1 China’s Development Model  What’s China’s development model in the urban industrial sector today?

2 China’s Development Model  What elements define a development model?  Again, look at Property rights (private vs. public) Markets (free vs. plan-set prices)

3 Readings  Whiting Property rights in small-scale industry  How close to private property rights?  How widespread?  Huang What is the role of state vs. private ownership in reform China? How has it changed over time? Is state or private more successful?

4 Urban Economic Reform  How did China change From planned economy To mixed state-private economy?

5 Theory and Policy Debates  “Shock Therapy” vs. Gradual Reform  Russia vs. China

6 “Shock Therapy” vs. Gradual Reforms  Shock Therapy Western economists  like Harvard’s Jeffrey Sachs and the IMF staff recommended that every element in the old system be simultaneously eliminated, to be replaced by  private property,  free markets,  individual rights and  representative government—  in that order of importance.

7 ‘sounds like: Washington Consensus  Huang, p. 3 Private property rights Economic opening  Free trade and free prices Financial reforms Macroeconomic stability Political liberalization

8 “Shock Therapy” in Russia  On July l, 1991, the central planning agencies, Gosplan and Gossnab, were abolished. Supply relationships were thrown into disarray.  On January 2, 1992, all price controls were lifted Prices increased 25-fold in one year. Price increases far outpaced wage increases  Industrial production collapsed because enterprises were unable to get credit By the end of 1992 Russia’s G.D.P. had fallen by 22 percent  Insight: there’s no such thing as a “free” market (Karl Polnayi)

9 A 1993 joke in Moscow went:  “What has one year of capitalism achieved in Russia that seventy years of Communism were unable to accomplish?  Answer: It has made Communism look good.”

10 Gradual Reform in China  Recall core elements of the planned economy: Planners’ preferences State monopoly ownership of industry/collective ag State control over prices  Reform in China Plan continues to exist No immediate privatization  Rather, allow new entry/competition adjust managers’ incentives No immediate price de-control  Rather, “dual-track” price reform

11 Gradual Reform in China  Note China’s multiple sources of economic growth Note that the former Soviet Union had long- ago made the developmental transition from an agricultural to an industrial economy  China simultaneously made the gradual transition from plan to market  better incentives, higher efficiency agriculture to industry  big opportunity for growth

12 Gradual Reform in China Successful rural reform served as model for urban reforms  legitimacy from improved living standards, improved rural incomes

13 Gradual Reform in China Ag reform  Revealed surplus labor For alternative employment in industry  Increased household savings For alternative investments in industry Develop rural industry  2 nd major success

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15 Gradual Reform in China Collective Enterprises: TVEs  Develop rural collective enterprises Run by townships and villages (former communes and production brigades)  Legacy of Great Leap Forward walking on 2 legs: agriculture and industry  Use surplus labor  Invest savings deposited in state-run banks  Redefine role for local officials  Reduce tax/fee burden on farm households

16 Gradual Reform in China Private enterprises  Emergence of private enterprises Absorb surplus labor Use private savings to invest  Especially where few state/collective resources available

17 Gradual Reform in China Private enterprises  QUESTION: Would you invest your family’s life savings in a private enterprise only five years after the death of Mao?

18 Gradual Reform in China Private Enterprises  (1981) State Council allows individual household firms (getihu 个体户 )  1982 constitutional revision to recognize individual household firms  1987 “ primary stage of socialism ”  1988 further constitutional revision and State Council regulations for larger private firms

19 Political conflict over reform  Elite policy conflict in lead-up to Tiananmen Square (1989)  Conservative backlash  1992 Deng’s Southern Tour” People’s Daily: “Without Reform There is No Way Out”

20 Gradual Reform in China Private Enterprises: Changing Ideological Justifications  th Party Congress “socialist market economy”  th Party Congress Private sector “important”

21 Increase in share of private enterprise, Songjiang County,

22 Increase in share of private enterprise, Wuxi County, (known as a “bastion of collectivism”)

23 Gradual Reform in China Private Enterprises: Changing Ideological Justifications  2001 private entrepreneurs allowed in CCP  2004 further constitutional revision Private sector not just permitted; encouraged

24 Gradual Reform in China State-owned Industry  gradual reform competition for SOEs from new entry of non-state enterprises (TVEs) early reforms to increase efficiency of SOEs no privatization initially contrast gradual reform in China with “shock therapy”

25 Gradual Reform in China State-owned Industry  competition for state sector from new entry of Collective enterprises (TVEs) Private enterprises Foreign enterprises Early competition in labor-intensive sectors: garments, toys, shoes, consumer electronics

26 Gradual Reform in China State-owned Industry SOE and Price Reform  limit plan, expand market dual-track price system: 1984  Freeze plan obligations in place  Allow sale on market of above-plan-quota output gradual approach to price reform  Use information from marginal prices on above-plan-quota sales most prices at market levels by ~1992

27 Gradual Reform in China State-owned Industry  measures to improve authority and incentives of SOE managers factory manager responsibility system (reduce influence of party-sec) managerial incentives -- long-term contracts changes in labor management contrast w/“shock therapy”

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29 Gradual Reform in China State-owned Industry  Large share of SOEs losing money in 1990s began selective privatization and bankruptcy for state and collective enterprises

30 Reading: Huang  What is the “Beijing Consensus”?  What is wrong with the “Beijing Consensus,” according to Huang?  What part of China’s economy comes closest to the Washington Censensus?