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SunChinaPrivat - John Sun Economics 508 Professor B...

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John Sun Economics 508 Professor B. Fleisher Privatization: P. R. China Privatization occurred in China at a much slower pace than in most other transition economies, as the data in Table 1 indicate. Looking at the official statistics on the number of private firms in the P. R. China, just China from now on, it seems that privatization isn’t occurring in China. State-owned enterprises (SOEs) still occupy the majority of the number of firms in China. Those figures become even more intriguing when one looks at the 9% GDP growth China has had in the past two decades (McGraw- Hill 2005 10). This paper will first give a brief history of privatization in China because much of their current situation is mired in the decisions of the past. The paper will then give an account of the current situation and trends in China. Finally, this paper will highlight two big problems with privatization in China: property rights are not protected, which hinders the development of privatization, and many SOEs are still inefficient leftovers from China’s old planned economy. Privatization in China began in 1978 under Deng Xiaoping (McGraw-Hill 2005 10). The first wave of privatization occurred in the agricultural industry 1 and is characterized by two main changes: “the leasing of land to individual farmers and the establishment of a two-track price system” (McGraw-Hill 2005 10). Basically, “China dissolved farming collectives or communes” (Cao 2001 17) and sold them to farmers at low prices. The communes were turned into family plots, and families were “granted a high degree of autonomy and flexibility in production and sales, as long as certain production quotas owed to the state were met” (Cao 2001 17). This is where the two- track price system became useful. Farmers would sell “a set quantity of produce at state price” (Cao 2001 17), but any surplus produced was sold at the, usually higher, market price. The effects of household land and dual-price track system cannot be understated; within two years, “China became self-sufficient with regard to food production” (Cao 2001 16), and “gross farm output increased within ten years by. . .138%” (Cao 2001 18). 1 Almost “70% of the Chinese labor force was rural” (McGraw-Hill, np).
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The incredible success of the reforms soon extended to “SOEs in urban areas (McGraw-Hill 2005 10). They were given more authority “to determine the quantity and variety of their outputs, to make their own employment decisions, and to retain much of their net revenue” 2 (McGraw-Hill 2005 11). The two-track price system was extended to SOEs, and they were given more freedom to buy inputs and sell products at market prices (McGraw-Hill 2005 11). Urban collectives, “enterprises owned jointly by managers and their workforces” (McGraw-Hill 2005 11), were created.
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