Progress without privatization : the reform of China's state industries

RESEARCH PAPER SERIES ENTERPRISE BEHAVIOR AND ECONOMIC REFORMS: A COMPARATIVE STUDY IN CENTRAL AND EASTERN EUROPE AND INDUSTRIAL REFORM AND PRODUCTIVITY IN CHINESE ENTERPRISES RESEARCH PROJECTS OF THE WoRLD BANK CHNA NUMBER CH-RPS #17 OcrOBER 1992 Progress without Privatization: The Reform of China's State Industries Tom Rawski University of Pittsburg Transition and Macro Adjustment Division Policy Research Department World Bank Washington, D.C. CONTENTS ACKNOWLEDGEMENT ......... i I INTRODUCTION .......................................... 1 II. PRiVATIZATION AND REFORM: A SKEPTICAL PERSPECTIVE ............... 1 Ill. AN OVERVIEW OF CHINESE INDUSTRY ............................ 3 IV. THE DYNAMICS OF INDUSTRIAL CHANGE IN CHINA DURING THE 1980s ........ 4 A. WHERE DO THE LOSSES COME FROM? ..........................7 V. MICROECONOMIC REFLECTIONS OF INDUSTRIAL REFORM . ............... 12 VI. CONCLUSION ........................................... 16 REFERENCES ........................................... 23 TABLES TABLE 1. INDUSTRIAL GROWTH, CURRENT PRICES ........................... 4 TABLE 2. INDUSTRIAL PROFITS AND LOSSES FOR 1989 BY INDUSTRIAL BRANCH ................................ 17 TABLE 3. INDUSTRIAL PROFITS AND LOSSES FOR 1989 BY PROVINCE ........... 18 TABLE 4. LINKS BETWEEN PROFIT AND RETAINED EARNINGS FOR STATE FIRMS, SAMPLE DATA, 1980-89 ........... 19 TABLE 5. LINKS BETWEEN PER CAPITA RETAINED EARNINGS AND BONUSES, SAMPLE DATA FOR STATE ENTERPRISES IN SELECTED INDUSTRIAL BRANCHES, 1980-89 ......................... 20 TABLE 6. LINKS BETWEEN ACCESS TO FUNDS AND CURRENT OR LAGGED RETAINED EARNINGS, El SAMPLE RESULTS FOR 1985 AND 1986 ................... 22 ACKNOWLEDGEMENT The research projects on "Enterprise Behavior and Economic Reforms: A Comparative Study in Central and Eastern Europe", and "Industrial Reforms and Productivity in Chinese Enterprises" are research initiatives of the Transition and Macro Adjustment Division (PRDTM) of the World Bank's Policy Research Department and managed by I.J. Singh, Lead Economist. These projects are being undertaken in collaboration with the following institutions: The London Business School (LBS); Rdforme et Ouvertures des Systhmes Economiques (post) Socialistes (ROSES) at the University of Paris; Centro de Estudos Aplicados da Universidade Cat6lica Portuguesa (UCP) in Lisbon; The Czech Management Center (CMC) at teldovice, Czech Republic; The Research Institute of Industrial Economics of the Janus Pannonius University, Peds (RIIE) in Budapest, Hungary; and the Department of Economics at the University of L6di, in Poland. The research projects are supported with funds generously provided by: The World Bank Research Committee; The Japanese Grant Facility; The Portuguese Ministry of Industry and Energy; The Ministry of Research and Space; The Ministry of Industry and Foreign Trade, and General Office of Planning in France; and the United States Agency for International Development. The Research Paper Series disseminates preliminary findings of work in progress and promotes the exchange of ideas among researchers and others interested in the area. The papers contain the views, conclusions, and interpretations of the author(s) and should not be attributed to the World Bank, its Board of Directors, its management or any of its member countries, or the sponsoring institutions or their affiliated agencies. Due to the informality of this series and to make the publication available with the least possible delay, the papers have not been fully edited, and the World Bank accepts no responsibility for errors. The authors welcome any comments and suggestions. Request for permission to quote their contents should be addressed directly to the author(s). For additional copies, please contact the Transition and Macro Adjustment Division, room N- 11065, World Bank, 1818 H Street, N.W., Washington, D.C. 20043, telephone (202) 473-1442, fax (202) 676-0083 or 676-0439. The series is also possible thanks to the contributions of Donna Schaller, Vesna Petrovic, Cecilia Guido-Spano and the leadership of Alan Gelb. i I. INTRODUCTION The idea of rapid transition to a private market economy dominates proposals for economic reform in the USSR and Eastern Europe. Respected international organizations propose radical change as the sole feasible reform strategy for these nations. Yet the same organizations counsel gradualism in China, where enterprises display a growing responsiveness to market forces despite the absence of privatization, effective bankruptcy procedures, and other features widely regarded as key reform components. Furthermore, the vision of free trade, flexible prices, and minimal government that suffuses much of the reform literature clashes with current reality in Western Europe, North America, and most particularly in the East Asian states whose economic accomplishments reform seeks to emulate. These divergences signal our present inability to answer fundamental questions about reform. How extensively must market forces penetrate to elicit the beneficial consequences of a "market economy"? How can we measure the strength of market forces or the progress of economic reform in transitional economies? Do semi-market economies face a choice among reform paths, or can we identify a narrow set of reform prerequisites? The present essay focuses on a subset of these issues dealing with privatization and with the progress of China's state-owned industries in its absence. I begin with a critical examination of the view that transferring state enterprises to private hands is an essential ingredient for reform success. I then sketch the dynamics of recent industrial development in China's economy by describing the process through which partial and uneven reforms that exclude privatization have expanded the role of market forces and financial pressures in state industry. I then reinforce this perhaps controversial interpretation by introducing statistical evidence that begins to test the proposition that gradual and partial introduction of market forces has substantially reshaped the behavior of China's state industries in the absence of privatization. II. PRIVATIZATION AND REFORM: A SKEPTICAL PERSPECTIVE Reform seeks to elevate income and material welfare by raising the trend rate of productivity growth. We can think of reform as an investment process in which governments select a menu of reform policies (e.g. privatization or subsidy reduction) as well as the intensity of implementation (e.g. how many state enterprises to auction off in year 1). From this perspective, the significance of including a specific policy instrument or magnifying its intensity within a particular reform program depends on several factors including a variety of initial conditions (e.g. the government's managerial capacity, the intensity of competition, etc.) and the degree to which other policies can usefully substitute for the instrument in question. The experience of China as well as of other socialist and non-socialist states demonstrates that, in comparison with feasible private alternatives, state enterprise often performs dismally in terms of productivity, cost control, technical development, customer satisfaction, and even 1 Progress without Privatization (though not in China) output growth. Many economies could benefit from the transfer of state firms to private ownership. What is not clear, however, is whether such transfers should come earlier or later in the reform process, or whether they should be partial and gradual or total and immediate. Unfortunately, discussions of reform policy often rush to offer extreme judgments on privatization that seem unrelated to any coherent theoretical perspective or empirical evidence. International agencies, for example, advised the USSR that "the ultimate goal of ownership reform is to privatize almost all enterprises" [IMF 1990, p. 26]. Another tract announces that "privatization is necessary because only private owners can establish an enduring basis for self-financing and managerial independence" [Uno 1991, p. 150]. A third insists that privatization is "urgent" but justifies this on the basis of political rather than economic arguments [Blanchard et al 1991, xiv, 32-33]. I read these statements (and many like them) as excursions into what Harold Demsetz [1969] has called "the nirvana approach, " in which the non-optimality of arrangements observed in actual economies is taken as sufficient reason to invoke the superiority of an unexamined alternative. Demsetz attacked Kenneth Arrow for recommending that government intervention could improve upon the private allocation of resources to invention without carefully analyzing possible costs of state entry into the management and financing of research and development. Ironically, we now encounter nirvana arguments from the opposite direction, as economists advocate privatization without considering the possibility that the future costs of market failure and regulatory intervention could make privatization less attractive than an alternative path of seeking to improve the performance of inefficient state enterprises. Demsetz himself steps forward as an exponent of nirvana, insisting that "solving the privatization problem is the only real hope" for Eastern Europe, and that "long delay in this matter will inevitably" result in "continuing poverty and bureaucracy" [1991, p. 1214]. Economic studies of privatization offer little sustenance for this confident determinism. A recent survey observes that while "private ownership has efficiency advantages in competitive conditions" there is no evidence of its general superiority "when market power is present." If state regulatory intervention "is substantial, the differences between public and private [ownership] can become a matter of degree" [Vickers and Yarrow 1991, pp. 112-113]. There is no general presumption that state-owned firms are less efficient than private firms, if the latter are subject to government regulation [Laffont and Tirole 1991, p. 103]. The reality of government failure makes privatization, which is often "highly politicized," an option that "poses formidable problems" [Lieberman 1990, pp. 3, 23]. Privatization may do no more than replace public with private monopolies and replace soft budget constraints with the sort of regulatory protection that can enable blatantly uneconomic producers (e.g. Japanese rice farmers, United States sugar growers, factories in Pakistan and elsewhere that generate negative value added at international prices, Polish producers of tropical plants, etc.) to achieve commercial viability under what appear to be "market" conditions. Progress without Privatization 3 The real question, which, as the earlier Demsetz [1969] observes, the nirvana method ignores, is whether the ACTUAL, as opposed to the textbook, consequences of privatization are likely to represent a sufficient improvement over the alternative of restructuring state firms - which involves its own costs and risks - to elevate privatization to a position near the top the reform policy agenda. The point here is not to claim that privatization is irrelevant or unnecessary, but to highlight the failure of proponents to muster a strong case for arguing that early privatization of large-scale industry is essential to the success of socialist reform efforts. Perhaps these proponents, many of whom receive comfortable salaries from organizations that are owned or funded by the public sector, see the need for privatization as so obvious that no detailed argument is required. If so, they should consider China's recent economic experience, which revolves around two features that differ widely from recent events in Eastern Europe and the former USSR. First, as noted above, China's urban reforms have remained partial and somewhat hesitant, with no significant transfer of industrial resources into the hands of private owners. And second, despite episodes of instability inspired by political as well as economic factors, the economy has grown rapidly, avoiding the massive uncertainties, shortages, idleness, hoarding, price gyrations and dislocations experienced in the former USSR and Eastern Europe. The crucial issue here is to determine the extent to which these peculiarities are causally related. This issue cannot be resolved here. The following pages have the more modest ambition of arguing that, contrary to widespread belief, China's limited industrial reforms have indeed brought about substantial and beneficial changes in the behavior of industrial enterprises, including large firms in the state sector. I begin with a brief overview of China's industrial system. III. AN OVERVIEW OF CHINESE INDUSTRY Table 1 provides an overview of Chinese industry for the years 1978 and 1988. Village-level industries are excluded. The following points emerge: -- The bulk of industrial output comes from "state" and "collective" firms. All of these firms are legally and practically tied to some level of government (although the closeness of ties may vary widely, especially for "collective" firms). -- Despite extremely rapid growth during the past decade, private industry contributes only a small share of incremental industrial output. The figures for 1980 and 1990 indicate the following progress for industrial gross output (current prices; see TJNJ 1991, p. 394): 4 Progress without Privatization -- These figures confirm that privatization is not an important feature of the Chinese industrial scene. Despite the rapid expansion of private industrial output, at least 90 percent of incremental industrial production during the 1980s came from state and collective firms that have no private owners (note that category labelled "other" includes some private and semi-private firms). Table 1. Industrial Growth, Current Prices Total State Collective Private Other Output Value (I Billion, Current prices) 1980 515.4 391.6 121.3 0.1 2.4 1990 2392.4 1306.4 852.3 129.0 104.8 Increase: Amount 1877.0 914.8 731.0 128.9 102.4 Share (%) 100.0 48.7 38.9 6.9 5.4 IV. THE DYNAICS OF INDUSTRIAL CHANGE IN CHINA DuRING THE 1980s Economic agents in any system strive to reach specific, mainly financial, objectives. Following Nelson [1987, chap. 2], we can distinguish two major types of activity: routine and innovation. Routine activities are those for which the dispersion of anticipated outcomes is relatively narrow; alternative outcomes are tightly clustered around the mode. Innovation involves departure from routine, which entails greater risk and increases the dispersion of returns. Both routine and innovation have market and non-market components. One might define economic reform as a process that encourages or obliges firms, managers, and workers to tilt their activity portfolios toward market rather than non-market: efforts and toward innovation rather than routine. Prior to the introduction of economic reforms in the late 1970s, industrial activity in China, as in other socialist economies, was oriented primarily toward non-market routine. Managers concentrated on meeting plan targets and on satisfying the requirements of their superior agency (guanli bumen) rather than emphasizing financial results or the needs of customers. This has changed dramatically. An investigation of the time that industrial managers devote to dealing with government officials, market-linked operations (sales, procurement, advertising, fund-raising, collections), and production matters (product design, enterprise layout, etc.) would undoubtedly reveal a massive decline in the importance of government relations (telephone records would be an ideal source for such a study). How has this shift toward the market emerged from a rather limited set of reform initiatives? Progress without Privatization 5 Before seeking an answer to this question, it is important to note that several features of China's pre-reform industrial structure that differed significantly from the standard picture of a "Soviet-type" economy. 1. There was a certain degree of decentralized control over industrial investment, production, pricing, and marketing. Localities competed to develop industries that could benefit their own economies, mainly using local resources and mainly serving local markets. These developments sometimes included the formation of ties with large firms in the state sector [Perkins et al 1987]. 2. Investment outlays during the period of socialist planning included a substantial effort to build complete sets of industries in most provinces and, whenever possible, in many regions within provinces. As a result, the sort of deregulation that leads to monopoly in Russia or Poland creates competition in China. 3. Efforts to socialize China's rural economy failed to extinguish the spirit of enterprise in what must surely rank as one of mankind's most entrepreneurial and business-oriented cultures. 4. The world's most dynamic economies stand at China's doorstep. These nations, with strong traditions of commercial ties to China, together with several million business-oriented Chinese scattered around the Pacific Rim, represent a unique pool of latent resources that can magnify the impact of any reform effort. 5. Tantalizing scraps of evidence suggest the presence of market-like forces prior to reform. Jefferson, Rawski, and Zheng, for example, that the marginal revenue product of materials is virtually identical in state and collective industry throughout the period 1980-88 [1992, pp. 255-56]. China's reforms have taken the form of enabling measures that remove barriers to enterprise activity and permit new initiatives. For the most part, the Chinese have avoided mandatory changes like privatization, bankruptcy, or elimination of subsidies. The principal reforms begun during the late 1970s and early 1980s included profit sharing for successful enterprises; a bonus system intended to harness latent energies within the labor force; gradual increase in enterprise autonomy in such matters as product mix, sales, and procurement; gradual creation of markets for resources; gradual expansion of price flexibility for the increasing proportion of commodities exchanged outside plan auspices; and a rapid expansion of opportunities for participation in foreign trade and investment. A second tranche of reforms implemented in the mid-1980s created additional opportunities to which enterprises could respond. The key innovation was the creation of a "two-track" or "dual price" system which permitted the emergence of regulated, but unplanned market exchange for nearly all commodities, including energy, minerals, farm products, building materials, components, equipment, and foreign exchange, and for many services, among them 6 Progress without Privatization technical knowledge and expertise. As the scale of these semi-market transactions expanded, price information generated outside the network of officially controlled transactions gradually eroded the operation of the planning system. Producers began to seek means of removing products from the planning system to take advantage of more lucrative sales opportunities. Beneficiaries of underpriced official allocations were systematically squeezed by suppliers who knew exactly what they were losing by being forced to deliver at planned prices [Liu 1991]. Bankers, themselves looking for profit, increasingly turned toward commercial lending criteria. The impact of these developments, however, was not even. It is generally agreed that the reforms provided the greatest opportunities for, and elicited the most dynamic response from urban and rural collective firms (and also from China's small private sector) that had failed to command the attention of planners and were therefore obliged to subsist on whatever crumbs of resources, workers, equipment, etc. the planning system provided after serving the needs of state firms. On the whole, larger firms, typically state-owned, that enjoyed greater access to resources distributed through the planning system, responded less eagerly to the opportunities arising from the reforms of the 1980s. This much is clear. But did they respond, and if so, how vigorously? Here, controversy arises. Chinese journals are filled with discussions of how to "energize" these large and medium-scale enterprises, suggesting that any response by these firms was slow and weak. External researchers offer similar views: James Stepanek for example, asserts that "Ten Years of Reform Have Left China's Big State Factories Unchanged" [1991]. Another observer sees an economy "dominated by huge state-owned companies that specialize in inefficiency" [Kristof 1991]. I view these perceptions as considerably exaggerated. I believe that state enterprises have experienced substantial pressures for improved financial performance that have moved them a considerable distance toward market-oriented behavior patterns. I see state enterprises as gradually drifting away from their official benefactors (and regulators). What evidence can be mustered in support of these assertions? A good place to begin is by analyzing the mounting financial losses of China's industrial sector. This monetary drain is widely cited as evidence of the general decrepitude of China's rust-belt industries. Table 2 contains information on profits (col. D, net of losses) and losses (col. C) by branch of industry. Table 3 provides data on industrial profit and loss by province. Both data sets refer to 1989, and both include "independent accounting units" exclusive of village-level firms. Although the source gives no separate compilation for the state sector, we know that 1989 losses of independent units in state industry amounted to Y18.02 billion, or 77.1 percent of the total losses shown in Table 3 [Industry 1990, p. 66]. In 1989, state industry also accounted for 56.1 percent of industrial output [TJNJ 1991, p. 26]; independent state units accumulated profits amounting to 74 percent of the total shown in Table 2 [Industry 1990, p. 66]. Progress without Privatization 7 A. Where do the losses come from? 40 percent of the losses come from two sectors: coal mining (line 1 in Table 2) and petroleum extraction (Line 2). Losses are common in these sectors because of artificially low administered prices. -- 16 percent of the losses come from five provinces, Jiangsu, Zhejiang, Fujian, Guangdong, and Hainan, which have few large-scale state plants, one small oil field, and little coal mining. These provinces are among China's most dynamic in terms of industrial growth, structural change, and export development. The accumulation of losses in these areas reflects the intensity of competition and the rapidity of economic change rather than any sort of industrial decline. -- another cluster of losses is attributable to defense-related industries of two types: (a) producers of military goods whose output faces declining demand following the abrupt drop in political tension between China and its neighbors, especially Russia, South Korea, and Taiwan; (b) "Third Front" producers of civilian goods established in remote areas as part of China's defense against possible attack from the U.S. or the USSR. Losses reported for Sichuan province amounting to 6.3 percent of the 1989 total (Table 3) may offer a crude approximation for this item. -- 1989 was a recession year in China; investment declined for only the second time since the start of reform [TJNJ 1990, p. 147], creating losses in branches like building materials (line 31 in Table 2), which accounted for 1/6 of firms earning losses and contributed six percent to the industry-wide loss total. Based on these crude calculations, we find that something like two-thirds of reported 1989 losses stem from causes that have no connection to the alleged unresponsiveness, non-competitiveness etc. of state industry, which accounts for a disproportionate share of profit as well as loss. Overall financial results (again for independent units exclusive of village firms) for 1989 appear rather favorable: if we focus on profits as a percentage of net fixed assets, a measure that is far from ideal,' we find negative returns in 3 branches, positive returns below 5 percent in two more, 5 branches reporting returns between 5 and 9.9 percent, 17 earning 10-19.9 percent, and 9 obtaining returns of 20 percent or more (col. H of Table 2). If we had separate results for state firms, they would be very similar: the 1989 rate of return for independent state firms was 10.6 percent [TJNJ 1990, p. 410], just slightly below the figure of 11.36 percent (for state, collective, and private units) shown in Table 2. 1 Net fixed assets as measured by Chinese statistics mix industrial facilities with housing and other and non-industrial assets and cumulate nominal figures from different years with no allowance for price changes. Such data cannot provide a good measure of capital stock. Furthermore, the conceptual difference between the separate accounting categories of "profit" and "tax" is by no means clear. 8 Progress without Privatization independent state firms was 10.6 percent [TJNJ 1990, p. 410], just slightly below the figure of 11.36 percent (for state, collective, and private units) shown in Table 2. If mounting losses (1990 and 1991 brought further increases) reflect the outcome of specific factors rather than fundamental weaknesses in the state sector, and if state firms, including the largest, have responded to the government's reform initiatives, how did this happen? Specifically, what prevented state firms from continuing in their traditional role of favored clients of government ministries? Competition is the main factor responsible for the growing responsiveness of state enterprises to market forces. The explosive growth of urban and rural collective industries and the simultaneous erosion of long-standing barriers to entry in markets for industrial inputs and outputs has undercut profit margins throughout the industrial sector. Barry Naughton [1992] persuasively argues that a wide variety of empirical observations, including a sharp drop in both the level of and interbranch differences in industrial profit rates, fall neatly into place once attention is focused on the effect of China's reform policies in reducing the monopoly power of state enterprises in markets for industrial goods. Despite the continuation of extensive regulatory intervention and regional protectionism, it seems clear that the 1980s have confronted virtually all industrial enterprises with unprecedented increases in business competition. For example: China's largest tractor manufacturer is trying to improve the quality of its products as well as its marketing and publicity techniques in a bid to offset. . . sluggish domestic sales. . . . the sluggish market. . . provoked incessant price undercuttings by producers. . . . The Luoyang tractor complex had been forced to sacrifice more than half of its profits in trying discounts, lotteries and free delivery of goods to boost sales [Gao 1990]. China's largest cookie producer, the Shanghai Yimin No. 4 Foodstuff Factory, is launching a counter-attack to recover [Shanghai's] biscuit market [which has been] taken over by products from Guangdong Province. . . . the factory. . . [is] developing well-packaged biscuits, a line now dominated by Guangdong products .. . Sources said the high commissions and high profit for stores selling Guangdong biscuits are one of the major reasons that. . . state-run cookie producers are facing difficulties" [Bing 1991]. These examples, and many others, demonstrate that references to "the domestic and international competition facing large and medium state enterprises" [Touzi 1991, p. 46] in Chinese industry are not exercises in rhetoric, but realistic descriptions of widely shared experience. Competition and falling profits have sharply curtailed the growth of government revenues, which have long been heavily dependent on the profits of industrial producers [Naughton 1992]. Revenue growth slowed first because of declining profits, but also because decentralization and the emergence of complex new commercial channels allowed enterprises to Progress without Privatization 9 revive China's venerable tradition of tax avoidance. Since actual collection of taxes is primarily a provincial and local rather than a central responsibility, it comes as no surprise to learn that the central government has found itself obliged to bear the brunt of the revenue squeeze resulting from falling profits and universal efforts to avoid paying taxes. The declining ratio of government revenue, especially central government revenue, to national product has increased pressures on state enterprises. Slow revenue growth raises the opportunity cost of additional subsidies for the center. After paying for administration, defense, key projects, and unavoidable subsidies to industries (like coal) suffering from policy-induced losses, discretionary resources available to the center have declined steadily. Following a brief episode of enlarged deficits that led to a painful bout of inflation during the late 1980s, the center has returned, at least temporarily, to its traditional policy of limiting its own deficit. The provinces and localities are more able, but less willing than the center to devote funds to subsidizing loss-making enterprises. The reason is simple: competition. China's junior governments compete among themselves for access to funds from private investors in Hong Kong, Taiwan, and elsewhere, and from various international agencies. These funds gravitate toward localities that show signs of rapid progress in developing airports, telecommunications, roads, and other expensive infrastructure facilities. Every increase in provincial or local government spending to subsidize loss-making enterprises threatens the diversion of foreign funds (and perhaps fungible domestic funds as well) to rival jurisdictions. The direct and indirect consequences of China's reforms, including commercial competition as well as the resulting diminution of public spending capabilities, has come to exert growing financial pressures on increasing numbers of state enterprises. Subsidies continue, but the long-standing tradition of "soft budget constraints" has developed uncomfortable lumps. We may speculate that official responses to requests for financial support, even when buttressed by the customary arguments about circumstances beyond the enterprise's control, have become less and less satisfactory from the perspective of the enterprise. As more firms secure the benefits available from successful pursuit of market opportunities, the relative attractiveness of seeking financial gains through various forms of rent-seeking has begun to decline. At the same time, leakage from the state supply system that allocates materials to favored users at concessional prices creates additional difficulties for state firms. The solution to these difficulties is money, and the primary source of new funds is the marketplace. Inflation, which drew adverse comment beginning around 1980 and accelerated sharply from about 1986, heightened the pressures on state enterprises. Inflation threatened to erode the living standards of urban workers unless their employers could supplement basic wages with rising bonus payments. One of the purposes of the profit-sharing reforms implemented during the early 1980s was to "activate the enthusiasm" of workers by creating pools of funds that could be used to pay bonuses and fund the provision of housing and other non-monetary benefits for employees. As we shall see, substantial links between profits and bonuses, and also between profits and housing investment, did in fact emerge. With living standards endangered and 10 Progress without Privatization subsidies harder to come by, inflation provided one more reason for state firms to look to the market as a source of financial benefits. The final contribution to the mounting pressures facing state firms came from the twin shocks of contractionary monetary and fiscal policies, introduced in late 1988 as an antidote to inflationary pressures, and the abrupt reduction of revenue flows from foreign investment and tourism following the violent suppression in June 1989 of popular protests in Beijing and other large cities. These shocks stripped many firms of long-standing protection from market forces. In retrospect, the contraction of 1989/90, which is widely viewed as a hiatus in the reform process, may in fact constitute a watershed or turning point that wrenched the attentions of managers and even workers toward greater market orientation. Many state firms, faced with falling orders and growing stocks of unsold goods, "stopped production and sent their workers home with as little as 50 percent of their salaries" [WuDunn 1990]. In a step reminiscent of crisis behavior in Japanese firms [Pascale and Rohlen 1983, pp. 239-242], "some factories have even resorted to paying employees with products, leaving it to the workers to sell the products if they need cash" [WuDunn 1990]. I hypothesize that the pressures resulting from these changes have substantially altered the culture of management in Chinese industry, including the state sector. This is not to say that every enterprise is led by dynamic entrepreneurs or that none specializes in angling for official protection or subsidy. This is certainly not true of China (or of any other economy). But the "rules of the game" have changed. Consider the following: 1. Profit is now the chief managerial objective in Chinese industry 2. For more and more firms, success in the marketplace is the chief source of profit. 3. Descriptions of Soviet management, which might have applied to the Chinese realities of 10-15 years ago, now seem incongruous when matched against current Chinese conditions. Nellis [1991, p. 20] writes that in the USSR, "every one of the managers [we] met saw that the rules of the game had been altered. But rather than take steps to position themselves. . . to take advantage of the changed set of rules, many were waiting to be told -- by the ministry, by other central authorities, by anybody -- what to do next." In China, the prevalence of such managerial passivity has declined steeply. 4. Managers in the state sector who compare market opportunities with the mixed blessing of embracing leviathan are increasingly ready to choose the former. This explains the seemingly bizarre complaints of state firms, who have benefitted for decades from an extraordinary array of preferential arrangements, that "state-run enterprises are not treated fairly but reduced to an unfair competitive position" [CD 1991]. These expressions reflect the growing belief that the cost to state enterprises of the regulations and restrictions that surround them is higher than the benefits conferred by access to preferential treatment. Progress without Privatization 11 5. These new views are reflected in statements that, ten years ago, could have come only from radical opponents of the regime. A 1991 conference organized by the "China Association of Investment Studies," a group apparently linked with the State Planning Commission, and attended by representatives of large state enterprises, municipal planning commissions, and the State Economic Commission, expressed the following views: [Touzi 1991] -- "The resolution of difficulties facing the efforts of state large scale enterprises to develop technically will not come from grants provided through the state planning system" -- "The meeting called for an appropriate reduction of basic construction investment within the government budget" -- enterprises should have the right to select their own technical development projects, to choose their own designers, to hire construction firms and equipment suppliers. They should also "have expanded rights to sell their products freely in foreign and domestic markets" as well as "the right to enter the capital market by issuing stocks, bonds, and collecting funds from urban and rural residents" -- one subhead summarizes these views: In the Management of Investment, Create a System that places the Enterprise's Investments at the Core In short, we see a clarion call for "corporatization" of large firms from the very people who seemingly have the most to lose from further erosion of the planning system. 6. Along with such discussions, there is a rush for the exits by former participants in the planning process. In Shanxi province, for example, measures to "activate large and medium scale enterprises" include the following provision: [Qiao, Wang, and Li 1991] "If the state is unable to purchase goods according to the time schedules specified in the contract stipulations or to provide commodities specified in mandatory plans, or if customers cannot absorb the goods according to the contract stipulations, then it is allowed for the producing enterprises to sell on their own, and this will be regarded as fulfilling the mandatory plan." With the execution of state plans routinely behind schedule, this is a prescription for legitimizing wholesale desertion from the planning system. It is cited by proponents of parallel opportunities for "specially designated enterprises" that remain firmly tied to mandatory planning - a state of affairs that now seems quite exceptional. 12 Progress without Privatization China's partial and limited industrial reforms have initiated a process of change that exposes enterprises at all levels, including large firms in the state sector, to a growing array of market forces and to increasing pressures to improve financial performance. According to one source, one-third of large and medium-sized state enterprises have responded "with rich vitality" (fuyou huoli) to these circumstances [Luo 1992]. Competition has slashed profits. Low profits have reduced the growth of tax revenues and limited the state's capacity to subsidize unprofitable enterprises, particularly since the most severe fiscal pinch comes at the center, which is more amenable to subsidies than the provinces, where subsidies may endanger the capacity to attract external funds. Leakage from official supply channels, inflation, macroeconomic policies intended to wind down inflationary pressures, and the shock of Tiananmen have heightened these pressures. As a result, large numbers of enterprises, managers, and workers have begun to redirect their energies toward the market rather than the plan, and toward innovation rather than routine. These impressionistic conclusions may prove controversial. In any case, they are largely qualitative. How can we begin to measure the impact of reform in a systematic fashion? The following pages offer some preliminary efforts in that direction. V. MICROECONOMIC REFLECTIONS OF INDUSTRIAL REFORM How has economic reform affected Chinese industrial enterprises? Although several studies have considered the consequences of reform for small groups of firms or for selected localities, researchers have only begun to probe the possibilities for large-scale investigations. Several Chinese organizations have collected large sets of panel data that are suitable for this research. I have begun to explore two such data sets. One, collected by the Institute for Economic Research of the Chinese Academy of Social Sciences (EI) provides data for 453 firms, 363 in the state sector, and 278 designated as "large " or "medium," for the years 1980 and 1983-86. The second comes from the Institute for Economic System Reform (TGS) and covers 852 enterprises, 736 in the state sector, and 617 designated as large or medium, for the years 1986-89. My first question concerns incentives. Have the reforms offered appropriate incentives to Chinese enterprises? Do financially successful enterprises end up in stronger positions than loss-making firms? In Hungary, Kornai and Matits [1984] found that reform failed to alter the leveling tendency of tax/subsidy policy, which extracted funds from profitable firms and compensated losers until there was virtually no correlation (and sometimes even negative correlation!) between profit and retained earnings. Farrell [1991] obtains similar results for from Polish data for 1986. What about China? Progress without Privatization 13 Results of initial calculations appear in Table 4.2 In 1980, the situation resembled what Kornai and Matits observed in Hungary: increased profit had almost no impact on retained earnings. This changed quickly. With the exception of the TGS sample for 1986, the remaining years show strong and (almost) consistent statistical association between profit and retained earnings. It appears that firms do have a clear incentive to purse profit and avoid loss. Financial outcomes are not equalized by "whipping the fast ox" - the Chinese term for the "ratchet principle" of impromptu exactions from successful firms. The reforms have brought large and beneficial changes. The retention rate suggested by the regressions rises in all but two years. There is the suggestion of a regime change in 1984/85. We find no difference in results if a small number of loss-making enterprises are excluded. Similar regressions limited to firms within a single branch of industry, show very tight links between profit and retained earnings, as illustrated by the following calculations using 1986 data from the El sample (these calculations include some firms outside the state sector): c b N Metallurgy -332.98** 0.53 0.997 24 Chemicals 24.37* 0.26 0.96 44 Machinery 25.24 0.25 0.92 124 Building Materials -27.81* 0.41 0.98 31 Food Processing 13.03* 0.42 0.77 21 Textiles 52.36** 0.36 0.97 22 Except as noted, absolute values of all t statistics exceed 3.0. * absolute value of t statistic less than 2.0. ** absolute value of t statistic within the range 2.0 5 t 3.0. If profits affect the well-being of enterprises, what about their link with material benefits to workers? Table 5 gives the results of calculations that explore this issue by focusing on the relationship between retained earnings per worker and bonus payments per worker across firms in particular industries during the late 1980s. The results, based on data for state enterprises included in the TGS survey, show a clear pattern of strong, positive links between per capita retained earnings and per capita bonuses. Most of the variation in per capita bonuses across enterprises in a single branch of industry can be attributed to inter-enterprise variation in per-capita retained earnings. In several branches, the regression results are virtually perfect, suggesting that bonus funds may actually be determined as a percentage share of retained earnings (note that the constant term in these regressions rarely displays "statistically significant" 2 Except as noted, all results pertain only to state firms. 14 Progress without Privatization industrial workers a strong material interest in the financial performance of their firms. When profits (or retained earnings - as noted above, the two are closely related) per worker increase, bonuses per worker increase as well. What of the link between profits and access to funds? In a market economy, access to funds is closely linked with profitability. Lenders and shareholders seek to avoid committing funds to enterprises or projects with poor profit prospects. If profitability declines, creditors seek ways of accelerating the recovery of their funds, and sources of new funds rapidly disappear. In a planned economy, this link between profitability and access to funds need not exist. The state may choose to support or even expand loss-making enterprises. In Hungary, Kornai and Matits [1984] found a negative relationship between profitability and access to bank credit in which smaller profits were associated with greater access to funds. The El data set provides extensive information about the sources of funds. I classify them into five overlapping groups as follows: State funds for investment purposes Bl D76 + D77 D76 central government allocations D77 local government allocations Borrowing for investment purposes B2 = D78 + D81 + D82 + D83 D78 investment funds from bank loans D81 borrowing from other units D82 funds from bond issues D83 funds from abroad Other forms of borrowing B3 = D60 + D123 + D132 + D134 D60 bank loans for new product development D123 production turnover borrowing D132 special borrowing D134 special funds obtained from other firms B4 = B1 + B2 = total funds for investment B5 = B2 + B3 = total commercial borrowing Successful reform involves the gradual commercialization of access to funds. This means an increase in the share of commercial borrowing (constructed variables B2, B3, and their sum, B5) as well as a tightening of the link between profitability and access to funds. We anticipate that funds provided by government allocations (item Bl) will remain less closely linked to profitability even if the overall funding situation takes on an increasingly commercial character. In part, this reflects the commitment of the state to protect and subsidize certain enterprises and groups. Non-commercial funding may also be undertaken to offset distorted prices (e.g. despite Progress without Privatization 15 energy shortages, there is little commercial incentive for investment in the loss-making coal industry) and to offset various forms of market failure (e.g. development of infant industries). We first check the simple relationship between current retained earnings (RE) and access to funds in the current year; the regressions take the form: New Funds in year t (Bl, B2, B3, B4, or B5) = c + b (REt) Although certain of the estimated coefficients (not shown) pass standard tests for statistical significance, the share of variation "explained" by these calculations is consistently small. There is no evidence of a strong trend toward commercialization of funding, nor do we see any sign of greater commercialization of bank loans as opposed to state allocations. Similar regressions using gross profit as the independent variable produce even weaker results. The weakness of these results may arise because lenders look at past rather than (as yet unknown) current-year profits in judging a firm's prospects. Additional regressions explore possible links between current funding (dependent variable) and current profits along with retained earnings lagged by one or two years. The general form is: New Funds in year t = c + bl(REt)+ b2(RE1-1) + b3(REt-2) These results, shown in Table 6, give a much stronger impression of financial commercialization.3 Most of the coefficients are statistically significant. The share of variation accounted for by the regressions is substantial. As expected, evidence of commercialization is more pronounced in categories of funds provided by loans (B2, B3, B5) than for state grants (Bl). Commercial forces are sufficiently strong that we see a clear relationship between total investment funds (B4, which includes both grants and loans) and lagged or lagged and current profit. However, the results for 1986 seem somewhat weaker than for 1985; furthermore, the negative coefficients attached to one element of retained earnings in nearly all of the regressions are puzzling. Taken together, these results are strikingly different from the Hungarian findings of Kornai and Matits [1984]. There is strong evidence that market forces are present. Although these initial results are neither uniform nor indicative of a steady shift in the direction of market controls, they are surely supportive of the view that Chinese reform has injected market forces into what was formerly a "planned economy," and that the state sector is not immune from the impact of these forces. 3 These regressions include data from a small number of collective firms. 16 Progress without Privatization VI. CONCLUSION This paper began with questions about the role of privatization in socialist reform. Privatization is widely regarded as preferable to reforming state industry. Both strategies have costs and risks as well as benefits. Given the lack of experience in this area, any marked preference must reflect intuitive judgments about possibilities and dangers that remain largely uncharted. In this context, the experience of China is worthy of attention. The initial outcome of China's reform efforts shows that state firms burdened with all the trappings of socialist planning can be moved in the direction of market-oriented and entrepreneurial behavior. Chinese firms now face negative as well as positive incentives. Despite the continuation of subsidies, we find concrete evidence that firms with low profits fall behind in such areas as retained earnings, wages, bonuses, housing expenditure, and access to funds. All this suggests that neglect of the reform or "corporatization" option in favor of ex-cathedra pronouncements favoring early privatization of state enterprises may be mistaken. The economies of Eastern Europe and the former Soviet republics are now enduring great suffering. Much of the pain is knowingly inflicted by reform-minded governments. Supporters of current policies believe that long-term economic progress is unlikely without an initial process of creative destruction. Reform proponents are encouraged to grasp the nettle of drastic adjustment with visions of a rosy future. China's experience raises the possibility that "growing out of the plan" is a feasible alternative to creative destruction. By avoiding extremism, China may have enabled its citizens to move toward a better future without incurring large transition costs. The analysis of China offered here may be disputed. Even if it is correct, the state of China's pre-reform economy, polity, and society may be sufficiently different from circumstances in other socialist nations to make successful Chinese policies largely irrelevant to the choices facing those economies. Until we acquire a clearer view of these possibilities, discussions of privatization and other policy issues should consider China's experience before drawing strong conclusions about the nature of appropriate reform strategies. Progress without Privatization 17 Table 2. Industrial Profite and Loss for 1989 by Industrial Branch A 9 C 0 E F G N BRANCH SNARES (percment) F RATIO Branch Lo*erm Loss~ Profite KFN Av Ls L% of Pr 1101% Losere Lossei Profite KFN JIL m*. Data in yem lo Millin Millie Yen I J K L M 1 1,822 50.55 -28.72 822.48 3.12 NA 4.29 2.49 21.98 .2.1 7.44 2.95 2 18 43.19 -25.11 538.58 239.94 MA 4.89 0.03 18.77 .2.84 8.41 2.93 3 120 0.42 3.39 28.10 0.35 12.43 12.03 0.18 0.18 0.38 0.34 0.54 5 1.055 0.5 7.89 51.54 0.09 11.05 14.92 1.82 0.37 0.81 0.82 0.80 8 78 0.49 3.45 25.70 0.84 14.20 13.42 0.12 0.21 0.38 0.31 0.89 8 104 0.93 10.50 101.95 0.80 7.90 10.30 0.18 0.38 1.11 1.22 0.30 9 382 1.93 4.84 103.91 0.53 41.59 4.47 0.58 0.84 0.49 1.24 0.68 10 8.168 11.38 50.43 388.08 0.18 22.53 13.79 9.47 4.94 5.31 4.38 1.13 11 3,682 7.78 8.38 104.04 0.21 92.82 8.04 5.88 3.37 0.88 1.24 2.71 12 88 7.12 1.27 59.72 8.09 580.83 2.13 0.14 3.09 0.13 0.71 4.33 13 393 0.94 4.89 22.85 0.24 20.04 20.71 0.80 0.41 0.49 0.27 1.51 14 5,108 13.00 99.45 871.04 0.25 13.07 14.82 7.84 5.5 10.47 8.02 0.70 15 3.035 2.37 15.45 70.10 0.08 15.34 22.04 4.88 1.03 1.83 0.84 1.23 18 1,548 2.55 3.99 45.58 0.18 83.91 8.75 2.39 1.11 0.42 0.54 2.03 17 1.469 1.74 4.45 49.88 0.12 39.10 9.98 2.28 0.78 0.47 0.59 1.27 18 1,630 0.95 2.75 28.54 0.08 34.55 10.38 2.50 0.41 0.29 0.32 1.30 19 2.228 3.29 21.08 139.85 0.15 15.81 15.09 3.42 1.43 2.22 1.87 0.88 20 988 0.82 14.21 68.99 0.08 4.38 21.25 1.52 0.27 1.50 0.80 0.34 21 534 0.44 5.3 21.07 0.08 7.55 27.87 0.m2 0.19 0.81 0.25 0.78 22 1,501 0.90 8.59 30.87 0.08 10.48 27.93 2.31 0.39 0.90 0.37 1.08 23 1.338 13.94 87.05 1,093.51 1.04 20.79 8.13 2.08 .08 7.08 13.07 0.48 24 54 0.16 31.89 215.79 0.30 0.51 14.88 0.09 0.07 3.33 2.58 0.03 25 400 5.33 ..47 80.81 1.33 NA -0.77 0.i 2.32 -0.05 0.73 3.19 28 3.402 9.02 102.12 811.01 0.27 98.3 18.71 5.23 3.92 10.75 7.30 0.54 27 298 0.88 29.18 95.88 0.22 2.34 32.97 0.45 0.29 2.98 1.02 0.28 28 82 0.43 28.42 149.73 0.52 1.83 17.85 0.13 0.19 2.79 1.79 0.10 29 854 1.58 10.48 88.74 0.24 14.89 15.70 1.00 0.88 1.10 0.80 0.85 30 2.898 2.80 18.97 119.05 0.10 15.32 14.25 4.15 1.13 1.79 1.42 0.79 31 10.539 13.78 50.83 534.34 0.13 27.18 9.48 18.19 5.98 5.33 8.39 0.94 32 817 2.29 108.84 89.93 0.37 2.15 15.30 0.95 0.99 11.2 8.33 0.12 33 3.938 3.29 30.04 142.42 0.08 10.2 21.09 8.05 1.43 3.18 1.70 0.84 34 5.115 13.24 118.88 748.02 0.28 11.33 15.88 7.98 5.75 12.30 8.92 0.65 35 1.279 4.94 44.15 298.28 0.39 11.19 15.31 1.97 2.15 4.85 3.45 0.82 38 1,833 3.13 55.84 204.89 0.17 5.83 27.18 2.82 1.38 5.88 2.45 0.58 37 787 3.79 34.94 154.07 0.49 10.85 22.89 1.19 1.85 3.88 1.84 0.99 39 355 0.73 10.49 52.51 0.21 8.98 19.98 0.55 0.32 1.10 0.83 0.51 Sum 85.087 230.18 950.18 9,385.88 0.35 NA 11.38 100.00 100.00 100.00 100.00 1.00 Data fmm kidusvy 199, pp. 1&2-30X kac7dg idpd t amahr uts at Afdfav i Sj v A Bach of bdstry (fsts thet the src st, sets 4nøsr.fursus mL 7<a ses aimiig se ad t idutrast intudad embørs. &: Lasm - m~e of flm, makg : kanss as rt met prGts G- 10ICMD C: Lat= si Inan s ~ 100 m-ss Y~i I: E ss f ~ fmd ats- 100,m D: Prefits - tati profitfs t of bss; 100 nefl Ysmi I J. K, L: rm etslet ~uiJt fl, s0ses, profitt, nt fixed assets L KFN - nei lot deprciil yerw-d valki ef b d aesl t {10 ~ NYom i h: 1~rasc s et basse~kasch s of firød asst. gurt for ai brinches -1 F: Aves less pr iet firm bs Ysi 18 Progress without Privatization Tabl 3. Iadnstial Profits and Lases for 1989 by Province A 8 C a PROVINCIAL SHARES ( OF ladel:averawel Branch LasIe Lasses Profits NVIO Lase L,asses profit NVIO lassiprofit IsslNVIO e. Data in 100 Million Yes E F 0 H FIG FIN 8ailig 587 5.13 64.31 175.17 0.85 2.41 6.43 3.57 0.35 L13 Tnji 77 6.84 21.88 124.18 1.12 2.7 2.10 2.53 0.38 0.42 Hebei 1.840 14.63 40.42 13.83 2.15 8.28 4.04 3.95 0.42 0.88 Shanxi 1.148 8.3 22.83 121.52 1.85 3.2 2.28 2.48 0.43 - 0.73 Inner Me 730 4.88 11.47 67.57 1.05 2.09 1.15 1.38 0.50 0.2 Lisoning 3,422 23.27 70.14 381.83 4.93 9.6 7.01 7.79 0.49 0.70 Jilin 1.648 9.23 31.08 134.13 2.37 3.52 3.11 2.75 0.87 0.76 Heilungj. 2.035 22.43 24.64 261.50 2.13 9860 2.48 5.33 0.31 1.19 Shanghai 1,127 5.66 128.48 371.81 1.82 2.42 12S4 7.58 0.87 0.13 Jiangsu 8.373 14.19 77.07 422.07 12.08 8.08 7.70 8.81 1.99 1.57 Zbefang 7,382 7.80 52.48 253.41 10.83 3.34 5.25 5.17 3.18 2.03 Anhui 2,837 8.11 21.01 129.51 4.09 262 .10 2.84 1.56 1.95 Fujian 1,708 2.8 24.20 1084 2.48 1.14 2.42 2.22 .16 1.02 Jiangsi 2304 6.82 14.58 88.94 3.32 2.92 1.48 1.81 1.14 2.28 Shandon 2.297 15.37 87.53 386.80 3.31 6.59 8.75 7.48 0.50 0.48 Henan 1057 11.39 37.34 191.51 2.96 4.89 3.73 3.91 0.61 0.79 Hubsi 4,131 7.27 50.99 221.34 5.95 3.11 5.10 4.51 1.91 1.17 Hunan 4,180 9.37 29.24 168.2 6.02 4.01 2.92 3.44 1.50 2.06 Guangdo 4,129 13.85 50.4 311.43 5.95 5.93 5.0 8.35 1.00 1.17 Guani 4,198 4.51 18.74 93.1 8.05 1.93 1.67 1.0 3.13 3.61 Hainas 237 05 2.31 0.44 0.34 0.25 0.23 0.19 1.37 1.48 Sichusan 7,194 14.89 58.84 284.14 10.38 6.29 5.88 5.79 1.5 1.83 Guiehou 978 4.22 8.31 83.0 1.28 1.1 0.83 1.30 0.70 1.52 Yunnan 1,160 2.30 21.1 110.23 1.87 0.88 217 2.25 1.70 0.77 Tibet 42 0.05 0.32 1.09 0.06 0.02 0.03 0.02 2.83 1.80 Shasanxi 1,857 5.51 19.00 100.80 2.39 2.38 1.90 2.08 1.01 1.26 Ganso 444 2.9 15.13 89.77 0.4 1.29 1.51 1.42 0.50 0.42 inghai 211 0.60 3.44 17.89 0.30 0.28 0.34 0.36 1.19 0.88 Ninia 184 0.80 3.28 17.08 0.27 0.28 0.33 0.35 1.03 0.91 Xingang 512 2.09 10 51.80 0.74 0.9 0.91 1.05 0.82 0.91 Sum 80,423 233.7 1,000.38 4J03.43 100.00 100.00 100.00 100.00 1.00 1.00 Sorm kdorvy 194P30381. A* Loses number of firms with loas 8, C. 0: Losses of losing finm total profits (apparently not of lossas), and nat value of industrial output, all measured in million Yen. Progress without Privatization 19 Table 4. Links between Profit and Retained Earnings for Stats Firm, Sample Data,. 1980 - 89 Yar Al Firn Firs with Positin Profits C 8 R2 C B R2 I Sample 1980 60.1 0.01 0.21 65.93 I 0.01 0.21 1983 3451 0.14 0.64 1.14 0.15 0.85 1984 334.54 0.22 0.07 330.30 0.22 0.07 1985 950 0.29 0.5 -21.21 0.29 0.6 1996 47.81 0.36 0.02 -32.94 0.38 0.97 S Sample 1988 478.17 0.02* 0.00 503.21 0.2 0.00 1987 -86.60 0.39 0.90 -107.871 0.39 0.0 1988 55.78 0.25 0.55 29.41 0.25 0.56 1989 -27.89 0.48 0.94 -142.75 I 0.48 0.98 Ragrassions Take the form RE-c+b*PROF, where RE - retained earnings PROF - pm-tax profits Except as noted, t statistics attached to the constant term are less than or equal to 2.5 in absolute value. The symbol I indicates a t-statistic with absolute value greater than 2.5. Except as noted, the t-statistics attached to the ostiuat of b exceed 15.0. The symbW * indicates t*vAehe betwen zero and 1.0. 20 Progress without Privatization Table 5. Liaks between Per Capita Retained EarWiap asd 8aesn, Sample Data for Stats Enterprise in Selected ladnetrial Braumbes, 1980 - 89 Food processing (N-231 198-89 5.4 0.054 0.29 1989 -0.25 0.856 0.99 Bevrages(N-20) 19809 0.48 1.121 0.01 198 2.80 1.137 0.00 Textiles (N-8 1986889 -2.1 0.204 0.55 1989 -3.26 0.486 0.18 Apparei (N-291 19889 -3.84 0.212 0.93 1989 -3.28 0.478 0.94 Paper and paper products (N-24) 198-89 -1.44 0.367 0.84 1988 -2.38 0.298 0.88 ChemicalsiN-48) 1986-89 -0.88 0.198 0.82 1989 -0.84 0.197 0.82 Chines modicine (N-29) 198680 -4.85 0.103 0.35 1981 *2.88 0.403 0.50 Rubber products (N-251 1986.89 *0.541 3.597 0.83 1989 0.06 0.292 0.10 Plastic products IN-24) 198689 -1.82 0.340 0.81 1989 -2.32 0.52 0.8 Buiing materivsiN-37) 19889 -003 0.523 1.00 1989 -0.05 .623 1.00 Progress without Privatization 21 Table 5. contiued: Liahs htwen Per Capits Retaised Earnisp and Baum, Sampl Data for Stats Enterprins in Selected Industrial Branches, 1980 -89 Ferrous metallurgy (N-29) 19889 *1.01 0541 0.67 1989 0.48 0.804 0.8 Non-forrous metal processing (N-17) 198688 -1.15 0.157 0.43 1989 0.04 0.114 1.00 Metal products (N-28) 1986-89 18.88 1.042 0.83 1989 42.38 1.122 0.88 Machinery (N-73) 1986-89 -1.92 0.147 0.84 1989 0.55 0.558 0.09 Transport equipment (N-31) 1986.89 -.77 0.87 us 1989 -1.79 0.087 1.0 Electrical equipment and components IN-38) 1988.89 0.31 0.913 0.99 1989 1.58 0.814 1.00 Souns ekioms hmo TGS apis data. Regressions take the forn PCBONUS - a + b*(PCRE), where PC8ONUS - annual bonus payments par worker PCRE - annual value of retaine dearnings per worker Results include al branches of the TGS sample for which the number of feir with valid observations for 1989 is at least 20. Nonarous metallurgy is included because its military links make it an interestin gspecial case. The number of firms reporting 1989 data is shown for each branch. Al regressinns are limited to state-owned firm. Except as noted. t statistics attached to the constant term ape leM thee or equal to 25 in absluts vabs. The symel i indicates a tstatistic with absolute value greater that 2.5. Except as noted, the t-statistics attached to the eastiate of b asceed 3.0. The symbol * indicates t*valu between zrre and 2.0. The symbol** indicates t-values in the range 2.0< - t < -3.0. 22 Progress without Privatization Table 6. Links between Access to Feads and Cmuet er Lagged Retained Earimp El Sample Resuts for 1985 and 1986 c bl b2 3 R2 Equations for 1985 81 177.80 -0.14" 0.38 * 0.03 152.41 1.38 0.04 * -0.81 0.08 82 195.25 3.37 4.82 0.51 16.088 2.31 4.89 4.30 0.87 83 521.12 038 * 1.75 0.20 399.88 8.50 0.54 .2.94 0.39 84 372.88 3.23 4.23 0.41 188.38 38 4.74 4.0 0.78 Bs 718.38 3.00 .2.86 0.27 415.84" 8.82 5.23 -7.24 0.82 Equations for 1988 81 187.48 -0.05 * 0.18 * 0.02 145.19 -.88 1.14 0.28 * 0.15 82 102.57 *2.32 4.08 0.48 153.81 * 1.07 -3.77 4.00 0.4 83 953.48 A0o 1.87 0.13 958.17 0.10 0.83* 1.6 0.13 84 290.02 * 2.37 4.27 0.41 298.99 * 0.19 * 2.62 4.25 0.41 85 1,056.03 .3.01 5.75 0.33 1,11198 1.17 4.58 5.88 0.34 Progress without Privatization 23 REFERENCES Blanchard, Olivier et al, 1991. Reform in Eastern Europe. Cambridge: MIT Press. Bing, Gang, 1991. "Biscuit Maker Seeks Recovery." China Daily, June 2, p. 2. 4. CD 1991. "State Firms in Focus." China Daily, May 22, p. 4. Demsetz, Harold, 1969. 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