Abstract
China is currently the second largest economy in the world. Sound economic policies had facilitated the China’s rapid rise as an economic powerhouse. The growth of Township and Village Enterprises (TVEs) is synonymous with China’s economic growth. The growth of TVEs is due to several structural changes. This paper will discuss China’s growth and structural changes, and the role of TVEs and SOEs in economic growth.
China’s Economic Development
The rural industry has been a critical part of the Chinese economy for centuries. In fact, China credits the rural industry with much of its current economic prosperity. The golden age of Township and Village Enterprises (TVEs), which lasted between 1978 and 1996, helped in changing China’s economy from a command economy to a market economy. Most TVEs were under the collective ownership of the community.
During the golden age of TVEs, there was rapid establishment of TVEs in rural areas. The government’s rigid control of cities restricted the establishment of TVEs in urban areas. TVEs provided stiff competition to State-Owned Enterprises (SOEs). This ultimately reduced the stranglehold that the monopolistic SOEs had on the market. Between 1995 and 1996, there was widespread privatization of most TVEs.
This enabled them to adopt a private ownership structure, which increased their efficiency and competitiveness (Naughton, 2007). Privatization of TVEs led to significant economic growth. Therefore, it is pertinent to claim that TVEs played a pivotal role in China’s economic growth.
In 1979, the Chinese government initiated the process of liberalization of rural enterprises. The government relaxed the directive that required state monopoly to purchase agricultural produce. This enabled more agricultural produce to remain in the rural markets.
Therefore, TVEs could now process more agricultural products. In addition, relaxation of the restrictive Cultural Revolution model of rural industrialization enabled TVEs to engage in any activity for which there was a market. SOEs opposed rural industrialization, as it would reduce their market share. On the other hand, local governments defended rural industrialization, as it would help in fueling the growth of the rural economy (Naughton, 2007).
Liberalization of the rural economy facilitated the rapid development of TVEs. Rural industries had a competitive advantage over urban industries. Availability of cheap labor was one of the major factors that led to the ultimate success of TVEs. During the 1980s, the average salaries of TVE employees were 60% less than that of SOEs (Naughton, 2007). This reduced the operating costs of TVEs. In addition, less government control of TVEs enabled them to venture into various businesses that were profitable in the Chinese economy (Brandt & Rawski, 2008).
Another factor that led to the success of TVEs is that they shared in the monopoly profits of the SOEs. Early TVEs had high rates of profitability. One of the major factors that contributed to the high rates of profitability is the fact that TVEs made better and realistic use of factors of production than SOEs.
In addition, early TVEs benefited from the market protection that the SOEs had created (Naughton, 2007). Entry of TVEs exposed the inefficiencies of SOEs. This made SOEs lose a sizeable percentage of their market share. This increased the pressure for the SOEs to reform (Brandt & Rawski, 2008). However, after some time, the profitability of the TVEs declined significantly.
This was because continued entry of TVEs into the market led to a gradual increase in competition. Initially, TVEs did not notice the competition as they had a cushion of high profits that protected them (Naughton, 2007). Reduction in profitability necessitated the TVEs to undertake major changes to remain competitive.
The institutional framework that surrounded TVEs facilitated their rapid development. TVEs were under the control of the local government, which had lower tax rates. On the other hand, the government controlled the SOEs. SOEs benefited from the government’s price policy.
However, the major disadvantage of government control was that the government charged very high tax rates on SOEs. In some instances, the tax rate was 100% of the profits of the SOEs. The unbalanced treatment of SOEs and TVEs resulted in increased profitability and competitiveness of TVEs (Naughton, 2007).
During their early stages of development, TVEs were in urgent need of capital. Failure to obtain capital would have restricted their growth. However, TVEs overcame this hurdle easily. The local government enabled TVEs to access capital. Local governments acted as guarantors to TVEs. This enabled the TVEs to access bank loans, which facilitated their growth. In addition, the local government controlled capital flows in rural areas.
Therefore, the local government initiated policy changes that enabled TVEs to access funds from various credit institutions. Rural credit cooperatives (RCCs) were the major sources local capital. In the 1980s, RCCs had vast sums of money due to a significant increase in household savings. Access to the huge source of capital from RCCs was one of the major factors that contributed to TVEs ultimate success (Naughton, 2007).
Continued growth of TVEs – and reduced profitability of SOEs – necessitated the central government to undertake several structural changes on SOEs. SOEs were the major sources of funds for the central government. Therefore, a decline in the financial health of SOEs led to a significant reduction in the central government’s revenue. The central government’s changes involved restructuring, reorganizing, and selling off SOEs.
These changes helped in increasing the efficiencies of the SOEs. In addition, the changes increased the autonomy of SOEs and growth of the TVEs paving the way for marketization of the economy (Fewsmith, 2001). The success of TVEs made the local government take several measures to prevent them from becoming as inefficient as the SOEs. Some of the changes included giving more autonomy to the managers of the TVEs and changing the property rights (Fan, Zhang & Zhang, 2002).
Dwindling of the fortunes of SEOs and increased profitability of TVEs led to a significant reduction in the revenues of the central government as a share of Gross Domestic Product (GDP). On the other hand, increased profitability of TVEs increased the financial power of local governments. Increased financial power of the local government, threatened China’s political stability. Therefore, in 1994, the government introduced major tax reforms to limit the financial muscle of the local governments (Fewsmith, 2001).
Success of the TVEs led to changes in their ownership. During the early period of the development of TVEs, collective TVEs dominated the TVE sector. From 1980 to 1995, there was a gradual change in ownership of TVEs. However, after 1995, several structural changes led to rapid privatization of TVEs. This increased the proportion of privately owned TVEs to more than 90% (Naughton, 2007).
Therefore, TVEs have played a critical part in China’s growth. They facilitated the development of the non-farm rural economy and provided employment to millions of people. The rapid growth of the rural industry necessitated several changes in the urban sector to cope with increased competition (Fan, Zhang & Zhang, 2002).
However, this would not have occurred if there were no structural changes in the government and management of TVEs. China credits its current economic growth to the successful implementation of several policies that facilitated the development of TVEs.
References
Brandt, L. & Rawski, T.G. (2008). China’s great economic transformation. Cambridge, MA: Cambridge University Press.
Fan, S., Zhang, L. & Zhang, X. (2002). Growth, inequality, and poverty in rural China: The role of public investments. Washington, DC: Intl Food Policy Res Inst.
Fewsmith, J. (2001). Elite politics in contemporary China. Armonk, NY: M.E. Sharpe.
Naughton, B. (2007). The Chinese economy: Transition and growth. Cambridge, MA: MIT Press.