The Socialist Era: Structures, Processes, Outcomes 1.Industry: firms & markets & planning 2.Agriculture: collectives & decentralization 3.Separation of Urban and Rural 4.Political Movements and Reform 5.Public Goods and Poverty 6.Comparisons and Connections

Structures Russian industrial structures Lenin sees state control over the economy as one big super enterprise—decisions on inputs and outputs are management decisions and management is a science of its own. Russian context of agriculture without much commercialization Limited crafts and trade Thus formation of large enterprises is substitute for market development and many enterprises.

Firms, Markets, & Planning Contemporary economics sees a basic division between firms and markets. Economics deals best conceptually with 2 extremes—competitive markets made up of many producers or monopolies which have only one producer.. Under neo-classical assumptions of perfect (& costless) information, calculation of marginal costs and marginal prices can be done by a single firm as easily as many firms so either the state as a single super-firm or a multitude of individual firms getting information from market signals could make the same decisions. But this is just an ideal of course in both cases.

Assumptions for a planned economy and the problem of public goods Perfect information Common interest Public goods are not divisible. States supply social goods (health, education) Real world economies have mix of private and public goods

Sizes of firm and market Naughton’s critique of late imperial economy— very efficient with markets, but small scale firms When size of markets and of firms are both small, how do you promote development? Make markets work to allow firms to be developed OR Focus on fewer larger firms directly without developing markets (more administration) How does one combine firm-market structures that vary by product or sector?

Reform in the Eastern Bloc Wlodzimerz Brus divides economic decision making in 3 tiers—macro/enterprise/household. Economies differ according to degree of centralization/decentralization for each set of actors. Decentralized model allows market mechanism for enterprise decisions on product markets but state ownership and capital/investment control. Soviet efforts to refine planning system technically but continuous decline in both growth rate and efficiency.

Eastern Bloc Reforms Janos Kornai: key is not big bang vs. gradualism, but of whether bottom up development or priority to privatization of state assets. Under bottom up strategy you sell state assets, new firms have few owners with hard budget constraints. Priority on privatization of state assets often voucher scheme, not sale, preferring dispersed ownership and without hard budget constraint.

Chinese Industry Context: 3 decades after Russian Revolution, begin from a more developed industrial base. Goal: heavy industry, hence needs lots of capital. Easy to envision industrialization as subject to state control because of need for capital Purpose of industrialization: wealth and power Soviet model for rapid industrialization Korean War fears shortly after WW II ends fuel state control

Chinese Agriculture Small scale plots, labor intensive, little mechanization; Efforts to introduce fertilizer and coordinated labor based in part on cooperative practices of past State organizes production. Seen as radical change from a peasant society of small holders but this perspective fails to see the distinctiveness of the Chinese structures and their basis in past historical practices.

Extending the Past into the Present Penetrate rural society to a degree never achieved before and not attempted elsewhere in the world. It is a Chinese pattern of change. Possible because extends earlier practices State always had a variable presence in countryside Purpose of organizing production is first to create social order and then to create greater economic security for agricultural households

New Results One major change is control over production decisions, an aspiration earlier officials had—some worried about what they considered excessive cash cropping and wish they could order people to plant more grain in the context of a subsistence-first priority. Second major change that is less remarked upon also very important—market networks are dismantled and countryside loses its craft industries as well as its markets that connect agrarian households to the commercial world they used to have.

Urban/Rural=Industrial/Agricultural Institutional separation AND bureaucratic connections Industrial and agricultural administration separate bureaucracies—major social effects: no migration to cities, separate organization of social order in urban and rural areas State extracts resources from agriculture to pay for industrialization—basic macro-economic relationship defined by state; savings from agriculture used for investment in industry

Basic social structures Urban danwei: manages housing, health, low cost grains and education. Social benefits higher than those of countryside. Changing society to be simpler not more complex – Less inequality in countryside – Little social differentiation in cities – Main differences are urban rural rather than differences within each

Modern break of urban-rural connections of early modern era In past there was more continuum between urban and rural. Elites who lived in towns or cities owned land in countryside. Much craft production in countryside. Treaty ports separate from countryside., Republican era: agrarian crisis as countryside increasingly distant from cities which are connected to larger international networks

Communist consolidation of break between urban and rural One kind of logical conclusion to 20 th c. changes Goals: Bureaucratic separation of countryside and city to create control over two very different social environments Reasons – Mao’s experiences in countryside (rural vision) – Chinese learning Soviet practices (industrial vision) Results: Creation of the “traditional” rural sector based on agriculture without industry.

Processes: State Simplifications Rural—gradual collectivization, reduce bases of economic differentiation among households Reduce local inequalities, inequalities persist among regions according to resource endowments. Create greater isolation with no markets except what is supplied by government in terms of information, services and goods. Take crafts out of the countryside, make it more agricultural

Processes: State Simplifications Urban—slowly get rid of professional and middle classes; keep differentiation among workers limited. Elites: political party elite, not economic or cultural elites. Party the only path of mobility- --social, political and economic fused.. Workers face various constraints and shortages, but they continue to do better than peasants.

Center-local Relations Remove markets and horizontal connections, Choice of top-down organization of economy or lower- level autonomy/autarky Administrative assignment of resources and outputs— issue of what spatial scale is control exercised on Levels of community autonomy—creation of communes is both decentralization AND creation of larger artificial communities from top down. Administrative decentralization makes the levels of communication, information and coordination lower and less demanding

Authority relations vary according to strategic concerns of central government and how they are to be met Early 1950s—centralized to build heavy industry & military, fear American invasion from Korea War. Early 1970s—Mao calls for 10 autonomous industrial regions for military, fear American invasion from Vietnam War In contrast, mid-150s decision to reduce military priorities, gives more priority to light industry and agriculture (more balance among sectors) Also seeks to take advantage of coastal resource endowments.

Economic Aspects of the Ten Great Relationships Heavy vs light & agriculture—more resources to light industry & agriculture Coastal vs interior for industry—allow coastal to flourish more Defense vs civilian industry investment: put more into civilian State-enterprise-workers: interests of each to be stressed. Center vs locale: give local more autonomy China and foreign countries—learn good from all nations (not just rely on Soviet Union)

Administrative Decentralization Sharing administrative power and profits among different levels of bureaucracy, NOT with enterprise directly; contrast with Yugoslavian model ; Mao prefers ideological over material incentives. Power to make plans goes to local administrations who coordinate within regions on materials and equipment allocations Capital construction and credit devolved to locales (appears to be no hard budget constraints) 1958: 88% of enterprises transferred from ministries to lower levels. Central govt controls directly 39.7% of production in 1957, 13.8 % in 1958.

Problems of Administrative Decentralization: a market contrast Call to increase production led to massive resources investment, low efficiency and false reporting Wu Jinglian pp54-57: discusses distinction between administrative and economic decentralization Administrative: give lower levels of govt incentives; still allocating resources bureaucratically Economic: market allocation of resources and production In reality administrative decentralization creates gaps and spaces for markets.

Mass mobilization & political movements Exhortation—individual sacrifice to build nation, new socialist individual, belief in CCP. Direct Economic effects most in countryside – Labor mobilization—slack season employment – Infrastructure in countryside, public goods Indirect economic effects especially in urban industrial economy – Red vs expert: to stress ideological belief over expert knowledge – Critique of technical knowledge & bureaucracy.

Outcomes: positive Heavy industrialization achieved. Strong state; industrialization does not mean commercialization— less commercialized than before. Agriculture stabilized in general. Persistence of regional differences. Agriculture produces capital for heavy industrialization. Also agricultural investment through labor mobilization.

Outcomes: positive Chinese pattern before 1978 allows development of a particular kind of urban society that is based on planned industrialization and the survival of a kind of rural society built in part on past practices. Public goods provision high relative to income—mortality rates good, public health and medical care good; primary education widespread.

Bad Outcomes: Great Leap Forward Goals & strategy: expand output thru labor mobilization Problems –Administrative decentralization—less ability to respond to disasters –Incentives for mis-reporting Outcomes: recentralize administratively & bureaucracy strengthened over movements Continued tension of bureaucratic & non- bureaucratic

Oscillating political equilibrium Administrative decentralization & movement outside bureaucracy Administrative recentralization Explaining dynamic: –Political bureaucracy: information and control; –Economics: principal-agent problem within a firm –What is missing—the market as mechanism for sending information via prices. Limits on efficiency, productivity.

Contrast with industrialization and urbanization elsewhere Model of industrialization and urbanization together creating a ‘modern’ society Processes of rural society being remade into urban society—migration, new jobs, skills, lifestyles. In world where economies do not industrialize, have large rural populations, sometimes have a few big cities and a large countryside. Cities can be overcrowded due to efforts to escape land. Urban and rural relationship favors urban everywhere, but with greater urban problems

Comparisons with past, challenges for future in 1978 Comparisons with past –Less connected internationally than before –Affirm the split between urban and rural that began in modern era –Persistence of gaps between regions Challenges for future –How to close gaps between countryside and city and across country the late imperial legacy makes these criteria for successful state. –How to integrate economy into global economy to develop more efficiently and effectively