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Explain The Growth Of The Nonstate Sector And Later The Private Sector... Notes

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EXPLAIN

THE GROWTH OF THE NON-STATE SECTOR AND LATER THE

PRIVATE SECTOR IN THE

CHINESE

ECONOMY DURING THE LAST THREE

DECADES.

The non-state sector has featured as a vital organ of growth for the Chinese economy during the reform-era. There was a virtual non-existence of a private before the reforms at the end of 1978 (Naughton, 1995). In 1985, the non-state sector accounted for around 35 percent of China's total industrial output and by 1999, it accounted for more than 72 percent. During the same period, an increase from 55 percent to 72 percent of total industrial growth was contributed by the non-state sector (Bai et al., 2001). Yet, in recent years, growth in the private sector has declined, and this change in momentum is important to consider. It is fundamental to first define what is meant by the non-state sector before examining its growth. The non-state sector in its simplest form can be taken to mean enterprise not in the state sector. However this is ambiguous. Therefore, it should be clarified that the non-state sector, when discussed by most economists and academics, refers to all enterprises excluding those in which the state exercises controlling ownership. With this clarification in mind, it is possible to explain more precisely, the growth of the non-state sector. Naughton (1995) argues that the growth of the non-state sector can only be understood in the context of the transformation of the overall system. This approach provides an excellent starting point for evaluation of the non-state sector growth over the last three decades and later the private sector. Two key explanations for the initial rapid growth path are proposed. Firstly, an evident shift in rural policy from the late 1970's provided far-reaching benefits for the non-state sector. Secondly, the transitional system paradoxically created the conditions for growth. Furthermore, the same system can be used to explain the decline in growth of the legitimized private sector over more recent years.

RURAL POLICY - CATALYST OR CAUSE?
Following the Third Plenum in 1978, Chinese policy towards the rural areas was "radically transformed" (Naughton, 1995). Despite the primary objective being to raise rural income by transferring income-generating activities to the countryside and improving prices, there were significant benefits for the non-state sector. Most importantly new sources of investment were created and the monopoly powers of state-owned enterprises (SOEs) were reduced, though nowhere near to market economy standards. Raising agricultural prices, reducing extraction from rural areas and increasing state investment in agriculture essentially led to a decrease in the effective tax rate on the rural sector. By increasing the flexibility of the agricultural sector and lowering the playing field in which it interacted with the more advantaged urban industries, the new policies introduced incentives for experimentation and increased productivity. This experimentation ultimately led to the percentage of households participating in household farming increasing from just 1% in 1979 to 99% in 1984 (Lin, 1992) and agricultural output subsequently soared. As a result, total household saving climbed from 7% of income in 1978 to 17% in 1982. (Naughton, 1995). Given that rural extraction by the central government was relaxed, a new source of income and thus potential investment now existed within the rural areas. This created a viable capital base from which the non-state sector could grow. The benefits for the non-state sector of higher household savings were realized because of central government policy on rural enterprise and the implicit step-back from SOEs. In 1979 a policy was laid out which stated "We should raise the share of commune and brigade enterprises in the total gross income… from 29.7% in 1978 to around 50% in 1985" (State Control document on township and village enterprises). This new emphasis on township and village

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