& Tornado Alley
Privatization in China is a complex matter encompassing a number of subtopics such as the following:
Combined with all of these is the matter of whether different policies may be appropriate for different size enterprises and whether different policies should apply for enterprises with foreign investment. Furthermore there is the matter of whether different policies are appropriate for locally state-owned (Town & Village), provincially state-owned and nationally state-owned enterprises.
Periodically advocates of government-ownership come out with studies that purport to prove that government-owned enterprises can be as efficient as private market enterprises. Clearly from a naive theory point of view state owned, directed and planned enterprises could be as efficient or more efficient than information-limited private enterprises. But in practice and from the viewpoint of more sophisticated theory non-market enterprises are structurally and chronically crippled as economic units. Study after study shows that state enterprises suffer from over-staffing and low productivity. And despite the common knowledge that thirty percent and more of the employees of state enterprises are redundant (unneeded) the authorities find it difficult to correct the situation because of the general unemployment problem. The hard reality is that enterprises are efficient only if they have to be in order to survive rather than being efficient because they strive for efficiency.
In China the record of privatization is mixed. There have been great strides as a result of the government allowing the creation of new market enterprises but less success in reforming the old state-owned enterprises.
The situation in the city of Shenyang in the northeast area of China that was originally Manchuria illustrates the scope of the problem.
Manchuria was the land of the Manchus and became part of China only when the Manchus captured Beijing and deposed the Ming emperor in the mid-17th century. The revolution of 1911 deposed the last Manchu (Ching) emperor, the child Pu Yi. In the 1931 Japan took control of Manchuria and set up the puppet state of Manchukuo under the nominal rule of the formr Ching emperor Pu Yi. The Japanese undertook to industrialize Manchukuo as part of the Japanese Empire. Shenyang under the original name of Mukden was the major city of Manchuria and it was there that much of the industrial investment from Japan was installed. After World War II and the Communist victory in China Mao Zedong decided to build upon the industrial base installed by the Japanese in Manchuria. Mao aim to make Manchuria and Mukden, now called Shenyang ("spirit of the sun"), the industrial heartland of China. A substantial part of the investment in heavy industry and machine tools that the Mao government could muster was put in Shenyang.
During the Mao era and thereafter Shenyang continued to be the center of metal and machine works production. The state enterprises needed subsidies which the government in Beijing provided. But with the Four Modernizations Program announced by Deng Xiaping in 1978 and the subsequent opening up of Guangdong Province in South China to investment from Hong Kong and elsewhere the government in Beijing had better uses of its funds than subsidizing the industries in Shenyang. Beijing did continue to cover the deficits of the enterprises in Shenyang but there was no funds for investment in new equipment. As the equipment from the Japanese era and the Mao era wore out and became obsolete the financial situation of the Shenyang worsened but there was no remedy forthcoming from Beijing. To a limited extent there was some improvement as a result of Japanese investment in joint ventures in Shenyang. But Beijing was reluctant to make the financial situation of the state-owned enterprises in Shenyang worse by allowing new competition to come into their markets.
In Guangdong Province in South China economic development was achieved by allowing Hong Kong firms to make investments in the territory just across the border, Shenzhen. The Beijing government's role in the development was primarily to stay out of the way. The provincial government and the local county government played a more active role. Sometimes in the hectic pace of development the economic and financial situations became chaotic. Too many local area were arranging for the building of airports for example. The Province of Guangdong ("eastern expanses") set up Guangdong International Trust & Investment Corporation (GITIC). In 1998 GITIC was declared bankrupt by the national government and closed down. The loss was about 80 percent of GITIC's debt of $3.6 billion. Despite the failures of some projects in Guangdong the province still leads China in its privatization programs.
Other provinces are also engaged in privatization. In Anhui province there are counties that have privatized most of their hospitals and schools. In the case of the hospitals it was a matter of financial necessity. Some hospitals had not paid their staff in months and lacked modern medical equipment. One hospital had an operating table with only three legs and patient undergoing surgery tumbled off of it. The county auctioned off hospitals in the hopes that the buyers would have the funds to pay the staff and to buy new and better equipment. In the case of the privatization of schools the movement was slowed as a result of protests by parents over the tuition charged when the schools became private.
With the mixed results of China's privatization efforts there is some cooling of the enthusiasm for privatization inside and outside of China. There was surprisingly little interest on the part of foreign investors for the initial public offering (IPO) of stock in China Telecom Corporation in late 2002.
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