Understanding China's Economy: from Academia to Reality

Started in late 1978, reform of state-owned enterprises (SOE’s) is a long lasting cause in China. In the paper Competition,Policy Burdens, and State-Owned Enterprise Reform ( AER P&P, 1998,681 citations ), Lin, Cai and Li argue that the key for successful SOE reforms is to create enough a sufficient level of market competition and remove the policy burdens. In a less competitive world, the separation of ownership and controls makes managers’ incentives incompatible with those of the state. Various state-imposed policy burdens are often criticized to give a chance for soft-budget constraints. In 1996, SOE’s employed 57.4 percent of urban workers and possessed 52.2 percent of total investment in industrial fixed assets. However, over 40 percent of SOE’s are losing money. By definition, SOE’s are owned by the state. However, the state needs to delegate their control rights to the enterprises’ managers. The separation of ownership and control is a common feature of any large moder...

One central theme in academic research about China is the existence of state ownership in enterprises. State owned enterprises (SOEs henceforth) not necessarily mean lower efficiency. Rather it depends on market structure. In his paper China's State Enterprises Public Goods, Externalities, and Coase (AER P&P, 1998, 99 citations), Gary H. Jefferson studied this question through the lens of Coase theorem (Ronald H Coase, 1960) and public goods. It is clear that SOEs have negative externalities for the firm itself, the whole economy and non-state sector. The key insight of Coase theorem is the need of clear assignment of property rights and the elimination of transfer costs in order to create an efficient incentive structure. SEOs by definition (owned by all the people), lacks proper incentive structure to monitor the enterprises. SOEs is subject to opportunistic behavior of workers, managers, and local officials, such as stripping by managers, shirking by workers, predatory ...

There are remarkable geographic differences both cross and within provinces in China. What creates the poor areas? Are they catching up? What should government do? In their paper (AER, 1999, 103 citations), Ravallion and Jalan looked at these questions. There is a bunch of evidence on convergence (Raiser 1998; Chen and Fleisher, 1996; Jian et al., 1996). However, it would be too hasty to conclude that China’s poor rural areas will eventually catch up. There is sign of dualistic divergence in the post-reform period between the coastal provinces and much of inland China (Jian et al., 1996). There is evidence for interurban convergence, but also for divergence within the rural economy (Howes and Hussain; 1994, Ravallion and Jalan, 1996; Khan and Riskin, 1998). A  "geographic poverty trap” can arise if there are geographic externalities generated by local public goods, or local endowments of private goods with spillover effects, and that capital is not perfectly mobile. In this si...

Compared with the western world, China seems to be another world.  In his paper (AER, 1997, 124 citations), the most eminent Chinese American economist Gregory Chow summarized four types of differences: private versus public ownership of assets, Western legal system versus Eastern semiformal legal system, individualism versus the collective good, and multiparty versus one-party political systems . Does state ownership or collective ownership (owned by township or villages) predicts worse performance? Not necessarily. The successful experience in China challenges the dogma that only private enterprises can be efficient. As questioned by Milton Friedman, the statement that “most assets in China are publicly owned” is misleading. Though the asset such as land is publicly owned, the enterprise using the land is privately owned. The manager of the enterprise and the land is connected through “leases”, or known as “responsibility system”. Similarly, the government can lease a state ent...