III. Market Transition Flashcards
The Reform Process : Market
Transition Strategy, Success and
Problems
Lecture 3.1
Historical Background: Political
Relaxation and Rural Breakthrough
- Cultural Revolution ended
- Social experimental reforms - possible
- Success of experimental rural reforms – political dividend
- Anhui province ( Lecture 4.1)
- Farmers shouldered the brunt of the planned
economy - More, deeper and coherent reforms possible
- Transition can move faster
- By 1984 a more coherent framework was crafted
Factors Behind the 1978 Reforms
- Failure of the GLP
- Rapid development of newly-industrialized
economies ( Taiwan, Korea, HK, Singapore) - Reforms to strengthen legitimacy of the CCP
- Failure of the GLP – became obvious
- “Acceptance”
– for replacement* Failure of the GLP - Rapid development of newly-industrialized
economies ( Taiwan, Korea, HK, Singapore) - Reforms to strengthen legitimacy of the CCP
- Failure of the GLP – became obvious
- “Acceptance” – for replacement
What is market-
oriented reform?
- Increases scope for fair competition
* (i) Enables more participants
* (ii) Making rules more transparent and
fair - Gradualist approach
▪ Party remains in control
▪ Reforms started without blueprint/plan
▪ China Low-income developing country
▪ Overemphasis on heavy industries
▪ Neglect simple consumer goods
▪ Debate: reform vs transition
▪ Reform – contribution to growth
▪ Transition – moving towards market
economy
First Phase
1978-1984: Reforming
Micro- Management Institutions
▫ Agriculture/rural sector
▫ Stimulate/improve incentive system to improve
efficiency
▫ Low efficiency, lack of incentives
▫ Macro policy and planned resource allocation
institutions - not intuitively clear
▫ Rural areas - collective farms - back to the
household responsibility system
▫ The relevant historical institution ?
1st Phase: SOE Reform
State-owned enterprise
Replaced profit remittances with corporate taxes
From profit remittances to taxes
Corporate taxes 55% of income
Profit was divided between State and
enterprises
From budget to indirect bank loans
Difference?
Second Phase 1984 - 1993 Reforms on the Resource allocation Mechanism
▫ Allow SOEs to operate outside the
Plan
▫ Source materials in open markets
▫ Expansion of rights to sell their products ( legal/ institutional reforms)
▫ Restrictions on sales of materials under the plan are lifted
▫ Allow flexible supply methods
▫ Setting up markets for production factors
▫ Develop networks to reduce transactions cost
2nd phase - 1985 onwards
1985 onwards : planned allocations in 1984 constant levels for in-quota demand
Number of materials in the plan - reduced at all
levels
Number of goods in the open markets - increased
▫ Prices of energy, metals were raised
▫ Plan prices were increased
▫ Prices outside the plan were liberalized
▫ Naughton’s framework – dual track
▫ Market development was fostered
▫ Naughton’s market reunification
How did the SOE reform work
Govt says: now you can seek resources outside of the planed economy
○ 2nd leg: everything must be replaced by the price system
○ If the 2nd leg will be replaced by the price syste, the number of goods allcoated by the 2nd leg
○ To eventually replace the 2nd leg with th eprice, the levels have to be constant proportion of that constant level over the years become smaller
■ Economy is growing
2nd phase reform: MACRO POLICY environment
The last contradiction — Macro policy reform
Improved market conditions, reforms in the two
trinity ( micro institutions and planned resource
allocation mechanism)
Environment for rent-seeking improved but caused many problems ??
Reform of the Macro Policy Environment
Price reform - consumer goods, intermediate goods and production factors
1978-1984 relative prices were adjusted
Prices of goods in shortage was raised; prices of
goods with surplus was reduced
Dual Track – goods under the plan – set by Gov’t
– goods outside the plan – market-
determined
▫ Second period of price reform
▪ Introduction of market mechanism into price
formation
▪ 1985- onwards dual track was introduced
▪ 1996 - 93% of all retail goods, 79% of all
agricultural products and 81% of total sales of
production factors were priced by the market
▪ Proportion of goods determined by mandatory
prices decreased from 70% in 1979 to 5% in 2000
▫ Exchange rate reform – deferred until section VI -> Internationalization of China’s economy
▫ Interest rate reform - fall’s under financial reform
▫ Price of labor ?
two-phase framework — when is 1st phase and when is 2nd phase
1st phase - 1984 to 1989
2nd phase - 1993 to 1999
First phase
First Phase (1984-1989)
Dual Track
1. Entry
2. Dual track inside State firms
3. Market prices
4. Growing out of the Plan
5. Particularistic contracts
6. Incremental managerial
reforms
7. Disarticulation
Macro stabilization
Macro stabilization
1.Planned instrument for
stabilization
2. High S & I
3. Macro cycles
Integration: Lin’s Trinity and Naughton’s Framework of the FIRST PHASE
First Phase (1984-1989)
Dual Track
1. Entry - Third Leg Micro
2. Dual track inside State firms – Third Leg Micro
3. Market prices – Micro and Planned Resource Allocation ( 3rd and 2nd)
4. Growing out of the Plan - Planned Resource Allocation 2nd Leg
5. Particularistic contracts
6. Incremental managerial reforms
7. Disarticulation
Macro stabilization (Distorted Macro Policy – first Leg)
1.Planned instrument for stabilization
2. High S & I
3. Macro cycles
