CHINA: Class 2

Policy Change in the Reform Period q Initiated in December 1978 after a power struggle q emphasis on the 4 modernizations q of industry, agriculture, science and technology

Economic growth rate has been quite high

Why no large drop in GDP with adoption of market reforms like EEFSU??? q Position A Incremental reform strategy is superior q Position B q China was VERY poor and had VERY inefficient agric. sector at the beginning q result: a BIG one-time boost from any productivity gains

q Only 20% of Chinese labor force in industrial SOEs (much smaller than EEFSU) q could get big one-time boost by transfer of labor out of agriculture q could adopt a DUAL-TRACK method of economic liberalization Other Important Differences

q EEFSU economies were functionally specialized q firms control by state-wide ministries q high industrial concentration q result is high interdependence q Chinese SOEs were controlled by regional governments thanks to reforms of 1960s and early 1970s. Result: q regions were largely self-sufficient q less industrial concentration q smaller enterprises q much firm duplication

Firm size, 1988 (empl. per firm)

Consequences q Created competitive climate in state sector q Chinese used this. q Easier to introduce institutional change on experimental basis as a regional experiment (bottom up) q facilitated technology diffusion across firms and regions q Costs--limited scale economies

Agricultural Policy Change q Initially: tinkering with communal system q Decollectivization-- Household Responsibility System q NOT from the top down. Begun spontaneously in poor provinces (Anhui, Gansu, Sichuan in 1978) q Prohibited in September q Essentially completed by late 1983 q Rationale??? Incentive problem

Index of Gross Value of Output, Agricultural Production Trends

Growth of output of selected products (% per year)

Comparisons to other regions Low income countries Brazil

Rural Living Standards Real per capita consumption (av. annual growth rate)

Per capita consumption trends in rural households

Ownership rate per 100 rural households

Controversy. The precise role in this turnaround of decollectivization Alternative candidates –changing terms of trade –greater availability of capital inputs –rural non-farm job opportunities

2. Changing terms of trade Procurement price increases in 1979 for quota deliveries

AND Rise in price paid for above-quota deliveries from 30 to 50% above quota price Reduction in procurement quotas Net effect of all these changes is: average price increase of 28% Plus. No change in prices for industrial products sold in the countryside.

3. Increased availability of farm inputs--especially fertilizer Bramall (1993): examines relationship between growth of grain output and growth of fertilizer use across provinces. Finds strong relationship

4. Increase in rural non- farm job opportunities produced the farm inputs boosted rural income directly