State Enterprise Reform in China: Managing the Transition to a Market Economy

By Dodds, Robert F., Jr. | Law and Policy in International Business, Spring 1996 | Go to article overview

State Enterprise Reform in China: Managing the Transition to a Market Economy


Dodds, Robert F., Jr., Law and Policy in International Business


I. INTRODUCTION II. BACKGROUND TO STATE ENTERPRISE REFORMS

A. The Ownership Structure of Industrial Firms

1. State-Owned Enterprises (SOEs)

2. Collective Enterprises

a. Rural Collectives

b. Urban Collectives

3. Private Enterprises and Others

B. The Pre-Reform Command Economy

C. Agricultural Reform and Growing Pressures

on State-Owned Enterprises III. BRIEF HISTORY OF STATE ENTERPRISE REFORMS (1978 TO 1995) IV. REFORM INITIATIVES

A. Autonomy

1. Steps Toward SOE Autonomy

2. Continued Government Interference and Weak

Rule of Law

B. Incentives and Disincentives

1. Profit Retention, Contracting, and

Taxation

2. Dual-Track Price System

3. Bonuses

4. Disincentives

C. Contract Responsibility Systems

D. Corporatization.

1. Objectives

2. The Company Law

3. Legal Theory v. Chinese Reality

E. Reshuffling Enterprise Ownership: Breakups,

Mergers, Enterprise Groups, Joint Ventures,

and Privatization

1. Breakups and Mergers

2. Enterprise Groups and Joint Ventures

3. Privatization V. EVALUATION OF CHINESE STATE ENTERPRISE REFORM

A. Enterprise Reform and Overall Systemic

Transformation

B. SOE Performance VI. COMPARISON WITH EASTERN EUROPE AND THE FORMER

SOVIET UNION

A. The Experience of Eastern Europe and the

Former Soviet Union

B. Advantages of the Chinese Approach

C. Differences in the Conditions Faced By China

and the Countries of Eastern Europe and the

Former Soviet Union VII. CONCLUSION

I. INTRODUCTION

The People's Republic of China (China) and the countries of Eastern Europe and the former Soviet Union are all currently engaged in the transition from command to market economies; however, their different reform programs have So far yielded starkly Contrasting results. In China, reforms that began in 1978(1) have brought unprecedented economic growth.(2) From 1978 to 1992, Chinese gross national product (GNP) grew at an average rate of nine percent per year.(3) In 1992 and 1993, growth accelerated to over thirteen percent, giving China the world's fastest growing economy.(4) In 1994, even with attempts to cool down the economy, growth remained above ten percent.(5) The economies of Eastern Europe and the former Soviet Union, on the other hand, experienced a massive decline in output after their governments initiated shock treatment economic programs in 1990.(6) From 1990 to 1992, the cumulative gross domestic product (GDP) decline was 21.5% in Poland, 44.2% in Bulgaria, 27.3% in Czechoslovakia, 19.3% in Hungary, and 35.6% in Romania.(7) Although most of these Eastern European countries have begun to resume positive growth,(8) they continue to struggle with inflation, unemployment, and difficulties with their privatization programs.(9) Russia faces the same problems and continues to experience negative growth and severe inflation.(10)

Most commentators account for these different results by focusing on the health of the private sector in each economy. They attribute China's success to the growing number of private firms that have thrived despite the government's costly efforts to protect and support inefficient state-owned enterprises (SOEs).(11) Commentators also commonly blame the failures of Eastern Europe and the former Soviet Union on the inability or unwillingness of governments to privatize SOEs.(12)

This model(13) for interpreting economic reforms is oversimplified and misleading. Applied to China, it exaggerates the gap in performance between SOEs and non-state enterprises, and it overstates the contribution of private firms to overall economic growth. …

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