Eco - Structural Change - Industry, Energy and Infrastructure

Chapter 14: Structural Change - Industry, Energy and Infrastructure 

Introduction

1. Growth in Chinese economy, especially the industrial sector has led to increased demands for energy needs
2. Important for China to continue growing but with efficient use of energy

Growth and Structural Change in Manufacturing

1. Introduction 

1. 1949-1978: Focus was only on basic industrial materials (Metals and machinery)

1. But the technology of China's machinery output was lagging behind still
2. Extremely capital and energy intensive (not efficient)

1. Post 1978: China focused on labor intensive low technology sectors.

1. Needed little fixed investments
2. Niche goods for niche markets (buttons and threads)
3. China's distortion of usual sectoral linkages and structural progresses mean that when the light and textile industries declined in 1978, it was not that China had got past the primary sector, it had actually only begun.

1. Didn't move upstream, started 'payback' or revisiting old neglected sectors
2. Light and labor intensive industries began growing (electronics, communications, furniture, plastic products)

1. These sectors are areas that produce more custom based

1. Old traditional sectors like mental and energy declined

1. Open to foreign trade also created new industrial opportunities that were labor intensive in nature

1. Post 1995: New patterns of structure change

1. Overall shift to light diversified manufactures ended in 1995
2. New industries that employed higher technologies emerged and grew (electronics and telecommunications)
3. Industrial deepening finally occurred, several old energy sectors begin growing again (remember: downstream)

1. Regional Growth Patterns 

1. Strong relationship between regional growth patterns and structural change patterns
2. Coastal grew quicker again as they are best positioned to take advantage of policy changes

1. Engage foreign trade, attract foreign investment, absorb world technologies
2. They were better endowed with skills and infrastructure

1. Coastal were also experienced with labor intensive firms and so new firms of that nature came in quickly
2. As much as coastal benefited, northeast were on the other end

1. Disadvantaged by early specialization in heavy raw material industries
2. Now have obsolete factories and depleted resources
3. Did not benefit from entry of small scale firms
4. Dropped in share of national output from 16.1% to 8.6%

Chapter 13: Industry: Ownership and Governance 

Introduction

1. Industrial revolution since 1978
2. Industry has grown at a real annual rate of 15% since 1980
3. Institutional change the main cause of this, movement away from command economy sparked it

Ownership Change: A Diverse Industrial Base

1. Introduction 

1. Privatization had nearly no role in early stage (1978-1993)
2. TVEs were the main guys who entered the market and drove competition and caused ownership changes
3. Ownership has 2 components

1. Right to Income

1. Part of income depends on asset owned
2. Residual income only as you've to pay off all outside parties based on contracts

1. Right to Control

1. Same as above, depends on your share of assets
2. Owner of asset can decide to do whatever he wants with it after all contractual obligations are fulfilled

1. Ownership Change in First Period of Transition (1978) 

1. SOEs began as the big fish in the industry, producing 77% of industrial output.

1. Managers had many targets to meet including welfare, health and political indoctrination and anything the bureaucracy says
2. Not much risk involved, nothing new

1. TVEs entered without the obligations that SOEs faced

1. TVEs ate the share of the industries till 1996

1. Small scale sector companies emerged as the authorities were content to let them independently develop

1. But they could not grow due to lack of property rights
2. Also faced discrimination

1. Government, Collectives & Private formed the tripod industrial sector in a gradualist industrial transition

1. More diverse ownership
2. More market growth
3. But continual government control

1. Ownership Change from 1996 through Present 

1. Company Law put in place in 1994 to provide legal framework on what ownership forms are allowed

1. Framework for 'corporatizing' SOEs

1. SOEs could sell shares to start moving into a hybrid ownership

1. Blurred the lines of ownership
2. Such changes still being worked out till today

1. Reorganization of ownership overshadowed by downsizing of SOEs

1. Policy makers grasped only the large firms to restructure and make them more competitive; and allowed the small firms to go into the hands of the local governments to decide how to restructure them

1. Dramatic difference in which the two paths led to.
2. Central government held firms were large, profitable and had monopoly over energy and natural resources
3. Local government firms were small and very exposed to competition (thus low profits)

1. SOEs began joint ownerships by selling shares but remained under government control
2. Collectives changed more drastically moving into privatization quicker and so collectives began disappearing into private firms
3. Foreign invested firms gained importance but not much, moderate pace.
4. Statistical data at this point is not accurate due to blurring of ownerships and selective recording of firms that are 'above-scale'
5. Select group of huge firms moved from control of government to control by State Asset Supervision and Administration Commission (SASAC).

1. Central SASAC held onto small number of firms that held key roles in key areas such as energy, telecommunication and military sectors
2. Local SASACs set up in provincial level as well

1. Small scale industry important but trends unclear

1. Grew quickly due to privatization and liberalization
2. But fell around year 2000 due to intense market competition

1. New data suggest apparent trend that small private firms are growing up to become large firms (above-scale size)

1. Remaining SOEs (capital intensive) accounted still for a large industrial output but low labor employment.

Chapter 12: Rural Industrialization - Township and Village Enterprises 

Introduction

1. Golden age of TVE: 1978-1996
2. Sprout in rural areas where there was less central control

1. Springboards marketization

1. Brought competition to SOEs
2. Increase rural incomes
3. Absorb rural labor
4. Interesting ownership model

1. Collectively owned = public owned enterprises
2. Such ownership dissolved the monopoly of SOEs.

1. Changed nearly every sector of China's economy
2. Dramatic transformation after 1996: Privatization

1. Most died to more intensive competition and lesser + more expensive credit

Origins of TVEs

1. Household business were important and caused a bottom heavy economy.

1. Flexible

1. Dense web of markets and sideline operations
2. GLF 1950s Command centric control disrupted the link between growing and processing agricultural products as state took everything.

1. Household income declined from areas where large portions of income came from sideline activities
2. Work fell into decay
3. Dense areas can no longer support its population due to small land

1. Switch to communes during GLF but less developed provinces could not make the switch and manpower drain from agriculture was a disaster
2. CR era made some changes to avoid GLF problems

1. Movement of workers out of agriculture controlled
2. Rural industries tied to agricultural collectives and asked to serve agriculture
3. Interpreted that industry should serve agriculture
4. Industry was capital intensive and did not absorb the rural labor force (90% of it in agriculture)
5. Rural industries left outside the plan since it served only a few local customers, not worth integrating
6. Revenues earned by rural industry channeled by local governments to public works and agriculture support projects
7. But small dense network of enterprises, common in Asia, was suppressed in China.

The Golden Age of TVE Development

1. 1979 liberalization of rural industries

1. Relaxation of state monopoly in purchase of agricultural products
2. Since TVEs were collectives, they are ideologically safe enough for urban industries to subcontract work to.
3. TVEs handled their own processing and they were now free to engage in whatever activity they could find a market for.

1. TVEs was seen as the path out of poverty, supported by the government.
2. Most dynamic part of economy from 1978-1995.

1. Employment from 28 million (1978) to 135 million (1996)
2. 9% annual growth rate
3. TVE value added <6% now >26% even though GDP was already growing rapidly itself.

1. Create competition for SOE and started marketization

Causes of Rapid Growth

1. TVEs faced factor-price ratios that reflected China's true factor endowment 

1. Big push strategy focused on wrong input (capital). China was labor rich but capital poor.
2. Government made labor expensive but capital rich
3. TVEs escaped this problem:

1. Worker salaries lesser than 60% compared to urban
2. When cut loose from Maoist Five Small Industries policy, they adapted quickly to available production factors
3. 9x the ratio of labor to capital as compared to SOEs.
4. Competitive advantage due to low wages

1. TVEs were able to share in the monopoly rents created for state firms; rural industries were extremely profitable 

1. High profit margin on capital was 32%
2. Not due only to point 1
3. Broader network of supporting services and achieving EOScale actually caused profit to decline
4. Instead they benefited from protected market (that was created for SOEs). They shared the profits from this market with the SOEs.

1. Early entrants earned the most but supernormal profits fell as more and more entrants came in. (Monopolistic Competition)

1. They also benefited from empty niches that was not covered by the command economy

1. Wenzhou's buttons, ribbons and elastic bands met pent up demand

1. Increase in incomes in rural sector also boosted construction demand

1. The institutional framework surrounding TVEs was favorable to development 

1. Ownership was as a complete whole and local governments had powerful incentives to develop TVEs even though they were not in total control as TVEs were a source of wealth to the local economies
2. 3 ways of local government support

1. Formal taxes were low on rural industry, so money stayed within the rural area 

1. Rural taxes were low, urban taxes were high
2. So they enjoyed price policy without needing to pay taxes
3. But about 30% of profits paid to local governments to support public goods and agriculture

1. These fees were extra budgetary so the local governments did not have to pay upper governments and often re-invested into TVEs for even more profit

1. Local governments acted as guarantors for TVEs, so bank capital was available. 

1. Other socialist economies had problems accessing capitals but not TVEs
2. Local governments also pressured banks to provide funds to firms
3. But TVEs continued to have hard budget constraints - They had to bear the full cost of failures (whole local community) - So more responsible.

1. Local governments underwrote some risks allowing firms to enter production with a larger size and enjoy EOScale.

1. Existing credit institutions were easily adapted to support TVEs 

1. Take advantage of high household savings that skyrocketed around the same time (1980s)
2. Borrowing through Rural Credit Cooperatives increased thanks to greater amount of savings

1. Revival of traditional economic ties meant that proximity to urban areas fostered rural industry growth 

1. Rural industries highly concentrated in the coastal areas 

1. Cities grew with knock on effect for rural places, providing transportation networks, communications markets, technology and other means to boost productivity

1. Because command economy had cut off links between cities and rural areas, the reconnection caused rapid growth of the TVEs

1. 60%-80% of rural output sent to Beijing, Shanghai and Tianjin
2. Facilitated by family relations when rural workers went to cities to work
3. SOEs also subcontracted work to rural areas as it was a way to cut costs.

1. Also less regulation and restriction in accessing rural resources like labor
2. Escape from rigid controls of state sector

1. Organized diversity accommodated growth 

1. TVEs did not have to follow models
2. Highly adaptable with employee owned co operations

1. Very different from bureaucratic SOEs.
2. Adapted to a broad range of opportunities / economic conditions

1. Many were actually private, inked as collectives to escape political pressure. Private companies are very flexible and mostly profitable

1. Conclusion 

1. Command economy did not touch the TVEs much but actually make them profitable due to the systems placed on other sectors (like tax)
2. Rural sector became a good ground for organizational experimentation
3. Entrepreneurial energies of Chinese given ample expression
4. China's huge size played crucial role, even miniature township economies where huge and there was tons and tons of competition

1. Competitive climate might have been adequate enough to overcome government control and distortions.

Transformations of TVEs in the New Century

1. Introduction 

1. Massive transformation in mid 1990s
2. More challenging external environment due to trade
3. Turned private due to intense competition

1. The Changing Economic Environment of TVEs 

1. National policy moved to building markets and regulatory institutions
2. Macro emphasis to control inflation and look into financial independence and accountability for banks
3. Tough environment for TVEs to thrive due to increasing competition
4. Urban firms forced to move into market niches (that the TVEs had exploited) due to more competition

1. Ended up TVEs had even more competition

1. Urban incomes rose and consumers demanded higher quality products than what TVEs could produce. So fall in demand
2. TVEs stopped absorbing agricultural labor until after 1996 but at a very slow rate
3. So they are now less special.

1. TVE Restructuring: The Great Privatization 

1. Introduction 

1. Public ownership of TVE interpreted as a result of a uniquely co-operative Chinese culture (only possible at early stage where local actors had to co-operate)
2. Or as an adaptation to political constraints and insecure property rights
3. With increased competition and labor mobility, local government increased incentives for TVE managers but local governments became a less important component so TVEs went private
4. National ideological constraints (socialist mindset) also relaxed so... everything went private

1. National Policy and Local Models 

1. Taboos against private businesses lifted but local governments get to determine pace of privatization
2. So locals experimented with privatization with different outcomes and mechanisms:

1. Market Conditions & Privatization 

1. TVEs do not usually lay off workers and tried to keep full employment even by under employing workers. Ended up having to lay off some as they moved private
2. Asian financial crisis made China aware of banking sector's importance. Local government's ability to pressure banks for credit declines. Banks ended up preferring to lend to private firms as private firms have collaterals that can be seized if loans go bad.
3. TVE managers moved to private because there was more money there. They might have been 'rich' in the past but that's because they were compared to relatively poorer locals. Local leaders told to focus on policy issues and leave running the TVEs to private sector as well

1. Insider Privatization

1. Insider Privatization 

1. Incumbent managers or government officials begin owning large shares of private firms as compared to other board members, workers, etc.
2. Managers know the firms best and may try to make the firm look worse so it can be purchased at a lower price (when they want to own it)

1. Possible corruption and plundering of public assets

1. But such managers often care about their firms and are usually the ones who started the firms in the first place
2. Because China doesn't want to use the word 'privatization', lines are blurred and so is transparency of ownership and operations
3. Thus, high variations in the process of privatization and restructuring

1. Local Variation in Privatization Process 

1. 3 notable experiments

1. Joint Stock Co-operatives. Workers allocated purchase rights for shares but not equal, managers can get 20x more. Workers can sell their shares after a year. Shares trading
2. Or government retain stake in firm trying to operate joint venture with new manager. Makes it hard to tell if the firm is actually private
3. Or privatization without a tail. Local governments give soon-to-be private buyers a choice between buying out the entire TVE at a high price or at a low price but pay government a share of profits for the next 5-10 years. So if the buyer feels that profits will be high, he will buy it out (so that's without a tail-profits tax). This is actually the preferred manner of purchase

Emergence of New Forms of Rural Industry in the 21st Century

1. Not just limited to privatization
2. Weaker ties to government
3. TVE markets are more and more interregional
4. Turning from being close to cities to becoming like cities (densely populated with road networks)
5. Emergency of highly competitive industrial clusters

1. High number of small firms contributing to single specialized product
2. All firms are competing against each other maximizing the MPL and MPK in narrow activities
3. Markets help to balance between flexibility and long term co-operation between firms
4. Such clusters also have appeared in Brazil and Italy

Chapter 6: Growth & Structural Change