S24: Capitalism without Democracy

• Growing out of the plan: How did China transition to market economy?
• “Capitalism with Chinese characteristics”: What is it? Is it a contradiction?
• Economics and politics: How did they co-evolve?

• Vietnam’s shift in allegiance from China to the Soviet Union: mutual defense treaty in November 1978
• Vietnam’s invasion of Cambodia and overthrow of the Khmer Rouge — China’s Maoist ally
• Fear of Soviet invasion: 1.5 million PLA troops along Chinese-Soviet border
• Three-way struggle: China, Vietnam, and the Soviet Union

• Deng Xiaoping’s meeting with President Jimmy Carter, two weeks before China’s entry to war.
• Goal: Secure America’s backing and neutralize the Soviet Union’s potential military invasion of China.
• Appeal to America’s other strategic goals: defeating the Soviet Union, exiting the Vietnam quagmire, and disarming Pyongyang’s nukes.

• Deng Xiaoping sought to consolidate his control over the military.
• Deng also wished to diminish the power of Hua Guofeng, Mao Zedong’s chosen successor.

• Primary goal: not territorial conquest
• Retaliation against Vietnam while minimizing its exposure to a potential two-front war with both Vietnam and the USSR
• Demonstration of military strength
• Realignment with the United States

Loss

• Unable to achieve its goal of removing Vietnam from Cambodia, as Vietnam’s occupation lasted until 1989.
• Heightened Vietnam’s animosity toward China.
• Peace negotiations between China and Vietnam didn’t occur until 1991, after the fall of the Soviet Union.
• Exposed the PLA’s poor performance

Win

• Prevented a Soviet invasion from the north due to U.S. support.
• Helped Deng Xiaoping gain power within the CCP.
• US Support: establishment of Beijing embassy in 1979, in the middle of the war
• Prompting a military modernization drive.

• What happened to the dance troupe after the Mao era?
• Who were the “winners” / “losers”? Why?
• How is the Mao era remembered in China today?

• Low-income: GDP per capita lower than large sub-Saharan Africa
• Human development level: Upper-middle-income economy
• Comprehensive economic infrastructure

• A country with abundant human resources, but bottled up in countryside
• (Misguided) capital intense development strategy: heavy industry

• How does Deng define socialism and capitalism?
• How can capitalism change China?
• How can China change capitalism?

Modernization theory

• Growth => Good governance
• Rising middle class demand greater rights, freedom, and ultimately democracy

Weberian model

• Rule of law as institutional condition for development
• World Bank, IMF, etc.: “Get governance right” before markets can grow
• Max Weber: Professional bureaucracy, specialized and impersonal

• What to reform?
• How to begin?
• Where to start?

• Who is Lu Guanqiu? How did he start his business career?
• What was it like to run a business during the Cultural Revolution?
• What was the business model of Wanxiang’s precursor?

Wanxiang

• 1969: Start-up at the depth of the Cultural Revolution
• 1977: Access to market; one of three surviving universal-joint producers
• 1993: Wanxiang America founded

China/Global

• 1978: Reform era begins
• 1985: Plaza Accord
• 2000: Entry to the WTO

Out of plan:

• Lu’s village business was excluded from the central economic plan: it can’t easily get raw materials or sell his farm tools.
• He survived by using scrap steel from nearby villages.

First breakthrough:

• His high-quality tools was adopted by the municipal farm-tool company in Hangzhou.
• The government included his factory in the economic plan, granting him steel quotas and market access.
• By the late 1970s, commitment to quality allowed Wanxiang to survive as one of the only three universal joints makers in China.

Lu Guanqiu focused on producing universal joints (in Chinese, wanxiangjie 萬向節), recognizing market potential from government plans for increased car and truck production.

• What is a TVE (township village enterprise)? How is it different from an SOE (state-owned enterprise)?
• What was the origin of TVEs? How did they evolve?
• What explains their success?

• Gave a household control over a plot of land in return for the delivery of an agreed quantity of grain after harvest
• This allowed households to effectively rent land from collectives and sell surplus on the market.

• Household contracting of communal land, in return for delivery quota after harvest
• Reformers: “Renting” land from the collectives
• Conservatives: Ideologically unacceptable; it would be the end of collective agriculture

Virtuous circle:

• Production responsibility system
• Agricultural growth
• Expansion of labor: Farm households working in non-agriculture, especially TVEs

Shift in developmental strategy:

• Expanding output while decreasing labor inputs
• From capital intensive (heavy industry) to labor-intensive development strategy

Rural

• Household responsibility system: Division of communal land for private cultivation
• Township and village enterprises (TVE)

Urban

• Contract responsibility system (1984): autonomy and profits to state-owned enterprises
• Special economic zones (1980): Shenzhen, Zhuhai, Shantou, Xiamen; further expansion in 1984
• Dual track approach: State-owned enterprises allowed to sell output exceeding quota at market prices

Co-existence of traditional planned economy and market channel

• Produce planned output, selling at plan prices
• Excess sold outside the plan at market prices
• Reduction of state monopoly enhanced competition
• Plan and state sector became less dominant elements in economy

• System of profit retention
• “Factory manager responsibility system”: managers, not party secretary, given top authority
• Local gov retention of revenue above control figure
• Universities and research institutes allowed to set up profit-making subsidiaries
• Cadre promotion based on local economic and fiscal growth

• Incremental and improvised, but also broad and bold
• Top-down direction but also de-centralized improvisation
• Inflationary economy with shortages => Political backlash

• Lu Guanqiu pioneered the “contract system” in 1983.
• He guaranteed fixed annual payments to the village government, with yearly increases.
• In return, he received exclusive management rights for three years.
• Factory output significantly increased from RMB 5.5 million (1983) to RMB 19 million (1985).

• Wenzhou’s economy started with tiny, household-based private ownership.
• They specialized in common items like buttons and ribbons, filling market gaps.
• Production was heavily coordinated by markets: Industries formed chains where households specialized in single production stages.
• Overtime, Wenzhou model led to the development of private banks and real estate firms.
  

• TVEs in the Pearl River Delta grew rapidly with foreign investment.
• Hong Kong and Taiwanese businessmen, with local ties, pioneered these cooperative village businesses.
• Village leaders managed land, export contracts, and labor.
• The PRD model was highly open to foreign trade, investment, and workers from elsewhere in China.

• Earning foreign exchange and importing foreign technology
• Foreign firms given concessionary access to long-term land use, tax breaks, and separate legal mandate
• Local govs given budgetary and policy autonomy

Human capital

Wanxiang hired high-school graduates to overcome difficulties in recruiting qualified employees as a TVE.

R&D

Wanxiang invested 5%-7% of its annual revenue in research and development. The “Four Heights” policy was introduced to improve quality through increased investment in technology, better equipment, higher personnel standards, and superior products.

State-business relationship

Despite becoming a private enterprise in 1994, the Chinese Communist Party (CCP) maintained influence through key personnel like Lu and his son, and CCP officials in management.

• Who is Ni Pin, Wanxiang’s US CEO?
• What is Wanxiang America’s business model? How has it evolved?
• Is Wanxiang American or Chinese?

• Rapid growth of auto-industry in China: Surpassed US in sales in 2009
• Rapid consolidation of US parts company: 50% gone as they were unable to compete in new cost-sensitive market
• New tech frontier emerging: EVs

• Over $1 billion in revenue
• 4000+ staff, only 15 Chinese employees
• Big three auto companies as largest consumers
• Manufacturing moved to China: $0.9/hr wage vs. $22.5/hr (US)
• Using acquisitions to see which processes could be enhanced and transferred to China
• Invests in maintaining proprietary technologies in US

• Successful non-state owned enterprise
• Family firm, with roots in early rural industrialization
• A Chinese company’s global strategy: Growth in the US, with limited public opposition

• Center does not dictate actions, but instead authorizes boundaries of local experiments, define and reward success, and encourage mutual exchange.
• Regional economies (provinces, municiplaities, counties) increasingly competitive; local governments holding responsibility for initiating and coordinating reforms
• Result: Mixture of top-down direction and bottom-up improvisation.

• Use weak institutions to build markets
• Emerging markets stimulate the creation of strong institutions
• Strong institutions preserve markets