*Remember to add in notes from the one day I was absent

3/23/17
Week 9.2
Fiscal Politics
Research puzzle
- Dramatic increase of fiscal revenue
- More importantly, county fiscal revenues vary substantially across China
- A remarkable 738.23% growth in GDP from 1994 to 2010. Although its unparalleled
economic performance has been extensively researched, few studies have investigated the
determinants of even more remarkable growth in fiscal revenues, which registered a
massive 1492.56% increase over the same period.
Reasons why this is puzzling
- First, the variation in subnational economic development cannot fully account for the
variation in fiscal revenues.
- Second, if competition indeed generates incentives to promote economic development,
each locality is expected to vie to attract investment to its own turf. We should then
observe a “race to the bottom” tax competition when local jurisdictions can influence
effective tax rates

3/28/17
Week 10.1: Transformation of State-Society Relations
The Maoist period: an autonomous state and state-dominated society
- Omnipresent, penetrative state
- Unchallenged by any other organizations
- No autonomous social organizations – civil society – tolerated: such organizations not
viewed as legitimate
o This goes back to Confucian times: secret societies
- Party-state all pervasive
- No concept of a “loyal opposition”
Characteristics of Mao-era’s relations with society
1. State’s autonomy from forces and classes in Chinese society
o No mechanisms in party-state institutions for society to exercise any influence
over the state
2. New state assumed traditional role as provider of society’s moral framework
a. Pervasiveness of political education, Mao Zedong thought
3. Central organizing principle of the new state was hierarchical
 a. Parallel vertical structures
b. => horizontal relationships in society almost impossible to sustain
c. Citizens are subjects of party-state rule, not participants in it despite “mass line”
principle, authority/policy top-down
4. Authoritarian tendencies in CCP brought to the fore by autonomy of post-1949 state and
lack of influence of society over it
a. Industry favored over agriculture, workers over peasants
b. But Mao/party had contradictory attitude toward urban life
i. Exalted in the “unity of life and work” of peasants, but underinvested in
rural sector
c. Peasants did not like collectivization, workers did not like nationalization, but
neither had any capacity to influence those policies
i. Peasants didn’t like collectivization essentially because the government
took their food and they starved and because they sometimes had to work
for free
ii. Urban workers didn’t like nationalization because it gave them less
autonomy, mobility, and salary increase
State’s control over people’s lives
- Benefits:
o Autonomous state is needed in early stages of industrialization so it can push
through contentious policies that have long term benefit, though not popular in the
short run
Hukou System
- What did CCP do to update its control of migration flows?
o 1953: urban residents were issued registration books and directives
o 1955: permanent household registration system covering both urban and rural
residents
o 1960: after GLF, the household registration system was invokes to return people
to the countryside
o From 1960 onwards, people were not registered permanently to a particular place
on the basis of their birth, or for women the place of the person they married
- What are the consequences of the hukou system?
o This locked you in for life to one of two vastly different socioeconomic structures,
remuneration, provision of public goods and services
o Reinforced by the ration coupons for the basic goods: one could buy food only in
one’s own administrative jurisdiction
o The lack of open urban food market meant that it was difficult to migrate
spontaneously
- Urban areas: more state-provided welfare resources via Danwei (place of employment?)
o control urban population and locked them into a dependency relationship based
on the workplace
 - Rural areas: enforces practice of self-reliance via communes
o Fragmenting the society and dividing it into a honeycomb of local communities
- What’s the purpose of the fragmentation and social control?
- What are the five basic areas that Danwei controls?
o Personnel
o Communal facilities
o Operates independent budgets and accounts
o Has an urban or industrial role
o Is in the public sector
Impacts of the Danwei System:
- Hierarchy of benefits and rights: varied by size, status of danwei
o Elite: workers in SOEs or government bureaucracy
o Within state sector, uneven allocation of goods and services depending on wealth
and status of the enterprise
 Better allocation of housing, schools, retirement depending on where you
lived and what kind of enterprise you worked in
- Labor mobility discouraged: hukou system
o So if you were dissatisfied with your job, could not move to another
o Spend your whole life with the same danwei
o Your identity was even defined by which danwei you worked for
- Lack of a need to be responsive to social forces and the eradication of all potential
opposition outside the party
o Policymaking became increasingly monolithic
o Policymaking became less grounded in socioeconomic reality
- What heightened the tendency towards the state’s coercion?
o Traditional statist culture (government decides things)
o The dominance of the party over all other institutions
o The tendency towards the individual domination by Mao Zedong
- These factors further strengthened the paternalistic nature of the authoritarian party
o Policy of “infantalization” pf society was pursued: individuals were treated as
children who did not know what was in their own best interests
o Blame the masses for policy failure
- This system is high on coercion and low on information flows
o Feedback on policy was inefficient and inaccurate
State-society relations under reforms: a negotiated state
- How have economic changes influenced the state-society relationship?
o Redefine the social structure
o Change power distribution between state and society
o Change principles on which society is organized
o Change the way society interacts with the state apparatus
- What are the changes in Chinese society?
 o More complex structure
o More fluid and dynamic, which leads to greater social and geographic mobility
and horizontal interactions
o Significant redistribution of economic power away from the state towards groups,
institutions, households, and individuals
More specific changes:
- A progressive undermining of the party’s own heroic narrative of its central role in the
revolution
- Re-emergence of popular religion, class, and even secret societies providing not only
alternative sources for belief but also sites for reciprocity and welfare distribution
- In urban areas, the emergence of a focus on individual desires and wants, which conflicts
with the party’s traditional collectivism
Why should the CCP be afraid?
- Emerging alternative foci of identity are ones that tend to weaken central allegiance
- With the belief vacuum at the center, traditional belief systems and organizations are
beginning to re-emerge, such as popular religion, clans, and even secret societies
CCP’s searching for a deeper source of legitimacy than economic growth alone
- Neo-conservatives:
o China is not ripe for a democratic transition and lacks the middle class that would
be necessary to promote this and ensure stability
o It is the state that must take the place of the middle class in development
- Popular nationalism
o Since 1989, the party strengthened patriotic education in schools and colleges
- New-left:
o Criticized that the government has not done enough to burb the inequalities and
corruption that have arisen as a part of the reform process
Week 12.2: market transition: strategy and process
The Chinese approach to transition
- Assumption:
o China is a low-income developing country
o It is critical to develop the economy
o System transformation would have to take place concurrently with economic
development
- Objective
o Market transition would not be completed until the economy reached at least
middle-income status
Comparison between chian and the eastern European countris
 - Approach to transition
o China’s gradualist approach
 Saw unmet needs everywhere in their economics
 Chinese people should be allowed to satisfy unmet needs and earn some
additional income
 If these new activities tended to erode the command economy and had to
be exempted from some of its rules, so be it
 Early reforms never reduced or eliminated distortions; instead they
loosened control over resources
o Eastern Europe: big bang approach
 Reformers aimed to move quickly towards a modern market economy and
to shed the legacy of communism ASAP
 Distrust the communist party and their government to correct distortions
in the economy
 Smash the entire edifice, eliminating as many distortions and privileges
and the resulting rent-seeking opportunities as possible, and start all over
from the bottom up
 In this process, it is okay to have some short-term loss of output
How did reforms start in China? The initial breakthrough in the countryside
- 1978 Household Production Responsibility System Reform
- Contracting individual pieces of land to farm households
- Farm households took over management of the agricultural production cycle on a specific
plot of land, subject to a contractual agreement that they turn over a certain amount of
procurement (low price) and tax (zero price) grain after the harvest
- The farmers kept 100% of the harvest above the contracted deliveries and can sell them at
market price
A two-phase framework of economic reform
- From 1978 to 1992:
o Dual Track System
 One track with market price, one with government price
o Growing out of the plan
o Particularistic contracts
o Entry
o Prices equating supply and demand
o Incremental managerial reforms instead of privatization
o Disarticulation
o Initial macroeconomic stabilization
o Continued high saving and investment
Dual track system
 - Refers to the coexistence of a traditional plan and a market channel for the allocation of a
given god
- The dual track implied a two-tier pricing system for most goods:
o A (typically low) state-set planned price
o A (typically higher) market price
- This meant that virtually all factories, including state-run factories, were introduced to the
market and began the prices of adaptation to market processes
- This system allowed state firms to transact and cooperate with non-state firms, allowing
valuable flexibility
Growing out of the Plan (see figure 4.1)
- All planned economies had some kind of dual-track system because they all had various
black and gray markets outside the formal planning system
- Gradually increasing the share of nonplanned, market transactions in the economy had
made the dual-track system into an unabashed transitional device
- The commitment to grow out of the plan crucially altered…?
Particularistic Contracts
- Under the dual-track system, planners signed individual contracts with every SOE
- These contracts specified tax payments and contributions to the material-balance plan
- There was no regular tax system – the de facto tax rate was specific to an individual
enterprise
- What was the contract based upon?
Entry
- The central government surrendered in practice its ability to maintain high barriers to
entry around most of the manufacturing sectors. What other factors facilitate this
lowering entry?
o The nation’s huge size and diversity
o The relatively large role that the governments played in economic management
even before reform
- Their entry sharply increased competition and changed overall market conditions in the
industrial sector
Prices equating supply and demand
- Since the early 1980s a significant proportion of transactions began to occur at market
prices and in 1985 market prices were given legal sanction for exchange of producer
goods outside the plan
- State firms were legally operating at market prices
- The transactions between the state and non-state sectors were permitted, such as joint
ventures and cooperative assignments vis subcontracting with rural non-state firms with
lower labor and land costs
Incremental managerial reforms instead of privatization
- State-sector managerial reforms were carried out as a less radical measure than
privatization
- A steady shift in emphasis away from plan fulfillment and toward profitability as the
most important indicator of enterprise performance
Disarticulation
- Reforms started and advances in sectors that are least attached to the core planned
economy, such as the establishment of the export-oriented enclaves, and rural reforms in
the poorest areas in China
Continued high saving and investment
- The steady increases in household income and the increasing opportunities in the
economic environment lead to a rapid increase in household saving
- Increase in household saving offset the reduction in government saving
- Led to a vastly enhanced role for the banking system, serving as an intermediary
channeling household saving to the enterprise sector

Week 11.1: Urban Economic Reforms

Industry: ownership and governance
- What are the institutional changes that lie behind the dramatic industrial transformation in
China?
- Lecture topics:
o A description of change in the ownership of Chinese industry
o A discussion on changes in industrial finance
o A more detailed discussion of institutions of corporate governance in Chinese
state-owned industry
o Privatization and hybrid-ownership forms
External forces that drove institutional change in Chinese industry:
- The entry of new firms => created an intensely competitive product market => discipline
a firm and force it to become more efficient
- Entry of new firms and the emergence of a competitive market => related to the
emergence of TVEs, the private and foreign-invested firms => contribute to a diverse
ownership structure
- The loss of protected markets => deprived SOEs of the high markups and surplus
earnings they had once enjoyed => dramatic changes in the system of industrial finance
and in the financial position of industrial firms
Ownership change: a diverse industrial base
 - Phase one (1978-1993): publicly owned organizations
o Traditional SOE: the “work unit” integrated into the government bureaucracy =>
77% of industrial output
o Urban collective enterprises: factories that were nominally owned by the workers
in the enterprise but were actually controlled by local governments or other state
bodies => 14% of industrial output
o Rural TVEs: 9% of industrial output
- Table 1: ownership composition of industrial output
1978 1996
SOEs 77 33
Collective enterprises 23 36
(of which: TVEs) (9) (28)
Private and household 0 19
Foreign invested 0 12
(of which, foreign (7)
nationals invest) (5)
(of which, Hong Kong
and Taiwan)
SOEs:
- Responsible for the welfare, health, and political indoctrination of their workers’
- Managers had little flexibility and low rewards
- Managers were required to fulfill plan targets and carry out numerous other commands
given by various parts of the bureaucracy
- There was little accountability or risk
TVEs:
- Largely unburdened by the external obligations on the SOEs
- Publicly owned TVEs were consistently the most rapidly growing sector and the most
dynamic factor in industrial transformations
Private firms:
- Primarily in the small-scale sector
- Chinese authorities were content to let the small-scale sector revive with relatively little
interference
- Minimal protection of property rights => hard to grow big
- Continued discrimination against private firms => collective forms grow so rapidly

Characteristics of Phase II for industrial transformation:

- Massive downsizing of the state sector
o Tens of thousands of SOEs and urban collective firms were shut down
o Laid-off workers totaled 40% of the SOE workforce
 o Urban collective workforce shrank by more than two thirds
o The changing ownership composition of industry was also shaped by a policy
adopted at the 15th Communist Party Congress (1997) called “grasp the large, and
letting the small go”
- “Grasping the big”: focus on the largest, typically centrally controlled firms:
o Reorganize them into even larger and hopefully more competitive enterprise
groups
o Restructure and refinance them while keeping them under state control
- “letting the small go”:
o Giving local governments much greater authority to restructure their own firms
o To privatize or close down some of them
Results of the phase II reforms (i.e. 20 years later)
- The central government industry concentrated on energy, natural resources, and a few
sectors with substantial economies of scale
- The local government-run factories were not only much smaller than those of the central
government, but also much more exposed to competitive pressures and consequently
much less profitable
Table 2: ownership composition of industrial output (above-scale industry), percent
1998 2004
Stare corporations controlled 49.6 38
by the state
Joint-stock corporations 6.4 42.1
Foreign-invested enterprises 24.7 30.8
Collective enterprises 19.6 5.3

Week 11.2: Inequality in China’s countryside

TVEs
- Too many TVEs
- Competition rose with the result that profit did not grow commensurately
- Result:
o Local officials privatized virtually all small and/or marginally profitable TVEs
o Competition among rural hukou holders with the relaxation on internal migration
diminishing
Why is there a contraction of job opportunities for unskilled workers?
- Mobility of capital to inland or moving out of the PRC
- Economic crisis of 2008
How have the sideline production schemes among peasants been encouraged and hampered by
state direction and market forces?
- Domestic supply and demand
- International agricultural price’s fluctuation, especially after joining WTO in 2001 =>
farmers became more vulnerable
Impact of the reduction in rural extractions
- Reduction in Rural Extractions:
o Since 2000, centre: gradually phase out rural taxes and fees in some provinces
o In 2002, party leaders: requiring all formal taxes and informal charges be phased
out by 2006
- The impact varies by locations:
o Not much change in the rich and coastal areas
o Insufficient funds for cadre salaries and public services at township and village
levels
- Transfer funds to compensate for local revenue shortfalls:
o Very little of this money has trickled down
o Lots of township and village governments have been in debts since the early
2000s
o In 2004, centre issued a new rural policy instituting a five-fold increase in rural
spending
- Illegal land seizure
o In 2004, 47,000 cases of illegal land activities
o Between 1990 and 2002, 66.3 million farmers had their land confiscated
o Uneven impact:
 Positive
 Negative: 60-70% for county and township government; 25-30% for
village governments; 5-10% for farmers
Peasant perceptions
- General trend:
o Farmers have experienced increase in income level (300%)
o More consumer goods
- Survey results:
o Farmers exhibited some of the highest levels of optimism
o Variation:
 In more developed rural areas, less reliance on agriculture for their income
=> believe upward mobility
 In agriculture-dependent areas, peasants experienced absolute, not just
relative, decline in their living standards
Week 14.2: Chinese Foreign Relations in the Post-Cold War Period
- PLA modernization clearly the lowest priority for Deng during the 1980s
- Need to build a strong civilian economy to support modern military
- Military modernization costly, drains scarce capital without producing much multiplier
effects
- The challenge for Deng was how to maintain control over and support of the PLA
- While relegating them to the lowest priority in development program
- How to keep them from resisting, possible maneuvering against him within party
- Leadership circles
- How to purge PLA of Maoists
- Deng’s strategy:
o Retain control, of the PLA:
 Deng keeps chair of MAC military affairs commission
 Stacks MAC with loyalists, purges them when they show least
recalcitrance over his policies
o Downplay the extent of threat facing china (external)
 Cultivate ties with US and Japan
 Soviets as biggest threat, but with waning of Brezhnev era, could be
entices
 With concessions on “Three Obstacles” (econ, political, culture?)
o Allow selective modernization:
 Upgrading of nuclear forces
 Bang for buck
 Missiles that could hit European Russia => deterrence
 Dual use technologies (especially licensed production rather that straight
purchases)
o Reduce the size of the PLA and retire the older officers
 Modern military doesn’t have to be so large
 Large army is expensive, even if not modernized
 Merit/education criteria for promotion => attrition of older, Maoist
officers and replacement with new generation of technocratic, better
educated, less politicized officer corps
 New officers also indebted to Deng for their career advancement=> loyal
to him
o Allow PLA to generate its own resources:
 First by exporting weapons
 Later for into commercial ventures: conversion of military plants to
production for civilian economy
 1990-91, 65% of output from military factories was civilian products,
especially electronics
 Import substitution, especially in technology industries
Is there a new cold war beginning between the US and China?
 - China passive during the CW: in a bipolar world, PRC content to play off US and USSR
against each other
- With the collapse of the bipolarity, they face two big picture possibilities:
o They assume the role of the USSR in a new bipolar world
o They accept, accommodate to US hegemony

China’s expanded global economic role:

- China’s expanded global economic role:
o New responsibilities, new challenges
 IGO/NGO membership from 21 (1977) to 51 (1996) and 71 to 1079 NGO
o Accession to WTO (2001) => PRC has to play by WTO rules
 A more liberal trading order
 Subject to WTO legal system
 Greater transparency, accountability
China and the region
- Saich: China needs to convince neighbors of 3 things:
o That its economic strength will be of benefit to all the region
o The need to develop new institutions for greater cooperation in the region
o China’s pursuit of interests, leadership in the region does not challenge US
 Most difficult to convince
- Friction:
o South China Sea
o Cross-Strait relations
o North Korea
o Leadership in the Pacific region vs. Japan and the US
- Taiwan
What doesn the US want from China?
- Ultimately, a democratic China
o Not just because values of democracy are deep in the soul of American national
character
o Not just because we value human rights for the citizens of other countries just as
for our own citizens
o Because democracies don’t fight each other
- A stable china
o We don’t want to see in china what happened in the USR
o An unstable china would not be the economic dynamo that it is currently and an
unstable china would be an unpredictable china in terms of security
- A cooperative china
o We needed china as a counterweight to soviet aggression
 o With the soviets gone, we don’t have this common interest any more
What does China want fr4om the US?
- Continued trade an investment: export led development leaves it vulnerable to shifts in
external markets
- Us support on the WTO
o For china to maintain momentum of economic growth, it needs WTO membership
o WTO membership runs through Washington
State-society relations in transition
Dimension of economic reform
- Slides on BB
Chinese foreign relations in the post-cold war period
- What are the debates over the effect of the rise of China’s economic power and is
integration into global frameworks of governance?