A rational path towards a Pareto optimum for reforms of large state-owned enterprise in China, past, present and future

Since Deng Xiaoping’s historic move towards a market economy in post-Mao China during the 1980s, by far, the most challenging task in China’s reforms has been that related to the moribund state-owned sector due to a range of ideological, political, as well as economic reasons. Such reforms have so far been slow and hesitant, moving forward and backward with mixed results. This paper tackles the pros and cons of such reforms and aims to square a rational strategy based on what has been done so far in the state sector. Unlike a narrow approach currently prevailing in the literature, this paper establishes a partial equilibrium model which incorporates the principal-agent problem into a mixed oligopoly model to explore an optimal strategy for state-owned enterprise reforms in China. We argue that ceteris paribus the current illnesses of low efficiency and rent-seeking commonly suffered by China’s state-owned sector can be cured by a two-pronged strategy in which the importance of property rights holds the key. We have identified two ‘Coase Property Right Points’ in the commonly known choices of institutional changes in a reforming Soviet economy to firstly, make it more efficient, and then Pareto optimal. One institutional change is a ‘joint-stock reform’; the other, a ‘full privatisation reform’. In particular, this study regards ‘social-extra policy burdens’ as the main obstacle to improve much needed efficiency in the state sector. Coase Property Right Points show the necessity for a reduction of the social-extra policy burdens vis-à-vis the state sector’s true comparative advantag

Performance and mechanisms of the Maoist economy: a holistic approach, 1950-1980

This article probes performance and mechanisms of the Maoist economy from 1950 to 1980, a period commonly regarded as a turning point that ushered in a bumpy but new path for China’s new economic fortune, including industrialisation and modernisation. Mao and his government have often been regarded as a developer and moderniser for China. This study questions it. To that end, the Maoist economy is re-conceptualised, re-examined, and re-assessed with qualitative and quantitative evidence including empirical modelling. The key findings suggest that the Maoist economy was a closed one with industrial dependence on agriculture in an urbanrural zero-sum. In the end, despite the official propaganda agriculture declined, industrial workforce stagnated, and the population was poor. This gloomy performance justified the post-Mao reforms and opening up, a game changer that put China on a very different trajectory of growth and development

From state resource allocation to a 'low-level equilibrium trap': re-evaluation of economic performance of Mao's China, 1949-78

This paper provides a full picture of how Maoist economy actually performed. We argue that Mao’s China neither undertook a structural change towards industrialisation nor generated a sustainable growth from 1949 to 1978.2 With fatal shortcomings of a planned economic system imported from the Soviet Union – the ‘principle-agent’ problem and information asymmetry for the bureaucracy, and disincentives for producers – China’s economy remained not only deliberately unbalanced but also predominantly rural until the 1980s. More importantly, the Maoist economy was not designed to enrich and empower the masses in society. Instead, all key consumer goods including food, clothing and housing were strictly rationed. The material life of ordinary citizens in China saw no improvement. This paper aims to reveal the harsh reality of the Maoist economy with solid evidence and theoretical explanation

Re-evaluating the ‘smile curve’ in relation to outsourcing industrialization

In this paper, we argue that the widely used concept of the value-added driven ‘smile curve’ in the international business literature, which often illustrates a zero-sum game between interdependent nations in the global supply chain, requires revisiting. In particular, the U-shaped smile curve for the distribution of profitability among partners can be inverted if firms from the developing economies manage to obtain high productivity from their workers and have no high entry costs to the midstream industries that specialize in global supply chains. We construct an economic model and find that the theories proposed in the paper are broadly consistent with the empirical evidence. Our findings have some important implications for the current debate on industrialization strategies with particular reference to outsourcing industrialization for developing countries

Endowment structure, property rights and reforms of large state-owned enterprises (SOEs) in China: past, present and future

Based on the criteria of the factor endowment structure of state-owned enterprise (SOE) sectors in China between 1980 and 2018, this paper rationalizes the classified reforming of China's state sectors by constructing a Nash bargaining model to capture the dynamics of ownership restructuring, and the reduction process of policy burden on SOEs. We reveal that the interplay between policy burden bared by SOEs and the ownership restructuring process largely depends upon their factor intensities since the reform period in the 1980s. Our model identifies two Ownership Reform Irrelevance Points (ORIP), which serve as the benchmark for the dynamics of the ownership restructuring process of China's large SOEs, which saw them move from ‘mixed-ownership’ to ‘privatization’. ORIPs demonstrate the need for a reduction in social policy burdens with regards to the state sector's comparative advantage of factor endowment structure through SOE ownership restructuring. This study theoretically analyzes existing literatures on the classified reforms of China's state sectors from 1978 to 2018. This study is the first to base such an analysis on the criteria of factor endowment structure focusing on the connection between the policy burdens bared by SOEs and their ownership restructuring process

Performance and mechanisms of the Maoist economy – A holistic approach, 1950-1980

This article probes performance and mechanisms of the Maoist economy from 1950 to 1980, a period commonly regarded as a turning point that ushered in a bumpy but new path for China’s new economic fortune, including industrialisation and modernisation. Mao and his government have often been regarded as a developer and moderniser for China. This study questions it. To that end, the Maoist economy is re-conceptualised, re-examined, and re-assessed with qualitative and quantitative evidence including empirical modelling. The key findings suggest that the Maoist economy was a closed one with industrial dependence on agriculture in an urban-rural zero-sum. In the end, despite the official propaganda agriculture declined, industrial workforce stagnated, and the population was poor. This gloomy performance justified the post-Mao reforms and opening up, a game changer that put China on a very different trajectory of growth and development