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P R I V A T I Z A T I ON In China

Moza Al-Suwaidi & Noor Al-Thani

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China’s Economic Rise

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What is “Privatization”?

A strategy that communist states undertake in order to transition the states economy into a more dynamic market economyIt aims is to tackle the factor of inefficiency in the public sector and reduce costs to the governments

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4. Impacts of privatization in emerging market economies are far reaching

Privatization is one of the key policies in transitioning economies and in economic development

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China’s privatization needs to invest in research

Lack of accurate data Issue of transparency Lack of information

about the enterprises

3China is considered to be the slowest in starting privatization among all the transitioned economies

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Privatization in China

In China, this process has been underway for decades but has been substantially different from the shifts that have occurred in other countries

Privatization in China currently involves several elements considered to be unique and potentially detrimental, and difficult to adjust to, this has led it to become problematic for the country as a whole

5The question of who to privatize first, answered

Total Factor Productivity (TFP)

Labour productivity

Profitability Sales Financial

performance Wages Employment rates

More profitable enterprises Enterprises with higher market shares Particular industries that are subject to higher demand Performance measures:

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It was founded in 1949 as the PRC Country undergoes several revolutions

under Mao Zedong Late 50’s the Great Leap Forward Late 60’s Cultural Revolution

After Mao’s death in 1976 the country experienced great transformations

1978 the country shifted from a command economy to a mixed economy

History of China

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Timeline

1978 1980s 1990s 2000

Closed centrally planned economy, dominated by Agriculture

Local experimentation in decentralizing the economy, in order to encourage growth

Economic growth slows down, country faces political issues, State-owned enterprises still unreformed

Banking sector reforms introduced, using macroeconomic tools to control the economy

Credit markets overheat, focus on partial privatization

Economy experiences growth driven by new reforms

Nevertheless, State-owned enterprises remain unreformed

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Centrally planned or command economy before 1979

Led by Chairman Mao Zedong, most of the nation’s economic output was directed and controlled by the state government

The government-established production objectives while controlling prices

By 1978, approximately 75% of all industrial production was maintained by government owned enterprises controlled by the central government

Privatization was not promoted by the government and foreign invested organizations were prohibited

No incentives to make a profit for firms or farmers

No competition Trading and investment was restricted

China’s Economic History (Before the boom)

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Major reforms took place in the late 1970s

Economic zones were created to increase the quantity of exports

Price and ownership incentives for farmers, and these farmers were then able to sell their crops on the free market

Small businesses were allowed and sometimes even encouraged to

optimize innovation and competition

The removal of the previous restrictions on trade successfully increased competition and encouraged foreign investments which increased growth

China has been able to double its economy roughly every eight years

China’s Economic History(After the boom)

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Negatives

Positives

Privatization has had positive and negative effects in China

In China, privatization has been part of an ongoing process following governmental control and governmental reforms in the local economy.

In order to transition from an economy that is largely compromised of state-owned enterprises into a more domestic oriented demand growth:

“Beijing must accelerate financial-sector policy changes. At a minimum that would include liberalization of interest and exchange rates, opening the capital account, and creation of more private financial institutions.” – Ming

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“Privatization is believed to help the economy to increase

competition and productivity in a manner similar to the reforms introduced in the 1970s and

1980s, but adjustment to these changes and other issues has

led to skepticism of the benefits of this kind of economic shift”

12Description of the Issue: Privatization in China

Analysts described it as ‘shock therapy’ to the economy privatization affects wage structures by increasing inequality within the

country Gender wage discrimination was observed to have increased Unemployment rate has increased

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14Employment shift yet issues exist The proportion of state employed

employees decreased substantially from the 1990s.

“some segments of the labor force were able to benefit from this transformation, while others struggle to deal with the increased social risks.” - Zenglein

However, there are many issues in terms of employee rights that seem to have been blurred in the transition

“A survey conducted by the Standing Committee of the National People’s Congress (NPC) in 2005 found that 80% of private firms violate employee rights (China Daily).” - Zenglein

This is largely due to the fact that the government has not yet implemented labor market laws protecting worker rights and thus have allowed private enterprises to take advantage of exploiting available opportunities and creating a power imbalance

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Issues highlighted by

R E S E A R C H The rate of privatization has been restricted because of the following reasons:

According to Guo and Yao it is a combination of debt and worker redundancy - many workers have been laid off

Fung, Kummer, and Jinjian concurred that the Chinese banking-based economy is experiencing a slow transition towards a financing economy with a stronger market orientation.

Also, Bai et al. reported that organizations which are fully privatized perform worse than organizations which are controlled by the government

16Factors of resistance to Privatization

China’s transition to a market economy is a curious mix it has improved the efficiency and productivity of some rather stagnant state-owned enterprises that lacked the competitive motive and the notion of innovation.

State-owned enterprises may have faced resistance in the past due to:

income disparities instability to a presumable stable economy.

Main factors of resistance: Due to the fact that when state-owned enterprises privatized, prices would in effect have to increase in order to support the commercial viability of such newly privatized enterprises.

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– “In industry, private companies for more than three decades have relentlessly gained market share at the expense of state firms, which now account for only about a quarter of output.” – Lardy

A large proportion of investment in manufacturing is undertaken by the private sector

The service sector however, is still exclusively limited to state-owned enterprises and thus, competition and success in the manufacturing sector should encourage the transition to follow into other sectors if the economy.

The return on assets between state-owned enterprises and private business is substantially large

Return on assets

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The government could provide subsidies as well as help ease prices and welcome private capital to the newly market oriented economy.

Limited government control has been found to be superior to complete privatization, and therefore more conducive to the optimized economic growth sought in the nation.

It is more cautious and strategic

A combination of government and private analysts could pool the existing information to determine the level of government control, which is optimal in different sectors and in different conditions.

Proposed Solutions

19Main ingredients for the success of private enterprises

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One of the main ingredients for the success of private enterprises in the transition process and amid this structural change towards a market-oriented economy is incentive.

As individuals in general work better when they are incentivized, this becomes even more understandable as China experiences an overall increase in the populations human capital.

An increase in education will provide individuals with a better understanding of the benefits and opportunities available to them by the privatization of state-owned enterprises.

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20Main ingredients for the success of private enterprises − continued

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Issue is how the increase in human capital is spread:- If an increase in human capital were reserved to urban areas, this would in effect increase income disparities, creating instabilities as a result.

Structural changes have occurred amidst an already accelerating economy, which has as a result lead to urban prosperity; affluent households are now able to send their children overseas for education, travel abroad, live in larger houses – Rawski . This as a result increases domestic demand, as households are now able to afford many of the products produced domestically.

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• China should benefit from other countries that have privatized. However, it should tailor its needs to the particular social and cultural norms that play a huge role in the way the Chinese society would react to the change.

• It should not simply copy models, but rather tailor models

to fit the country better. • Thus, it should not be viewed as

only a matter of technological catch-up, but rather a process that encompasses trail and error to what best suits the societal change.

Lessons that can be learned

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Problems can be overcome through strategic integration and development.

Standards need to be maintained and accounts need to be reported, in order to inspect efficiency and productivity.

The government should target particular sectors of the economy in order to avoid present inefficiencies.

Concluding Remarks

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FOR YOUR ATTENTION.

THANK YOU

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