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2012-11-27_Lecture#11-State Owned Enterprise Economy.docx

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Political Science
Lynette Ong

Ernie Tam 2012-11-27 Lecture#11-State Owned Enterprise Economy  SOE are divided into National level (huge SOEs) for instance, major steel companies, and national banks. These SOEs are ruled by National Chinese government. 1) China Petroleum corporations  Provincial Level SOEsowned by provinces and large in nature  Prefecture level SOEs  Municipal Level SOEs (shanghai and Beijing as example)  County Level SOEs (even though small can have a couple hundred people employed)  At the beginning of this course, We talk about how China had a gradualist approach 1) Agriculture reform into SOEs until second decade in the mid 1990s. 2) In this lecture, we will look at WHY SOEs are so politically arduous.  There are three phases of SOEs: 1) Collectivist pre-reform period Late 70s and early 80s. Dan Wei system (working Unit)Pension was provided by Dan Wei as well. (provides a sense of identity)  Dan Wei system played multiple functions: political/administrative body that extended party control to the urban grass roots level. 1. Indoctrining party ideology to its workers.  Production Unit: to centrally planned economy. Production quarters and given necessary resources from budget to reach production targets an guaranteed a certain amount of $ for goods. 1. StateDan Wei (Gives Dan Wei quota and raw materials)Sells back to state 2. No FREE market and gets everything from the state. 3. Profits that Dan Wei makes must be given back to state authority.  Economic/Social WelfareHousing, healthcare, pensions to members of this community.  People who work in the Dawei are taken care of by the Dai Wei. 1. “Cradle to grave” system  Collective identity Aside from collective identity, the system also impeded labor mobility. Since social welfare was not portable across Dan Wei, then it forces people to remain. (you are entitled for pensions only after working for the companies for 25 years…if you jump ship to a new firm, then you lose all your benefits) 1. Not a meritocratic system but rather a seniority one. 2) Post Reform period 1978-1992dual track system  One price for the state and one for the market  By the late 80s, the shares directly made by companies were significantly higher. You have state planning constant and the market pricing larger and larger.  In the initial years, most of the products needed in the market were produced by state but overtime while the state plan remained constant, market grew over time. So the economy gradually grew out of the plan. (This is for TVEs) Ernie Tam 2012-11-27  It really depends on the industry. Heavy industries were non TVEs. The SOEs dominated heavy industries. For consumer durable like food and clothing, textiles etc…they were controlled by TVEs  The market supplies for these products were filled by TVEs. They were small market and producing light manufacturing goods.  Contract Responsibility system Idea similar to household responsibility system 1. Successful in lifting living standards of rural citizens. Beginning in the 1997, the contracts were introduced so that the director of the SOEs signed the contracts which linked enterprises with profitability. If an enterprise becomes more profitable, its employees would in theory get better pay in terms of bonuses etc… 2. This system has provided incentives for good performance. It has however failed bad performance. And did not do a great deal of improving for SOEs. 3. Soft budget constraint If my salary is $5 K a month, I need to pay 2 K for mortgage, 1 K for products, 1 K for vacay, 1K for food, and 1K for something else. (which exceeds 5 K) o If I have a friend who I can borrow from relentlessly, then I’ll be operating under a soft budget constraint. (concept of a “sugar daddy”) 4. Opposite of this is a hard budget constraint 5. All the SOEs have a “sugar daddy” and that is the state/banking system. That is why the budget constraint that it is a soft budget.  SOEs can continue making losses and won’t be held accountable. If you think about why Contract responsibility system as household responsibility system, In the rural system, there is a hard budget constraint 1. If rural household spend more than they can make, they cannot make their ends meet.  Decentralization of system In the 1980s diminished the central government’s fiscal capacity. Tax revenues were retained and collected by local governments.  Up until the 1980s, the central government funded the SOEs by providing direct subsidies and since they have so much revenue, they can fund SOEs no problem.  In the Mid 1980s, State owned banks were created to finance the SOEs instead of central government providing subsidies. State owned banks were now responsible for providing the funds to SOEs.  CREATE DIAGRAM FOR THISthe state used to provide direct subsidies to the SOEs (up until 80s). In the 80s with falling levels of state revenue, the state owned banks were created to provide “soft loans” to the SOEs. There were 4 big banks with designated functions. Ernie Tam 2012-11-27 1. You have the ICBC In charge of lending/depositing in cities, (industrial/commercial bank of China). People living in the cities would deposit money into this bank. 2. ABCRural areas (agriculture bank of china) 3. Construction bank of China (CBC)Projecting/managing housing loans 4. Bank of China (BOC)handling foreign exchanges/tr
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