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Date Created: 08/28/14
Exam 3 Review China39s Economic System The Lewis Two Sector Model Named after W Arthur Lewis Most common explanation for acceleration of growth Applies to Asian and Chinese growth model Demand for labor depends in manual product PANEL A Traditional Sector Agriculture Labor input PANEL B Modem Sector Industry Real wage 9Na Supply Why Europe and the West NOT China How did the west get rich 2 schools of thought o The first one is a result of social changes introduced between 1500 1900 I Abolition of serfdom guarantees of human rights the reformation and protestant ethic Magna Carta and European Enlightenment helped to cause openness and flow of ideas and technological innovations which lead to the Industrial Revolution and acceleration of growth I Secure property rights relatively untrammeled markets and a degree of social mobility These function by promoting entrepreneurial activity and investments to help people devote themselves to economic activity rather than prayer and violence This was most prevalent in England o The other school of thought is that this evolution was triggered by social forces themselves I Such as historical events that pre determined the the development of countries and continents for centuries to come o Western superiority an accident that cumulated into something irreversible China could just as easily won had it been as lucky Everything needed for success was present in China as well Evidence if Western Superiority Portugese required science of navigation to cross oceans without following shorelines Chinese had abandoned exploration for political reasons Westerners had developed clear superiority in weapons Was the above accident or did it have deep rooted causes o According to Pomerantz the reason Europe succeeded and China did not was largely determined by chance a lack of large deposits of coal and iron ore close to each other and the absence of large outward migration The mass migration to North America helped to alleviate pressure on a scarce resource land and to avoid diminishing returns Mystery of Chinese early superiority in technology Early development of mechanical hemp weaving and blast furnaces Other Chinese inventions horse collar compass printing gunpowder Why China Lost Lead A State dominance over market and property rights intervening state controlled resources for revenue B Maritime trade as an invitation to exit C People told not to move not to trade stay in place Execution for departure without permission D Pervasive censorship state determined what to wear to read etc WHY TRY European Advantages Small states competing and trading Role of Church save time for prayer Judeo Christian respect for labor Free Markets Rulers constrained Why Didn39t Take Advantage of Second Chance 0 Imperial administration by Confucian elite cultural superiority What is there to learn 0 Clocks and watches as attacks on claims of Chinese superiority 0 Indifference to Western science 0 quotMore fond of a defective antiquity than the most modern device 0 quotWe have never set store in strange and ingenious objects Overview of China 0 Republic of China 1911 0 First President Sun Yat Sen 0 Heavy influence of Soviet model and important role of Comintern United Front Communists and Nationalists 0 Massacre ofJuy 1927 0 Japanese invasion 0 Chinese civil war ended in 1949 The Grand Bargain Chinese Party ensures economic growth Chinese communist party guarantees you growth and prosperity In return you accept them as a monopoly party Public Acceptance of party rule and party ideology this growth provides patronage jobs this growth also expands demand for labor and reduces unemployment Communist Party 0 Obligatory retirement vs Soviet system 0 Over 70 million party members 0 Admission reluctantly of entrepreneurs and students 0 Attitude towards corruption 0 90 of Chinese millionaires children of party officials 0 Intraparty competition Overview Continued 0 Chiang Kai Shek To Taiwan 0 KMT party has governed Taiwan Communists in China 0 China Land Reform 1949 Start of collectivization mid 19505 Great Leap 1958 Cultural Revolution 1967 Market Socialism as an Option Communist Party Obligatory retirement vs Soviet system Over 70 million party members Admission reluctantly of entrepreneurs and students Attitude towards corruption 90 of Chinese millionaires children of party officials Intraparty competition Overview continued Chiang Kai Shek To Taiwan KMT party has governed Taiwan Communists in China China Land Reform 1949 Start of collectivization mid 19505 Great Leap 1958 Cultural Revolution 1967 Market Socialism as an Option Example of China Example of Yugoslavia 0 Strong cooperative movement in Europe China39s Claim to be a Market socialist economy 0 Chinesestyle socialism the state and private economies coexist national planning is absent and private property rights are supposed to be protected 0 The CPC plays a leading role 0 19822007 Chinese Constitution recognizes private economic activity as a legal and major component of its socialist economy China Puzzle 0 The China Puzzle is how country like China with its poor protection of private property weak corporate governance lack of democratic accountability and absence of a rule of law can grow rapidly over more than three decades 0 Ranks 75quot in corruption M form vs U Central Govt Central Adm Function Territorial Control Personnel Finanoe Agriculture Industry ProvinceA Province B ProvinceC Personnel Finanoe Agriculture Industry Tournament Models Lazear and Rosen Regional officials promoted by center Compete on relative terms such as highest rate of growth Business Ownership Business types Unregistered businesses operating in shadows Rule of law One eye open one eye shut Types of businesses Private unregistered Private legal POs Mixed ownership State majority owned SOE Many of yesterday39s tycoons in jail 0 POs to gain a degree of legality 0 Share of enterprises not majority owned by the state account for 70 percent of GDP 0 The figures below count only registered enterprises N Firm advance a 2T0 00001 02 03 04 O5 O6 O7 08 09 China s industrial enterprises O00 a Fi 39 erlues over Sm yuan ofw rich priv te I I nance Rev Source China Macro Corporate Governance 0 Foreign companies plus sponsor 0 Domestic company State Private requires sponsor Rent seeking by political sponsors SOEs and National Champions 0 National champions are companies deemed of such national importance that they must be owned and managed by the state The Chinese state continues to be protective of its SOEs 0 Chinese SOEs are state solefunded corporations and enterprises with the state as the bigges t share holder Top 10 Chinese Companies by Market Capitalization in US bil Petrochina Co Ltd Industrial And Com mercial Ban k of China Ltd China Construction Bank Corp Bank of China Ltd Agricultural Bank of China Ltd China Petroleum amp Chemical Corporation China Life Insurance Co Ltd China Shenhua Energy Co Ltd Ping An Insurance group Company Of China Limited Bank of Com municat ions Co Ltd China39s capital market 0 Huge household saving rate highest household savings rate in the world gross savings more than half of gdp 0 Enterprise saving rate no access to capital must finance out of saving 0 Restricted financial intermediation 0 Political capital market 0 Rise of IPO market 0 FDI capital Formal market State Banks Only 4 of loans to private businesses 0 Informal market 0 quotmoney never sleeps Private firms account for about 70 of profit Wenzhou rate begins at 18 Maturity rarely belong two years usually a half year 15 to 2 per month for established businesses 89 of Wenzhou population has borrowed outside banking system Comparative rates of return SOE 4 negative real return Return to a nonstate firm at least 10 higher than a comparable SOE Political capital markets According to World Bank figures the market capitalization of listed companies was 81 percent of GDP in 2010 up from 62 percent in 2008 but down from 100 percent during the run up of the Chinese stock market in 2009 On the other hand domestic credit provided by banking sector to companies was 146 percent of GDP in 2010 and 145 percent in 2009 Capital market inefficiency occurs when investment finance does not go to uses that yield the highest rates of return adjusted for risk Most Chinese capital is allocated by banks that do not necessarily use economic criteria in making loans Only four percent of bank loans go to private business and it is private businesses that earn the highest profit rates State enterprises are estimated to earn a four percent return on capital versus a minimum of 14 percent for registered private companies Insofar as private companies borrow at the Wehzhou rate of 18 percent and above this means they must earn profit rates above that if they are to survive and prosper 0 As The Economist writes quotChina is often held up as an object lesson in state directed capitalism Yet its economic dynamism owes much to those outside the government39s embrace Figure 1 The market loll bank el1dilngiorSOEs Price r X D eadweigl1l Quantity K Hukou 0 In 1989 there were already about 30 million migrant workers in China In 1993 the number increased to 62 million and by the end of 2006 to 1318 million By the end of 2010 there were an estimated quarter of a billion rural migrant workers in China accounting for about one third of the rural workforce The migration of workers made possible huge changes in the composition of output At the start of the reform some one third of output originated in agriculture Currently it is close to ten percent China39s Labor market 0 Two tiers State employees vs agricultural workers 0 Hukou Household Registration System rural or urban 0 Migrant labor force China was twenty percent urbanized at the start of its reforms Now it is officially one half but in addition millions of rural residents work as migrant workers in construction and industry outside of agriculture China is therefore nearing the end of its quoteasy growth era This end will likely occur at a relatively low standard of living State employees Rural peasants Migrant workers WTO Labor Conventions Apple Loss of manufacturing to low income Asian countries Dealing with Inequality Chinese gini coefficient rose from 29 in 1985 to 45 in 2001 most between 1988 and 1995 Coastal provinces have income 34 times interior Although inequality between urban and rural residents most inequality due to differentials within urban and rural professions education entrepreneurship Sen s Theory of famine Famines not normally caused by decline in production Famine caused by distribution problems Famines not found in democracies famines prevalent in dictatorships 0 Democracies avoid large scale starvation because people are voters 0 Conventional view 0 Sen 0 Dictatorships are subject to famine because 0 They tend to intervene in agriculture 0 They are prepared to act against certain members of the population such as against tribes or classes Sen s entitlement approach 0 Factors other than production responsible 0 Other factors Urban bias Wasteful consumption in communal consumption Exporting of grain by zealous local party officials Grain exports reached a high in 1960 Mobility limits China39s Great Famine 19581961 0 Estimates of 17 to 35 million lives During Great Leap agricultural production fell first 15 and then 16 0 Kept secret losses known only in the 1980s Central planning responsible Distribution system gave urban workers preference Central orders reduced production With centralized planning planning errors are magnified cattle and tea Most destructive famine in world history Bad weather a contributing factor Work system of collective farm reduced effort shirking and free riding Desire to force saving from agriculture to pay for rapid industrialization exaggeration in reporting Soviet famine 193233 6 million 1941 115 million Two views orchestrated by Stalin vs planning errors Weather was a contributing factor Aftermath of collectivization Quotas and urban bias Planning errors could control sown acreage but not productivity Gerschenkron theory of substitutions Applied to Europe and Japan Substitutions for missing preconditions Banks for entrepreneurs State for entrepreneurs Russia and Japan China A Case of Substitutions 0 Are there functional substitutes relational contracting culture of trust etc 0 In state owned enterprise system common superior resolves disputes and issues orders 0 Enterprises outside the bureaucratic system do not have a common superior and must resolve disputes differently 0 Gradual abolition of planned economy 0 Separate systems for domestic and foreign firms with a gradual disappearance of segregation JV law 0 11 Central Committee decision economic development replaced class struggle 0 TVEs could not be private but they were unconstrained by plan obligations 0 Red Hat enterprises 0 Patronage system Bribes 0 Local officials need to show results Growth and Private Property 0 Standard Assumptions No prosperity 0 Without a rule of law 0 Without private property 0 Businesses cannot calculate returns without a stable rule of law China has grown rapidly and raised its living standards without a rule of law and as a socialist market economy Rule of Law 1986 General Principles of Civil Law 0 1988 amendment to the constitution legalizing land leasing 0 13 Party congress 1987 private sector as a supplement to the state sector 1988 Law of Industrial Enterprises 0 14 Party Congress 1992 endorsed socialist market economy 1997 Price Law prices set by the market 0 March 2004 Parliament votes to enshrine private property in the constitution Growth Before Law 0 Legal developments catching up with economic developments 0 Legal system does not provide clear protection of property rights 0 Motivation of regional and local officials Employment Growth Stationary bandits and tax revenue Problems of Rule of Law 0 Conflicts between different laws regional vs national laws on land leasing 0 Rules enacted by ministries and local governments Dependence of courts on local government 0 Low status of the legal system 0 Legal system the property of government Contract Law 0 Prior to 1990s individuals and private enterprises were not legal persons and could not enter into contracts 0 Contract Law of 1999 natural individuals allowed to enter into contracts 0 Relational contracting informal social ties
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