China's Economic Transformation Third Edition Gregory C. Chow WlLEY Blackwell
Contents Preface to the Third Edition Part I: Historical Background and General Survey 1 Economic Lessons from History 1.1 Introduction 1.2 Significant Events in Major Historical Dynasties 1.3 The Republic of China, 1911 1.4 Summary of Historical Lessons 1.5 What History Can Reveal about the Chinese Economy References and Further Reading Questions 2 Experiments with Flanning and Economic Disruptions 2.1 The Communis! Party Rises to Power 2.2 Historical Review: 1949-78 2.3 A Model of the Chinese Planned Economy 2.4 The Behavior of Economic Units in a Planned Economy 2.5 Output Flanning in Theory and Practice 2.6 Organization and Administration of Economic Flanning References and Further Reading Questions 3 Economic Reform up to the Mid-1990s 3.1 Why Economic Reform Started in 1978 3.2 Agriculture 3.3 Reform of State-Owned Enterprises
vi Contents 3.4 Price Reform 48 3.5 The Banking System 49 3.6 Foreign Trade and Investment 50 3.7 The Nonstate Sectors 51 3.8 Institutional Infrastructure 52 3.9 Reform Policies Similar to Those of Taiwan 53 3.10 Reasons for the Success of China's Economic Reform 56 3.11 Summary 60 Appendix: China's Geography 61 References and Further Reading 63 Questions 63 4 Further Reform up to the 2010s 65 4.1 Introduction 65 4.2 Enterprise Reform 66 4.3 Banking Reform 68 4.4 Foreign Trade and Investment during the Asian Financial Crisis 72 4.5 The Impact of WTO Membership 74 4.6 Reform in Agriculture 81 4.7 Rural Poverty 82 4.8 Prospects for Reform 85 References and Further Reading 87 Questions 88 Part II: Analysis of the Macroeconomy 89 5 Economic Growth 91 5.1 The Neoclassical Model of Economic Growth 91 5.2 Data on Output, Capital, and Labor 93 5.3 A Review of Regression Analysis 98 5.4 Estimating Production Functions for China 99 5.5 Use of the Neoclassical Growth Model to Forecast GDP 104 5.6 How Large Will the Chinese Economy Be in 2020? 107 5.7 Lessons from Forecasting 108 References and Further Reading 108 Questions 109 6 Economic Fluctuations 110 6.1 The Multiplier-Accelerator Model of Economic Fluctuations 110 6.2 Dynamic Properties of the Multiplier-Accelerator Model 113 6.3 An Econometric Method for Estimating Parameters of Linear Stochastic Equations 115 6.4 Estimating a Multiplier-Accelerator Model of the Chinese Economy 116
Contents vii 6.5 AVector Autoregression (VAR) System 120 6.6 Econometric Models of the Chinese Economy 122 References and Further Reading 122 Questions 123 7 Macroeconomic Policies 125 7.1 Introduction 125 7.2 Monetary Policy 127 7.3 An Econometric Analysis of Inflation and of Monetary Policy in China 134 7.4 Basic Facts about Government Revenue and Expenditure 136 7.5 Fiscal Policy 139 References and Further Reading 140 Questions 141 8 The Effects of Political Movements on the Macroeconomy 142 8.1 Specification of a Dynamic Optimization Model of the Chinese Economy 142 8.2 The Solution of the Dynamic Optimization Problem 145 8.3 Statistical Estimation 149 8.4 Measuring the Effects oftwo Political Events 150 8.5 Conclusions 156 References and Further Reading 157 Questions 157 Part III: Topics in Economic Development 159 9 Consumption 161 9.1 Trends in Per Capita Consumption 161 9.2 Household Expenditure Pattems 165 9.3 Rural Per Capita Consumption Expenditures in 1998 by Province 171 9.4 Consumption of Housing in Rural and Urban Areas 173 9.5 Demand and Supply of Urban Housing 175 References and Further Reading 176 Questions 176 10 Energy and Environmental Problems and Policies 178 10.1 Introduction 178 10.2 Environmental Problems in China 179 10.3 Laws, Agencies, and Policies for Protecting the Environment 181 10.4 Problems of Policy Implementation and Law Enforcement 185 10.5 A Study of Industrial Pollution 187
viii Contents 10.6 Regulation of China's Industrial Air Pollution 189 10.7 Conclusions 191 References and Further Reading 192 Questions 193 11 Population 194 11.1 The Role of Population and Human Capital in Economic Development 194 11.2 The Chinese Population and Its Rate of Growth 196 11.3 Population Policy 199 11.4 Evaluation of China's Population Policy 203 11.5 Economic Explanation of the Birth Rate 205 11.6 Why the Population Control Policy Should Be Terminated 207 References and Further Reading 207 Questions 208 12 Human Capital 209 12.1 The Importance of Human Capital and Its Measurement 209 12.2 Labor Supply and Demand 210 12.3 Investment in Human Capital 216 12.4 Measuring the Rates of Return to Schooling in China 222 12.5 Health Services 224 12.6 The Social Weifare System 228 References and Further Reading 229 Questions 230 Part IV: Analysis of Individual Sectors 231 13 The Banking and Financial System 233 13.1 Commercial Banks 233 13.2 The People's Bank 235 13.3 Factors Affecting the Functioning of the Banking System 237 13.4 Possible Weaknesses of the System 240 13.5 Possible Directions of Reform 241 13.6 Weakness of Commercial Banks and Related Problems 243 13.7 Other Financial Institutions 244 13.8 The Role of the Chinese Government in Reforming the Financial System 249 References and Further Reading 251 Questions 251
Contents ix 14 Shanghai Stock Price Determination 253 14.1 Introduction 253 14.2 A Model of Stock Price Determination 254 14.3 Empirical Findings from the Shanghai Stock Exchange 257 14.4 Comparison with Findings for Hong Kong and New York Stocks 262 14.5 Concluding Comments 262 References and Further Reading 263 Questions 264 15 The Behavior of State Enterprises 265 15.1 Organization of a State Enterprise under Central Flanning 265 15.2 Flanning and Operations of a Large-Scale State Enterprise 269 15.3 A Simple Model of a State Enterprise under Central Flanning 274 15.4 A Simple Model of a State Enterprise after Initial Reform 277 15.5 State Enterprise Restructuring in the Late 1990s and Its Effects on Enterprise Behavior 280 15.6 Current State of Chinese State Enterprises 283 References and Further Reading 284 Questions 285 16 The Nonstate Sectors 286 16.1 Relative Growth of Nonstate Sectors 286 16.2 Private Enterprises Prior to 1949 287 16.3 Economic Conditions for the Growth of Township and Village Enterprises 288 16.4 Econometric Measurement of the Relative Efficiency of State Enterprises and TVEs 291 16.5 Characteristics of a Free-Market Economy 292 16.6 Characteristics of the Chinese Market Ecomomy 295 16.7 Role of Entrepreneurs in China's Economic Growth 297 References and Further Reading 299 Questions 299 17 Foreign Trade 301 17.1 Some Statistics of China's Foreign Trade 301 17.2 Explanation of Trading Patterns under Free Trade 303 17.3 The Determination of Foreign Exchange Rates 309 17.4 China's Foreign Trade Policy 314 17.5 Problems in Implementing Foreign Trade Policies in the Early 1980s 318 17.6 Protectionism in the United States 322 References and Further Reading 324 Questions 324
X Contents 18 Foreign Investment 326 18.1 The Role of Foreign Investment 326 18.2 Historical Developments 328 18.3 The State of Foreign Direct Investment (FDI) as of 2002 329 18.4 Policies for the Regulation of Foreign Investment 333 18.5 Opportunities and Problems for Foreign Investors 334 18.6 How Attractive Is China for Foreign Investment? 338 18.7 The Impact of WTO Membership on Foreign Investment 339 18.8 China's Investment and Economic Expansion Abroad 341 References and Further Reading 343 Questions 343 Part V: Studie«of Economic Institutions and Infrastructure 345 19 Laws of Asset Management and Corruption 347 19.1 Introduction 347 19.2 Laws of Asset Management 349 19.3 Managing One's Own Person 352 19.4 Managing Physical Assets 353 19.5 Managing Assets under the Responsibility System 355 19.6 The Misuse of Collectively Owned Land 358 19.7 Corruption and Economic Reform 359 19.8 Concluding Comments 363 References and Further Reading 364 Questions 365 20 The Legal System and the Role of Government 366 20.1 The Legal System prior to 1949 366 20.2 The Legal System since 1949 368 20.3 The Role of the Legal System in a Market Economy 371 20.4 The Economic Role of Government 372 20.5 The Role of Flanning in China's Market Economy 376 20.6 The Govemment's Decision Process 382 References and Further Reading 384 Questions 384 21 The Education System and Policy 385 21.1 The Education System prior to 1949 385 21.2 The Education System after 1949 387 21.3 Education Policy 387 21.4 Economics Education 390 21.5 Demand for Education 398
Contents xi 21.6 Concluding Comments 403 References and Further Reading 403 Questions 404 22 Lessons from Studying the Chinese Economy 405 22.1 Lessons for Understanding the Subject of Economics 405 22.2 Lessons from Understanding the Chinese Economy 407 22.3 Lessons from Forecasting the Chinese Economy 418 References and Further Reading 423 Questions 424 Index 425