Hyperinflation in centrally-planned economies: the Chinese Exception

Louis R Godena louisgodena at ids.net
Mon Oct 14 15:10:18 MDT 1996

Barkely Rosser compares the current economic configuration in China with the
New Economic Plan in 1920s Soviet Russia.    It is a specious analogy.

The World Bank estimates that,  between 1985 and 1992,   non-SOEs
[State-Owned Enterprises] required,  on average,  less than a third as much
investment as SOEs to achieve equivalent industrial output.    But this
discrepency largely reflects concentration by SOEs in capital-intensive
industries.     On the other hand,  SOEs had higher ratios of fixed assets
to net output in all but two of 40 industrial sub-sectors.    The Town and
Village Enterprises (TVEs) as well as the collectives (the second fastest
growing entities in the economy) simply could not survive with the same
viability without the SOEs.     And I suspect Mr Rosser knows it.

Here is another little puzzle for Mr Rosser,  squirreling around in his
footnote maze.     In just four years between 1989 and 1993,  the industrial
output rose by 193 per cent (!),   a performance that can have no historical
parallel.   But it creates another puzzle for our would-be NEPman.    Why
were non-SOEs so dynamic when the vast majority were collectively owned or
run by townships and villages (and nominally under the control of the
Communist Party at various levels)?    In China,  it appears,  it does not
matter whether an enterprise is publicly owned,  only which level of
government controls it.     The share of TVEs in industrial output,  in
particular,  rose from 13 per cent in 1989,  to 24 per cent in the first
nine months of 1995.    To Mr Rosser,  these TVEs are like bumblebees:  they
fly,  but how?

Without stinting in any regard other factors peculiar to the Chinese model
(unlimited supplies of cheap labor,  continued stability of rural life,
etc),  it appears that for the time being at least the Chinese Communist
model appears to be bearing fruit at the local and regional level.    The
large SOEs (the Fungsheng Steel Works,  employing 186,000 workers in one
factory complex,  is an example) enjoy a symbiotic relationship with
hundreds of smaller enterprises in each locality,  stabilizing regional
economies by controlling inflation and investment and providing the nexus
for continued economic growth.

Mr Rosser has a hunch that I favor China because it is run by a Communist
Party,  though I've only initiated two other threads on China in the ten
months I have been subscribed to this hellish list--one on Chinese
anthropology a month ago,   and a short piece on Mao's legacy in July.    I
originally posted on China's relatively low inflation rate as a first step
toward a comparative analysis with the economy of Vietnam,  which is similar
in some ways.

Who cares whether Barkely is "appalled" by the events of June,  1989 in
Tiananmen Square?   It was not even a blip on the screen.    Authoritarian
governments in East Asia  in fact,  pursued economic growth--market driven
and otherwise--for decades without relaxing their hold on political power.
Only after sustained economic growth had created per capita incomes several
times those of present-day China did pressures for political reform become
compelling.    And,  as I pointed out earlier,   the Chinese Communist Party
has never embraced the goal of a market economy.

Louis Godena

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