hyperinflation in centrally-planned economies: the Chinese exception

Rosser Jr, John Barkley rosserjb at jmu.edu
Fri Oct 11 15:12:52 MDT 1996

Louis G.
     Your numbers on Chinese investment are all wet.  I
think that you have lumped the centrally owned SOEs with
the TVEs, or something like that.  The centrally owned SOEs
have produced substantially less than half the PRC GDP
since the early 1990s, a percentage that continues to fall
as that sector has been allowed to stagnate relative to the
others.  I have numerous sources on this, although one for
starters is Barry Naughton, "Chinese Institutional
Innovation and Privatization from Below," _American
Economic Review Papers and Proceedings_, May 1994.
     The double-digit inflation rates in the PRC are better
than what has happened in many transitional economies, but
its performance is hardly the best there is out there on
that front.  Where it has done much better has been in
avoiding a decline in output, indeed has had a very rapidly
growing economy, although disguised unemployment and
growing income inequalities are emerging.
Barkley Rosser
On Fri, 11 Oct 1996 08:17:57 -0400 (EDT) Louis R Godena
<louisgodena at ids.net> wrote:

> Why has China been able to avoid the crippling hyperinflation that has
> bedeviled so many centrally--planned economies attempting reform?*    The
> short answer must certainly focus on the question of investment controls.
> Analysis of central-local relations demonstrates that,  even during reform's
> heyday,  China's central authorities had not lost their capacity to select
> and control local government and party officials in order to tame
> inflationary investment demand and impose investment reduction policies.
> Both state and private sector borrowing are typically the purview,  in each
> enterprise,  of managers operating under a so called "management
> responsibility contract."   But these managers work under the supervision of
> the effective owners,  various levels of the government,   representing the
> Communist Party,   which has a big stake in their success.
> Inflationary controls put in place by the Party in its reform plan (see
> *China's Economic Structure Reform*  Foreign Languages Press,  1984) follow
> closely the stated goal of a "planned commodity economy,  not a market
> economy that is entirely subject to market regulation."    They allow for
> market forces to determine to some degree the allocation of resources,  but
> carefully balance,  through investment controls,  the competing inflationary
> impulses of dynamic and relatively low producing enterprises.
> Further,  fully three fifths of China's fixed investment capital is absorbed
> by its state-owned enterprises (SOEs).   The non-SOEs (the majority of which
> are collectively owned or run by townships and villages) are by far the most
> dynamic in terms of output.      The World Bank estimates that,  between
> 1985 and 1992,  non-SOEs required,  on average,  less than a third as much
> investment as SOEs to achieve equivalent industrial output.     Inflationary
> pressures were mitigated somewhat by an only modest decrease in the share of
> the state sector in industrial development income (from 86.5 to 74.3 per
> cent from 1982 to 1992).    The use of the SOEs as a potential brake on
> inflation has worked well because of a relatively high investment rate
> (officially estimated at 35 and 42 per cent of the Gross Domestic Product
> [GDP] in the 1990s,  enough to finance vast investments within SOEs while
> leaving plenty left over for non-SOEs.
> Louis Godena
> *Yasheng Huang,  *Inflation and Investment Controls in China: The political
> economy of central-local relations during the reform era.*   (1996:
> Cambridge University Press)
> William A Byrd & Allen Gelb,  "Why Industrialize?  the incentives for rural
> community governments," in Byrd & Lin Qinsong,  eds., *China's Rural
> Industry* (Oxford University Press,  for the World Bank,  1990)
>      --- from list marxism at lists.village.virginia.edu ---

Rosser Jr, John Barkley
rosserjb at jmu.edu

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