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Chapter 15

ECON 336 B & R - Chapter 15.docx

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McGill University
Economics (Arts)
ECON 336
Christopher Green

Chapter 15 (B&R): Chinas Industrial Development Introduction The main objective of the chapter is to outline the central achievement of Chinese industry: the emergence of mechanisms for extending industrial capability o Such an achievement is measured by Chinas ability to sell to overseas markets to a multitude of products and sectors This has only been achieved by a handful of economies and emphasizes that Chinas economic boom is permanent rather than temporary Chinas industry before reform was already substantial, but it lacked quality in goods Now, China is accelerating its value added and labor productivity, only lagging behind a few other east Asian countries now Globalization and further variation in the products it now produces than range from machinery to equipment have increased its prominence as an exporter of manufactures. The main aspects of their success does not necessarily lie in their deregulation or privatization, but in the creation of completion, expanded entry and efforts to improve performance The evolution of Chinas industry should follow closely that of other nations and globalization should certainly accentuate this Many features of Chinas economy derive from its unique history and institutional structures This essay focuses on two questions: o What are the consequences of Chinas substantial, though incomplete, shift from plan to market? o What is Chinas progress in creating a technologically advanced manufacturing sector? Chinas Industrial Reform Pre-reform system Before reforms, Chinese industry was almost all state owned and urban, where SOEs employed most and had the most output The rest of the industry in China was in smaller collective forms located in both rural and urban areas, mostly owned by local governments o These grew slowly and were mostly forced to serve agriculture o Urban collectives concentrated on light industry o Rural firms manufactured producer goods that were difficult to obtain during the pre- form period All resource allocation was control by government and profits were also remitted to fiscal authorities as their revenue Central planning begin to have less of an influence after 1960s, where governments at the provincial level or below had more control o This decentralization create fragmentation at regional levels, as major investments were undertaken with limited opportunities for interregional trade Chinese planners emphasized quantity over quality and encouraged vertical integration to reduce reliance on unreliable suppliers Although industrial production expanded, there were not many improvements in quality and productivity Industrial Reform Industrial reform can be divided into 2 periods: o The first 15 years, where expansion focused on incentives and market forces on the allocation of resource flows o After the mid-1990s, reform focused on restructuring of resource stocks, which including many layoffs of redundant workers and privatization of state controlled enterprises The initial reform had two key components: o Increasing incentives and autonomy, both lacking before o Introduction of the dual track system, where inputs and outputs were partitioned into plan and market segments By the start of the second reforms, almost 78% of goods were transacted at market prices The first reform also had many elements of entry of firms, where the important emergence was in township and village enterprises (TVEs), owned and controlled by local governments o They drew labor from those in agriculture o They could now utilize more inputs available from the market through the dual track system There were also increases factorable treatment of FDI and reduction in tariff barriers, influencing coastal and SEZ regions Therefore, SOEs experienced considerable competition from both TVEs and foreign-linked firms Initial stages had non-state sectors producing larger shares of output and exports then expanded rapidly, with foreign invested firms (FIFs) and TVEs contributing Although debatable, generally productivity gains were larger outside the state sector Under pressure, state sectors moved toward market oriented operations, but change was modest and uneven During the second reform, facing increasing pressure and competition, redundant labor was laid off (downsizing) and state ownership declined Although employment in China has either declined or stagnated, output, quality and labor productivity have increased substantially since the mid-1990s FIFs have also expanded fast, employing more workers, and there has been accelerating growth in domestic private manufacturing Foreign-invested enterprises (FIEs) have been very important, where: o They have absorbed most of the FDI o Have significant amounts of exports than domestic counterparts Nonetheless, FIEs also have 2/3 of the their sales go into the domestic market They have stimulated domestic firms to compete in the export market Because of their movement into the global business community, they have increased efforts in the direction of standard international practices However, there is still a legacy of the command economy in China, where frequent government intervention, control of high-level personnel appointments and SOE credit dominance have been persistent Role of Market Forces in Chinas Reformed Economy While there are still barriers to domestic trade, there is evidence that this form of protectionism is slowly declining There are many elements of this, such as: o Expansion of logistics o Branding o National advertising o Cross regional completion and mergers in the press Therefore, the cellular economy perspective is slowly eroding Analytical Framework (optional, I think) Introduction The demise of central planning, relaxation of over of international trade and investment, and improvements in logistics stimulated entry, increased competition and deepened market integration Chinese companies steadily faced increasing financial pressures and this presaged the decline and disappearance of many weak firms and redundant workers There are two main themes that are explored: o The shift toward a market economy over the last 2 decades o How far has China come to being closer towards that of industrial economies Some preliminary remarks (largely optional, I think) Definition of capability, in two steps: 1. The firms revealed capability a. The range of products which it produces b. For each product line, it refers to the unit variable cost of production and the perceived quality of the product. This quality can be improved through improving the generally attributes of the product, whether through R&D or through reputation, brand image, etc. 2. The underlying capability a. Consists of elements of know-how held collectively by groups of people comprising the firm b. These elements of know-how will be important in producing products not made by the firm and enhance the ability of the firm to take advantage of new opportunities over time c. Therefore, it can be a measure of adaptability There will be some threshold of capability, where blow this level, no firm can survive Any potential entrants must achieve this level of capability There are also two key characteristics that aff
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