From: mte152s@vaxc.cc.monash.edu.au
Newsgroups: soc.culture.china,soc.culture.hongkong,soc.culture.taiwan
Subject: NEWS: 2nd China Survey Article
Date: 14 Dec 92 11:05:52 +1100
Organization: Computer Centre, Monash University, Australia

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Capitalism with Chinese characteristics
(second article in a China Survey)
The Economist, November 28 -- December 4, 1992
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Competition has the key to China's success
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The Chinese reforms have succeeded thus far because they introduced a great deal
of competition into the economy, albeit sometimes in forms that are hard to
recognize. This has created an economy that at its grassroots works
surprisingly well -- since it increasingly resembles and is integrated with the
economies of its East Asian neighbours -- but which in its half-reformed state
is full of contradictions and strains, especially in the role of the government.
Begin with the happier part of the story.

The first of China's three waves of reform was directed by Mr Deng himself in
the late 1970s and early 1980s. He did two main things. One was to create a
market economy in food, initially by freeing prices for most food except grain
and eventually by abolishing the agricultural communes as the unit of production
and replacing them with what were basically family farms.

His two moves were a spectacular success. Output rose sharply. More
significantly so did productivity. Farming output perhead in China did not go up
at all between the mid-1950s and 1978. In the first half of the 1980s, real
value-added in agriculture went up by 7% a year while the number of people
working the land went down. This made everyone in China, either as food producerr
or food consumer, quickly and palpably better off. It laid the goundwork for
substantial growth of agriculture output, and generated the surplus of rural
savings needed to finance the industrialisation of China. The political genius
of the reforms was that they captured this surplus not by milding the
countryside, as mistaken third-world or Stalinist industrialisation-drivens
always did, but by making farmers richer. Mr Deng created a committed reform
constituency three-quarters of China's population.

The second element of the early Deng reforms was less spectacular, but is
proving to be just significant. The "open-door policy" began by eliminating the
central government's monopoly over foreign trade. Four experimental "special
economic zones' were also set up, three in Guangdong province next door to
Hong Kong, the other in Fujian province across the strait from Taiwan. These
were intended to draw in foreign capital, companies and expertise -- mainly, as
their locations show, from the ethnic Chinese businessmen of Hong Kong and
Taiwan. The open-door policy has transformed the economy, bringing it the same
benefits that the export-led growth of the East Asian tigers delivered to them.
A later article will explain just how.

INDUSTRY"S TURN

The agricultural reforms worked so well that attention of China's policy-makers
quiickly shifted away from them (as will the rest of this survey). The next two
rounds of reform, in 1984 and 1987, dealt instead with industry. More was
accomplished than people usually assume, though the central difficulty with
state-owned industry has still not been tackled.

To see how much has been done, it is useful to refer to a checklist drawn up by
Mr Perkins, the Harvard economist. He notes that four conditions must be met for
a market system to work well in a reforming centrally planned economy. They are:
(1)Goods must be made available through the market rather than through
administrative allocation. (2) Prices must reflect long-run relative scarcities
rather than the dictates of the plan. (3) competition must exist; no monopolists
otherwise no productivity gains. (4) Managers must behave according to the rules
of the market, rather than those of the state bureaucracy. In China, numbers
(1) and (2) are being taken care of by reforms begun in the mid-1980s and
nearing their end now. Number (3) is also being taken care of, though mostly
inadverntly. That leaves still number (4).

(1) Ever fewer goods are flowing through the hands of the planners. In 1978
around 700 kinds of producer goods were allocated by the plan; by last year the
number was below 20. In the rapidly growing non-state sector, almost no inputs
or outputs are covered by the plan. But even in the case of state-owned firms.
if an industrial survey by the Chinese Academy of Social Sciences can be
believed, as long ago as 1989 around 56% of inputs were bought outside the plan
and almost 40% of output sold outside the plan. Today the market rather than
distributes almost 60% of coal, 55% of steel and 90% of cement.

(2) It is therefore no surprise that prices are coming closer to reflecting
true scarcities. The two-track pricing policy that the government introduced in
the mid-1980s gave rise to some predictable corruption, as middlemen bought
cheap at state-set prices and sold dear at market prices, but at least the
policy introduced market pricing into the system. More important, it made market
prices the relevant ones for non-corrupt marginal decisions by most factory
managers (because, provided the state quota accounts for less than all the
inputs and output, the cost of an extra unit of input and price of an extra unit
of output is fixed by the market). And market pricing is spreading. In September
the government cut the number of raw-material inputs subject to price controls
to 89, meaning that the prices of 75% of these items, by value of sales, are
now market-set. Moreover, since mid-1991 the government has taken advantage of
a period of price stability to raise state prices like those for grain and coal
much closer to market levels.

(3) competition has spread through the economy from many sources. One source
is foreign trade and investment. A bigger source is the interprovincial rivalry
released by the decentralisation of economy power. Every Chinese province has
been transfixzed by the success of Guangdong, whose real GNP has grown by an
amazing 13% a year for the past 14 years. All relize that Guangdong has had the
incomparable advantage of being next to Hong Kong. But most now realize as well
that Hong Kong would not have knocked on Guangdong's door had it not been for
the province's pro-business government and the small share of state-owned firms
there. The result is that provinces are striving to out do each other not just
in attracting foreign investment but in designing and carrying out models of
reform. It is strikingly like the social and economic experimenting that
America's federial system was intended to achieve.

The biggest spur of all to competition, however, has been the luxuriant growth
of industries, mainly in the countryside, that are not owned by the central
government but are not exactly private either. These usual creatures deserve
an article of their own, which comes later in this survey. It is enough for now
to note that the "collectives" have spread thoughout China, competing vigorously
with each other and with the state firms too.

These developments have created an economy that looks like less socialist all
the time. China's industrial structure resembles that of its East Asian
neighbours far more than that of its former ideological friends in Russia and
Eatern Europe: Chinese industrial output is dominated by a huge number of small
firms rather than vice versa.

It is the smaller firms that are growing. In 1978, just before the reforms
began, state-owned firms accounted for 78% of China's industrial output. The
state share has fallen by more than two percentage each year ever since, and is
now just over half (see chart). The Chinese government guesses that figure will
hit 25% by 2000. If agriculture and services are taken into account, the state's
share of Chinese output is already no more than 25%: some West European
countries should be so lucky.

The most significant change in reformist China is how much more efficient the
economy has become. Between the mid-1950s and the mid-1970s, a horrigying era
that included the Great Leap Forward and the Cultural Revolution, China's real
GNP grew by a respectable 5-6% a year. But it seems that, in the two decades
before the reforms started, China's "total productivity" did not increase much
, it at all. This mouthful represents the best measure economists have for how
efficiently an economy is combining inputs or capital and labour to produce
a given amount of output. Practically al of China's pre-reform growth came from
adding more inputs, especially capital, not from using them more efficiently.
With savings and investment rates as high as China's -- both run at around 35%
of GNP -- economic growth can be bought for a long time this way, but not for
ever. Without productivity growth, an economy sooner or later stops growing.

Things changed in China after 1978. By one recent calculation, the factor
productivity of China's state firms rose by almost 2.5% percent a year during
the 1980s, up from zero in the pre-reform years^. The same figure for non-state
firms in the 1980s was 5%. In both cases, productivity growth picked up speed
as the decade went along.

There are other signs that the Chinese economy is becoming more competitive and
efficient. Profitability in the state and non-state industries is declining at
the same time as their productivity is going up. Returns in the state and
non-state sectors are begining to converge. And the range of profit rates across
industries is also narrowing -- from 7-98% in 1980 to 8-23% in 1989. All this
suggests an overall reduction in monopoly power and profits and an equalization
of returns across regions, industries and companies.^^ In gathering political
support for his reforms in the early 1980s, Mr Deng said he was aiming to build
"socialism with Chinese characteristics". It is now obvious that he has been
building capitalism with Chinese characteristics.
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^:G.Jefferson, T. Rawshi and Y. Zheng, "Growth, Efficiency and Convergency in
  China's state and collective industries", Economic development and Cultural
  Change, 1992
^^:B. Naughton, "Implications of the State Monopoly over Industry and its
   Relaxation", Modern China, January 1992.
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PS: this is the second  article in a CHINA survey in THE ECONOMIST 1992.11.28
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Newsgroups: soc.culture.china