The Socialist Experience ARE/ECN 1990 Lecture 5 Big Push Industrialization … East Asian Development with Chinese Characteristics ? State-owned enterprises, no private sector … not like the rest of Asia (mostly) ? Soviet strategy: Heavy industry first (did NOT do what rest of East Asia did – labor intensive goods and services) … not like the rest of Asia ? For political control / ideology (Aukarky … not a trading nation) … not like rest of East Asia ? State control of economy: Planning (resources allocated on basis of preference of government) – not like rest of Asia Economic Planning ? Ex-ante coordination of planning is an important aspect of plan production ? As will be seen … unless steps are taken to simplify the plan, it becomes ENORMOUSLY unwieldy … Full Planning Problem X66X65X64X63X62X61 X56X55X54X53X52X51 X46X45X44X43X42X41 X36X35X34X33X32X31 X26X25X24X23X22X21 X61X15X14X13X12X11 Comprehensive plan … ? Each row is activity of ith agent (lists the flows from agent 4 to all other agents) ? X41, X42, X43, X44, X45, X46 – From computer chip factory #206 to (agent 4): ? Nintendo factory #67 (agent 1) ? China NASA space program (agent 2) ? Wolfenstein factory (agent 3) ? Keep one for himself (agent 4) ? Precision agricultural sector (agent 5) ? Mao’s own playroom (agent 6) planning ? Each column is list of flows to agent 1 from all other agents … think of a production function … Full Planning Problem X66X65X64X63X62X61 X56X55X54X53X52X51 X46X45X44X43X42X41 X36X35X34X33X32X31 X26X25X24X23X22X21 X61X15X14X13X12X11 Agent 5 is food producer … gets seed from agent 2, gets fertilizer from agent 3; chip for tractor from agent 4 … etc. … he then send food (row 5 to other agents when he is done … [agent 6 could be a food producer, too] … have to get chip factory some food from food producer 5 and food producer 6 … Reality is very complicated ? How to take millions of firms and make them produce output that will be input for other firms … and then create outputs that will be for consumption and production … ? There are millions of goods … ? Each good has hundreds of parts … ? And require hundreds of thousands of machines … ? To ultimately provide for a billion consumers … ? How many planning nodes in complete problem: – 100,000 x 10,000,000 x 100 x 100,000 x 1,000,000,000 = a lot! Need to simplify: method 1: planned subeconomy Xu4Xu3Xu2Xu1 X2uX44X43X42X41 X2uX34X33X32X31 X2uX24X23X22X21 X1uX14X13X12X11 Row 2 is fertilizer Last column is exports from planned agents to ALL unplanned agents Column 1 is food from unplanned sector to chip factory Row 4 is chips “AIC” “Grain bureau” Need to simplify: method 2: compartmentalization X(B+u)2X(B+u)1 X2(B+u)X22X21 X1(B+u)X12X11 Compartment A Compartment b and unplanned economy … think of compartment as regions … Need to simplify: method 2: compartmentalization X(A+u)2X(A+u)1 X2(A+u)X44X43 X1(A+u)X34X33 Compartment B Arrows now … flows between planned and unplanned AND flows between regions … Need to simplify: method 4: minimize interaction X(A+u)2X(A+u)1 X2(A+u)X44X43 X1(A+u)X34X33 Compartment B Because it is still hard to coordinate … and in order to minimize need for investment in transport (and to keep guerilla economy): 2 strategies:, -- make areas as self-sufficient as possible – minimize flows between planned and unplanned (2 residential permits) … Need to simplify: method 4: danwei or unitized system X(A+u)2X(A+u)1 X2(A+u)X44X43 X1(A+u)X34X33 Make unit (factory / university / government agency … take care of as many roles as possible … therefore within a factory’s compound, you build: Housing / school / hospital / even garden plots … XA Final simplified plan XBu XAu Make unit (factory / university / government agency … take care of as many roles as possible … therefore within a factory’s compound, you build: Housing / school / hospital / even garden plots … XB XA XBA XAB food Some inputs XUA XUB Even after simplification, planning is hard to coordinate ? Problem of timing (so stock inventory) ? Problem of quality (plan completion counted in units shipped) ? Still problem of coordination (in 1978 at height of planning, MOST materials got through non- planned channels – with guanxi or connections) ? OK for simple technologies (rice / raw steel) … difficult for car … [China had 1000s of automobile plants, making car by hand … maybe only 50 per year … all parts were custom made and custom founded) / impossible for modern day car … or Dell computer .. Planning compromises, summary ? Kept plan simple (review from above) … – Large unplanned / decentralization / walking on two legs / minimize flows / unitization ? Reduced product innovation ? Reduced consumer goods ? Planning rallies ? Rationing program (coupons for everything) ? Two tier system in 1970s Other ways to help: ? Government monopoly over banking … ? All profits of industry go through banks … all purchases come from banks … ? Control by party (party cell in EVERY factory / university / hospital / army unit / etcetera) … make leader changes / monitoring / oversight .. ? Redundant systems of control: – Physical (planning commission) – Financial (banks) – Personnel (party) Consequences ? Fast Growth in investment ? Rising per capita GDP ? Investment in basic health, education, housing. ?But – Little growth in income – Slow growth in employment – Slow growth in productivity (most of growth from investment of capital into capital … poor incentives) – Slow structural transformation (still highly agriculture) – Little integration (by design) ? Domestically (little regional specialization) ? Closed door to the rest of the world (outdated technology) – And, poor information and control …. look what happened in the countryside Needham puzzle 2 (revisited): would China have grown faster under capitalism or socialism through the 1950s and 1960s … Especially in mid- 1950s … China was proud … growing fast … and infinitely better off than 10 years before Figure III-1: China: Investment Rate (GDCF/GDP) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 Up from almost “0” in the late 1930s and 1940s