The attached article, while not theoretical, at least gives the policy an intelligible look. It seems that when things don't sell, like TV's, the state-owned factories continue to make them anyway, because that's what they do; because they still get income from the state even when things aren't selling; and because they can't lay anyone off. So this policy of calling a halt to investment in particular branches of industry -- like TV production -- is an attempt to get the state-owned firms to act more like capitalist firms, and invest in making something other than their usual wares, and hopefully something there's a lack of. As opposed to the capitalist method of having them fire their extra workers and give their extra money to a bank who would lend it to someone else in a different business while they waited for the market to clear. It's a kind of half plan -- telling the state-owned colossi what they can't make, but not what they should; and continuing to subsidize them and continuing to disallow firings.
It's easy to see how it might not work. But at least it doesn't seem childishly wrong.
(BTW, everyone knows the old Eastern European joke about gradual reform, yes? In the future, all cars will drive on the left. But to ease the transition, in the beginning only half the cars will do so.)
Michael
China's competitive transition pushing state industries away
Copyright © 1999 Nando Media
Copyright © 1999 Associated Press
By ELAINE KURTENBACH
BEIJING (August 22, 1999 12:27 p.m. EDT http://www.nandotimes.com) -
Big screen color TVs sell for $150. Washing machines go for $100.
Men's and women's shirts are $2.50. Prices have never been lower at
Beijing's Landao Department Store. But that seems to be the problem.
China is struggling to transform state-run factories into competitive
industries but its markets remain glutted with consumer goods.
Producers already deeply in debt are bankrupting each other with
fierce price wars instead of adjusting to market demand.
Fearing that the deflationary debt spiral will worsen unemployment and
ignite social unrest, the government announced a ban last week on
investment in production of a wide array of consumer goods.
Meanwhile, President Jiang Zemin is visiting one factory after
another, exhorting all to do their best to reinvigorate state
enterprises.
"The good performance of state enterprises is not only a major
economic issue ... but also a major political issue affecting the fate
of the socialist system," Jiang said in a recent speech during a trip
to the industrial northeast.
His campaign to reboot the economy seems, however, to be making little
headway in weaning state industries from their reliance on state
subsidies and protection.
"They have gotten to the point where the easy stuff has been done and
they are running into economic, political, financial and social
constraints," said Ken Courtis, regional economist for Deutsche Bank
Capital Markets (Asia).
Prices in the saturated consumer market have been falling since
October 1997. Regulators imposed minimum prices for TV sets and some
other items, but instead of cutting production, state factories
churned out even more. As prices drop, losses are mounting, driving
manufacturers ever deeper into debt.
Many products may be the cheapest ever, after adjusting for inflation,
but consumers aren't buying. With factories laying off workers by the
millions each year, people worried about losing their jobs are
stashing their money away.
In addition, the Asian economic crisis and slower world growth have
cut Chinese exports and reduced foreign investment. Massive public
works spending, repeated interest rate cuts and other tinkering
haven't spurred consumer buying. Now the government spending boom is
waning.
Despite the sense of crisis, President Jiang and other leaders seem to
lack the political will to starve inefficient state enterprises and
nurture the fast-growing private sector.
Instead, they are resorting to a mishmash of government mandates that
may help alleviate the symptoms of China's industrial malaise but are
unlikely to cure it.
Production of television tubes was suspended for two to three weeks in
early summer. Investment in factories to produce TV sets, air
conditioners, refrigerators, plastic bags, bicycles, microwave ovens,
candy, salt, apple juice, liquor and other items will halt Sept. 1. To
counter a real estate glut, officials will withhold permits for new
luxury apartments, hotels and office buildings.
The government announced recently it will raise pay for civil servants
by 30 percent to 40 percent, apparently in hopes of discouraging
corruption and encouraging more consumer spending. To compel the
thrifty to spend more, it reportedly plans to tax the interest on
savings.
Yet, while the economy sags, government bureaucrats and
state-enterprise managers are tied up with a Maoist-style political
campaign intended to purge those judged to be corrupt or disloyal.
Officials say they have lost weeks of work time to Jiang's "three
stresses" campaign, which is emphasizing theoretical study, political
consciousness and "healthy" trends.
Another campaign, against the banned Falun Gong meditation sect, also
has eaten up valuable time.
Courtis, the Deutsche Bank economist, says that little will change as
long as leaders fail to enforce a wholesale overhaul of industrial
management and to create financial markets to channel credit to the
economy's most dynamic sectors.
"Money is going only to those who know how to destroy capital. They
can keep pulling all the levers, but until that basic mechanism
changes, the economy won't recover," he said.
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