A Political Economy of Chinas Reform and Transition

1
A Political Economy of Chinas Reform and
Transition

• Chapter 4 by Naughton
• and
• Chapter 10 by Haggard and Huang

2
Part I

• This part follows chapter 4 by Barry Naughton
• The focus is on the political economy of Chinese
  Economic Reform

3
General Impression

• Besides economic factors (the need for continuous
  growth), political factors have also been
  important to shape the reform of Chinese economic
  policy.

4
Questions to Discuss

• Is Chinas reform and transition driven by
  economic or political factors?
• To what extent has Chinas reform and transition
  been driven by economic or political factors?

5
General Features of Chinas Reform and Transition

• Gradualist transition
• A structural break in early 1990s
• 1978-1993 A cautious incrementalism (high
  stability) and lack of policy decisiveness

6
First period of transition (1978-1993) Reform
without losers

• Allowing TVEs
• Incentivization
• Dual-track price system
• Dencentralization
• Inflationary cycles
• Particularistic contracting

7
Second period of transition (1993-now)

• Fiscal reform
• Corporate reform
• Company law
• Foreign trade and investment
• Joining WTO
• Financial reform (banking system)
• Price system
• More stable inflation
• Privatization
• Welfare reform

8
Chinas Political System

• Run by the Chinese Communist Party
• Authoritarian and Hierarchical

9
The Structure of Power in Different Transition
Stages

• From 1978 to early 1990s
• National power was fragmented with numerous veto
  players.
• Revolutionary vs. conservative elders
• Eight Elders and a handful of younger leaders
• The power to make or block economic policy was
  widely dispersed.
• Central Advisory Commission
• From early 1990s to now
• Less fragmented national power

10
Chinas Political System at the Beginning of the
Reform

• A centralized political system that provided
  leaders with abundant patronage to distribute
• Physical goods
• Managerial jobs (nomenklatura system)
• Reciprocal accountability
• No real checks and balances
• Leaders and aspiring leaders compete to promote
  their own clients to responsible posts and
  positions that give them a vote in crucial
  commitees and Party Congresses.

11
How did the 1978 reform started?

• Political equilibrium has been broken in the
  cultural revolution.
• The first response of Chinas leaders after 1976
  (Maos death) was to fix up the old economic
  system and rehabilitate the CP political system.
• Great Leap Outward
• The effort failed and this convinced Chinas
  leaders that maintenance of the status quo was
  infeasible.

12
Benefit and Costs of Reform for the Leaders

• Costs
• The supply of rents is reduced
• The possibilities of autonomy increase
• Commitment within the hierarchy declines
• Benefits
• New types of patronage resources

13
Part 2

• This part follows chapter 10 by Stephan Haggard
  and Yasheng Huang
• This part focus on the interaction between
  governments and the private sector.

14
Relationship between Government and the Private
Sector

• Mainstream theories
• Government as protector and enforcer of private
  property rights
• Private sector could also affect the government
  and distort policy-making by rent-seeking
• What are special of China?
• Many important production factors are controlled
  directly bythe government (e.g. financial sector)

15
The Nonstate Sector of China

• Composition
• Collectives
• De jure private firms (registered as private)
• Shareholding enterprises
• Joint ventures
• Foreign-invested enterprises (FIEs)
• How big is the non-state sector of China?
• SPCs definition 68.4 percent of total
  industrial output
• NBSs definition 21.2 percent of industrial
  output

16
Two Interesting Observations

• The domestic private sector remains relatively
  small and subject to a variety of policy and
  economic constraints.
• Chinese government shows a revealed preference
  for foreign over domestic firms.

17
Financial Constraints on the Private Sector

• Do private firms in China face constrains in
  terms of access to capital?
• Is this normal?
• Transitional Economies Croatia, the Czech
  Republic, Romania, Slovak Republic
• Poor Economies Ghana, Ethiopia
• What are the main sources of financing for
  private firms in China?
• Retained earnings
• Informal finance

18
1993 and 2002 Private Sector Surveys

• Data
• 1993 1,440 firms start-up capital
• 3,258 firms larger firms than those in the 1993
  survey not necessarily start-up capital
• Findings
• How to interpret the findings?

19
More Evidence

• Has Chinese bank became more supportive of the
  emergent private sector?
• Chinese banks have become more market oriented
  and profit driven. At the same time, new loans
  became highly centralized in the 1990s (Shen and
  Park, 2001)
• The state of Chinas rural finance has
  deteriorated in the 1990s (IFAD, 2002 Nyberg and
  Rozelle, 1999)

20
Comparison with East Asian NIEs

• Other East Asian governments are typically more
  supportive of private sectors.
• Other East Asian governments are typically more
  cautious in opening to FDI and have more
  protection on domestic private sector.

21
More Discussion

• What are the reasons offered by the authors on
  Chinas preference for foreign over domestic
  capital?
• Do you agree?

22
Students Contributing to Discussion

• Candy, Carolyn, Eric, Zero