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Enterprise Reforms in Chinese and Polish State-Owned Industries

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Enterprise Reforms in Chinese and Polish State-Owned Industries 1 ?C3 o --JL'/ 1cq 1l Public Disclosure Authorized ResearchPaper Series Number CH 8 Comments welcome July 1991 Public Disclosure Authorized Enterprise Reforms in Chinese and Polish State-Owned Industries Qi rao Fan and Mark E. Schaffer Suntory-Toyota International Center Center for Economics Performance for Economics and Related Disciplines London School of Economics Public Disclosure Authorized Houghton Street, London WC2A 2AE Houghton Street, London WC2A 2AE This paper represents the individualviews of the authors and not those of the sponsoring agencies or institutionsor their affiliated agencies. Commentsand suggestionsare welcomeby the authors. Public Disclosure Authorized Abstract The paper compares three separate state-owned industrial enterprise reforms: China 1978-90, Poland 1982-89, and the "Balcerowicz Plan" reforms in Poland that began in 1989. The authors argue that the first two "socialist" reforms were very similar, both in the measures enacted and in the results achieved. The third reform already surpasses the first Polish reform in its achievements, despite the fact that the formal set of "Balcerowicz Plan" reform measures were inherited largely unchanged from the preceding socialist reform. The authors contend that a critical ingredient in the success of the Polish reform in 1989-90 was the credibility of the new regime; conversely, the weakening of the credibility of the Chinese regime in 1989-90 further undermined its reforms. This is the revised version of a paper preparedfor the conference on Management and Economic in China Today: Simiarities with Eastern Europe?,Maastricht, the Netherlands,15-16 November 1990. We are extremelygrateful to Saul Estrin, Stanislaw Gomulka, Athar Hussain, Stephen Howes, Brigitte Granville, and an anonymous refereefor many helpful comments and discussions. Fan gratefully acknowledgesfinancial supportfrom the BradleyFoundation and the Ford Foundation. The paper was completed while Schaffer was a Research Officer at the Center for Economic Perfonnance in the "Programon Post-communistReform." Schaffer gratefullyacknowledges financial support from the Leverhulme Trust. The Center for Economic Performanceis financed by the Economic and Social Research CounciL EnterpriseRefonns in Chineseand Polish State-ownedindustries, by QimiaoFan and Mark Schaffer (i) Outline 1. Introduction ........................................................... 1 2. Enterprise Reforms in China ................................ 2 2:1 Profit Retention and Enterprise Incentives ............................. 3 2.2 The Double-track Price System ...................................... 4 2.3 The Enterprise Tax System .......................................... 7 2A The Contract ResponsibilitySystem ................................... 10 2.5 Factor Allocation ................................................. 10 2.6 Summary....................................................... 13 3. Enterprise Reform in Poland ..................... ......................... 13 3.1 The 1982 Reform: Basic Principles .................................... 14 3.2 The 1982 Reform: Results .......................................... 14 3.3 The 1989-90Enterprise Reform: Basic Principles ......................... 18 3.4 The 1989-90Enterprise Reform: Results ............................... 19 4. Some Comparisons ...................................................... 22 5. ConcludingRemarks . ..................................................... 32 References .............................................................. 34 Enerprise Reforms in Chinese and Polish State-owned industres, by Qimiao Fan andMark Schaffer ( 1. Introduction Since 1979 the Chinese authorities have implemented a wide range of reforms of state-owned enterprises (SOEs). The reforms have proceeded through three stages. The initial stage (1979-1983) of enterprise reform emphasized several important experimental initiatives that were intended to enlarge enterprise autonomy and expand the role of financial incentives within the context of the traditional planning system. These included the introduction of profit retention for enterprises and performance-related bonuses for employees and permitting SOEs to produce outside the state mandatory plan. During the second stage (1984-1986)the emphasis of enterprise reform shifted to, first, the formalization of the financial obligations of SOEs to the government and, second, the exposure of enterprises to market influences. From 1983, profit remittances to the government, which were decided by bilateral bargaining,began to be replaced by a profit tax and the government embarked on a program of the reform of indirect taxes. In 1984, the government allowed SOEs to sell output in excess of plan quotas at negotiated prices and to plan their output accordingly,thus establishingthe so-calleddouble-track price system. During the third stage (1987-present)of China's enterprise reform the Contract ResponsibilitySystem (CRS) was formalized and widelyimplemented. The Contract ResponsibilitySystem was an attempt to clarifythe authorities and responsibilities of enterprises and their supervisory bureaux The main purpose of these measures is to reduce government intervention in the running of SOEs and to make them financiallyindependent, and to introduce profit rather than plan fulfillment as the indicator of enterprise performance. As we shall see below, however,the Chinese government has so far been unable to enforce financial discipline. In 1982 Poland started its own enterprise reform. Under the 1981 reform blueprint, central planning was to be largely dissolvedand enterprises were to become independent, self-financingand self-managedeconomic entities operating in a market environment. The legal and institutional bases for the reform were established prior to the actual start of the reform in 1982. In practice, the reform measures were introduced gradually and incompletely. By the end of the 1980s it was clear that the reform had failed to achieve its major objectives, in particular that of implementing a sound enterprise incentive structure. In September 1989 the Communist government was replaced by a Solidarity-ledcoalition that then proceeded to enact a radical stabilization and liberalizationprogram (the "BalcerowiczPlan," named after the Finance Minister). This program has induced changes in enterprise behavior and in this area can, in our view, already be described as at least moderately successful. By the middle of 1989 China's economic reforms came to a virtual standstill, while reforms in Poland proceeded with unprecedented speed. Political events have had profound but entirely different effects on the reform processes in both countries. Our purpose is to compare the nature and process of enterprise reforms in the two economies and to analyze in particular how the reform process, including changes in the political regime, has affected the incentives faced by state-owned enterprises. The paper will focus on what we take to be the main features that characterize the enterprise reforms and there is, therefore, no pretence at being comprehensive or exhaustive. The processes of enterprise reform in the two countries are discussed separately in the next two sections. This is followed by an examination of the similaritiesand differences in the experiences of the two countries. A brief conclusion is provided in the last section. 2. Enterprise Reforms in China Before 1979, Chinese state-owned industrial enterprises operated along standard Soviet-type planned economy principles: (1) SOEs were subject to mandatory production plans and were furnished with most of their material inputs through administrativesupply alocations, though as compared with Eastern Europe, China's planning was selective and plan targets tended to be slack. (2) Product prices were determined by pricing authorities and government agencies controlled the circulation of products from producers to users. (3) Wages and salaries folowed a national wage scale. Enterprises were responsible for retirement pensions, medical expenses and housing of their employees, and they had little control over the size and the composition of their labor force. (4) Investment and working capital were mostly financed by grants from the govemment budget or loans from the banking system according to government plans. After the payment of commodity taxes SOEs remitted all their profits, if any, to the state budget and the state budget in return covered all losses incurred by enterprises. Under such a system the budgets of enterprises were integrated with that of the government and enterprises had no operational or financial autonomy. Prices and indirect taxes were used mainllyfor accounting purposes and had no effects on the behavior of enterprises. In fact, as they remitted all their operational profits to the government's budget enterprises faced a 100% profit tax and had, therefore, no profit-based incentives to improve efficiency or increase profitability. Enterprise Behavior and Economic Reforms in CEE Research Project, CECSE 2 2.1 Profit Retention and Enterprise Incentives. The Chinese government started reforming the SOEs by first allowing them to retain a proportion of their profits. Based on the success of a number of uncoordinated experiments in state-owned industrial enterprises in Sichuan Province the State Council issued in July 1979 several regulations concerning the operation of SOEs and this signalled the beginning of the first stage of China's enterprise reform.' Among other
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