Entry of NonState Ownership

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Entry of Non-State Ownership
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Questions

• Why SOEs have grown so slowly while non-state
  forms of ownerships have flourished?
• Why TVEs grew faster than private enterprises
  during the early reform years?
• Why TVEs stopped growing after 1995 while private
  enterprises continued its rapid growth?

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Township and Village Enterprises (TVEs)

• TVEs are rural local public firms owned by
  community (township or village).

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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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SOEs vs. TVEs Some Empirical Evidence

• SOEs vs. TVEs (Liu and Otsuka, 2004)
• 1995-99, management reform (providing incentives
  to chief executives) had little effect on
  production efficiency of SOEs but significant
  effect on TVEs.

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TVEs vs. Private Enterprises(Jin and Qian, 1998)

• Why TVEs grew rapidly despite its weaker
  managerial incentives, greater political
  intervention from the government, softer budget
  constraints, and market ability to private
  enterprises?
• Institutional factors favoring TVEs
• Central governments influence
• Community governments power
• Underdevelopment of market

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Why Central and Local Governments Like TVEs More?

• TVEs may be a more effective instrument than
  private enterprises to achieve the goals of
  governments
• Financial Objective
• Governments revenue
• Political Objective
• Employment
• Income

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Favorable Factors for TVEs Growth I

• Access to credit
• Due to (central and local) governments influence
  and underdevelopment of the capital market, TVEs
  have access to a larger pool of capital than
  private enterprises have.
• Transaction costs
• TVEs, with help from the community government,
  have a lower transaction cost in accessing SOEs,
  an important source of technology and materials.
• In contrast, private enterprises have lower
  transaction costs in competitive markets.

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Favorable Fators for TVEs Growth II

• History Matters Twenty-years of commune system
  had accumulated huge amount of physical and
  capital and given TVEs organization advantages
  over private enterprises.
• Local governments can provide better political
  security to TVEs when the rule of law is absent.
• TVEs facilitates community governments to convert
  land to cash when the development of land rental
  markets lags behind that of product markets.

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How Important are the Factors? (Jin and Qian,
1998)

• Data
• Provincial data from 1986 to 1993.
• Proxies for economic factors
• State supply of credit Loan to TVEs divided by
  their output
• Local political strength Share of rural
  households not adopting Household Responsibility
  System by 1983.
• Product market development Transaction volume in
  rural free markets divided by total rural output.

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Theories Supported

• Access to credit theory
• Provinces with more credits from state financial
  institutions see larger TVE outputs.
• Transaction cost theory
• Provinces with more developed product market have
  smaller share of TVE.
• Provinces with larger state industry see larger
  share of TVEs.
• Political protection theory
• History matters theory

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Key Factors Determining Interprovincial
Differences in TVE Share

• Key Factors
• Initial collective assets
• Product market development
• The size of state industry
• The above factors explain over 70 percent of
  interprovincial differences in TVE-PE ratios (in
  employment of output).

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Privatization and Wage Structure (Ho et al., 2002)

• Data from Shangdong and Jiangsu provinces of
  China.
• Privatization was associated with increased wage
  and earnings inequality.
• They also find increased returns to education, to
  experience, and increased wage gap.

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Productivity Effects of TVE Privatization (Sonobe
and Otsuka)

• Data
• The Great Yangtze River Region
• 1995-98
• 53 counties
• 78 garment and 80 casting enterprises

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Empirical Findings

• When local governments support for
  subcontracting with SOEs became unimportant,
  privatization improves production efficiency.
• Confirmed for the garment industry
• Also confirmed for the casting industry although
  the effect is weaker, possibly due to the
  stronger SOE-TVE subcontracting relationship.

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The Wenzhou Model

• Wenzhou used to be a poor rural area, but it now
  ranks among the most prosperous cities in China
  due to its explosive growth in the 1990s.
• The Wenzhou Growth Model
• Initially, poor farmers began to produce
  low-quality consumer goods.
• In 1990s, private household enterprises upgrade
  their products with innovation and rapid
  imitation, overcoming bad reputations (for
  low-quality goods) to capture the national
  market.
• Local governments in Wenzhou facilitate free
  economic activities by constructing effective
  local marketplaces, greatly facilitating
  spillovers of valuable market information.
• Long tradition of handicrafts and commerce
  networks.

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A Map Zhejiang Province
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Explaining the Increase in Chinas Agricultural
1980-84 (Mead, 2000)

• Before 1980, Chinese households tend to allocate
  a disproportionate share of non-land inputs to
  individual private plots.
• As much as 53 percent of increased farm output
  1980-84 may be explained by eliminating
  inefficient input allocations before 1980.

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