Mapping Business Opportunities in China Market transition Mapping Business Opportunities in China

Since 1996 China had moved away from command to market economy Transition still not completed. Why? Reforms could never hinder economic growth (in contrast – Eastern Europe or Russia “big bang”) China didn’t necessarily want free market, it just wanned to improve its economy In China – giving limited concessions in market economy were given to meet unmet needs It was accepted that these concessions will eventually erode the whole system Surprisingly, it worked very well First there was a policy decision that the reforms could never hinder economic growth – the transition was never the aim, the growth was (and is). China didn’t necessarily wanted market economy, it just wanted to improve non-functioning planned economy. In contract – Eastern Europe or Russia – to move towards market economy as fast as possible (“big bang” – missed growth is part of the deal and have to be accepted). In China – some concessions in market economy were given here and there (foreign invested enterprises, village enterprises etc.) to meet unmet needs (for consumer goods, for foreign currency etc.). It was accepted that these concessions will eventually erode the whole system, but it was never the aim of the reforms. Surprisingly, it worked very well and the transition was followed only by minimal social and economic distortion.

How did it all start? Beginning of 80s decision to reduce 30 years lasting pressure on the farmers. The procurement prices were Farmers still had to deliver certain amount of grain (procurement) BUT could sell rest in the market. Agricultural production began to surge. In 1984, one third higher then in 1978. Simply because of the market forces! The market finally clearly won over the plan! The procurement prices were raised, and most importantly, prices above procurement quotas were increased dramatically (major incentive). Collectives were allowed to subcontract production to farmers – these had to deliver certain amount of grain BUT could sell rest in the market. Agricultural production began to surge. In 1984, one third higher then in 1978 – simply because of the market forces. Another effect – if farmers now could fulfill the quota requirements the way they waned, they could invest time the way they waned – surge of output in township and village enterprises.

Key features of early Chinese reform till 1993 Dual track system Growing out of the plan Entry allowed No privatization Dramatic reforms still ONLY in non-essential sectors for planned economy Dual track system – there was still plan according to which enterprises get planned (low) prices for the planned production. But what the enterprises manufactured above the plan, could be sold on the market for a market (higher) price. Growing out of plan – the plan less and less important, more and more goods could be sold for market prices. Gradually, the planned quotas for production were totally abolished (around 1993). Particularistic Contracts – in order to make the plan work the planners needed to sign individual purchase contracts with every enterprise. Entry – government allowed market entry to private and collectively owned companies. No privatization – SEO were forced to be more competitive, but were not privatized. Reforms in non-essential sectors for planned economy – for example production from export zones was always outside of plan.

Shift in the reforms after 1993 Till 1993 reforms gradualist – “no loosers” (rural citizens won better life, urban citizens still OK) Since 1993 – reform with loosers – in mid 90s plans were almost instantly canceled – SEOs had to sell their products for market prices – bankruptcies (their production too expensive) 2001 – China enters WTO – even deeper market reforms carried out – market economy almost completed But almost no social protection, no social safety network Is China still a communist country now?