Abstract
China’s economic transformation demonstrates that the paths of transition and development are broader and more varied than generally predicted by economic research relating to other countries. Research focused on China’s experience contributes to the scope and richness of the economics literature in notable ways. The China literature illustrates and makes more vivid established insights and paradigms, including those of Nobel laureates whose work relates to development and institutions. Furthermore, China is inspiring new insights and understanding regarding the central role of institutions. This paper, in particular, focuses its review on the literature that expands our understanding of the process of induced institutional change.
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Notes
In its recent revision of relative purchasing power parity measures of GDP, the World Bank estimates that China's GDP is 40% less than previously reported by the Bank. http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21589281~pagePK:34370~piPK:34424~theSitePK:4607,00.html. This revision adjusts China's PPP measure of GDP to somewhat less than one-half that of the US. However, at the time of the writing of this paper, China's exchange rate is widely believed to be substantially undervalued in relation to the US dollar.
I believe that the last comprehensive review of the literature relating to China economic reforms was conducted by Perkins (1988).
While these data sets are unusually detailed, significant aspects of these data have yet to be fully reconciled with those of other nations. Also, see the NBER website http://www.nber.org/~confer/2007/cwt07/cwt07prg.html for a workshop on this topic as well as the websites of Robert Feenstra and Chad Bown for information on current data and recent research using these trade data.
See, for example, Brandt and Rawski (2008), a compilation of research papers resulting from a broad effort to match specialists in functional areas, such as economic transition, agriculture, and industrial organisation with their counterparts who specialise in China.
These include journals published in Japan, such as the Journal of Chinese Economic Studies and the Journal of Econometric Study of Northeast Asia.
The count of economists with Chinese surnames cannot distinguish among the country or region of origin, for example, Mainland China, Taiwan, Hong Kong, the US.
According to Williamson (2002), who is generally viewed as the author of the Washington Consensus (Williamson and Miller, 1987), the doctrine consists of ‘ten reforms that I originally presented as a summary of what most people in Washington believe Latin America (not all countries) ought to be undertaking as of 1988 (not all times).’ Subsequently, the Washington Consensus became widely viewed as the intellectual foundation for the shock therapy proposed by economist for the transitional economies of Eastern Europe and the former Soviet Union.
Also see Fischer and Gelb (1991) and the World Bank (1996) for accounts of blueprints and sequencing across key dimensions of the orthodox reform agenda.
According to the China Statistical Yearbook 2006 (NBS, 2006, Ch. 15, Industry, Explanatory Notes on Main Statistical Indicators), ‘Collective enterprises constitute an integral part of the socialist economy with public ownership.’ Political sub-jurisdications, such as municipalities, towns, and villages, generally own a substantial share of such collective-owned enterprises.
John Williamson, ‘The Washington Consensus as Policy Prescription for Development’ (http://info.worldbank.org/etools/bspan/PresentationView.asp?PID=520&EID=257).
Perkins and Rawski acknowledge the fundamental role of productivity growth in driving the measured contribution of capital: ‘The rise in the contribution of capital did not occur independently of the rise in productivity… . Thus it was the jump in productivity growth (after 1978) that led to a higher GDP growth rate that made possible the greater contribution of capital’ (p. 19).
In the spirit of endogenous growth theory, the emphasis on productivity growth does not preclude the possibility that China's high rates of savings and low population growth have themselves contributed to productivity growth. Specifically, they may have affected productivity by promoting human capital investment, which may increase returns to scale at the firm level or facilitate technology spillovers from the broad economy to individual firms (see Romer, 1986). The point is that to the extent that high savings rates and limited population growth have contributed to the sustained growth of living standards, they have done so through their indirect contributions to productivity growth.
See Zhang et al. (2005) for an account of the sources of China's rising returns to education.
Naughton (2007, Figure 9.1) shows two substantially different estimates of the decline in poverty – an official Chinese estimate and a World Bank estimate. However, both involve more than 25% of China’s rural population escaping poverty status.
For China, Hsieh and Klenow (2007) estimate potential gains from allocative efficiency to be in the vicinity of 40%; for India, the potential gains are close to 60%.
Another example analyses the implications of alternative assignments of property rights, such as the right of the lender to monitor for the purpose of mitigating problems associated with asymmetric information in credit allocation, for example Dewatripont and Maskin (1995).
Ruttan particularly focuses on a case study of institutional innovation conducted by Hayami and Kikuchi (1981) in a Philippine village involving changes in technology and resource endowments associated with the introduction of high yielding varieties of rice and a national irrigation system. These changes led during 1966–1976 to a shift from share tenure to lease tenure and to a dramatic increase in sub-tenancy arrangements (p. 362).
Guo (2005) provides a broad context for understanding the certain advantages associated with the relative ‘backwardness’ of China's institutions.
Bowlus and Sicular (2003) also show that the absence of land markets that function across villages contribute to both labour shortages and surpluses.
See Jefferson's (1998) characterisation of the state-owned enterprise as a public good.
See Jefferson's account of the problem of markets in labour quality within China's SOEs, ‘Missing Markets in Labor Quality: The Role of Quality Markets in Transition,’ http://people.brandeis.edu/~jefferso/res.html.
During the academic year 1986–1987 when the author was teaching in the School of Economics at Wuhan University, he observed that the graduate students were not quite as diligent as he had anticipated. They explained that this was due to the fact they anticipated assignments under the labour allocation system that were not likely to require them to use their advanced economics training.
In 1985, the average wage of staff and workers in SOEs was 0.845 that of the firms operating under other types of ownership. From 1985, the relative SOE wage fell year-on-year until 1993 when it stood at 0.712, a 16% decline over 8 years. Thereafter, as managers acquired greater rights to set compensation and furlough workers (ie xiagang), the relative wage of SOE workers began to rise. Jefferson et al. (forthcoming) document a rapid rise in the relative productivity levels of SOEs from 1998 to 2005.
See the survey of Jefferson et al. (1999) of differential assignments of managerial control rights in samples of SOEs and TVEs.
Bai et al. (2000) argue that in the absence of an umbrella safety net, such as unemployment insurance, SOEs continue to play a critical transition. Because independent institutions for social safety are lacking and firms with strong profit incentives have little incentives to promote social stability due to its public good nature, SOEs are needed to continue their role in providing social welfare. Charged with the multi-tasks of efficient production as well as social welfare provision, SOEs continue to be given low-profit incentives and consequently, their financial performance continues to be poor.
Cao et al. (1999), Li et al. (2000) and Li (1997) all find empirical evidence to support this view.
Lardy (1998, 2002) documents these losses, chronicles the government's attempts to reform the banking system, and describes the rule changes associated with China's accession to the WTO.
See recent estimate of returns to investment by Bai et al. (2006) and Jefferson et al. (2006). Both find increasing return to capital in the China’s secondary (industrial) sectors.
Mao’s decentralisation movement accompanied the Great Leap. In 1958, the number of SOEs subordinated to the central government was reduced from 9,300 in 1957 to 1,200 in 1958 (Qian, 2002, p. 25). Recentralisation followed the Great Leap disaster. The second wave of decentralisation (1970) shared many features of the 1958 decentralisation but went even further. Qian (p. 27). The number of SOEs under central government supervision fell from 10,533 in 1965 to just 142 in 1970.
These bundles of regional production capabilities are documented in Naughton (2007).
Young (2000) argues that substantial barriers to trade exist between Chinese provinces. Other research (eg Bai (2004) and Long and Zhang (2008)) since 1990 find a clear trend toward greater regional specialisation.
Chinese policy makers refer facetiously to the ‘10+1’ policy paradigm, that is, ‘If province X will give you those 10 incentives, then our province will give you those 10 plus this one more.’
The trade ration is defined conventionally as (imports+exports)/GDP.
See Naughton (2007), Ch. 1, ‘Legacies and Settings.’
Wu (2000) describes the transformation of a mental model associated with the Fourth Plenum of the 15 CCP National Congress (1989). According to Wu, that Congress ‘rejected the Soviet-style view that the quality of the socialist state was proportional to the size of the state sector..(The Congress called for) an economic system based on the principle of “Three Benefits”: …the domain of the state system shall be narrowed; develop multiple forms of public ownership; encourage the development of the non-public sector such as private enterprises.’
Consistent with the Bromley-Yao imagery, Wei (1997) assigns to his reform agents the responsibility of delegating ‘different parts of a reform program into groups. Within each group, there is strong interdependence. Across groups there is no strong interdependence’ (p. 1,236). The gradual reform process entails the implementation of rapid, simultaneous reform within interdependent groups, while coordination across groups may proceed more slowly.
Josef Brada inquires how China ‘evolved from a government that gave us the Great Leap Forward, the Great Famine, and other economic and social disasters…to one that seems almost Socratic in its steering of economic reform.’ Brada continues, ‘…this is not the message of the classical public choice school of thought like Tullock and Olsen.’ Brada's question goes to the heart of the question concerning the nature of the Chinese leadership's objective function that underlies the ‘generally stable, pragmatic political environment,’ which is the focus of this section. I leave it to another to identify the objective function of the Chinese leadership and CCP that answers Brada's question.
Elements of this argument are set forth in Jefferson and Zhang (2007).
In spite of this assessment that a process of political transition or blowback is underway, the view of Wu (2000) is not atypical: ‘The key feature of the old system is the unification of the three entities – the party, the government, and the economy…. The interrelationship that arises from this unification is deep and complicated….(Soviet) people, particularly the social and political elites, have tremendous interest in maintaining the old system….As such the reforms face enormous resistance.’
See, for example, Rawski (forthcoming) regarding China's culture, market, and entrepreneurial legacies. Roland (2004) notes that Sachs and Woo (1994) attribute China's recent high growth rates to the country's ‘backwardness’ in the immediately preceding period. Seen in a long-run historical perspective, however, Roland argues that China has been anything but backward. For example, Chinese agriculture, which was the initial engine of growth early in the transition, has always been among the most productive in the world. I therefore suggest that one of the clues to the success of China's transition is not its ‘backwardness’ at the onset of the transition but the inherited high level of knowledge and culture relative to its economic performance.
Likewise Sala-i-Martin (2002) shows that as China’s middle class grows and graduates into the ranks of the world’s relatively high income population, China, by itself, has the capacity to reverse this convergence trend and become a key source of an increasing maldistribution of global income.
Japan provides an interesting case of a country having received accolades for its special economic, institutions, culture, and achievements. While this admiration diminished as a result of the nation's apparent shift to a low-growth trajectory, Japan does retain its distinctiveness with respect to the Toyota system, involving just-in-time inventory, industrial policy, and close ties with suppliers (see Ezra Vogel, Japan as Number One , 1979).
See Jefferson et al. (2006) who document distances between the technology frontiers of China and the US–Japan and internal patterns of productivity differences.
Of course, as in the US, certain pollutants, such as sulphur dioxide and nitrous oxides, may exhibit a turning point, while others, such as carbon emissions, do (have) not. As Naughton reports (2007, p. 490), ambient air quality has improved in many Chinese cities as gas and electricity use has substituted for coal for cooking and heating in many homes; also, leaded gasoline has been omitted. At the same time, as automobile use surges, concentrations of nitrous oxides have increased.
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Acknowledgements
I appreciate the helpful discussions and insightful comments provided during visits to the Chinese Center for Economic Studies at Fudan University, the Chinese Center for Economic Research at Peking University, and the Center for Economic Development Research at Wuhan University. In addition, I was greatly assisted by comments and suggestions from Josef Brada, Loren Brandt, Albert Hu, Albert Keidel, Ma Ying, Dwight Perkins, Peter Petri, Louis Putterman, Thomas Rawski, Su Jian, Xu Chenggang, Yao Yang, Zhang Jun, and Zhang Yifan. Research support provided by the US National Science Foundation (award # SES-0519902) is also gratefully acknowledged.
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Jefferson, G. How Has China's Economic Emergence Contributed to the Field of Economics?. Comp Econ Stud 50, 167–209 (2008). https://doi.org/10.1057/ces.2008.14
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DOI: https://doi.org/10.1057/ces.2008.14