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2024 | OriginalPaper | Chapter

5. The Growth of China's Industrial Output Since the Reform: Double-Track Pricing and Border Competition

Author : Jun Zhang

Published in: Reform, Transformation and Growth

Publisher: Springer Nature Singapore

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Abstract

The chapter delves into the growth of China's industrial output since the reforms of the 1980s, focusing on the dual-track pricing system and border competition. It explains how state-owned enterprises maintained their dominant position despite decreasing profitability and increasing economic efficiency. The text also highlights the rapid growth of non-state sectors, particularly rural and urban collective segments, which surpassed state-owned sectors by 1992. The author introduces a modified model of dominant sector theory to analyze the production behavior of state-owned sectors under dual pricing. The model considers planned constraints, profit maximization, and the impact of subsidies and price regulation. The chapter further discusses the competitive fringe effect, the role of local governments in rural township enterprises, and the comparative analysis of China's reform with Russia's 'Big Bang' approach. It concludes by emphasizing the significance of China's dual-track reform strategy in maintaining industrial output growth during the transition period.

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

next chapter Technology, Classification of Scale and Industrial Organization: Why Can China's “Large Enterprises” Make Higher Profit Margins?

This standard model can be found in any textbook of microeconomics.

The argument about the relationship between the average revenue \((AR)\) and the marginal revenue \((MR)\) is very simple, which can be found in any textbook of microeconomics.

In the late 1980s, in response to macroeconomic problems, the government once more carefully controlled the pricing power of the enterprise, especially the control over the price ceiling of production goods. In the most stringent time, 90% unplanned price-limited production of steel and non-ferrous metal was under control. See Chen Gongyan, Qiao Gang: Formation of Product Market and Price Reform, in Fang Gang, Li Yang, Zhou Zhenhua: Toward Market (1978–1993), Shanghai, Shanghai People's Publishing House, 1994.

“Competitive fringe” is a standard concept frequently used in the theory of industrial organization.

Naughton (1994a, 1994b, 1994c).

The dual price system in the state-owned sector clearly provides favorable conditions for non state-owned sectors to enter the market. Lin Yifu and others in Chinese Miracle: Development Strategy and Economic Reform also mentioned this view, believing that in the 1980s the increasing resource allocation and price system were intended to improve the allocation efficiency of products and materials of state-owned enterprise, yet they also provided the conditions for township enterprises to enter the market. The survey done by the Development Office of the Institute of Economic Research of the Chinese Academy of Social Sciences (1987) shows that 72.1% of the main raw material supplies of township enterprises was purchased from the state-owned sector at a high price. In addition, we should also see that the production liberalization outside the planning of state sector provided the township enterprises with another way to enter, that is, the “joint venture” between the two sides. Township enterprises, especially those located in developed areas and urban fringe, were often allied with state-owned enterprises which became an important way for state-owned enterprises to expand their production capacity and increase profits. See Center for Economic Research, Fudan University: Enterprise Reform and New Path of Development –- A Collections of Surveys of Horizontal Integration of Industrial Enterprises in Shanghai, Shanghai, Fudan University Press, 1988.

(Hungary) Kornai (1985).

To be exact, Kornai did his comparison in his paper by quoting the data from Schweitzer’s book Scale of Enterprise.

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Nee (1992a, 1992b).

The Whiting (1993).

Weitzman and Xu (1994).

Naughton (1994a, 1994b, 1994c); Jefferson, Rawski (1994).

Naughton (1994a, 1994b, 1994c).

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Marx (1975).

For example, in the case of Russia, the production of some important means of production has fallen particularly badly.

Mackinnon made a deep analysis of the consequences of Russia's complete liberalization program. See: McKinnon, R., Gradual versus Rapid Liberalization in Socialist Economies: The Problem of Macroeconomic Control, Proceedings of the World Bank Annual Conference on Development Economics, 1993, the World Bank, 1994.

Ross (1994).

Thanks to Dr. J. Donnely of Washington State University for providing me with this document.

I would like to express my gratitude to Dr. Zhou Huizhong for offering me his paper. See Zhou, H., Behavior of State Enterprise in a Hybrid Economy with Imperfect Market, Economic Systems, 1994, 18 (1).

Zajicek and Heisler (1995).

From the title of their paper, it is clear that the author is clearly commenting and discussing Sachs’article, The Economic Transformation of Eastern Europe: The Case of Poland.

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Naughton, B., What Is Distinctive about China’s Economic Transition? State Enterprise Reform and Overall System Transformation, Journal of Comparative Economics, 1994, 18.

Nee (1992) Discussed the relation between township enterprise and local government in detail. See Nee, V., Organizational Dynamics of Market Transition: Hybrid Forms, Property Rights, and Mixed Economy in China, Administrative Science Quarterly, 1992, 37 (1).

Nee. V., Organizational Dynamics of Market Transition: Hybrid Forms, Property Rights, and Mixed Economy in China, Administrative Science Quarterly, 1992, 37 (1)

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Zhou Zhenhua: Cultivate the Main Body of the Market Economy: Development of Non-State Economy and Reform of State-Owned Economy, in Fang Gang, Li Yang, Zhou Zhenhua: Toward Market (1978-1993), Shanghai, Shanghai people's Publishing House, 1994.

Title: The Growth of China's Industrial Output Since the Reform: Double-Track Pricing and Border Competition
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_5