Published titles include: Derong Chen CHINESE FIRMS BETWEEN HIERARCHY AND MARKET. Dong Fureng INDUSTRIALIZATION AND CHINA'S RURAL MODERNIZATION

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1 STUDIES ON THE CHINESE ECONOMY General Editors: Peter Nolan, Lecturer in Economics and Politics, University of Cambridge, and Fellow and Director of Studies in Economics, Jesus College, Cambridge, England; and Dong Fureng, Professor, Chinese Academy of Social Sciences, Beijing, China This series analyses issues in China's current economic development, and sheds light upon that process by examining China's economic history. It contains a wide range of books on the Chinese economy past and present, and includes not only studies written by leading Western authorities, but also translations of the most important works on the Chinese economy produced within China. It intends to make a major contribution towards understanding this immensely important part of the world economy. Published titles include: Derong Chen CHINESE FIRMS BETWEEN HIERARCHY AND MARKET Dong Fureng INDUSTRIALIZATION AND CHINA'S RURAL MODERNIZATION Du Runsheng {edited by Thomas R. Gottschang) REFORM AND DEVELOPMENT IN RURAL CHINA Qimiao Fan and Peter Nolan (editors) CHINA'S ECONOMIC REFORMS Christopher Findlay, Andrew Watson and Harry X. Wu (editors) RURAL ENTERPRISES IN CHINA Michael Korzec LABOUR AND THE FAILURE OF REFORM IN CHINA Nicholas K. Menzies FOREST AND LAND MANAGEMENT IN IMPERIAL CHINA Ryoshin Minami THE ECONOMIC DEVELOPMENT OF CHINA Yuming Shen INTERSECTORAL RESOURCE FLOWS AND CHINA'S ECONOMIC DEVELOPMENT

2 Hong Wang CHINA'S EXPORTS SINCE 1979 Tim Wright (editor) THE CHINESE ECONOMY IN THE EARLY TWENTIETH CENTURY Yanrui Wu PRODUCTIVE PERFORMANCE OF CHINESE ENTERPRISES Haiquin Yang BANKING AND FINANCIAL CONTROL OF REFORMING PLANNED ECONOMIES

3 Market and Institutional Regulation in Chinese Industrialization, Die Lo Lecturer in Economics School of Oriental and African Studies University of London 9A

4 First published in Great Britain 1997 by MACMl LLAN PR ESS LTD Hound mills. Basingstoke, Hampshire RG21 6XS and London Companies and representatives throughout the world A catalogue record for!his book is available from the British Library. ISBN DOI / ISBN DIC Lo 1997 First published in the Umtcd St:nes of America 1997 by ST. MARTIN 'S PRE SS, INC., Scholarly and Reference Division. 175 Fiflh A\enue. New York. N.Y ISBN Library of Congress Cataloging-in-Publication Data Lo. Die Market and institutional regulation in Chinese industrialization / Die Lo. p. em. Origmally presented as the author's thesis (Ph.D.}-University of Leeds Includes bibliographical references and index. ISBN (cloth) I. lndustrialization-chma. 2. China-Economic conditions :t China- Economic policy I. Title. HC L l-dc CIP All rights reserved. No reproduction. copy or transmission of this publication may be made without wnnen permission. No paragraph of this publication may be reproduced. copied or transmined save with written permission or in accordance with the provisions of the Copyright. Designs and Patents Act or under the terms of any licence pcrmiuing limited copying issued by!he Copyright Licensing Agency. 90 Touenham Court Road, London WI P 9HE. Any person who docs any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his rights to be identified as the author of this work in accordance wuh the Copyright. Designs and Patents Act This book is printed on paper suitable for recycling and made from fully managed and ~ustained forest sources I ()()

5 Contents List of Tables List of Figures Preface and Acknowledgements vii x xi 1 Overview 1 Introduction: The China Question 1 The Intellectual Context 2 Towards a True Alternative 6 The Structure of the Book 8 Some Explanatory Notes 11 Part I Theoretical Issues 2 Towards an Alternative Perspective on Systemic Transformation 15 The Regulation of Late Industrialization 15 Institution, Organization, and Innovation 27 Transformation of the Soviet-Type Economic System 37 Part II Explaining China 3 Chinese Industrialization in Structuralist Perspective 55 Structural Change as Engine of Growth: The Limits to Growth 65 Demand Constraint on Growth: Market and Institutional Regulation in the Growth Process 82 4 (Re)interpreting Chinese Enterprise Reform 88 Assessing the Performance of State-Owned Enterprises 88 The Policy Regime: Getting the Facts Straight 96 Making Sense of the Reform-Growth Dynamics 102 Towards an Alternative Interpretation 113

6 VI Contents 5 Testing Alternative Explanations of Growth 119 Main Propositions 119 TFP Change: The Relative Performance 121 Learning Effects and Demand-Driven Growth 125 Structural Change as Engine of Growth 131 Concluding Remarks 135 Data Appendix 136 Part III Sector Studies 6 The Electronics Industry: State Industrial Policy and Development 147 The Engine of Growth of the 1980s 147 The Development Pattern 151 The Success of the Consumer Electronics Sector 157 The Failure of the Semiconductor Sector 164 Concluding Remarks The Motor Industry: Institutional Reform and Development 172 The Engine of Growth of the 1990s 172 The Development Path 176 State Industrial Policy and Sectoral Management 181 Local Authorities, TNCs and Technological Development 188 Firm Organization: Rationalization and Flexibility 193 Concluding Remarks Conclusions 199 Notes 205 Sources of Data 217 Bibliography 219 Index 233

7 List of Tables 1.1 China's Economic Growth in International Comparison, Shares of Gross Value of Industrial Output by Ownership Sectors, Trends in China's Exports and Imports, Social Purchasing Power, Profitability, Labour Productivity and Enterprise- Retained Profits of Selected Industrial Branches, 1980, 1985, 1988 and Fixed-asset Investment : Sources of Fund Changes in Capital Intensity and Capital Renovation of Industry, Major Industrial Sectors: Relative Shares in GVIO and Average Annual Growth Rates, Major Proportionalities in Chinese Industry, Foreign Trade Values and Trade Dependence, Exports and Imports of Mechanical and Electronic Products, Exports and Imports Commodity Compositions, Volumes of Output, Sales and Year-end Stock of Three Consumer Durables and Three Producer Goods, Retail Sales. Investment and Industrial Growth Rates, Profit Rate, Loss-to-Profit Ratio, and Loss-Making Enterprises, TFP Growth, Top Ten Loss-Making Industries of SOEs and Non-SOEs, Total Profits and Enterprise-Retained Profits, Working Capital and Bank Loan for Production, Estimating TFP Growth (Original Data), Estimating TFP Growth (Adjusted Data), vn

8 viii List of Tables 5.3 TFP Growth (An 'Arbitrary' Approach), Testing Verdoorn's Law in Chinese Industry, Testing Alternative Sources of Labour Productivity Growth, Testing Sources of Productivity Change by Using Pooled Data, Testing Structural Change as Engine of Growth, Testing Consumption Demand and Economic Growth, Gross Value of Industrial Outputs, GVIO of Enterprise Sectors at the Level of TAIAEs, Price Indices of GVIO, NVIO of Enterprise Sectors at the Level of TAIAEs, Labour Employment of Enterprise Sectors at the Level of TAIAEs, Labour Productivity of Enterprise Sectors at the Level of TAIAEs, Value of Fixed Assets Net of Depreciation of Enterprise Sectors at the Level of TAIAEs, GVIO of Machinery Sector and Value of Social Retail Sales, Outputs and Labour Productivity of the Electronics Industry (TAIAEs), Top 20 Electronics Enterprises (Ranked by Sales Revenue), Exports and Imports of Electronic Products, Concentration Ratio (by Sales Revenue) of China's Electronics Industry, Output Volumes of Television Receivers and Picture Tubes, Semiconductors Output Volumes: Discretes and ICs, China's Output Volume of Motor Vehicles, GVIO of All Industries, the Auto Industry and Auto LMEs, Imports of Foreign Auto Technology in the s: Major Projects 180

9 List of Tables IX 7.4 Concentration Ratio (by Sales Revenue) of China's Auto Industry, Profile of Heavy-Duty Vehicles Corporation, 1982, 1987, 1990 and Local Contents of Foreign-Designed Cars and Jeeps, Profile of the Second Auto Works and Dongfeng Auto Corporation, 1982, 1987, 1990 and

10 List of Figures 3.1 China's Terms of Trade in International Comparison, Relative Shares of Large, Medium and Small Scale Enterprises in GVIO of Township-and-above Enterprises 6.1 GVIO of Major Enterprise Sectors of the Electronics Industry, Output Composition of China's Electronics Industry, x

11 Preface and Acknowledgements The objective of this book is both to construct an analytically enlightening account of China's experience of economic development and reform over the period , and to engage with the policy debate over the transformation of the Soviet-type economic system. My starting point is that a study of this kind must be based on empirical investigations rather than a priori conceptions. Throughout the book, the reasoning has been derived from observed (stylized) facts rather than 'first principles' of economics. This approach of course runs the risk of lacking theoretical sophistication. However, in view of the literature that is flooded with unrefined applications of established theoretical concepts/models and where too many empirically ill-founded policies have been prescribed, the approach adopted here is a necessary correction. I also attempt to remedy the shortcoming by means of synthesizing a range of relevant, alternative theoretical perspectives. This leaves open the possibility of drawing alternative inferences and conclusions from the study. Indeed, precisely because I do not work from the notion of the 'pure' market - that is, the possibility of a perfectly functioning market system - the overall conclusion I arrive at is far more open than most available studies. The conclusion states that both market and (non-market) institutional regulations have been indispensable in accounting for the successful facets of the Chinese experience. In this connection, a word of moral matter is in order. My critical attitude towards the market-centred approaches that are predominant in the relevant literature, to be sure, involves a personal reason: as a socialist (in a moral if not political sense), I believe that public ownership - where workers are not subject to the full rigour of the impersonal market - is potentially more humane than private ownership. Yet this moral concern does not interfere in the analytics of the book. It does prompt me, in the course of writing, to view with vigilance those writings which adopt the market-centred approaches on the ground of faith, not their analytics. Indeed, throughout the book, I use the term systemic transformation instead of the widely-used term transition. The term transition implies the presumption of the possibility and desirability of something called the market economy. In contrast, the term transformation implies an open-ended process leading to the XI

12 Xll Preface and Acknowledgements formation of a systemic/institutional framework that might incorporate the market mechanism but is not itself on the whole reducible to the market economy. This book is a development of my PhD thesis which was submitted to the University of Leeds in The bulk of the research was done in But the evolution of the main concerns (if not the actual ideas) of the book can be traced back to several years earlier, when, as a journalist, I began to seriously watch the political and economic developments in China. During this process of evolution, I have incurred an intellectual debt to my teachers, friends and colleagues. I wish especially to thank Malcolm Sawyer who supervised the thesis. Hugo Radice, Adrian Wood, Mahmood Messkoub and Paul Dunne, among others, have given useful comments and suggestions, for which I am grateful. Simon Peck and Graham Sykes have helped me to use the computers. Chris Edwards' sympathetic yet critical comment on my MA dissertation, which was submitted to the University of East Anglia in 1991 and has subsequently become Chapter 3 of this book, has been very helpful. Encouragement from Peter Nolan and Ajit Singh has helped to strengthen my confidence in conducting the research. Chapters 3 and 4 of the book have been presented at seminars in SOAS, and I have benefited from the comments of a number of colleagues, particularly Ben Fine and Christopher Howe. A number of friends in Hong Kong have always been a source of inspiration. I would like to thank Cheng Yuk-shing, Thomas M.H. Chan, Tsang Shu-ki and Wang Xiaoqiang for their support and friendship. Finally, I wish to express my gratitude to the publishers concerned for permission to reproduce or draw on my previously published work. Chapter 2 of the book is an abridged version of three articles, two of which being Lo (1995a) and Lo (1995b). Chapter 7 draws substantially on Lo (1995c). This book is dedicated to my parents, my wife and my son.