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ECON 336 Naughton - Chapter 12.docx

9 Pages

Economics (Arts)
Course Code
ECON 336
Christopher Green

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Chapter 12: Rural Industrialization: Township and Village Enterprises Town and village enterprises are part of rural industry and have almost played an important role in China, but most of all during the period from 1978 to 1996 TVEs were collectively owned and diverse, changing nearly every part of the Chinese economy TVEs that sprang up catalyzed the transformation of the command economy to the market economy by: o Providing competition to state owned enterprises o Drove marketization in economy o They also increased incomes and provided employed for those released from farms, narrowing the rural urban gap After 1995-1996, TVEs began privatization, but there were some effects in the economy, such as: o Increased product competition o Credit became scarcer o Credit was difficult to obtain Therefore, although some TVEs could survive and adapt, many went of a business, the collective owned TVEs decreased, and their ability to absorb employment from displaced farmers reduced TVEs today are less connected to government and have significantly evolving roles and forms in the economy 12.1 Origins of the TVEs China had a proud history of a traditional economy, where industry was present, process agricultural goods into market goods in a bottom heavy manner However, this changed in the 1950s as China transitioned into a market economy, where rural agriculture took over and the countryside deindustrialized o This is because agricultural production replaced manufacturing, which was now controlled by the government The harmful effects were soon evident as incomes went down, especially for households who previously reaped profits from such sidelines activities o This was particularly punishing in areas where there was little land for agricultural production However, there were a few attempts at re-industrializing rural areas: o In the GLF, one policy was to encourage rural communities to engage to nonagricultural undertakings, but this proved to be disastrous. Because of this, almost all of the commune-sponsored enterprises were shut down by the government post-GLF o There was a second attempt during the Cultural revolution when Mao developed the new leap forward where there were new state sponsored rural industrialization efforts Here, movement out of agriculture was controlled These new industries were tightly connected to the agricultural collectives They constantly exhorted to serve agriculture. This meant to supply producers goods to agriculture This served as a platform for the 1970s industrialization The Five Small Industries were: o Iron and steel o Cement o Chemical fertilizer o Hydroelectric power o Farm implements/tools These capital intensive industries had small factories, and were characterized by large economies of scale and hired only a small number of workers They also benefited from many government subsidies in many sectors Because of this, they did not absorb much of the rural workforce; about 90% still worked in agriculture It had been much more practical to leave these rural industries outside the plan Although such rural industry was a curious offshoot, it had many benefits: o Workers sometimes got paid in work points o These work points were sometimes used for the collective as a whole o The earned revenues would be used by community governments for projects such a public works or to aid agricultural projects Essentially, they were allowed to capture some of the profits from the states monopoly over industry 12.2 The golden age of TVE development Liberalization of the state monopoly, where more additional production of agricultural products could stay within rural markets, increased resources available for nonagricultural enterprises to process goods Therefore, rural enterprises gradually took over the processing work In addition, urban firms were encouraged to subcontract to rural enterprises For many, especially local governments who realized that TVEs were very profitable, TVEs were the only outlet out of poverty and thus defended them vigorously, fending off pressure from state firm monopolies TVE value added grew to become a significant proportion of GDP in 1996 (in addition to the fact that GDP was already growing rapidly) and raised incomes, shrinking the urban rural income gap Creating competition for existing state owned enterprises (SOEs), they drove the entire transition process SOEs had to increase efficiency and create incentive programs in order to survive in the face of the competition from the SOEs TVEs also provided Chinese exporters with new labor intensive manufactures 12.3 Causes of Rapid Growth There are many causes of rapid growth, and there is no single answer, but here are five favorable factors that contributed to their success: 1. TVEs faced factor-price ratios that reflected Chinas true factor endowment Chinas economic endowment can be summarized by: Abundant labor Scarce land Scarce capital The Big Push has an irrationality: it was capital intensive Labor was cheap and credit was easy On the other hand, TVEs had factor prices more consistent with Chinas real factor endowment Compensation of workers was much less in comparison to state enterprise and urban workers They had much less access to subsidized capital, where credit was provided at almost market rates They could also access capital for internal funds, albeit at a high opportunity cost Therefore, the ratio of labor to fixed capital was 9 times more in TVEs than in state run industry Therefore, TVEs could specialize in sectors with low capital labor ratios and thus take advantage of their low wages They faced the right incentives to find profitable business facing realistic factor price relationships, and over the long run, gave them a competitive advantage 2. TVEs were able to share in the monopoly rents created for state firms; rural industries were extremely profitable The total rate of profit on capital was very high (even with tax per unit of capital) This was mainly due to the TVEs ability to create a broader network of supporting services and achieve economies of scale However, in subsequent years, profitability began to decrease What can explain the rapid growth and subsequent declines in profitability?: Since TVEs benefited from the entry into the protected market of state owned enterprises, they captured a share of monopoly profits These monopoly profits existed because of the SOEs access to low priced raw materials However, as these profits eroded because the entry of TVEs, monopoly profits were reduced, and thus there were less monopoly profits to capture Empty niches also accounted for this pattern of profitability, where initially, the TVEs could supply the demand for unmet needs o Examples of this include housing development, after the increase in rural incomes However, as profits lured more firms into a sector, profits naturally decreased 3. Institutional fra
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