Political Economy Reforms in China

Political Economy Reforms

• The Chinese Communist Party (CCP), State Council, National People's Congress (NPC), and Central Military Commission (CMC) have overlapping political structures.
• The Party is superior to the State, holding ultimate power and operating with two constitutions.
• Economic policy is delegated to the State Council, which acts as the government.
• Post-1978, power became concentrated in the hands of a few leaders like Deng Xiao Ping and Chen Yun.
• Deng and colleagues initiated economic and political reforms to prevent the concentration of absolute power.
• Reforms included eliminating the position of Party Chairman, replaced by the General Secretary of the CCP, separating the Party from the government, removing the Party from administrative duties while allowing it to retain supremacy.
• A new division of responsibility emerged between the Party and government, as well as among individuals within collective leadership.
• Zhao Ziyang was made premier to run the government and was simultaneously the first party secretary.
• A key economic challenge was to extricate the economy from command-economy institutions.
• A key political challenge was to mobilize support for reforms without alarming superiors.
• Zhao managed the first phase of reforms, removing planned economy institutions, and was subordinate to Deng and Chen Yun.
• Economic policymaking was delegated to the Premier and implemented by government agencies, yet the Party maintained ultimate power.
• Division of responsibility was instigated by Deng to prevent the concentration of absolute power.
• Zhao Ziyang favored cautious, consensual decision-making, focusing on agriculture and industry and using a dual-track strategy.
• Zhu Rongji favored rapid, personalized decision-making, strengthening institutions of the market economy with market unification.
• Reform was top-down led, with new roles between the Central and local governments, and Zhu Rongji shaped the reform, which reflected the new political economy.
• Key features of the New Institutional Framework included centralized resources.
• Local governments were allowed to retain resources and had a greater voice in determining reform outcomes.
• The central government focused on policymaking, while local governments focused on entrepreneurial activities and local growth.
• Economic policy was shaped by institutions and the personal authority of leaders, with the Premier heading economic management.
• Deng and Chen Yun held equal personal authority, while Zhao Ziyang, as CCP secretary, was subordinate to both.
• Policy needed to be cautious with passive consensus, which led to the effects of first phase reforms.

Political Events and Second Phase Reforms

• The Tiananmen Square Massacre led to a period of conservative ascendancy, during which SOEs were downsized, dual-track policy continued, and cultural environment was relaxed.
• Deng's Southern Tour visited SEZs and profit and privatization were no longer taboo.
• The CCP endorsed a socialist market economy governed by small group policies, led by Xi Jinping.

Rural Reforms

• Advantages of household operations include harmony of interest, low transaction costs, quick decision making, risk-bearing capacity, simplified income distribution, and low management costs.
• Debates occurred in socialist countries regarding large-scale vs. household operations, but family farms/households have superiority.
• Two development paths emerged after 1952: New democracy to socialism, which involved farmers being able to buy/sell land, hire labor, and borrow money; contrasted with Socialism.
• Socialism, advocated by Mao Zedong, transitioned to socialism and planned economy, with heavy industry development.
• Socialism won out from cooperatives to People’s Communes.
• The commune system of farming was ineffective due to loss of freedom and claim to surplus labor for farmers as well as inefficiency, long agricultural cycles, and difficulty in measuring effort or output.
• Experiments before 1978 failed due to incompatibility with land ownership and classless society goals.
• The Zhejiang Experiment (1956) paid farmers according to output but was labeled capitalist.
• The 1959 Experiment coincided with an anti-right campaign.
• The Anhui Experiment (1962) was supported by farmers.
• From pre-modern traditional society, state landownership was the foundation for smallholder family farm economy.
• The Qin and Han dynasties owned Land with state taxes imposed, lords collected rent, and separated ownership from land-use right with contracts .
• The Tang dynasty had sophisticated land tenancy.
• All land was rented to farmers.
• The Ming dynasty had a permanent tenancy system with field base right and subleasing, capital investment to improve land.
• A Three-in-one setup of agriculture included the integration of land, irrigation, and farming.
• In 1955, private property was eliminated, with all land owned by village collectives.
• The household contracting system separated land ownership from land-use.
• Farmers granted land use right during contract period with village collective.
• Contracting Output Quota to Household (1978 reform) was a Combination of small scale household operation with large scale land ownership
• Benefits of Contracting Output Quota to Household was: avoids fees, prevents free-riding, party of the contract turns from work groups to households
• The most acceptable and convenient system was land ownership remained with collectives

Rural Reform Limitations and Solutions

• Limitations of rural reform included preventing agricultural production on a large scale.
• Other existing problems of rural economy included stagnant rural economy, poor rural residents, and backward rural residents.
• No legal or permanent land-use right for farmers.
• Land contract law Laws guarantee farmers’ rights of contractual operations.
• The major systems for production included job contracting to each work group, output quota contracting to each household and responsibility contracting to all.
• The impact of rural reforms on development of TVEs: emergence of new rural labor supply.

TVE Reforms

• TVE reforms are related to agriculture and processing
• Historical antecedents included commercialized countryside.
• Attributes of TVEs: Government controlled production decisions and sourced raw materials from farmers and planned resource allocation. Promoted industries were poor substitutes.
• 1978 Reforms freed to allocate labor time, increased grain output, reduced time spent in farming and removed labor supply restraints.
• The Golden Age of TVEs increased competition for SOEs.

SOEs

• During the planned economy SOEs were managed through different departments and lacked symmetry between power and responsibility.
• The non-state companies that formed were small and recreated with the lifting of entry

SOE Ownership

• There were penalties when trading off efficiency and equity and small efficiency was lost if incentives were right
• To fix that: Improvement of efficiency, incremental reforms and disruptive privatization.
• Governance solutions: Autonomy and incentives to increase efficiency, Increase of oversight to control managerial slack and corruption
• New policy consensus was public firms should focus on profits and there should be clear focus on income/profits over public interest
• Problems with SOE: Corporate governance issues need addressed and SOEs are not allowed to fail so there are soft budget constraints that get in the way of them increasing in value