Socialization of Investment and Institutional Changes in China: A Heterodoxy Approach

Abstract

In this paper, we show that economic development in China can be analyzed by the cyclical emergence of institutions that delimit a continuous reorganization of activities between the State and private sectors in the economy. For this purpose, we develop a ‘developmentalist approach’—based on the contributions of John M. Keynes, Alexander Gerschenkron, Ignacio Rangel and Albert Hirschman—that aims at understanding the formation of a policy space suitable for the socialization of investment in China under an international environment characterized by the financial globalization.

KEYWORDS:

• China
• economic development
• State

JEL CLASSIFICATION:

• B25
• O17
• 053
• P41

Notes

1 Kregel (1985, p. 37) points out that although it was clear in Keynes recommendations for a greater State participation in investment, this did not necessarily mean a direct participation, on the contrary, a combination of State, semi-autonomous institutions and mixed forms of capital ownership.

2 Brazilian economist of the Century XX who had great influence in the analysis of the specificities of the backwardness economic development.

3 See, among others, Rangel (1980, 1981, 1985).

4 That is, development as a process of jumps between one imbalance to another.

5 This reaction to the Asian crisis and the Western Development Program ushered in a new internal dynamic of growth with emphasis on energy and transport infrastructures with strong chaining effects, especially in heavy industry (steel, cement, chemistry, etc.).

6 Data from the National Bureau of Statistics of China (NBSC) show that the Chinese rail network jumped between 2009 and 2015 from 86,000 to 121,000 kilometres in length.

7 Orthodox views on the Chinese process of development can be found in Lindbeck (2008) and Wei et al. (2016).

8 The responsibility contract allowed the peasants to sell part of the production that exceeded the quotas stipulated by the government to supply the cities. The land, however, remained public property.

9 The dual track system was characterized by the coexistence between a system of market prices and another system under state control, especially in cereals, foodstuffs and energy.

10 The State control subsidy on the price of a cereal basket guaranteed substantial increases in peasant income, becoming itself as a fundamental instrument for the formation of a broad consumer market.

11 In 1978, the total number of employees in the ECPs was 28.2 million workers, tripling in the first ten years of economic reforms to 93.7 million and reaching 138.7 million employees in 2004. At the end of the 1990s, 40% of Chinese industrial production was being processed in ECPs, which in turn accounted for 27% of the country's manufactured exports in 2004 (Kang, 2006).

12 As a result of this policy, cereal production reached 407.3 million tonnes in 1984, an increase of 33.6% over the 1978 harvest (Rong et al., 1992, p.375).

13 The process of gradual installation of the ZEEs included not only the construction of an export platform, but also a nodal element to the reunification of the country under the mantra of the ‘One Country, Two Systems’ proposal.  

14 On the extension of the ‘dual track system’ to exchange rate policy, see See (2014). It was, as in the case of the price system, a transitional mechanism.

15 The reformist wing of the Communist Party of China (CCP) led by Deng Xiaoping himself emerges as the big winner of the 14th CCP Congress (1992). On this process, see Marti (2007).

16 The ratio between exports over GDP rises from 7.5% in 1980 to 10.5% in 1986, 17.5% in 1991, reaching 20.4% in 1995, 26.5% in 2003 and 35.7% in 2006, falling from then until reaching 22.6% in 2015. The investment rate underwent a strong acceleration process from the end of the 1990s.

17 According to Lo et al. (2011, p. 271): ‘Seen in the light of the mainstream doctrines, certain important elements of the system might appear to be market imperfections and might entail allocative inefficiency. But from the perspective of the alternative theories, these elements could in fact be conducive to productive efficiency.’

18 China holds the position of the world's largest net creditor in the amount of US$1.97 trillion, equivalent to 20.8% of its GDP in 2014 (Cintra & Silva Filho, 2015, p. 426).

19 Keynes (1937) suggested a circuit involving finance-investment-savings-funding in which obtaining financing (liquidity) is the beginning of the capital formation process, saving is generated from investment decisions as a result of the income multiplier process, and ex post saving can be channelled into the financial market to consolidate investing firms’ short-term debt. In this sense, a functional financial system is one that is capable of providing finance that enables entrepreneurs to invest and that channels savings to fund their debts later (funding), whether directly or indirectly. Studart (1995, 284) defines the functionality of the financial system from a post-Keynesian perspective as follows: ‘a financial system is functional to the process of economic development when it expands the use of existing resources in the process of economic development with the minimum possible increase in financial fragility and other imbalances, that may halt the process of growth for purely financial reasons.’

20 For comparison purposes, in 2015, in Brazil this ratio was 54.2%, India 76.7% and Russia, 54.5%.

21 The ‘big four’ Chinese banks are the Bank of China (BOC), the China Construction Bank (CCB), the Agricultural Bank of China (ABC), and the Industrial and Commercial Bank of China (ICBC). ICBC is the largest bank in China by total assets, total employees and total customers. BOC specializes in foreign-exchange transactions and trade finance. CCB specializes in medium- to long-term credit for long-term specialized projects such as infrastructure projects and urban housing development. ABC specializes in providing financing to China's agricultural sector and offers wholesale and retail banking services to farmers, township and village enterprises (TVEs) and other rural institutions. The share of public banks in the total assets of the Chinese banking sector was 55% in 2010 (Lo et al., 2011, p. 271).

22 According to Gabriele (2009, p. 4): ‘State-owned and state-holding enterprises are now less numerous, but much larger, more capital- and knowledge-intensive, more productive and more profitable than in the late 1990s. Contrary to popular belief, especially since the mid-2000s, their performance in terms of efficiency and profitability compares favorably with that of private enterprises. The state-controlled sub-sector constituted by state-holding enterprises with at its core the 149 large conglomerates managed by SASAC, is clearly the most advanced component of China's industry and the one where the bulk of in-house R&D activities take place.’

23 Data from National Bureau of Statistics of China (NBSC).

24 As per Lo and Wu (2014, p. 320) ‘(…) a new model has emerged in recent years, in which the main vehicles of the development of frontier technology are the SOEs. The development of high-speed railway technology is a prominent case. (The state plan to develop large-scale civilian aircraft manufacturing is also in line with this new model)’.

25 The objectives of capital controls evolved over time, but generally have included the following: (i) helping channel external savings to desired uses; (ii) keeping monetary policy independent of the influence of international developments in the context of a managed exchange rate regime: (iii) preventing firms and financial institutions from taking excessive external risks: (iv) maintaining a balance of payments equilibrium and exchange rate stability; and (iv) insulating the economy from foreign financial crises (Zhao, 2006).

Additional information

Funding

This work was supported by Conselho Nacional de Desenvolvimento Científico e Tecnológico; Fundação Carlos Chagas Filho de Amparo à Pesquisa do Estado do Rio de Janeiro.