Urban Economic Growth

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Urban Economic Growth

• Lecturer Zhigang Li

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Questions

• What are the sources of productivity growth in
  urban economy?
• What are the main drivers of investments in urban
  area?

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Outline

• Privatization
• Overview of the process
• Productivity implication
• Investment implication
• Corporate governance reform
• Infrastructure investment

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Ownership Composition

• 1978 1996
• State-owned enterprises .77 .33
• Collective enterprises .23 .36
• (of which TVEs) (.09) (.28)
• Private and household 0 .19
• Foreign invested 0 .12
• (of which HK-Taiwan) 0 (.05)

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Privatization

• Entry of non-state-owned firms
• 1978-present
• Exits of state-owned enterprises
• Late 1990s
• Privatization of the state sector
• Late 1990s - present

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Entry of New Firms

• During 1978-1993, entry of new firms was the
  dominant force that drove the change the
  ownership composition of Chinese industry (table
  13.1).

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Exits of SOEs

• 1994 The Company Law was adopted
• Provide a uniform legal framework into which
  different ownership forms fit.
• Provide a framework to corporatizing SOEs
• 1997 Grasping the large and letting the small
  go
• The state retained control on centrally
  controlled firms (e.g. energy and resources).
  Local governments had greater freedom to
  restructure local SOEs.
• Tens of thousands of SOEs and urban collectives
  were shut down. Laid-off workers totaled 40 of
  the SOE workforce. Unban collective workforce
  shrank by more than two-thirds.

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Privatization

• The entirely privatization process has been
  highly decentralized and run by local
  governments.
• No clearly articulated rationale for
  privatization (there was not even a n
  announcement that privatization has been adopted
  as a policy).
• Insider trading pervasive in early phase and the
  negative impact has been far less than that of
  Russia.
• The process of Chinese privatization is not well
  understood yet.

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Investment Implications

• Chinas industry has grown at an real annual rate
  of around 15 since 1980.
• Table 13.3 (2002)
• Workers (M.) Assets (B. RMB)
• All SOEs 24.9 8,972
• Central SOEs 5.9 4,336
• Percent 23.7 48.3

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Productivity Implication

• Intensified competition
• Selection effect
• Incentive to use resources efficiently
• Incentive for innovation and imitation
• Non-state firms are more efficient than State
  firms

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Effect of Competition on SOEs(Xu, 2000)

• Data
• Same data as in Wei Li (1997)
• Survey data on 700 SOEs
• Use average mark-up ratios for SOEs as proxy for
  market competition. Higher mark-up suggests less
  competition.
• Findings
• Market competition increases efficiency of firms.

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Why TVEs outperformed SOEs? (Perotti et al. 1999)

• Social responsibilities beyond profit-seeking
• Housing, education, health insurance, and
  pensions.
• It is estimated that the social welfare provision
  accounts for 40 of the profitability difference
  between SOEs and TVEs.
• Unfavorable taxation and prices
• By 1995, the SOE s produced 44 of GDP, but
  contributed 71 of fiscal revenue.
• Failure of state-investment system
• Capital diversion and statistics bias

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Why TVEs outperformed SOEs? (Continued)

• Disadvantage of TVEs
• Technology
• Labor skills, education levels of staff
• Access to bank loans and government supports
• Advantage of TVEs
• Ownership and governance structures
• Managers of SOEs are not just managers
• Hard budget constraint
• Support from SOEs
• Support from local government
• TVEs are more flexible in using market
  opportunities
• Flexibility due to size and accounting system

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Corporate Governance before the Reform

• Under the planned economy, socialist enterprise
  was really a constituent part of an enormous
  bureaucracy, serving as a multifunctional social
  unit.
• Managers do not have incentive to increase firm
  productivity or profitability.
• Soft Budget Constraint
• Loss-making companies continue to receive
  financing.

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Creating Corporate Governance (1979-1993)

• Incentive provision
• Firms are allowed to retain part of profits.
• The power of incentives continue to rise.
• SOEs partially participate in market due to the
  dual-track system.
• Enterprise managers gained authority and
  autonomy.
• The internal organization of most SOEs was
  basically unchanged.
• Soft Budget constraints

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Creating Corporate Governance (1996-current)

• Budget constraints were hardened.
• The number of industrial SOEs dropped from
  120,000 in the mid-1990s to 31,750 in 2004.
• Traditional SOEs were converted into joint-stock
  corporation or simpler limited liability
  companies.
• The Company Law specifies the board of directors
  as the supreme authority in the corporation.
• By May 2003, 62 of listed firms have boards.
• Forming SASACs as oversight agencies

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State Asset Supervision and Administration
Commission (SASAC)

• In June 2003, control of central SOEs was
  transferred to Central SASAC.
• Petroleum, metallurgy, electricity, and military
  industry, telecommunications.
• During 2004 and 2005, local SASACs were set up at
  the provincial and municipal level.
• SASACs focus on profitability monitor enterprise
  operations, appoint members of boards of
  directors and establish procedures for appointing
  managers and to approve major decisions in
  enterprise operation.
• SASAC does not directly collect the earnings.

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Oversight of Managers of Publicly Owned Firms

• An immature mixture of control-based and
  market-based oversight system
• Banks play minor role in monitoring firms
• For listed firms, mostly of them have parent
  companies, which generally have controlling
  stakes that cannot be challenged. Requirement for
  disclosure and for independent directors are
  immature.
• Chinese state firm managers have achieved an
  extraordinary degree of independence.

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Constraints for CEOs of Listed Companies in 2000
(Table 13.6)

• Internal Percent External Percent
• Board of directors 29.2 Product market 79.1
• Self-constraint 25.8 Stock market 4.8
• Annual meeting 19.9 Job market 4.5
• Bureaucratic superiors 13.2 Labor market 4.0
• Local government 5.4 Consumers 3.3
• Supervisory board 3.4 Banks 2.7
• Employees 1.7 Key suppliers 1.3
• Party committee 1.3 News media 0.3
• Trade union 0.1

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Infrastructure Investment in China

• The role of government
• Direct or indirect financing
• To create a regulatory and market environment to
  facilitate private investment
• Main types of infrastructure investment
• Electricity plants and network
• Transportation
• Telecommunication

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Electricity

• The electricity sector barely keeps pace with the
  economic growth
• Electricity output grew 7.8 per year between
  1980 and 1998.
• Electricity output grew 11 per year between 1998
  and 2004.
• Per capita consumption of electricity in China is
  still in the range of a low to medium-income
  country.

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Telecommunication

• Chinas telecommunications infrastructure is
  rapidly approaching middle-income-country
  standards.
• China invested only 0.2 of GDP on
  telecommunications in 1980s. By 1989, China had
  only one telephone per 100 residents.
• Investment in telecommunication reached 1.5 of
  GDP by 1993. By 2004, 51 out of 100 people have
  telephones.