Organizer and Chair: Bruce L. Reynolds, Cornell University
Discussant: Xiaoguang Wang, Yale University
For me, this question is extremely broad and far reaching. China has opted for a mode of social organization, the market mechanism, which presupposes that individuals and groups each maximize their own separate "objective function". Will this principle of behavior, which seems intrinsically selfish, generate political dissolution, in the form of tension and conflict between individuals, classes, regions organizations and levels of government? In particular, might the tidal forces of rapid industrialization precipitate civil war, as they have in many societies (including the United States)? Or can the market serve as the basis for a stable, cohesive society?
The panel presenters approach this issue, as scholars are wont to do, from a more narrow and a discipline specific perspective. Belton Fleischer and Jian Chen test for interprovincial income inequality, and find it to be declining. Jun Ma examines central government economic power (fiscal, monetary and regulatory), and judges it to have declined vis-à-vis localities. Yang's paper provides a pivot for the other two: he addresses both inter-regional output inequality (which he argues is rising, not falling), and central local relations. All three papers begin by trying to establish what is happening, and deal to some extent with the causes (largely economic) for those changes. They are more reticent in dealing with the possible consequences (especially political) of those changes. Scholars are loathe to speculate, especially outside their own discipline.
I will do my best to undermine this admirable predisposition, by asking that in the presentation, the authors spend no more than half their time laying out the economic facts of what is happening and why. I will instruct them to devote the balance to exploring what sort of polity, and what sort of China, we would see in twenty years if these trends continued unabated. I am confident that Prof. Wang will also achieve this sort of integration in his discussant's remarks.
A secondary objective of the panel is to encourage members of the Chinese Economists' Society to participate more actively in the AAS. The panel emerged from a posting on the e mail bulletin board of CES, and the three presenters and the chair are CES members.
Jian Chen and Belton M. Fleisher, The Ohio State University
Between 1978 and 1989, China's 29 provinces (excluding Tibet) experienced average annual growth rates of per capita nonagricultural GDP that varied from -0.5% to 7.7%. Whether such unequal rates of economic progress increase or reduced economic inequality in the intermediate term clearly depends in a proximate sense on the correlation between levels and rates of change of per capita income. In a more fundamental framework, whether regional growth patterns lead to divergence or convergence of income levels depends on the mix of labor flows from relatively stagnant rural areas toward the booming urban sector and how rapidly new capital formation in the rural interior leads to industrialization and accelerated growth there. We combine a Solow type growth model with a Lewis Harris Todaro framework of the role of labor mobility in economic development to organize our research on the factors influencing convergence and divergence of the provinces' growth rates from 1949 to the present. The main emphasis of the paper, however, is on growth in the market reform era since approximately 1978.
Our initial research indicates that per capita growth over the period 1978-89 is strongly negatively correlated with per capita income in the initial year and that there has been marked trend toward regional income equality compared to the re reform era in China. Evidently, market forces, on average, have tended to promote convergence, rather than divergence of economic well being when measured on a regional basis.
Some factors influencing growth, however, may promote divergence and thus exacerbate existing regional income inequality in the future. For example, the currently wealthiest provinces, e.g. Shanghai and Guangdong, are those offering access to the transportation facilities which facilitate both exports and domestic sales. Being predominately coastal provinces, they also have, through historical emigration patterns, the closest ties with overseas Chinese who have been the most important source of direct foreign investment and business "know how," which have contributed significantly to these provinces' recent phenomenal growth rates.
We explore the factors that facilitate new capital formation in China's interior and poorer provinces as well as the forces influencing the movement of labor from areas of high unemployment to areas where labor demand is greatest. While the relatively greater supply of capital to China's wealthiest provinces tends to promote divergent growth patterns, labor supply limitations may work in the opposite direction and promote convergence toward regional income equality. On one hand, China's "floating population" may generate a highly elastic labor supply to the fastest growing regions, keeping the marginal product of capital high there and permitting them to continue to benefit from investment financed by both domestic and foreign sources. On the other hand, urban migrants tend to remit much of their earnings to their families at home; moreover, government restrictions on migration and insufficient housing and other amenities restrain population and labor force growth in the most prosperous provinces. Our preliminary research indicates that, other things equal, per capita GDP growth has been highest in those provinces with the greatest proportion of "surplus" agricultural labor.
Dali L. Yang, University of Chicago
This paper seeks to examine the intersection of two trends in the Chinese economy-robust rural industrial growth and increasing disparities between coastal and inland regions-and their policy consequences. It documents the fact that the Chinese leadership has recognized that (relatively) lagging growth in inland regions was significantly due to lagging rural industrial growth. In the past few years, the Chinese leadership has promoted a number of policies aimed at promoting rural industrial growth in inland regions.
This paper seeks to understand the policy making process as well as examines the actual implementation of the policies and their political implications. How are the policies promoting rural industry in inland regions carried out? What are the tools (such as credit, technology support) used to carry out these policies? Are they successful? What roles have local governments played? Have local governments undermined or enhanced central policy objectives? This paper will potentially contribute to our understanding of a number of important issues, including regional cleavages, central local relations, and industrial policy.
Jun Ma, Georgetown University
Over the past 15 years, China has moved gradually from a highly centralized planning system to a very decentralized one in almost all aspects of its economic management: taxation, government spending, credit allocation, production and investment planning, material allocation, wage and price control, international trade management, etc. This decentralization process has significantly changed the role of each level of government in economic management, and greatly complicated the relations between different levels of government. This paper analyzes three aspects of the central local relations and their impact on macroeconomic management and market development, and draws implications for the direction of China's future reform. The three key questions discussed in this paper are:
(1) On fiscal management: how do the central local fiscal relations affect the central government's ability to achieve the goals of stabilization and equalization through fiscal policies?
(2) On monetary management: how do the central local monetary relations affect the central bank's ability to control money supply?
(3) On regulatory framework: how does the division of regulatory power between the central and local governments affect the functioning of the market system?
It is argued in this paper that as for fiscal policy, the central local fiscal contract system adopted in the early 1980s has left the central government with very limited policy instruments. The localities have obtained de facto control over effective tax rates and tax bases, while the lack of coordination between the decentralization of revenue collection and the decentralization of expenditure responsibility has restricted the center's flexibility in using expenditure policy. As for monetary policy, it is argued that the central bank has not been able to effectively control money supply as the localities could react strategically to the central bank's credit policy. The regions found ways to force the central bank to revise the credit ceiling upwards, thereby creating inflation. As for the regulatory issues, the paper points out that under the decentralized system local governments have tended to abuse their (vaguely defined) administrative and regulatory powers in order to protect local economies. Such local protectionist behaviors have severely restricted the role of the market in resource allocation. While some aspects of the above issues are being addressed by the 1994 reform package, solutions to some other aspects are yet to be developed. Although the design of a new framework of central local relations is beyond the scope of this paper, we attempt to highlight selected elements of the needed reforms in the future.
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