The role of the state in structural transition and economic crisis

Abstract

As academicians, we emphasize to our students to keep up with class, and always read ahead. When I took over as President-elect of the WSSA in April of 2008, while busy communicating with the Section Coordinators and plan the 2009 Annual Conference (Reno, Nevada), I would occasionally pause and ponder what I would present for my President Address (reading ahead). What do I know that would be of interest to the general membership of the WSSA? I naturally thought of China and its economic reform, as half of my research output over the last decade has been in this area. Then, the subprime crisis came to be, and I wondered about how the economy would cope. I can claim some expertise to the former, but of no special authority regarding the latter. However, I do have some thoughts regarding the role of the State during such economic upheavals, but in a more conceptual manner than a policy solution.

Notes

1 If the South were to seek independence, the Federal government's response is predictable, as the Civil War is the hidden wound of the U.S. One can imagine the criticism from Gorbachev as an over-reaction, after all Lithuania, Estonia, etc., won independence one-by-one without major civil war.

2 For a discussion of the reforms leading up to Tiananmen, refer to Fei and Hou (1994).

3 A bit of history. Deng actually uttered this most famous quote much earlier at the 1961 Guangzhou Conference, which marked the split between Mao (CCP Party Chairman) and Liu Shaoqi (the Government Chairman, equivalent of President), as the latter openly criticized Mao over the failure of the Great Leap Forward. In 1963, as Liu's top lieutenant, Deng implemented economic policies that were prototypes of the current CER (Fei & Hou, 1994).

4 This is despite the severe contractionary policy in 1994 to combat China's worst inflation since 1989 (which was a major cause of the Tiananmen student protest). Refer to Chang and Hou (1997) for more details of this pivotal year.

5 Confucius was touring the many State of the time looking for a ruler willing to allow him to implement his ideals to construct the model State. At Gaixia, the local peasants mistook Confucius for an infamous gangster. And cornered Confucius and his entourage of students with the intention of starving them to death.

6 Lin is currently Vice President and Chief Economist of the World Bank. Perhaps his insight will aid in how the World Bank deals with similar issues in the future.

7 Most of the Republics of the former USSR are suffering the same hardship. A recent book by Craig MacPhee (2005) has a detailed and in-depth look at the chronicles of the Georgia Republic.

8 Documentary evidence shows that the Chinese reformers clearly had a “capitalistic” blueprint in mind, at the latest, in 1984. This is evident in the Central Committee (1984) document.

9 Indeed, some may be as so bold to predict the inevitability of the march towards a capitalistic market system, even if it is with Chinese characteristics and socialism bent (Hou & Hou, 2002).

10 This is another reason why “patience” is a cultural trait. When time is measured in centuries rather than decades or mere years, patience seems to be as natural as the air we breathe.

11 The statistics is even more lopsided than it appears. These 19 facilities represented 85% ($392 million out of $461 million) of the total contract, with the bulk coming from Kellogg Continental of the U.S. and its subsidiary in the Netherlands. It is also worth mentioning that the nature of these early technology imports are not the same as the Foreign Direct Investment (FDI) currently flowing into China, as they were “purchases” of entire plants, often with some technical advisors attached.

12 During 1960–1970, overall trade between China and Peru was less than $1 million. Yet, in 1971, the total trade reached $58 million. Peru voted for the admission of China into the UN in 1971.

13 Echeverris not only supported China's admission to the UN, he also gave a strong speech advocating the expulsion of Taiwan in 1971.

14 The industrial sector was only able to absorb about one-third of the excess rural population, despite the costly efforts of the reform policy of Witte.

15 ^<fn0075>This is why in the Disney movie “Mulan”, the heroine's disabled father was called up for military duty when the barbarians invaded. He was paying his taxes. Mulan's family was a military family, which receive a rice stipend in peacetime, and goes to war to pay their taxes when the need comes.

16 For a more formal discussion of gentry, culture, and capitalism in China, refer to Yin (1987) and Yu (1987). The effect of Confucianism and Chinese Culture on neighboring nations, please refer to Hou (2010), and Liao (1983, 1985).

17 These, among other issues, gave the CCP (Chinese Communist Party) a platform that was very popular to the general public.

18 This is if you accept the argument made by Hou et al. (2005) that China's reform really began in the early 1970s.

19 This is exactly what Hou (2008) meant by a “negative” institution cost as it reduces the cost of production.

20 It is generally acknowledge that the “organized” illegal activity (i.e. the Russian mob) has a significant hand in many aspects of the economy, but actual numbers are hard to come by.

21 Indeed, Srinivasan (2008) came to the same conclusion that even though China is ahead of India in practically every aspect, but the democratic political institutions in India may allow the slow Indian elephant to overtake the China dragon in the long run.

22 The more appropriate term should perhaps be “institution cost”, but the choice of transmission cost is to parlay into a “trans” trilogy of transformation cost, transaction cost, and transmission cost.

23 This dramatic fiscal difference is not just due to the political institutions. One needs to remember that unlike the U.S. government (which is a “pure” government), the Chinese government is also the largest landowner and the biggest entrepreneur.

24 It is perhaps a stretch to call the CCP General Secretary Hu Jintao and Premier Wen Jiabao as benevolent philosopher kings, but such inference may not be as absurd as one may think.

25 The “Group of 20” is made up of Finance Ministers and central bank Governors of the G20.