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2024 | OriginalPaper | Chapter

3. Monetary Incentive and Property Rights Structure of Socialist Enterprises: China’s Experience

Author : Jun Zhang

Published in: Reform, Transformation and Growth

Publisher: Springer Nature Singapore

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Abstract

During the ten years from the pilot reform of enterprise distribution system in 1978 to the contracted responsibility system promoted across the country in 1987, China's state-owned enterprises have experienced a series of decentralization of power and transfer of profits reforms aimed at expanding the autonomy of enterprise management and encouraging the employees to work hard. All these institutional changes were trying to relax or even free enterprises from the constraints of the centralized, unified revenue and expenditure distribution system, and to give full play to the role of material incentives through setting and expanding the funds that an enterprise is entitled to retain and reward funds while strengthening the ideological education. The fact that statistics shows that the annual corporate profits are increasing is a reflection of the original intention of reform.

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previous chapter Socialist Government and Enterprise: An Analysis from the Perspective of “Exit”

next chapter Privileges Sustained by Central Planning: An Analytical Method of Property Rights

The monetary income of employees of state-owned enterprises is divided into wage income and bonus income. Generally speaking, however, the wage variable is predetermined by the state outside the state-owned enterprises. Therefore, this model regards salary as an exogenous variable and examines only bonus income. Of course, in the reform of state-owned enterprises, if wages and benefits of enterprises are linked together, then this salary has a bonus nature, so it belongs to the research object of this paper.

(US) Egon et al. (1985).

Ward (1958).

Bonin (1980).

“A normal range” is defined as the stage where a marginal product is less than the average product or the average product is decreasing. The term is usually explained in textbooks on microeconomics.

For example, in the Soviet Union in the 1950s, business managers and professionals could earn bonuses which were about 12~19% of their earnings. But in China, according to a survey of enterprises in mid 60 s, although ordinary workers may receive a bonus, a factory director and deputy director and party secretary of an enterprise had no bonus at all. It was only after the reform that the enterprise reward fund was gradually restored.

For discussion of this problem, see Jean Tirole, The Theory of Industrial Organization, The MIT Press, 1990, pp. 35–56.

Detailed discussion can be found in Maurice Bernstein's article titled Economic Reform in Eastern Europe. Other scholars have concluded that in Germany and Romania in the 1970s, bonuses for senior managers had been awarded out of the preferences of higher authorities and were not linked to certain indicators of successful performance.

According to some documents, in some Eastern European countries, the bonuses of workers and staff were drawn from the special departments of enterprise’s wage funds for quite a long time. The reason is that the action of a single worker rarely affects a company's performance, so a typical way of motivating workers is to give bonuses to those who were “role models”.

This is actually a kind of “ceiling” phenomenon frequently encountered by socialist countries in economic reform. The government is likely to constantly revise its original rules in order to reduce objections after hearing opposition from the grassroots. Some scholars call it “changing rules throughout the game.”.

For private enterprises, corporate goals are determined only by the pursuit of top managers, and the workers’ goals have little impact on the firm’s behavior. This is mainly because workers’goals and behaviors are determined by the “labor market” and the competition mechanism outside the enterprise. Therefore, the second hypothesis does not hold true for private enterprises.

Hungarian economist Kornai, in his article titled Efficiency and Socialist Moral Principle, investigated the binding of this moral principle and the choice made by socialist governments between efficiency and fairness of morality, see (Hungary) Janos Kornai: Contradictions and Difficulties, tr. Shen Lisheng, pp. 103– 116, Beijing, China Economic Publishing House, 1978.

The target of this survey is 200 enterprises, of which the large and medium-sized state-owned enterprises are the main ones. On average, 74.5% of the enterprises have adopted the contract system. Among them, the contracting rate of state-owned enterprises is 97.3%. See Hu Tingzhao, Cai Xuchu: Macro Environment, Economic Behavior and Countermeasures in the Development of Enterprises, in Economic Research References, 1989 (98).

Zhang Jun (1989).

Armen Alchian, Harold Demsetz: Production, Information Costs, and Economic Organization. American Economic Review, 1972, 62 (5), 777–795.

(US) Egon Neuberger, William Duffy, et al: Comparative Economic System -- Comparison from the Perspective of Decision Making, tr. by Wu Jinglian, p. 71, Beijing: Commercial Press, 1985.

B. Ward, The Firm in Ilyrian, Market Syndicalism, American Economic Review, 1958, 58, 58. pp.566, 589.

J. Bonin, Work Incentives and Uncertainty on a Collective Farm, Journal of Comparative Economics, 1977, pp.77, 97.L.Israelson, Collectives, Communes and Incentives, Journal of Comparative Economics, 1980, 4, pp.99, 124.

Zhang Jun: Structure of Property Rights, Ownership and Socialist Enterprise System, in Economic Studies, 1989 (8).

Title: Monetary Incentive and Property Rights Structure of Socialist Enterprises: China’s Experience
Author: Jun Zhang
Publisher: Springer Nature Singapore
Book: Reform, Transformation and Growth
Print ISBN: 978-981-9957-11-8

Electronic ISBN: 978-981-9957-12-5

Copyright Year: 2024
DOI: https://doi.org/10.1007/978-981-99-5712-5_3