Summary

The government of the People's Republic of China (PRC) has implemented an economic reform and opening up policy since the late 1970's. For the more than 25-year long transition period from a centrally planned economy to a more market oriented economy, a number of private entrepreneurs and private enterprises have emerged and are now playing a critical role for the economic development of the PRC. The purpose of this paper is first to examine the historical and current development of the private sector in the PRC, and then to try to identify its characteristics, economic implications and bottlenecks to further development. We then explore a simplified mathematical model, illustrating the behavioral pattern of private and state-owned enterprises (SOEs) in the PRC. Finally we try to present some policy implication.

This study consists of seven chapters. In Chapter 1, we review the historical development of the private sector in the PRC and identify three phases. The first, running from 1978 to 1986, is the initial stage of economic reform, when the private sector was positioned as a supplement to the socialist state-owned economy. During the second phase, from 1987 to 1996, the basic acts on private enterprise were enacted and the new concept of the "socialist market economic system" was first introduced. In the third stage, from 1997 to the present, the private sector was upgraded to an "important component of the economy" from its previous position as "supplement." Communist Party membership was opened to private entrepreneurs and the famous "Three representations" principle was launched. The Constitution was also amended to protect private property rights. In Chapter 1, we also attempt to make some brief observations about the politics or implications of private sector development on the future of the PRC economy. More specifically, we discuss the issue of why increasing number of private entrepreneurs are now actively trying to participate in the political process, and anticipate more involvement of the private entrepreneurs into the political process. We also stress that the PRC Communist Party shows considerable flexibility in handling the matter of private sector development, as is clearly reflected in the "Go ahead of time."

Chapter 2 looks into the modality of the pursuit of private sector development. We examine how the PRC has promoted the private sector, identify its gradualist approach and the process of "Pareto improvement." We look into the background of why the PRC has taken gradualist approach, identifying several factors such as population density and long-term unemployment problems.

Three phases are identified in this connection. We find that the approach has become more radical after the third phase. For instance, we find that the PRC attempted to accelerate privatization by setting up an Asset Management Commission. A philosophical discussion on the "control power of state-owned enterprises" is also made in this chapter. The traditional theory argues that the existence of a large state-owned sector guarantees the socialist system. If this is so, what are the implications of the further development of the private sector on the economic and social system of the PRC in the future?

In Chapter 3, we introduce a wide range of statistics and findings on the private sector in the PRC and highlight its growing economic presence. The number of firms and workers by sector, growth of registered capital, output and investment, and tax revenues are all highlighted. Regional imbalances in private sector development are also identified. In Chapter 3, we take Zhejiang Province as a case study, looking into how private sector has developed there. We discuss why the private sector has developed so rapidly there, and what were the conditions for this development.

Based on the above findings, in Chapter 5 we explore a mathematical model, illustrating the behavioral pattern of private enterprises as well as SOEs in the PRC with multiple objectives such as profit maximization and output or market share maximization. Using the model, we discuss the implications of behavioral pattern with multiple objectives for output, investment, employment, and profits as well as the number and size of firms. We derive four main propositions from the model. First, during the process of reform, private enterprises as well as SOEs invest more capital and employ more labor more than enterprises that pursue the single objective of profit maximization. Second, enterprises with multiple objectives may lose profits and fall into a weak position in competing with enterprises with the single objective of profit maximization. Third, holding other conditions constant, the number of private enterprises increases with marketization and privatization. Lastly, the average firm size depends on the marginal ability of managers, which in turn depends on marketization and privatization. With the progress of marketization and privatization, the average firm size decreases.

In Chapter 5, we also introduce some findings from a survey on Chinese enterprises conducted by the Institute of Economics, Chinese Academy of Social Sciences (CASS), looking at behavior and performance indicators.

In Chapter 6, we further examine the results of the CASS survey using cross-sector and time series analysis on the performance of the surveyed firms. We compare various efficiency indices by type of firm and in particular highlight the impact of changes in capital structure on output. It is shown that these findings provide some evidences for the propositions derived from the model in Chapter 5. Finally we make a brief concluding remark in Chapter 7.

Comment(s)

There are [0] comment(s) for this entry. Post a comment.