around the areas that a lot of it to places that
did not
o ;rior to 1$1$( most industry was located in coastal cities( =hanghai( Gapanese
Manchuria
o Conscious attempt to #uild new industry in inland areas
- =u#sistence constraint
o -n china( policies have to #e chosen #ased on the fact that China is on the margin
of su#sistence
- 5ecisions
o Chinese leaders personal e+perience
4ived through poverty and humiliation during war
4ittle "nowledge of outside world
4ittle "nowledge of industrialiation( rural #orne
As a result( their decisions are colored #y these issues
*+ample / china throws people at pro#lems( without resource allocations
o =oviet ;recedent
Chinese planners attempt to adopt the soviet model and move away slowly
o Chinese decision ma"ers
'his is a small group of friends( the successful leaders of a revolution
10
Fet together in smo"e-filled rooms and hash it out
Mao is the most important( #ut there is other important
policyma"ers
9hat you don2t see here is a systematic policy-ma"ing apparatus
!o advisory #oards( no s"illed planners( none of this e+ists
Chinese policy ma"ing was not scientific or founded in economic
theory
9hat they had was precedence( and personal e+perience( and a
desire to fi+ Chinese history
o =e:uence of policy regimes(
;eriod #etween 1$%3 and late 1$00s has five policy regimes
Consider/
;riorities
5o regimes do more and more and do #etter and #etter
-s regime open to trade and other interactions to rest of world
9hat sorts of technological preferences does this regime displayC
o Capital intensive of traditional technologies
o 6irst Regime/ 6irst 6ive @ear ;lan ;eriod
Reminiscent of =talin era
Attempt at a #ig push toward industrialiation
Attempt to generate highest possi#le investment( suppress
consumption su#ject to su#sistence constraint
;ump all resources into heavy industry( lots of factories that will
#elch lots of smo"e
4oo"s at e+tractive policy towards rural china
o Agriculture is viewed as a source of la#or( food for
wor"ers( source of materials
!o farm investment( it would divert from industrial investment
11
'his is a #ig industrial push
'he commune of 1$%& is used as a tool for industrialiation( e+traction of
resources from countryside
Frowth strategy
;ut all resources into one sector and strengthen su#sistence
;ut everything you can dump into industrial development
9hen you thin" a#out openness( china is constrained
,ecause of Aorean war( Chinese imposed trade em#argo on china
o China( in 1$1$( signed a treaty of friendship and trade with
soviet union
o China was more than open to trade with soviet union and
#loc
o China was open to trade with free world in 1$0&
4oo"ing at nature of technology china ac:uires is large-scale(
capital intensive soviet technology
o -t is not primitive( it is new stuff from soviet union
-n first five year plan( )$1 large-scale projects
1%) projects were soviet inspired
6actory in china was copied from soviet technology
o =oviet technicians came in to oversee construction
o Chinese wor"ers got training in soviet union
Much of the technology soviet union ac:uired was
from .=
China is getting large scale injection of industrial development
o 9hat happensC
Crac"s are emerging over the course of 1$%0s
,ig push strategy creates tensions in economy( it is an un#alanced growth
strategy
12
-n china( agriculture lagged( agricultural plans were toned down
successively
China was not performing as well with agriculture
,ottlenec"s with transport and industry
1$%)( Chinese leadership was #ecoming disillusioned with soviet strategy
Mao feels that the #alance of the Chinese economy was lost due to soviet
strategy
<nly H through first plan( Chinese leadership is figuring out how
to move away
- 1$%&/ Freat leap forward
o Radical departure from first five-year plan
?ery large and significant plan
o <ne issue that disillusioned Chinese was the massive planning #ureaucracy
'housands of people wor"ing to #uild economy
o Mao did not li"e the #ureaucracy
6igured out way to devolve the day-to-day decisions to individual agents
o 5isillusioned with slow pace of development
-t would ta"e decades to industrialie under five year plans
=econd five year plan #etween 1$%&-)2
!ever implemented( was a gap on the calendar( written and
discarded
o Freat 4eap 6orward
'hree #anners
=imultaneous construction of industry and agriculture
=imultaneous development of modern and traditional industry
=imultaneous development of large modern and small-scale
enterprises
13
Alongside those three directions of change( there was the commune
system
5ramatic change of planning system
o Reasoning of great leap forward
if we focus on capital intensive modern plants( we2re leaving huge amount
of resources in china under-utilied
we are only focusing on )$1 construction projects( what a#out all the
people who do not have a project in the district
we got lots of people( we have lots of resources underemployed
o let2s put all resources to use( and continue with large( capital intensive sector
o put local resources to use at virtually no opportunity cost
don2t let the local individuals divert plans from resources
o D9al"ing on two legsE
;lanned sector
4ocal technology( small scale( mostly rural
o @ou can vastly increase industrial output #y having #oth cylinders firing
'his is technological dualism
!ew soviet technology and older mulit-hundred year technology
o 9hat happened is local resources were diverted from agriculture to small-scale
industrial projects
D,ac"yard iron and steel plantsE
Chinese leaders are encouraging these plants
9or"ers preferred wor"ing in these plants
o 9hat happensC
,urst of industrial growth
Collapse of agriculture
o 6or the first and only time( the su#sistence constraint was neglected
o 'he great leap forward was a terri#le failure
11
-ndustry goes way down and agriculture was a disaster
5iversion of la#or to industry( another aspect of the great leap was farm-
capital construction
<pen allocation
o Chinese leadership #elieved their num#ers
Frain e+ports/ net e+ports( less total imports of grain
;aying #ac" loans from soviet union
1$%$( grain output is collapsing( china ramps out e+ports
1$)0( china is in the midst of a massive famine( china is still
e+porting su#stantial amounts of grain
-t was not until 1$)1 that Chinese leadership #egins to import food
1$%&( ;eople are diverted from field to industry( 1$%$( people are going
hungry( people move out of grain fields to other pursuits(
-t was not until 1$)0 that people #ac" to move into grain fields
'hat was two years after the great leap forward #egan( localied
disaster
Ferm of good idea that e+ploded into total disaster
o 9hat happens during the great leap forward/ china instituted communes
1$%&( people are eating in dining halls( ,A. is in effect( effort is diffused
amongst large collection to other people
*arly 1$)0s( china creates new guiding thought( new line of development
- !ew line
Readjustment of pace of development
A#andoning of great leap
Consolidation of e+isting plans
Reinforcement of wea" lin"s( and #eefing up agriculture
-mprovement of :uality(
1%
this points to the fact that much of the output in the countryside
was jun"
-t was of such low :uality nothing could #e made
o ,ecause Mao Iedong was associated with great leap( he moves to the #ac"ground
#etween 1$)1-1$)%( as compared to earlier and later
o ,etween 1$)1-1$)%( this period was one of #alanced growth
o -ndustry must #e coordinated with rest of economy( especially with #inding
su#sistence constraint
o Agriculture is #ased first( and only time( in Maoist era that agriculture gets
highest development
;eople are dying #y the millions due to lac" of food
;roduction in agriculture related industries is ramped up
China #egins to modernie agriculture( fertilier and farm machinery
factories
;eople diverted from agriculture were returned
Commune system was reformed
;eople no longer wor" for commune level( they get their money
from their team
o 5ocument has rights of teams at common level 7the )0 articles8
'here is also an industrial development note 700 articles8
Much of decentraliation
o 'hese was all a#out removing the Maoist great leap forward issues
o -n terms of some of the other dimensions( this is( in some sense( the height of
Chinese economic planning and careful allocation of resources
o Concern is using resources efficiently( not throwing more la#or at china2s
pro#lems
o 'his is the pea" of china2s prestige and power in china( this is when e+pertise
counts for the most
-n terms of openness( soviet union and china part ways
o China( of course( is living in legacy of investment in china
1)
o =oviet projects( #etween 1$)1-1$)%( there is an awareness in china that soviet
union is moving on and it is #ecoming a #ac"water
o 1$)1-1$)%( china opens up to western *urope( shopping e+peditions e+pected to
#uy western technology
Cut short #y cultural revolution in 1$))
10
-!=*R' MARC> $
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!<'*= >*R*J
1&
3-11-10
RE*# RI+,IN TO+EE W-+T I MI++E#.
Chna!" Pe&/o&mance
- 'hree sets of data
- 9hat do they tell usC
o Mar"et growth after 1$2$
o F5; growth of 3B year
o 5ecent level( compara#le to china2s past performance
o =hare of agriculture is falling( share of industry is increasing
o Frowth rate #ad predictor of future growth( #ounces all over the place
o 'his is #ecause of policy fluctuations in the regime
- 9here does aggregate output goC
o -n soviet accounting( there is no other claimant( it goes to consumption or
accumulation
o Accumulation as a net share of material product was very high
o Accumulation was very sta#le( on average( 2%-30B
- ;olicy to results
o 'wo largest sectors in aggregate output are agriculture and industry
&0B of total output( mostly agriculture at first( #ut slowly moved to
industry
o Comments around productivity
- Agriculture
o Almost all agriculture was conducted in the commune system
China did not move from collective farms to state-run farms
'here are some state farms( #ut minor and e+perimental at #est
'here are state institutions
1$
;rocurement stations
Commercial trading posts to sell goods to farmers
6ertilier distri#utors
Relationship #etween commune system and rest of economy
6irewall #etween agriculture and rest of economy( agricultural
inputs produced within the plan only flow within distri#ution
6armers are at whim of government
>owever( farmers can drag their feet and passively resist(
Reluctant( gruding o#edience to those unpopular directives that are
unavoida#le
Agriculture is not the intended investment(
Fovernment "nows there is a floor with minimum needed to invest
and produce to feed china
As a result( much of the farmers are left to fend for themselves
4oo"ing at state investment that goes to agriculture( the portion
that goes to agriculture
3B of total investment goes to support agriculture
At the pea" of the agriculture first policy( in the wa"e of the
famine( investment goes up to 10B(
Agriculture is a last-claimant( agriculture from state2s point of
view is chugging along
- Chinese Agricultural policy
o <utput is measured #y gross agricultural output
o 'his does not net out intermediate goods
<n the input side( la#or( capital( and current inputs
-f we have a value-added measure( we don2t need current inputs on the
right-hand side
Fross output of agriculture is attri#uted to technology in year t and the
#undle of land( la#or( and capital in year t
20
>ow do we #uild an input #undleC
o 'a"e all of the inputs( raise each to a particular power and
add them all together
o 'hen multiply all this stuff together
o 'his is a co##-douglas production function
Aey components of agricultural output/
Frain/ largest output(
o -n 1$%0( china produced 30) AF of grain( su#sistence level
is 2%0-300AF
o -n 1$0&( china produced 31$AF( marginally ade:uate
-tems that grow rapidly are minor items that don2t contri#ute to
#ottom line
o ;opulation growth is occurring
'hus( agriculture is not growing ade:uately to suit population
growth
6ive types of agriculture
Crops
6orestry
Animal hus#andry
6ishery
=ide-4ines
o 'hings teams and families do in off season(
o =ide lines grow in this period
o Chinese agriculture is slightly higher than in 1$%0
- Agricultural development
o Raw la#or
,etween 1$%0 and 1$0)( la#or availa#le for agriculture has more than
dou#led
21
4and input/ 4and in china is cultivated land( and this num#er declined
=ewn area vs3 cultivated area
Cultivated area is used at least once per year for farming
=ewn area is counted every time you sew a piece of land
o A farm field of 10 mu will count as 10 mu of cultivated
area( and( if there is two crops #eing grown( is counted as
20 mu of sewn land(
o Multiple cropping inde+/ how many times its #eing used
per year
Multiple cropping inde+ is a whole num#er(
depending on the crops used
o >ow do you increase the multiple cropping inde+C
5oing so is a prime o#jective of agricultural policy
o -rrigated area
'here is a large group of individuals that can #e mo#ilied to wor" on
irrigation projects
4arge num#ers of people in china were often rounded up to wor" on
irrigation projects
4arge #ang for #uc" to use water control( and elements
;rojects change
1$%0s( flood control( emphasis is around getting rid of e+cess
water
4ater 1$%0s( focus shifts to irrigation( lots of la#or focused on
diggining in winter months
1$%&( massive great leap campaigns( which ta"e people out of
fiends and into irrigation projects
o Freat leap was a pea" of irrigation development
>undreds of dams for %30 million hectares
;ro#lems with northern irrigation
=urface water in China could #ecome al"aline very :uic"ly
22
Much of the la#or that was used was wastedK put towards
counterproductive projects
-n the 1$)0s( efforts to irrigate north china were eventually
redirected
Movement towards su#surface water
Chinese farmers !eeded pumps
1$)0s( consorted effort to actually supply them with necessary
manufactured goods
o 6armers can #uild( #ut can2t pump out without right issues
@ou2re not ta"ing surface water( you2re recycling groundwater
o -ssue of sin"ing
Multi-purpose water development projects
A#ility to mo#ilie people( farmland capital construction( to get
out there is characteristic of commune system in china
o Chemical 6ertilier
1$%0( <utput is 031% metric tons( and use is twice as much
9hat is used is imported( and that2s small
1$0$( 11 million metric tons( and large domestic production(
China is applying 100 "g per hectare( this is a#out twice the world
average
A#out 1+ as much as -ndia applies in 1$0$( china is a heavy user of
chemical fertilierL
,ig changes are still to come
9here does this stuff come fromC
-nvestment from new factories
China is using lots of organic fertilier
;ig crap( river mud( anything that improves soil
<rganic fertilier per hectare 0%"g
23
;ig 6ertilier
o Mao/ Any pig is a fertilier factory
o Advocated growth of pig population
o Agricultural mechaniation
!ature of de#ate/ can you mechanie #efore you reformC
@ou need #ig farms in order to ma"e full use of agricultural machinery
Can you first introduce mechaniation or can you do it the other way
aroundC
China chose to increase farm sie and then to mechanie
1$%0( mechaniation intentionally low to reflect the choices of
government to incase sie
Also an appreciation of China2s factor endowments( lots of la#or( ma"es
little sense to mechanie farming in china
6arm mechaniation is a pretty radical departure from farming
Appropriate mechaniation/ relieving time constraints
-f machinery can speed up farm production to get crops out(
mechaniation is appropriate( relieve crucial constraints
o *+periment station
-dentified #est crops in the area and made them widely availa#le
Also made #etter varieties availa#le to farmers
China is two years ahead of international efforts( compara#le
:uality to -R&( shorter growing season and higher yields per acre
o ;lant protection
;esticides and her#icides
-n china( during most of the collective era( there were very few
pesticides and her#icides(
>ow do remove the #ugs from plantsC @ou round up all the
people and pic" the #ugs off the plants
China was a#le to effect a solution #y mo#iliing la#or
21
o Freen Revolution pac"age
-mprove varieties
9ater control
6ertiliers
- ,ottom 4ine
o <utput is growing at modest rate( slightly ahead of population( 332B on a gross
#asis
o ,ut inputs are growing li"e cray(
o =omething must #e wrong here( that2s the pro#lem reflected in num#ers
'here are many studies in Chinese agriculture(
;roductivity performance in china is god-awful
China is using more inputs( falling productivity is undoing progress
9hat2s wrong hereC 9hy is productivity lower in 1$00 than in 1$%0
9hen you loo" at productivity figures( y
-nstitutions were changing( and they were changing in a way that
undermined productivity
6armers #ecame disaffected
;eople didn2t want to wor" in this form of organiation
Chinese agricultural policy was deficient
-dea of self sufficiency wrong( this is a #ad agricultural policy
o -ts li"e telling !@C to #e self-sufficient
,y 1$0$( everything is totally screwed up
;eople who can grow grain aren2t
;eople who can2t grow grain are devoting all their resources to it
6alling productivity is true( loo"ing at deficiencies in organiation( and
loo" at implementation of faulty policies
'his is an astoundingly #ad result
2%
3-1)-10
*'&cul%u&e and Indu"%&y
- Movement from and agricultureK 4ight -ndustry to >eavy -ndustry
o 6ocusing development on desired #ranches
- *+treme volatility
o China2s growth rate #ounces :uite a #it
o 'he volatility in industry is :uite e+treme
o <ne year -ndustrial growth rate was minus 11B( another year 3%B
-ndustry was very unpredicta#le year over year
- >ow does this movement to heavy industry occurC
o Capital accumulation
@ou have to move capital to the targeted sectors
;lanned economy is perfect for this
Chinese planners were a#le to divert resources to producer goods
from consumer goods
4oo" at steel industry vs3 te+tile industry( steel grew significantly(
te+tile grew sluggishly( #ecause of the government2s emphasis on
producer goods
o 'echnological "nowledge
@ou need to "now how to #uild these massive plants
@ou can produce it yourself or you can #orrow it
China( in fact( was a heavy importer of technology
Ac:uisition of "nowledge "ey ingredient in china2s growth story
- 'echnology and its contri#ution to heavy industry
o 5istinguish five slices of industrial sector
=oviet Ac:uisition
>i-'ech =ector
2)
At that time( it is not involved in -'( #ut military hardware( nuclear
power development( an area where the Chinese state throws smart
and educated people in
;lanned economies( in general( are not technologically #ac"ward(
after all( =oviets got to space first
>owever( they cannot do it across the #oard( they have no means
of diffusing technological "nowledge across economy
o A few sophisticated industries and a the rest technological
#ac"waters
-ndigenous metropolitan enterprises
Concentrated
Rural -ndustry
,ac"yard segment
!o assistance from planned economy
-solated from region to region
-solated form technological progress
o Chief recipient is the soviet industry
=oviet cooperation with china predates the people2s repu#lic
As parts of China came under communism( competition for northern
industrial areas in china
,iggest event furthering cooperation was Mao Iedong2s trip to =oviet
.nion3
Mao wor"ing out specific mechanics of economic and political ties
=oviet and Chinese agreements
'reaty of 6riendship
Mutual assistance over 30 yrs
=oviet Credits( M300 million
o China would pay #ac" with raw materials and producer
goods that would #e #uilt in factories designed to soviet
specifications
20
Agreements for military and nuclear cooperation
China and .==R are fast friends going into 1$%0s
China is still a poor( and undeveloped country
o 'he agreements provide for the =oviet .nion provide for large-scale industrial
facilities in china
=oviet agrees to #uild 1%) large factories
=oviets agree to train 3&(000 Chinese wor"ers( they wor" in the soviet
factories in preparation for the Chinese factories openings
Materials and machines came from soviets
-f you total all this up( the 1%) factories that the soviets sponsored totaled
to a#out half Chinese investment in industry
Chinese claim( in retrospect( the loan was worth a#out %33 #illion @uan( in
1$%0
o 5uring this period( china is largely isolated from the western economies
=u#se:uent developments are from soviet technologies and industrial
development( and Chinese incremental improvements
'echnology comes overwhelmingly from soviet union
o =u#se:uent development comes from diffusing technology that2s ac:uired
-ndustrial development is driven #y factories china #uilt
o Chinese and =oviets part ways in late 1$%0s
=u#se:uent development comes from diffusing technology
Comes from planning system
o -f you have an operating steel mill( you can plan on
copying it
o -f a soviet plant is operating at capacity( you can replicate it
o <ften( replicated on-site
Chinese technology of 1$00 is greater than Chinese technology in 1$%)
o Chinese technology tric"les down( systematically contri#uting to smaller plants in
#ig cities and small plants dispersed in parts of china
2&
o >ow do you get technology from large-scale factories to small scale onesC
'here was a systematic diffusion(
Chinese planners were aware they are a #ac"ward country
.nderstand that their injection of technology was a one-time event
'wo-9ay visits
'echnicians from smaller plants would wor" at larger plants for a
year
'echnicians from large soviet plants would #e sent to rural plants
to help them modernie
4arge systematic interaction across these tiers of hierarchy
4arge plant may have correspondent( little #rother out in the
countryside to which it sends cast-off machinery
o 'he idea here is that the wal"ing on two legs strategy was a good idea that too" a
#ad turn during the great leap forward
5uring the late )0s and early 00s( wal"ing on two legs resuscitated
o After great leap forward( now understood that #ac"yard industry is useless N
All output was poor :uality
o 6ive small industries developed through china
>ydro-electric power3
6armers can do everything e+cept #uild a generator
Fenerator suita#le for hydro-electric plants
6or "ey pieces of e:uipment for fertilier factories
,y 1$0&( there were a#out )000C enterprises in small industries(
received allocations from state planned sector
o A hydro-electric generator was a legitimate commerce
transaction
o ;lan called for selling of these generators to rural
communes
'hese enterprises were locally #uilt and operated
2$
'his could not have happened without a su#stantial diffusion of
technology
>ydro power is not a traditional industry
Chemical fertiliers not a traditional industry
o -f you loo" across the five small industry
6ertiliers/ =mall plants producing majority of fertilier
Cement/ majority produced #y small factories
o 9al"ing on two legs is succeeding the second time around( after disastrous
attempt #y great leap forward
- ,y and large( Chinese don2t have ready access to modern technology
o Assessing whether if Chinese have done a good jo#( need to loo" at constraint
China has done a good jo# with their constraint( diffused technology and
made large incremental improvements( wal"ing on two legs strategy
o 'ypically( you would see a large jump in productivity with technological
"nowledge
o -f you loo" at calculations of productivity growth in Chinese industry( this has
grown at very low rate
o -f you invest li"e cray over 30 years( every wor"er gets more capital to wor"
with
Capital deepening
,ut when you ta"e the capital into the denominator of productivity per
wor"ers( that growth goes away
o >owever( the productivity of the Chinese industrial economy does not grow much
at all
'his is a pro#lem(
'here is something that is leading to massive inefficiencies in Chinese
economy
- Motor ?ehicle industry
o =u#stantial economies of scale
o 'o produce cars( light vehicles( you need a factory that produces 100(000 year
30
o 'o produce truc"s( you need a factory that produces 30-10" per year
Anything lower( there will #e higher costs per unit
o =u#stantial economies associated with agglomeration
6actories cluster together
Rationale/ factories cluster #ecause they need parts from one another( they
share parts from input supplier
Cuts costs of coordination from many factories
o China does not have a motor vehicle assem#ly plant
<ne of the 1%) plants the soviets gave was a large truc" factory
-t was started at #eginning of first five-year plan in 1$%3( targeted for
completion in 1$%0
-t was called in china the num#er 1 motor vehicle plant( designed #y soviet
engineers
200 soviet engineers and technicians( as was most of the materials( were
#rought from soviet union
!eed to #uild part suppliers too( and need to #e self-contained
9ould need to have parts that would have to #e purchased
Additional parts were #uilt internally
4a#or/ you need to send people to soviet union to #uild =talin motor
vehicle plant
9hat a#out the s"illed people who will ma"e repairs to the plant
China developed a school to train these people( soviet factory was
a tractor factory
'rained highly s"illed people to #uild these industries
;lant was completed( plant was under production in 1$%0(
produced a#out &000 in 1$%0( ta"es time to ramp up to full
production
-njection of soviet technology and successful construction of
modern soviet factory(
o =oviet technologyOus technology of the 1$10s
31
o Chinese are getting 99-- era 6ord truc"s
o second five-year plan
development of num#er 1 motor vehicle plan( and development of num#er
2 motor vehicle plant( #ut never implemented
great leap forward disrupts issue
at num#er 1
attempt to #uild more vehicles e+ceeding specifications of plants
local ur#an municipalities attempt to #uild local motor vehicle plants
shanghai #uilds 1%" motor vehicles in 1$)0s
!anjing gets some small-scale soviet assistance
'hey are not producing hundreds of thousands( #ut are developing
,ac"yard( Freat leap industries
,y end of great leap( *very province( e+cept 'i#et( is producing
motor vehicles
'his is completely unsuccessful in that #ac"yard industries could
not sustain production( they are scavenging
o 'hey are putting together something that it can run under
its own power( and report it as a vehicle
=trictly ma"e due( limited technological capa#ility( virtually no
prospects
'his is negative output( #ecause people are #eing ta"en out of farm
fields and stuc" in these terri#le industries
Freat leap industry was cho"ed off #y shortages of materials
;ea" output in motor vehicle industry was a#out 23" vehicles
5esign capacity of one factory was a#out 30(000
-ndustry collapsed su#se:uently
o 4ate 1$%0s( down to 3(%00 vehicles
Freat leap forward cost China ) years of motor vehicle production at
num#er 1 motor vehicle
32
.r#an municipalities did very well
=hanghai has parts and materials suppliers that provide to motor
vehicle plant
,y 1$)&( china is $&B self sufficient in inputs to motor vehicle
production
1$)%-1$))( output is a#out %0" cars
o China( in 1$)%( was planning on #uilding two plants
<ne will #e a !um#er 1 motor vehicle replica
<ther will #e a heavy plant
China sends a delegation to western *urope
China purchases technology from ,rittan( 6rance( and
Cechoslova"ia
,uy some American tools from -talians
Chinese have plans to #uild #eyond %0" units year
o 1$))( cultural revolution
9hat happens to output( 1$))( %0A units
1$)0( 20A units
!ot until 1$00 that china gets #ac" to 1$)) level
*ntire operation is in place and capacity is dou#led instead of #uilding
new plants
<utput dou#led at num#er 1
!ew plants in 1$)%( are actually #uilt( #ut construction of num#er 2 motor
vehicle #egins in 1$)$( and does not #egin operation in 1$0%
9hat2s the pro#lem
o -n the wa"e of the cultural revolution( everything went
slowly( everything too" longer than it should have
o ;lants/
'here are lots of plants which produce nothing over the years
33
,y 1$00s and 1$&0s( 'echnology in Maoist motor vehicle industry were
still what would see in 99--
1$0%( china #egins a massive wave of technology ac:uisition
- China2s plants were unusual
o =mall scale plants not agglomerated
3-1&-10
Chna!" Indu"%&al 0&o1%h
- After China2s initial ac:uisition of goods( much of china2s planning goes to diffusing
soviet technology
o Many means to diffuse technology
;lans for Replicas of factories
=oviet technology is replicated in new plant
o -nstances of moving plant to new location
;lan to relocate industry towards interior
o ;lanning system important device to implement new technology
o Fuidance
Centrally controlled Ministries also provide technical assistance to
provincial run industry
- Many training programs
o -nstitutes for motor vehicle and training process
o 5ispatch of e+perts to small factories( may #e there for years installing e:uipment
o >oriontal cooperation of #igger and smaller factories(
smaller factories will get cast-off machinery
small factory may #e a great leap for technological capa#ilities
o infrastructure creation
hydro-electric generators put into place through state sales
Aey e+ample( again( is five small industries
- Massive technology transfer to ongoing diffusion for twenty odd years
31
- ;ro#lems/
o -njection of new technology comes to a sudden halt in the late 1$%0s( soviet union
and Chinese diverge around great leap
o 1$00s( china is lagging compared to rest of world
China stuc" in 1$%0s
.se of planning system for motor vehicle capacity
Motor vehicle/ a characteristic structure
4arge cities with independent industrial capacity
=mallKtiny plants that produce a few hundred vehicles per year
scattered all over china
!umerous small plants all over china( rest is spread over
mediumKsmall plants
Frossly inefficient( many modern industries( including motor
vehicles( have economies of scale
o 4oo"ing at other industries( fragmented
O$e&all Economc #e$elopmen% n Chna2 The -ou"ehold Pe&"pec%$e
- Regional #alance
o ?ast #ul" of china doesn2t really have any modern industryKtransport
o Much of the regional im#alance were placed in undeveloped areas
o ;lan is used to address regional im#alances
o 'here allocations in central plans of payments to poor areas
Rich areas have some of their production siphoned off( they can produce a
lot and then invest and consume less than what they output
;oor areas( production less than consumption and investment
@ou can do this in the planning system
o 5irect controls that limit disparities #etween wor"ers
All wor"ers are on national pay scale
9or"ers in Puhou ma"e the same in =hanghai
3%
Regional differences in state pay are ?*R@ small
o 'his is not at all surprising
'hese were used to address regional im#alance
'his planning system changes the #ul" of agriculture
o ;oor areas/
Five them low procurement targets at high procurement prices
Five them goods at low prices
.se commercial instruments
- 5onathornK4ardy Argument
o -ssues in central redistri#ution
>ow centralied was China2s government in Maoist ;eriod
>ow cellular was the Chinese government
Chinese government was a series of localied economies that were
not well connected to each other
o 4ardy/ there are lots of redistu#ition instruments( and the government used it
e+tensively( there are no loose pieces that didn2t wor"
o 5onathorn/ *conomy was very fragmented( Cellular
o Reallocation of resources
9as it enough to discuss the regional disparitiesC
5id the poor areas improve during the Maoist era
o Argument is outdated( #ut shed light on the economy
o 5ung =hao ;ing/ views are congruent with 5onathorn2s
-n 1$0%( he feels regions do what they want and do nothing in the central
plan
o >owever( a large amount of goods are centrally controlled( steel
4ardy has a point( government should #e a#le to regulate( to some e+tent
o 'here is new data concerning the pattern of regional disparities
3)
Fuanghou grew rapidly during this time
Fueeghou vs3 Gialing
F per Capita( in 1$%$( 33 @uan( compared to G4 with 10& yen
F in 1$&0( 100( G4( 000
o Fap widening
o !eed to see if the gap is closing( its widening( from 1%0 to
%00
-f you2re starting at nothing( you can generate such growth
o F discrepencies have not gone down at all( places li"e F are not growing at
higher growth rates
o ,ottom graph reflects relative differences( is gap #etween rich and poor closing
o Fovernment distri#ution
;oor places get to "eep up to 1%0B of whatever revenue it raises( on
average 10B more
Rich places( li"e ,eijing( gets to "eep 3)B of revenue
'a+ing rich places and su#sidiing poor( #ut still not a#le to close gaps(
central redistri#ution effort not enough
- -ncome distri#ution
o Ag vs3 non ag population
o -n rural china( 1$%0 Q households has watch( 1K% has radio( 1K% has sewing
machine( 1K3 have #icycles
-n 1$&1( less than 1 in 100 households have '?s
o 9e are not tal"ing a#out consumer goods( we are tal"ing a#out food
o 9hat happened to food consumption
1$0$( food consumption marginally a#ove where it was
o 10B increase in consumption( official num#ers
Fiven hard data( that is an upper #ound
o -ncome distri#ution of gradually increasing pie
30
-ncreasing at a rapid rate
- 1$0&( there were many surveys
o Astounding poverty(
o Continuous poverty in entire county( less than %0 @uan collectively for three
years
-magine all of 'omp"ins County in continuous poverty
o <ut of sight hypothesis does not wor" in north china plain( right out of ,eijing
Also( there are relative well-off provinces with some poverty stric"en
counties
o 4oo"ing across all households in china( how much richer are the richC
o 100-200 million in poverty
o 5ung =hao ;ing floored #y poverty in China
o 5istri#ution statistics
;oorest 10B of china/ 1&31B of income
Richest 10B get 223%B of income
o Fini Coefficient
'a"e all households that are from poorest to richest( and ta"e B of
households on horiontal access( 10B mar" is poorest 10B of households(
horiontal access cumulative
5o same thing with income( vertical a+is is cumulative percentage
of income
Curve gets steeper as gets closer to 100B
-f it was perfectly distri#uted( #e a linear curve
-f it were perfectly une:ual( one person( the richest one person(
would get everything
'< get gini coefficient( you ta"e area ine:uality #etween actual
distri#ution and perfect e:uality( and divide #etween perfect ine:uality
>igher F-!- coefficient( more ine:uality
o China is in the 33 range of F-!-( une:ual distri#utions
3&
?ery une:ual( Malaysia( ;hilippines( god awful is greater than 3%
,est you2ll see is in the 32 range
o 9here is the ine:uality coming fromC
-t is not coming from the ur#an population( which is 031)
'he rural population is not a#ove china2s overall coefficient
'he pro#lem comes from the #ig ur#an-rural gap
<verall distu#ution is worse than #oth
o 9hat did china do a#out povertyKune:ual incomes
;rior to 1$0&( largely out of sight( out of mind
!o large-scale poverty alleviation in china
'here were provisions for grainKcollective welfare
'otal amount of resources was very small( poverty was not a major
concern in china
'hings changed dramatically in china thereafter( things changed
systematically in china after the 1$&0s
'hese differences were not widely "nown at the time
'his is what we "now a#out Maoist development in retrospect( there is no
national accounting in those circumstances( out of sight( out of mind
Concern with ine:uality is local
3-30-10
Chna3" P&oduc%$%y
ChinaRs productivity did not factor well
la#or productivity of a#out 2B year in agriculture and industry
growth of output is not demonstrate with the agricultural output
Regional #alance
there is effort #y government to transfer from rich regions to poor regions( #ut not enough
to narrow the inter-regional gap
at the #eginning of period( there are huge #alances( at the end of period 1$0&( the regional
im#alances are still there
income distri#ution
not very impressive #y international standards( compara#le to countries such as ;a"istan
and -ndia
3$
still much worse than the socialist countries
in terms of ur#an population( distri#ution is e:ual amongst rural and ur#an
individuals
however( the gap #etween ur#an and rural is su#stantial
there are huge num#ers of rural Chinese living in chronic poverty
chronic poverty is dire poverty( these are people who are #arely staying alive and
are stuc" in the situation
there are 220 counties where the entire population
literacy( educational attainment
in terms of material product delivered to population( performance is not good
if you loo" at china compared to other very poor countries( people in china have
#etter healthcare and education compared to other individuals
china e+cels in delivering social consumption goods
Economc Re/o&m n Chna
Reform period #eginning in late 1$0&
this is a #ottomless pit( the amount of material regarding the era
in the period from 1$0)-1$0&( there are numerous events that create a window of opportunity
for change in the economy
=e:uence of death
1$0)( Mao Iedong dies
other leaders are free to discuss changes
Mao2s closest followers are eliminated
Chinese central leadership #egins to collect hard information a#out Chinese economy
'hey have an opportunity to move #eyond the Maoist constraints
to gather information a#out economy( the Chinese leadership gathered numerous
surveys
poverty in provinces( they were startled #y results( they did not e+pect these
poc"ets of poverty amongst even rich provinces
inventory( there was more than a yearRs output of steel rusting in the #ac" yard( not
#eing reported to central #ureau
numerous little factories that ,eijing does not "now a#out( local planners not
telling ,eijing a#out little output
leaders are finding out that economy is much different than they thought
china is #eginning to deepen its contacts with the world
more tourists to china
great leap outward/
#uying missions loo"ing for western technology
#eginning to #e much more familiar with the state of the technology in the
world( and were startled #y how #ac"ward they were
1$0&( important meeting at the end of the year
this meeting was the ultimate rejection of the Chinese 5evelopment Model
Chinese development model
regional #alance
suppressing income differentials
10
self-reliance to avoid international em#arrassment
regional self-reliance
technology catch-up
aversion to mar"ets
models of reform
when Chinese leadership thin"s of where they are and where they are going( produce
a se:uence of models for economic development
after 1$&1( DChinese are not #lind man wading in river( loo"ing for the ne+t stoneE
we will loo" at model and how it is implemented
Models/
,ird in a Cage
1$0&-1$&1
!ew *conomic Model
1$&%-1$&$( superseded #ird in a cage
=ocialist Mar"et *conomy
1$$3-present
superseded new economic model
never #een superseded( #ut amended
,ird in the Cage
!ame derived from a statement from one of the top Chinese leaders( chen @uan( that
Chinese economic planning
#ird is state economic enterprises( and around the #ird( there is a cage( Chinese
economic planning system
if you put a cage too close to the #ird( the #ird will get sic"ly( if you ma"e it too large(
cannot control the #ird(
you need to #uild the right "ind of change
chen @uan does not want to get rid of the cage( he wants to only twea" the cage to ma"e
it the Dright sieE
>e does not want to fundamentally change the planning system( he wants to slightly
amend it
-n order to figure out what we need to do( we need to figure out what we can ta"e out of
the plan
Chen @uan decided to get rid of the commune system( let the farmers #e free
6or every state enterprise( there are e+cruciating amounts of paperwor" and no
incentives for wor"ers or productive factory managers
let2s give enterprise managers more latitude to #etter than allotted
let2s not get rid of planning( let2s not allow the planning system to #e so tight that it
s:uelches any sort of efficient #ehavior
as this played out on the ground( the major reforms outside of the plan
there were a num#er of reforms( within the plan
enterprise managers were a#le to mar"et the additional output outside of the planned
level( and they can #enefit from that profit
there is a strong incentive for the #ird in the cage( for the #ird to #ehave in efficient
ways(
produce more( economie( improvise( and produce #eyond allocated levels
this is not a#ove and #eyond the levels( a state enterprise can act a#ove and #eyond
11
regular levels
there is no word where the economy is going until 1$&
6irst attempt/ 'his is where we want to #e in five years( and this is how we get there
Chinese central committee is rejecting feeling from the stones
focus more carefully on what is prescri#ed in the 1$&1 plan
new economic model introduced in 1$&1
china remains a socialist planned economy( #ut the planning system( has to remain
fundamentally reformed
#ut it has to #e a su#stantial o#jection of reforming
according to top leadership of communist party( planning system had fundamental
defects
the major defects
the old system has no distinction #etween function of government and
enterprise( the #ureaucracy does not differentiate #etween the producer and the
planner(
enterprises should have a certain function( government should have a certain
function( and they should #e identified
pro#lem with the difference #etween regions and #ranches in economy
state in old system e+ercises rigid control
the cage is too tight and we are stifling any vitality
no importance is given to commodity production( the law of value( and
regulatory role in the new mar"et
within an enterprise or within a farm( there is successful egalitarianism
there were evidence of defects from 1$%0s to 1$&1(
enterprise managers were not a#le to effeivitely manage enterprises and
farmers were una#le to farm
Chinese economy has its economic vitality stifled
creativity and innovation gone
more fundamental reform was needed
china needed to readjust economic policies and open itself to outside world
1$&1( Central committee document
outlined what reform should loo" li"e
small documents from small committees that outline how the economy should #e
reformed
1$&1/ -n new economic model
Aey element/ en%e&p&"e au%onomy
design of new system precedes from notion
much of the decision vested in planners is diverted from innovation
autonomy over investment related decisions and pricing over outputs
enterprise manager has a voice in decisions that were once dictated
this autonomy is intentional
prior to this( the managers got a whole level of directives that was inadvertently
given to mangers( there was some wiggle room
now the autonomy is everywhere
telling enterprise managers that they have the a#ility to ma"e decisions does not
mean they will do it
12
'a+ for profit
enterprise now pays ta+es( instead of simply having calculated profit
under new plan( ta+payer gets enterprise profit
he pays ta+es and "eeps the after-ta+ profit( what can he do with the refrained
profit
if he can get the wor"ers to wor" harder( everyone is #etter off
#onus and #etter living provisions for wor"ers
#onus and notice from higher-ups for enterprise managers
thus( enterprise manager has incentive to wor" harder( and has the opportunity
in this system( there are mar"ets for virtually everything in sight
the enterprise manager can #uy and sell products( they can hire la#or( they can
#uy technology
these mar"ets e+ist alongside the plan
>ow are the planners going to control the economy with all this autonomyC
0udance plannn'
Mandatory planning/ 20-30B of industrial sector( that is old soviet type
planning
shrin"s to covering almost all industry to only a :uarter of industry
free-mar"et planning( 20-30B
6ormerly trivial
9hat2s in the middleC Roughly %0B of industrial out is DFuidanceE
this means that planners do not issue commands( they operate on profita#ility
you have autonomyKaccess to mar"ets( go out there and raise mar"ets
constantly manipulating terms of credit
implementing the economy #y command( they are encouraging the enterprise
managers to go out and profit and do well for themselves
9hy does the government even have a mandatory command style economic sectorC
-f guidance fails and that the economy goes off the path( there is a mandatory hard
minimum set #y the mandatory planning
if the guidance wor"s well( the mandatory minimum is irreverent
if the plan is lousy( he will hit the mandatory limit the minimum for mandatory
planning
what2s the difference #etween mandatory and guidance plans
different factories didnRt have different plans( an enterprise would #e under all
three regulations
enterprise would #e #ound to small mandatory plan( guided for the rest( and
have the opportunity to enter the free mar"et
fundamental reform weather or not you can run an economy on this #asis
would it #e possi#le to dispense this types of enterprise commands( #ut the
Chinese said they were going to try with this planning elsewhere
thereRs still going to #e a plan
thereRs still going to #e a plan from a-# afterwards( then you told every enterprise
what to do
those #ecame the commands afterward
new role of planners
you have to transfer the :uantities produced to a price( planners are re:uired to
13
generate prices( ta+es( terms of credit for levels produced
there is a reform of the planning #ureaucracy
regions and ministries have planning power of their own( they will su#vert
guidance planning
if guidance planning is to wor"( you cannot let intermediate #ureaucrats su#vert
guidance
with the new economic model comes new planning #eauracracy
state planning commission still has provincial planning commissions which have
all enterprises under it
ministries #ecome advisory to the central planning commissions
the provincial planning #ureaus that previously has factories under it #ecame an
advisor to the provincial planning commission
there are numerous changes associated with the new economic model
numerous details written into new legislation
going sector-#y-sector
models of what is happening on the ground
!ew economic model did not wor"
;lanners proved very :uic"ly that they were incapa#le of providing the right guidance
loss of macro-control( inflation was rampant( real income in ur#an income decreased
#y 1$&0-1$&&( the new economic model was dead( entrenchment from 1$&$-1$$2 was
put on hold
Chinese leadership formulated new attempt at an economic model
"ocal"% ma&4e% economy
the mar"et is to play the fundamental rule in resource allocation under the macro control of
the statement the pu#lically owned sector is the mainstay of the economy
dramatic change from previous stage
previously( china has planned economy
1$$3( central leadership says its moving away from economy
state moves away from micro-management
state will #e controlled with macro-economic control( however( the pu#lic sector
remains the mainstay of the economy
there is no plans to a#andon the state sector
China is( today( #y and large( a mar"et economy
5etails for socialist mar"et economy
1-1-10
+econd E5am /o& Cla"" Wee4 6&om Thu&"day.
Chna3" Economy c&ca (9)7
<ne piece of #ad news after another
3
rd
planning session of 11
th
plenum planning committee decides( in 5ecem#er 1$0&( there
needs to #e reform
;rescriptions of reform
#ird in a case
#ird is the real economy and the cage is the economic system( especially soviet type
11
planning( tin"er with the sie of the cage( constrains individuals agents and to tin"er the
cage itself
soviet type planning stays
#ird in the cage/ li#eraliation of the planned sector
tin"ering with state enterprises/ a#le to produce and mar"et a#ove plan
if a state enterprise produces a#ove plan( the enterprise could mar"et the
remaining 10B and "eep the profit
!ew *conomic Model
the planned commodity economy
soviet type planning
allocation mechanisms/
20-30B mandatory plans( what it must produce( old style soviet type planning
20-30B spontaneous regulation/ 6ree mar"ets
Chinese leadership hesitant to call the new program free mar"et
%0B guidance planning
you have a#ility to e+ercise autonomy( and you will have incentive( #ecause
you can #enefit from profit-ma"ing
enterprise managers are told to go out and ma"e a profit
there is a plan( #ut it is implemented under the guiding portion of the plan
parametrically
Manager manipulates various tools that impinge profita#ility
;lanner manipulates parameters( and hopes that the enterprise manager
successfully accomplishes the goals
;lanners still have to implement the plan and its :uantities( how many
:uantities of railroad trac"s( etc3
planners need to translate the commands into prices and terms of credit
this plan was announced in the mid 1$&0s( was to #e implemented #y end of late
1$&0s
plan did not wor" and it was a#andoned #y 1$&$
new economic model failed
inflation grew rapidly( output stum#led( mi+ was not desired goods
socialist mar"et economy
1$$3( China is going from( plan to mar"et
new economic model of the 1$&0s( was still a planned economic economy
1$$3( the Chinese government ends planning
role of the state will #e dramatically different( no more micromanagement
state will withdraw from issuing commands( and step #ac" to traditional
instruments of macroeconomic policy
china will continue with socialist economy( China will include pu#lic ownership(
which could #e stretched to include pu#lically owned corporations
almost all prices will #e decontrolled
almost all control of enterprise will #e ended
mar"etiation will #e encouraged across the #oard
mar"etiation/ changes from grain procurement system to mar"et system(
land system/ land law of 1$$&( farmers get land on 30 year leases( and get it for
the rest of their farming lives( there is a mar"et in land( a mar"et in everything(
1%
mar"etiation is actively encouraged
so is entry/ non-state sector has e+ploded
very permissive stance toward entry for non-state firms( not many fields that
are reserved for state
entry of new firms/
many state firms were privatied or corporatied
some of these firms have no state ownership at all once reform ta"es place
tradition of state-owned enterprises( when state is sole owner( is no more
very few enterprises that still have ownership
government will have minimal impact on enterprises
very few enterprises that have state ownership
level playing field
this has #een often repeated
differential treatment #ased on ownership has #een repealed
#ased on domesticKforeign ownership of company( state vs3 private
mar"et economy will treat every entity the same #ased on the mar"et
social welfare provisions
previously( Chinese enterprise was social city in of itself( had to provide(
healthcare( daycare( etc
socialist mar"et economy/ getting rid of the socialist functions of enterprise and
giving it to government
ta+ collection
ta+ collection was formerly something ta"en care of on a national scale
now there is a DfederalE ta+ system
each ta+ing jurisdiction has its own area( Chinese now has its own internal
revenue service
,asic prescription remains to present/ transition from planned economy to mar"et
economy with large element of non-state ownership
Pha"e" o/ Economc Re/o&m2 The Ru&al Pe&"pec%$e
;re-1$0&
vast majority of the rural economy falls into the unplanned jurisdiction( state only tells
farmers how much they need to procure
farms are collective( farmRs team is the collectiveRs #asic accounting unit
farms are allocated small private plots( which they "eep for themselves
very difficult for one commune to interact with another( communes could not pool or
allocate resources
the communes are cellular in nature
;ost 5ecem#er 1$0&
"ey changes are outside the plan of rural communes
1)
#eginning in 5ecem#er 1$0&( central committee reissues #ill of rights from 1$)1
ma"es sym#olic statement that team has rights
ma"es another important measure/ to increase procurement prices
information is coming in a#out the discrepancies across china( and so the government
decides to #uy at significantly higher prices
farmers are getting 20B more for the grain than previously
%0B #onus for those who go a#ove :uota
other prices are also increased( and much more grain was purchased a#ove :uota
than previously
Chinese government is getting serious a#out the procurement
1$0$-1$&0/ reform #egins to heat up
reforms are unofficial( and( technically illegal( until =eptem#er 1$&0
various regions in china see the writing on the wall and get rid of collective farming(
parcels of land are doled out to family farms
the government still owns land #ut run #y family households
this unofficial reform wor"s very well
central leadership( in 1$&0( approved Dresponsi#ility systemsE
responsi#ility systems is contracting #etween the collective and groups of
households on the other
essentially( they devolved decision ma"ing from collective to small farmers
also provided for diffential compensation( it is lin"ed to performance
household responsi#ility system is contracted to household
there is no unified distri#ution
#asic accounting unit of collective is gone
the party that contracts with the collective is the individual household
the household has o#ligations to collective( and 100B retention rate a#ove the
collective
the collective is thus ta"en out of farming( the collective #ecomes a landlord and
the individual households #ecome family farmers
this change has very little effect on the planned economy
note/ the mandatory procurement system continues
4and Contract #etween collective and households
section 1/ given from team to mem#ers
#rigade and team still e+ist in theory
section 1 tal"s a#out land and its e+pected output
of this land/ certain amount is contracted #ased on populationKla#or force
land was divided up on a per-capita #asis
half of land was divided #y headcount( other half was divided #y la#or
force( add that together for household( and that2s the total allocation
amount of land given to household will not #e changed for a certain num#er of
years
e+plains the o#ligation of household to team will #e counted
the individual household farmer has the right to choose the individual crop
rotations scheme appropriate to the holdings
farmer is not the decision ma"er
farmers decide what to plant and how to rotate crops
10
imposes tight constraints on what you can do with the land
you cannot contractKsell land( you cannot decide that you are not going to
#uild on it( it is constrained to agricultural uses
section 2/ production responsi#ilities
many areas crossed this out( and moved to section
re:uired farmers to grow specific :uota of certain crop( e3g3 rice
section 3/ delivery responsi#ilities
first/ delivery to state
second/ delivery to collective
can #e relieved of de#t if there is an act of god
can #e put into de#t to the collective for those who failed to produce :uota
paragraph , refers to :uota/
team would #e told that it has a total :uota( #ut it can also sell a#ove :uota(
which got a premium price
what teams would fre:uently do is that they would divide up the :uotas
amongst households
section 1/ shows where delivery will go
state ta"es where procurement :uota will go and its agricultural tas"s
if team has capital accumulation fund( e+penses of team must #e accounted #y
households
household must pay for land( and will "now where payments will go once they
pay for teams
=ection %/ mandatory la#or
pro#lem the team now faces
team once deployed la#or( #ut it does not control la#or now
contract re:uires a#out two wee"s a year to maintain pu#lic wor" projects
section )/
provision for those team mem#ers who were in de#t when responsi#ility
system too" over
de#ts do not go away once responsi#ility system arises
wor" out with a team a repayment plan once the system is implemented
section &
#oilerplate/ discusses collective assets and payments for inputs( e3g3( electricity
typical term of a contract would #e three years
crude provisions for dispute resolution
'his is tenant farming/ household is team( its tenant farming with fi+ed o#ligations(
#ased on shares
you pay fi+ed o#ligations( in a good year( your income will #e high( you get to "eep
everything a#ove :uota
#ut in a #ad year( 100B of ris" is on farmer( if you have nothing a#ove delivery
o#ligation( youRre screwed( thereRs nothing in the provision
100B of #enefit and ris" falls on household
commune( team( procurement systems are all still there
this is simply a tin"ering of the commune and its mem#ers
the contract is fairly detailed
delivery o#ligations written in to contract that may #e different from those neigh#ors
1&
there is also a lot of latitude as to what can #e written into contracts
incentives are very high-powered
previously( with collective( wor"ers could shir" responsi#ilities
now( there is no free-riding( your effort is rewarded
there is a very strong incentive to wor"
opportunities to sell output a#ove :uota level
state during this time( is providing for state :uota
opportunities for very good incomes( and retention
greatest deficiency in contract/ three year horion
at the end of three years( you donRt "now if land will #e redistri#uted
in year three( you may mine land for all its worth( you have no incentive to invest in
it
numerous ways to lose land/
village decides to redistu#ute it
perhaps land was distur#ed #ased on traditional little fields( #ut the village
could consolidate #igger fields
village often recognies that the land allocation is not similar to that of the
population
there is a good pro#a#ility that you will not have the same land after three years
there is no rentingKsu#letting around
the #est farmer in the village gets the same as the worst farmer in the village(
and there is no opportunity to reallocate in side deal
why would you not allow farmers to reallocateC !o reason
9ithout reallocation( there was an -nherent inefficiency in the system
no fine-tuning of distri#ution
many of changes came in 1$&3-1$&1
improvements of initial system
does not change the essence of household responsi#ility
government decides that farm la#or can #e hired
as of 1$&3( private investment in virtually all forms of capital e:uipment are
allowed in rural china
you can #uy a motor vehicleKtractor( should you #e a#le to afford it
free-mar"eting of surpluses as of 1$&3 is legitimate( this is a#ove delivery :uota
as of 1$&3( goods su#ject to :uota can #e freely traded a#ove :uota
you can cross goods a#ove regional #oundaries
land can #e rented as of 1$&1
other changes in 1$&1
houses can reclaim unused land
no e+piration date in contract( household reclaims wasteland through farmland
capital construction
peasants are reaffirmed for mar"et system
as of 1$&1( farmers can #e shareholders in enterprise
1$&1/ there is a rejection of self-sufficiency( there is a reduction of specialiation
of farmers who :ualify #y these definitions( it is a mar"et that specialies activity
there is incentive to specialie(
#y the end of 1$&1/ household responsi#ility system is nearly 100B of farmers
1$
ta"es four years to dismantle collectives
commune system is a#andoned once household responsi#ility ta"es hold and is the wave
of the future
1$&1/ there are a few communes( all the rest are gone
%0