Enterprise Reform and Private Sector Development

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Enterprise Reform and Private Sector Development

• Some Possible Lessons from China
• Qimiao Fan, the World Bank

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Presentation Outline

• Is China Relevant for Madagascar?
• Chinas Enterprise Reform and PSD Experience
• Some Possible Lessons

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China and Madagascar
Is China Relevant for Madagascar?
Value Added by Sectors, of GDP
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China and Madagascar
Employment by Sectors, of Total
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China and Madagascar
GDP per capita in US
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• Both China and Madagascar are low-income
  developing countries
• Similar initial conditions in late 1970s and
  early 1980s with economy dominated by agriculture
  and state-owned enterprises in the urban sector
• Despite similarities in initial conditions,
  performance differed significantly in the past
  two decades in the two countries
• Policies do matter

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Chinas Enterprise Reform and PSD Experience

• Liberalization of the Agricultural Sector
• Encouraging the Growth of the Non-state Sector
  Through Liberalization from the Start of Reforms
• Township and village enterprises (TVEs)
• Special Economic Zones (SEZs) and
  Foreign-invested enterprises
• Encouraging the Growth of Small and Medium
  Enterprises
• Gradual but Progressive Reform of the
  Stated-owned Enterprises (SOEs)
• Management autonomy and responsibility
• Dismantling central planning
• Ownership reforms

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• Liberalization of the Agricultural Sector
• Started with one village by the villagers in
  Eastern China in 1978
• Rapidly extended to the rest of the country in
  1979
• Led to the decollectivization of the rural
  society
• Individual household agriculture became the norm
• Free market transactions for agricultural
  commodities
• Eighty percent of population affected
• Between 1979 and 1984, agriculture grew about 10
  per annum
• Agricultural production increased 126
• Per capita consumption doubled in real terms

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• Encouraging the Growth of the Non-state Sector
  Through Liberalization from the Start of Reforms
• Township and Village Enterprises (TVEs)
• Developed to initially support the agricultural
  production needs of the rural population
• Owned by members of the township or village
  and/or governments at the township/village level
• Operated completely outside state planning
• Strongly encouraged by the central government
• But lacked clear ownership and access to
  financing
• Contributed 25 to GDP growth between 1979 and
  1994
• Share of total employment increased to 20 by
  1999
• Share of exports increased to 45 by 1997
• TVEs provided significant competition to SOEs and
  also made reform of SOEs much easier by
  demonstrating the benefits and creating employment

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• Special Economic Zones (SEZs) and
  Foreign-invested Enterprises
• Important part of the open-door policy
• Set up in the coastal provinces to experiment
  with various reforms, to attract FDI and to
  promote exports
• The key policies are liberalization allowing both
  foreign and domestic private investors to invest
  in most sectors and fewer regulatory barriers
• Local governments in the SEZs have significant
  autonomy over policies, regulations and
  investment approval
• The SEZs set the standards and provide
  competition to the rest of the enterprise sector
  including the SOEs
• Successful policies, experiences, best practices
  and managerial and technical know-how quickly
  extended to the rest of the economy
• The coastal regions linked to the SEZs attracted
  over 90 of total cumulative FDI as well as large
  amount of domestic investment

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• Encouraging the Growth of Private Small and
  Medium Enterprises
• Initially, individuals and private enterprises
  were allowed into the service sector in the late
  70s and early 1980s
• Private enterprises were then quickly allowed
  into many industries in manufacturing and
  transport
• Individual enterprises were first mostly in the
  informal sector with little regulation but as
  they grew, they quickly moved into the formal
  sector
• Domestic private enterprises have been gradually
  allowed into many other sectors including
  infrastructure and recently financial services
• Some private enterprises have grown into large
  conglomerates

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• Gradual but Progressive Reform of SOEs
• SOEs dominated the urban economy and most sectors
  outside agriculture
• SOEs burdened with social responsibilities and
  politically more sensitive to reform because of
  ownership issues
• As a result, SOE reforms have been much more
  gradual but progressive
• Started with contract responsibility system to
  increase managerial autonomy and incentives in
  mid 1980s, followed by price liberalization,
  gradual abolition of central planning and public
  investment in competitive sectors in early 1990s
• Small and medium SOEs were privatized through
  sales and partial ownership reform of large SOEs
  undertaken through stock listing in both domestic
  and overseas markets in late 1990s
• Growth of the new non-state sector has been
  crucial for SOE reforms as they demonstrated the
  benefits of reforms, created employment to absorb
  layoffs from SOEs and provided competition and
  pressure for SOEs to improve performance

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• As a Result of the Reforms, New Private
  Enterprises Contribute Increasingly More to GDP
  Growth

• In the early part of the reforms, agriculture
  contributed most of the growth
• But starting in the mid 80s, most of the growth
  came from the non-state industrial sector
  including the TVEs, foreign funded enterprises
  and private domestic enterprises
• Contribution from the SOE sector has declined
  steadily

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Possible Lessons from China

• Strong and Continued Political Commitment at the
  Highest Level is Critical
• Clear and formal statement of commitment (e.g.,
  the open-door policy and protection of private
  property rights have been enshrined in the
  Communist Party Charter and the countrys
  Constitution in China)
• Commitments need to be reaffirmed whenever there
  is doubt and uncertainty (e.g., when a new
  leadership comes in or after major political
  events)
• Clear and strong endorsement of new reform
  initiatives that are consistent with the overall
  direction of reforms (e.g., agricultural reform
  initiated by farmers in a village)

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• The Reform Strategy Has to be Credible,
  Consistent but Pragmatic
• Reform strategy should set clear directions for
  overall reforms
• But should leave sufficient room for
  experimentation and local initiatives
• While slowdowns and pauses are sometimes
  inevitable, reversals are costly, damage
  credibility and should be avoided at all costs

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• Political Economy Aspects of Reform Are Crucial -
  Minimizing Resistance and Maximizing Support for
  Reforms Through Careful Sequencing and
  Articulating and Demonstrating Benefits
• Starting with the most affected sectors or areas
  where the benefits are likely to be large and
  visible and support is strong (e.g., agriculture
  in China)
• Training and educating the key stakeholders
  (e.g., government officials and SOE managers)
  will help reduce resistance to and increase
  support for reforms
• Articulating and demonstrating the benefits of
  reforms through experimentation and pilots (e.g.,
  Chinas SEZs)
• Quickly and decisively extend reforms and best
  practices to the rest of the economy once proven
  successful through formal legislation, regulation
  and training

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• Encouraging the Growth of New Enterprises and FDI
  is the Key to the Success of Reforms
• Allowing the entry of new private firms into
  previously closed sectors is usually easier than
  reforming the existing SOEs
• Growth of new private firms create employment and
  increased tax revenue that will make reform of
  SOEs much easier
• Success of new private firms will provide
  demonstrations on the benefits of reforms, help
  maximize support and increase pressure for SOE
  reforms
• Entry of new firms will also provide competition
  to SOEs and help improve SOE performance