econ 4690 review note prelim 1

8/12/2019 Econ 4690 Review Note Prelim 1

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Chinas Economic Geography and Population

- All chinas economic geography books say China is a very large country with a lot ofpeople

o This is extremely important when considering chinao US is also as large as china, but there are many differences between the

geographical inheritance of the countries US has friendly neighbors China has had frictions with USSR/Russia and India, belligerent neighbors

for much of its history- China can be thought of as three topographical regions,

o descends from northwest to southeasto Northwest of china is some of the most rugged terrain

Ginghai/Tibet Plateauo Further to east, still highland areas, but not as far rugged

This is still, in many cases, very forbidding terrain In other countires, would be thinly inhabited, but in China, densely

populatedo East, more hospitable terrain, plains

North china plain, the Yangzu Plain, coastal hill plain in Fujin andGuangdong

Most of this land that we consider to be the best parts of china, is veryhilly

Flat plains are small compared to rest of landmass Of 67 countires in flat Fujin, most are classified as mountaneous

o Rivers in china flow west to east Very few natural transport routes running north south Much more difficult to move, no natural waterways, and crossing

successive waterwayso Highlands in china generally slice up low-lying regions into small chunks of

plains and basins China is a large number of low-lying areas split off by natural barriers

- Climate:o Lies on same latitude of US, temperature varies rapidlyo Very similar temperatures in summer to US, but much colder winterso Precipitation varies dramatically, arid and humid areaso Those areas that have significant precipitation, the climate is monsoonal

80% of percipiation falls during four warmest months of the yearo The amount of precipitation varies when considering year to year

Wet areas one year could find themselves under arid conditions Climate varies quite dramatically over a particular time

o Monsoonal climate: Driven by temperature differences, chinas landmass, and temperature of

ocean


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o Implication of wide variation of temperatures and climates lead to numerousgrowing conditions

China, until recently, was an overwhelmingly agrarian economyo Anything in the world that can grow will probably grow in china

But differences in climate means different growing conditions even 100miles away,

Soils change, microclimates Each county in china has local specialties that do not grow well down the

road This is a rich and variable agrarian climate

o China is very successful in importing crops and seeing where they can growo Chinas variability can be thought of as a mosaic of agrarian economy

Within each tile theres a fine-tuned agricultural system Its difficult to export the farming practices of one area in China to another

part Variability in china is very important

oChinas people are highly differentied in the ways they support themselves

o However, most of china is not suitable for agriculture 15% of china can be farmed When you look at land suitable for farming, compared to people in china,

shocking numbers

Amount of land cultivated in china per person is US acreo By comparison in US, 1.5 US acres per person

Acre of farmland: roughly the size of a football field Farmland in china is generally of lower quality

Because there are so many people, Chinese farm land that issubmarginal that under most circumstances would not be farmed at

all In china, thus, theres a lot of hilly land cultivated that is subject to

erosion

There are upstream areas that should have been forested, butbecause they are under cultivated, dump silt and wreck havoc onirrigation

Chinas land generally gets too much or too little rain of Chinese land gets consistent water gets too much water is subject to arid conditions

o These are lands that individuals would generally wouldntbother with

Chinese agriculture has invested heavily in water control, yearafter year, irrigation and flood facilities

o They require constant maintenanceo Thus, while china is a large country, much of land is not useful for feeding large

population


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o There are some areas of china that have been turned pretty much into disasterareas, those with very fragile circumstances, and have destroyed naturalenvironment

Northwestern china areas have been covered with fine yellow silt In some areas, silt is 70 meters deep

Once vegetation disappears, it is subject to erosion, and disappears ingullies, instead of uniformly

Land has just been torn away Cave dwellings very common as late as 1950s

Much of silt ends up in airo The good land was used before, but they needed to farm since it was available

Big country yes, but in terms of population, not so large at all- Other natural resources:

o China has been an agrarian society, but there have other pursuitso China has very large energy resources

Comparable to US or Russia with resources Different than Japan Much of energy is in form of Coal Large deposits Northern china, with small deposits in south

Oil Huge hydroelectric potential

Last 30 years been exploiting Reserves in China will go much quicker than in US

o Industrial minerals Iron ore

Very large endowments, abundant in china, though low grade Widely spread, though northern deposits are better than those in

south Rare earth metals are produced worldwide in china

- In order to have regional specialization, you need transportationo Raw materials and industrial products need to be moved aroundo Cheep transportation recently meant water transportation: west to east, to east to

west Coastline on east

o Internal transportation is important for Chinese in inland areaso North-south transportation in china is very difficult

Only major route is Grand canal, 600ADo Other north-south routes include water routes, but not entirelyo Transportation in china, except along west-east rivers has been very difficulto If you think of china as a mosaic, there were too many macroregions

Inland areas have thin interaction due to high cost of transportationo Because of numerous transportation costs, Chinas economy is only thinly

integrated with each other- Chinas population

o China was a big country with a lot of people, and this is true from early years


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Note on how estimates made: Chinese government has been interested incounting heads, but not all heads: only heads of men who could work andpay taxes

Extrapolate resto Some variation from one series to another, so they produce same overall trends

Population declined dramatically during mongol invasion, everyoneagrees, but no word one extent

o Meaning of population: china is a large country with very large populationo Population in china from 1650 on

140 million in 1650 to 450 million in 1850o China has been a large country for hundreds and hundreds of years

China crossed 1 billion in 1982 and crossed 1.3 billion in 2005 Compared to US population: 60 million was reached in US in late 19th

centuryo If you look at official census figures, china classifies 6-8% of total population as

minorities

Vast majority of Chinese were considered Han Chinese This was not always so: Han Chinese started in northwest, and gradually

assimilated eastern population Vast majority of minorities are unassimilated Chinese

o If you look at quality of Chinese population, china stacks up very well, even in1949

Literacy in china, in 1930s, amongst males was around 30% or better By standards of world of 1930, that was a high literacy rate Another area reflecting quality of population: skills

Chinese are good farmers, and are very skilled of getting food outof marginal soils in marginal climates

In many handicrafts, Chinese are quite accomplished,

o Large store of how to survive with limited resources Human capital official statistics may be unimpressive, (literacy), but

transmitted skills are exceptionalo Very large population of china is settled very unevenly amongst landscape

Core areas are extremely densely populated Hundreds of people per sq. km

In the peripheries, areas are less dense, which are bad for farmingand submarginal

- Implications of geography and populationo One of biggest problems is Control problem

Large pockets of settlement isolated by natural barriers

Problem even as late as 1970s 1979, in all of rural china, there were 7 million telephones for 750

million people

Its quite difficult to communicate in china Most people, in 1979, would have not used a telephone

o This is what the village officials get to use, if they are luckyo 30% of villages in china do not have any telephones


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If you want to communicate with next village, you send a runner,like you did 200+ years ago

Many villages inaccessible by motor vehicle in 1979o Two entire counties inaccessible by caro Some areas where you can only get there by walking

Projecting control has been a problem Amazing how Communist party was able to project control into

small areaso Prior to communist party: proverb was Emperor was far

awayo China is largely a continental economy

Much of china is inward looking, to other parts of china, not to outsideworld

When you have poor transportation and hundreds, if not 1000s, ofkms from coast, you only consider trading with yourself, and notoutside world

o Much different than USo Internal diversity

Need for trade and specialization because environments vary sodramatically

No surprise that Chinese have expertise in commerce, This is constrained by transport costs, but Chinese have exploited

possibilities of regional specializationo Food problem

Food problem, until recently, has been a consistent constraint on chinaseconomic development

There are just too many people, relative to amount of farmland Always a worry for china as to where it will feed its people

Why doesnt it importo Look at total grain produced vs chinas need, its a hopeless

proposition to import foodo China needs to feed itself by virtue of its size, very difficult

due to massive populations Worse by 1800s, all the possibilities of extending food production in china

had been exploited

All the decent farmland, and all irrigation tricks had been exploited There was no easy thing to do

Food has been a continuing problem Addressing this problem has had numerous consequences withenvironmental damage, or Chinese labor force issues

o Labor surplus You cant take people out of Chinese agriculture year-round and move

them other pursuits

you need them on the farm to produce food but china does have a labor surplus to an extent


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you need people during the good months to grow foods, but duringwinter, had really nothing to do

o very little to do when could not farm seasonal labor could conceivably be used for something else

Chinese agriculture requires that these individuals stay on farm, even ifthey are idle

Chinas Economy in 1949

- Normal state of Chinese economy after war, trying to take war damage out of pictureo on heals of 12 year war

- how developed was china in 1949o GNP, net of war damage, ballpark: $100 per capita

Today: $800-1000 Compared to US, America achieved GNP of 800 per capital in late

colonial times Looking around world in 1949, china, net war damage, was pretty far

down the list, china was a poor country in 1949o China is not using a lot of inputs, Chinese agriculture is highly developed\

Chinese farmers are producing a lot of food per unit area, compared toelsewhere in world

This is compred to many centuries of learning how to make due Large investment in agricultural infrastructure

o Chinese famrers, being well equipped with water control facilities, need a lot ofland

Labor productivity is low, and theres a lot of seasonal unemployement Labor is stranded during off-season Every scrap of land that can be farmed is being farmed, even if it is

of very poor qualityo What does a Chinese farm look like?

Avg farm is less than one hectacre Typical farm is split into on avg, 6 parcels of land Not one chunk of land, but its 6 fields, non-contagious

o Typical distance between fields is 4/10 mile Avg Chinese famer has 6 tiny farm fields spread across village

Small plot of land farmed very intensively, lots of labor poured into land Why dont the farmers trade for contigious plots?

Because they want the variation for particular land They want land spread around the village as a matter of insurance

o Low state of development not attributable to lousy development- Transportation network

o In terms of modern transport, china does have railroads, 15K miles of railroads in1949

US reached that milestone by 1840so Total operation motor vehicles in 1949 is 100,000

Most Chinese have no access to any form of modern transportation


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o Heavily dependent on old modes of transportation: carrying things on back or onanimal

o In many places, there are no roads in which to drive motor vehicles In Guejo, there were 13 counties inaccessible by motor vehicle

o Industrial development

Large industrial sector, but Chinese industry was mostly handicraftindustry Factories or workshops that have no source of power other than modern

industry Modern industry is half the size of handicraft industy All of modern transport is about 10% of GDP, if you put everything that

hints of modern in one pile, entire sector is 10% of entire economy Modern sector has higher labor productivity

o Where is modern sector? Is it sprinkled across china? No! its only in a few places, northeastern

china, shanghai,

Some of Inland china has modern sector developed during WWII For most of china, population is engaged in agriculture, handicraft

industry, and rudimentary transportation, barely touched by anythingmodern

If you look across rural china, only modern thing that you will see isadvertising

Western companies gave rural Chinese trading cards and calendarshighlighting their products, though rural china didnt have them

- Statisticso Steel production in china, in 1952

China produced 1.5 million tons of steel

On a per-capita basis, puts china at level at end of Civil war in USo 1952, less than 1 million tons of oil,o Put this on per-capita basis, negligible amountso 1952 Urbanization

Around 14%, by Chinese definition Vast majority of population lives in rural areas and is engaged in agrarian

persuitso If you have low GNP per capita, and if vast majority of population is in those

persuits, living standard is not good Between 1850-1952, 5% of population starved to death Higher in northwest china, 8.8%

oAre these numbers credible? Yes! Chinese eat grain and little else, almost 90% of consumption is from grain

and vegitables, minimal meat and oil consumption How much grain does it take to feed people?

In terms of raw grain, on the order of 300KG per person/per yearo We have no idea how much china produced during this time

From 1955-1957, china produced 302KG grain per person, these are goodyears for agriculture


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o What this means is that if farming is doing quite well, and if you were todistribute it perfectly equally, everyone would have enough food

o Years prior to 1955 were not so good, and thus, the result was that people starvedo China was on the brink of subsistence,o fundamental problem in china is man/land ratio

China had used up the potential of traditional technology

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China, Pre-Communist

- Land ownership and utilizationo National land commission took stock of land ownership of Chinao In Mid- 1930s, Rural China Breakdown

10% of population is landless >50 Mu( ~10 acres), 10% of population, but own half of land of middle

china Large middle group, owns between 5-50 Mu, own half of land of middlechina Residual group


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- Structural change; share of agriculture of economy falls- Industrial revolution is usually the transition between the traditional and modern

economic growtho Can precisely determine when the revolution begins

- So, why do different countries experience industrial revolutions at different times?-

The key elements of China and its industrial growtho 13thcentury: Sung period, most developed country in the world

Compared to Brittan in 18thcentury, China looks like to be on the brink ofindustrial revolution, Brittan would not catch up until 1700s

China, in 1850, is far behind that if Brittan in 1850o Why did china not industrialize early or why did it underdevelop?

China is on the brink of an industrial revolution What is the industrial revolution on the ground?

o Use of new materialso New machineryo Agricultural development that creates labor surpluso

Development of markets and organization Look at china in 13thcentury, its a very technically advanced economy

Iron plows Double cropping Advanced irrigation A market system far advanced from Europe Paved roads, a national mail system A compass and navigation charts Grand canal system

Organizationally, china is advanced Paper money Credit system, merchants can remit credit Large cities with very developed markets

o Population inside Hang Jhous walls, 1 million, 500K outside walls in suburbs NYC hits 1 million in 19thcentury

o Chinese achievements are impressive by standard of much later date Medicine Metallurgy Merit-based civil service National granary system

o China is very impressive in 13thcentury, and its moving rapidly- What Happened?

o In a few hundred years, the sense of dynamism is gone in later centuries Immediate drop: mongol invasion does huge damage, killing off

countryside and its population Why, after Mongols are gone, does china not resume its dynamic growth

after the Sung dynasty?

After Mongols, extensive growth:o more land, more people, more capital


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china grows, but its not technology growth like in previous period Changes, post Mongol:

Migratioin, people pour into the fringes of Chinese empireo 16 million hectares under irrigationo 42 million years lalter

Population explodes due to Chinese irrigating more lando Relative stability during extensive growtho China is growing in relative isolation

By the ching period, the Chinese government becomes more inwardoriented, continental economy based on internal trade

During this period, internal trade was developed Chinese are developing the crops to new, unfamiliar areas

o China is going backward, compared to rest of world Atlantic economies was, until recently, left out

- But china was on the brink of industrial revolution, the knowledge they amassed, did notdisappear

o Some of the technologies that were used in the Sung period were not brought backto useo Particular aspects of Chinese technology by 1750 were inferior to those in 13th

century- Chinese economy, by 1850, would be described as a mature late imperial economy

o Family owned and operated farmso Active markets in commodities and laboro Rural gentry, small powerful local landowners

Basis in society is holding office, or qualified for office holding, moneyfrom office is invested in land

- In 1850, Changeso

What happens is that the traditional system reaches its limits, no land that caneasily be brought under cultivationo China is not making technological breakthroughs, it is operating under traditional

confines of technology Water control systems deteriorates,

Yellow river begins to flood in northo Series of unrests

30-50 million deado Central government is clearly failing,

Water control failure Law and order

Government cannot afford to do much of anything As it fails, it becomes predatory

o Implements counter-productive revenue measures, reducingthe revenue base

o Government begins to tax internal trade, disasterous sincegovernment is based on internal trade


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Central government is simply grasiping for strawsas it looks to raise revenue and maintain law andorder

o China was still pretty much closed to other country No foreign trade

oLate 18

th

century, British sent mission to China Chinese dismissed Brittan as useless to country

You dont dismiss the royal navy and a country leading industrialrevolution

- China collides with outside worldo Trade,

Only one trade port, prior to 1842, Guangzhou, was open to foreign trade Four ports were forefully opened in 1842, for total of five, More and more ports were open to trade due to losing encounters with

western countries

42 by early 20thcentury

Chinese saw trade with other countries as bad thing Farmers manufactured handicraft, such as textiles, Textiles were major import, local market was decimated by imported machine-made cloth

Opium becomes a very large trade item with china Trade of china, there are relatively few internal linkages Individuals who were on the brink of subsistence, fell below brink after

trade openedo wars

Numerous wars to open ports After each of these wars, and more ports are opened, reparations needed to

be paid to foreign countires Opium wars War with Japan 1890s

Killed any internal Chinese economic reform Foreign direct investment was available after,

Foreign governments took over its own customs services Young people went to china for an adventure in late 19th, early 20th

century, and got work at US or British-run China maritime customsservice

China could not set tariff rates to protect industryo Territorial Concessions

Taiwan was lost due to one of the port wars The Japanese took over Manchuria as a colony Extraterritoriality

Foreigners in china were exempt from Chinese lawo They were subject to laws of own country, they were not

considered to be in China

Parts of china were given over to foreign establishmento Shanghai, for one


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o Foreign Direct investment 1895, investment is legalized

Foreigners are lined up, flooding into China 1902, china crosses billion dollars of investment Most of this is direct investment in factories, of investment is foreigners

building own factories in china Looking at 1930s, only 1/3 of factories in China are foreign-owned

Local entrepreneurs are at adept at emulating and competing withforeigners

Dualistic structure of Chinas economy Shanghai is a modern economy, but looks nothing like a rural

village in chinao These issues are on top of the central governments problems of water control and

unrest- Substantial reforms did not occur until 1890s or early 20thcentury- Mao Zedong will look at this era and say never again

o Things got out of control in 1850- The backward view of those who made those deceissions in 1949 were those whoexperienced the mess of late-imperial and republican times

High Level Trap

- Minimum needs of mass of Chinese populationo Double labor supply, double need for mass consumptiono Yp curve shows total Chinese output, using best practice and best organization

Taken as given, existing practice, existing organizationso Of course, countries dont do all things right

Ming period, set practices and organizations are not, best, putting them onactual output curve, represents whats actually happening

o If consumption is equal to maximum productivity, youre totally screwed, youvereached the absolute limit of technology resources

- How do you get out of the high level trap?o Industrial revolution

- China is making progress, but by 1850, the confines of technology put it in the high-leveltrap

o China has no investable surplus that it can put into technology innovation2-4-10

Interpretation of Chinas Extensive Growth- High Level Trap

o Mass consumption is a linear representation of labor force. Mass consumption isminimal subsistence level

o What happens? After period of trying to make due at subsistence level, china moves up

actual output curveo China is using all available stock of technology, constraint at L* is technology,


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China is using all use of organizational possibilities, trap is youre usingall these technologies

o Before the 19thcentury, china was able to save itself by reorganizing or bringingin new technoligcal innovations

o China is using everything it can to feed its people, nothing for investment ordefense

o Some people deny the high level trap Riskin: its not relevant to China in the 19thcentury.

There was an ability to produce surplus, but surplus is beingsquandered

There were people who were using surplus for conspicuousconsumption

This is an unresolved question Some people will generate numbers that show china was producing

surplus in 19thcentury

Others will point out death rate, and conclude this is inconsistentwith what a surplus looks like

o Communist government postponed technological innovation, believedreorganization would save country

A look forward from 1949

- Chinese economy fell on hard times in 1850, fumbled along and experienced realdeclines in output per capita in late 19thcentury and early 20thcentury

o Bright spot in nationalist decade 1927-37- From 1949, china grows at impressive rate- 1952-1978, Chinas GDP is estimated to have grown at 4.4%, 2.5% at per capita basis

o Clearly within range of modern economic growth, and comproable to rest ofworld

Slower than many asian areas, Taiwan, Japano China is doing quite well over 26 years

- 1978-2005, chinas economic growth is truly remarkable.o Group of just a few countries that have had 9-10% growth rateso 1978-2008, china is alone in sustaining growth for 9% for 30 years

- Sources of growth:o TFP: total factor producitivity

To increase output: You can increase inputs: Extensive growth You can use inputs more efficiently: Intensive growth

o 1952-78, GDP growth was growing mostly through extensive growth TFP 0.5%

o 1978- onward, GDP growing very quickly, TFP is growing at quickly, at 3.8%o Looking forward from 1949, we will look at instillation of socialist economic

institutions, maoist era, then look at reform, and eventual dismantling of socialistinstitutions

- State of Chinese economy in 1949o Grain output was 78% prior to 12 years war, compared to 1930s


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o Cotton output was 52%o Coal 52%o Steel 12%o Textile 67%o New government regime was establishing itself, restoring law and order, parts of

country that had not yet been liberated from nationalist regimeo China inherits in 1949, rapid inflation

Challenge for new government that it successfully meets, Issued new currency, nationalized banks, and brought inflation

under controlo Chinese government initiated cooperation with Soviets,

Heavily dependent on Soviet union for trade and technologyo Land reform

Began prior to 1949 in parts of china that were liberated earlier All of china had undergone land reform by 1952

o During the recovery period, there isnt a lot of transition to socialism

Communists are running show, but its still a capitalist economy What serves as chinas constitution before 1954 was the Common

Program of 1949

Does not subscribe to socialism immediately Economy will comprise four sectors

o State owned sector inherited from nationalist governmento Cooperative sectoro Private sector (most important)o State capitalist (residual, odd-ownership forms)

A pre-socialist plan that recognizes the support of capable farmersand entrepreneurs in china

These people should not change, but everyone else will subscribeto new governmento Establishing government organization

Very little was involved with what we consider socialist institutions China does not have a central planning commission until 1952, no

statistical bureau until 1952

These basic socialist structures do not exist until end of recoveryperiod

o Land reform Initial situation of rural china,

Agricultural situation is very advanced given traditionaltechnology

o Squeeze high yields out of marginal land All land that can be farmed is being used for farming There is nothing that can be done that can increase farming and

output in a cheep way, everything has been done Two approaches to agricultural problem

Technological


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o Since Chinese farmers are adept given technology, one wayto relive issues is to get newer technology

o In 1950s, invest in industries that are beneficial to farmers,chemical industry

o Another way to approach problem is organization

Deny its a technological constraint and attempt toorganize better This approach Chinese government took in 1950s

o Land reform in china Took land from upper tail of landowners and gave it to those who owned

very little

Took from landowner class who owned more than 50 mu At bottom of chain, those poor farmers who owned little (less than

5 mu) or no land

Land reform was very narrow campaign: Took from those who hadtoo much and gave to those who had too little

o 10 million families identified from whom land was taken 44% of all land in China was transferred,

o 10 million households previously owned more than 50% ofChinese land

About 50% of population gained form redistribution Average gain was 2 mu (1/3 acre) received

o Youre pretty much going to get a garden sized plot of lando But, if you have nothing, this is major, or if you have a 5-6

mu land plot, youre going to increase income significantly,

25%

This is a once-over redistribution Results of land reform

Redistrubiton of rich to poor 2 million deaths of landlord class, landlords were killed in process

of exproporation

Assignment of labels, landlord class label given to families, stayswith children

o You did not want to have this label, landlords arediscriminated against, even though they are not landlordsanymore

Fairly unequal distribution of land, did not give everyone in chinaan equal chunk of land

o Why? It was not the intent of the land reform to do this Some people in china have very large farms because

theyre the best farmers, you dont want to give to

lousy farmers

Good farmers could keep large farms Regional distribution, not uniform thorough country


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As a member of a lower level cooperative get land from rentpayments and for labor provided to collective

Much different than mutual aid team, since farm is operated as onebig unit, differences between farms are gone, one big farm

o Members could also rent animals and tools to collective Manamgnent committee which tells individual members ofcollective what to do Work point system, when you work for collective, you receive

weekly work pointso Used for distrubtion of labor

Advanced APC Socialist institution in which property is collectively owned, and

there is a collective agreement with family famrers

The farm was established from land without compensationo Animals and tools are compensated when collectivized

Farm outright owns land in village How can farmers get income?

o Main source of income is now labor, provide labor andcompensated for that

o Private plots: famrers would receive a small plot from land,o 95% of land would be collective farm to which you will

provide labor services Some goes to private plot and some goes to

collevtive farmo Work point system continues

How you would be compensatedo Farm produces gross income, pile of grain

You get 90% of income in kind, (as grain)o From gross income, collective farm itself deducts current

production expenses Fertilizer, tractor services

o From expenses, collective is left as net income Deducts taxes, Main taxes was charge per acre of

land Deduct accumulation fund, money to be used as

investment in collective farm, deduct for welfare fund of collective

o leave income for distribution how would you distribute? Look at work points throughout year, and then

determine the value of the workpointso Families have different workpoints based on family size

and activityo If you don;t have enough workpoints to feed yourself, you

will go in debt to collective, and will be expected to repayback


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Who gets welfare?o Those who are too told to work, those who are disabled,

Point of private plots: to give people something to do outside of theworkday, gives something to do outside of private plot

To have some sembelance of farming outside of countryside2-9-10

Rural China and Transition to Socialism- Land reform

o No more landlord classo Even though there are no more landlords, they are still labeled as such

If your family previously owned land, you will still be labeled as sucho On average, poor people get 25% more land form reformo During terrible times, poor sold land,

Over time, land began to re-concentrate- Mutual aid teams

o Sharing labor for a particular tasko Instead of everyone plowing field individually, the team will plow entire villageo Also, during mutual aid team period, change in grain sales

Government forced farmers to sell grain Government needed to sell grain because there was not enough for cities

Landlords used to sell grain, that didnt happen once landlord classgone

Government steps in for compulsory procurement/sales to feed city people- Agriculture producers cooperative

o Elementary cooperative Collective farming, but not collective ownership

Villagers would rent land to collective farm and be compensated

o Advanced cooperative Land is expropriated by government to collective farm How are famrers paid?

Not through their land, but through their labor Work points

o Each day you go to work, you get work points Assigned based on time or on a piecemeal system

o Collective will add up all work points at end of year anddetermine what work point is worth

Collective has gross income, added in-kind

Take away all costs of production exceptlabor From net income,

Taxes Investment for water control Collective welfare, people who are unable to

work


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o Collectives were not generous inpayments

Take the profit and multiply by the value ofthe workpoints

o Most of the workpoints were already used, people ateduring the year

You could go into debt if you eat more than earno This is a massive change from the strictly commercial faring system only five

years prior- Commune System

o Implemented rapidly in 1958 Virtually all farmers in china by end of 1958 are members of communes

Socialist forms reach a frenzy from mid 1958-end Farmers go from being members of APCs to communes

o What is a commune? Its a large collective farm

An APC was 100-300 households A commune is, on average, 10x larger than an APC

A commune takes in a large market area All assets are collectively owned by the commune, as a large

organization

Households earn income by working on commune, no private plotsat first

Commune does a lot of things APC did not APC only was farming Commune took over local government, militia, etc

o Rural administration completely absorbed into commune It is a collective farm, but its a lot more than a collective farm

- Who makes decisions?o Prior to 1955, made on household level, family farmers

Exception is compulsory grain saleo Introduction of APC, decision making is collectivized

Elementary APC was about a dozen households, handful of people makingdecisions for APC, decisions are being centralized and taken away fromfarmers

Coordination around farmers more and more of the flows being subsumed into government distubution

introduction of compulsory procurement of edible oils and cotton- Prior to 1955, local market for goods

o 1955 in lower APCs, households are receiving outcome and selling labor servicesto collective farm, but no longer independent farmers

o With change to advanced APC, no more rental income, land is collectively ownedand manage, income distrubtion are soley from workpoints

Marketing is done by communeo Commune is much like advanced APC, but individual personal plots are gone

Trade between villages is controlled by local bureaucracy


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- Looking at advanced APC, 100-300 households on averageo Typical advanced APC was broken down to smaller units, brigades and teams

under it- Looking at commune of 1958, it was one big unit, deployed several thousand laborers,

o Laborers organized along military lineso

Highly centralized controlo In subsequent years, management of commune is decentralized

- How many communes are there?o They are very large units, looking at 1958, there are 24,000 communes in all of

china, if you do the math, 500 million rural people divided amongst 24 thousand

communes,o Composition of rural communes, brigades and teams

Of necessity, labor needs to be broken down into smaller packages,brigages and teams,

- Transition to socialism was considered to take numerous five year plans, 1960s-

In reality, by 1957, local ownership was gone, and rural china was socializedo What changed?

Maos High Tide Speecho Why the acceleration?

Mao and the people around them had a change of ehart, they got impatientwith the slow progress of rural china, they changed their minds, they werenot going to plod along anymore

This is consistent with the organizational approach to take chinasproblems

This was consistent with a decision to not invest in chinas agriculture This jump to larger form of organization was consistent with fixing

agriculture problem with organizational fixes Collectivization and organizational problems Once you begin collecvtivation, there is no stopping point until

you go to cooperative farming in collectiveo Land reform does not stop problem, by 1954, land

reconcentration already beginning People already selling land and poorest people

becoming hired laborers This was not the solution the communist party

wantedo What did the communist government do? APC, collative

sold laborers Lower APCs are voluntary organizations and goodfarmers didnt join them

Lower APCs were often disbandedo Advanced APCs, people kill livestock and eat them instead

of collectivizing livestocko With larger farms, you can deploy larger amounts of labor

for numerous activities


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Communist government makes rational decisions to move forward,middle forms of organization are unstable

o You either have family farming with market system andinequality, or communization but its the logical stoppingpoint in roads

You can solve the poverty problems until you stopand get to collectivization

o Family famrers would keep all what they produced, excepttaxes

Family famring, there is a direct connection between work andreward

Families on commune will only earn workpoints, you dont knowwhat workpoints are worth

o Immediate connection between your effort and reward isdissipated through workpoint system, no real incentive towork harder

o When you go to work in the morning, you think how do Iget paid Do I get paid for showing up? Do I get paid for hard work?

o You only get paid for showing up, hard to monitoragriculture labor

Opportunity to shirk labor, laborers are doing half-assed job

o In collective farm, you cant blame an individual whoshirked responsibility, crop is product of all laborers

Collective farming has an Achilles heal: people have incentive toshow up and free-ride

o I can show up and not do anything because everyoine elsewill do it for me, but too many free-riders

o Collective farm in china never sold incentive problemo No incentive for hard work

Many people in china have their hopes dashed by collectivization,they were demoralized, they had no incentive to work

o Didnt accord with what some Chinese famrers wanted One other way to think about collective farming transition: in five or six

years, this is a microcosm of problems

Theres always a dichotomy between conditions on ground andgovernment plans

Foot-dragging, it is obvious in collective ownership, you see it in socialistera and move back towards market institutions

Socialist Transition in Urban China- 1957-1958- Instead of moving to collectivization, moving to nationalization

o Ownership by government, government owns factories and distribution system- Stages


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o Utilization, private businesses are to exist, but there are there for explotation forgovernment

Government does not want to kill off golden gooseo Restraint, government takes role in running private businesseso Expropriation

-

Utilizationo Starting in 1949, there is already a substantial state sector in urban chinao When japansese left in 1945, guanmindong government had substantial amount of

factories that Japanese owned and that Chinese government started during waro 1/3 of output is from nationalist factories, produces many producer goodso 1949, common program

China, for the near future will have a: State sector Private sector State capitalist sector

o Essentially the other category, private businesses thatmay have large government control

o During the recovery period, china takes over banking system, Chinese entrepenrusdealing with state for financing

Chinese government controlled finance and producer goods, Government is controlling the commanding heights

o 2/3 of industrial output is still privately produced, government is saying to go outand make money

o This lasts until 1951 With the Korean war, many do very well, demand spikes during Korean

war- Restraint

o 1952: transition enters second phaseo Initiated with the five-Anti Campaign Bribery Tax evasion Cheating on government contracts

o Targeting crimes of private businesses, government will look at private businessesof china to see if they are breaking any of these five-antis

450,000 businesses were being investigated by this campaign of the companies investigated were found in violation If you are in violation, you get fined

Very often, to pay fine, business would have to sell shares ofcompany to state

o Things are getting tough for private businesses in 1952 Some have fallen into the state capitalist category, in 1952, the writing is on the wall, entrepreneurs who had enjoyed brief

heyday have seen a change in attitude in regime many individuals, after rise of communist regime were uncertain to stay or

leave, those who stayedo Many firms were told what to do,


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Theyre still private enterprises, but have no market other than whatgovernment tells

o Profit rates If you make more than x% profit, you need to reinvest or distribute You cant take money out industrial firms,

o1949, 2/3 of industry is private

o 1952, 40% of industry is private, half is socialist, and 10% state-capitalist residualcategory

o 1953, transition to full socialsit ownership is clearly gathering steamo 1956, private industry is virtually gone, including those who work strictly to state

orders- Expropriation

o 10 year payments, 1.2 billion yuano Bulk of takeovers occur by 1956, payments were made by 1966

1.4 million people who were previous owner of enterpriseso What happens if you had government intervention

Many cases, you would continue running the business as normal

Often times you were demoted, governemt would take over But you are no longer owner, you are paid manager

5% return on investment, you are not a capitlais,t you are a paidmanager

o By 1957, private business is virtually gone in Chinese industryo You would think that this would do damage to Chinese industrial output

Moral should be shot from this expropriation There is a one-two year stumble, industrial output grows slowly, 1955

industrial output barely grows at all Looking at aggregate output in industrial china, there is decent aggregate

growth Takeover of urban china without distruction in process, there is no stumbleuntil great leap forward

o Nationalization in urban chinao By 1957, bulk of urban industry is nationalized,o Same process in industry is occurring in retail

This is surprising since retail is very small, but almost all private trade hasbeen wiped out by 1957

o By 1952, were still talking ownership as a market economyo By 1957, all commercial activities are industrialized, conversion to national or

collective ownershipo By 1957 on, we can speak of a socialist economy in china

2-11-10

Movement from Market to Socialism

- New planning mechanismo Soviet-type planning

Soviet planning mechanisms State planning commission


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State Statistical bureau State Capital

o Created in 1954 State economic commission

o Created in 1956 General bureau of raw materials

Apex Agencies of planning economy Oversee entire economic activity China also had various ministries

Responsible for well-defined realms of particular economyo Ministry of agricultureo Ministry of machine building

These institutions are installed during first five-year plan periodo Institutions of full-fledged soviet planning not up until 1957

- How do we coordinate control amongst Chinese economyo How many agents are there in china

Thousands of collectives Hundreds of thousands of enterprises Large number of commodities

You just cant tell people to farm Coordination mechanisms that deals with agents and commodities Coordinating economic activity is a vast undertaking, Activities are interdependent, coordination arises because of this

interdependenceo Ex: motor vehicle factory

Interdependent with glass factory, tire factory, steelfactory, etc

Just cant tell motor vehicle factory toproduce cars, you need to tell tires and tirefactory to produce four times the amount oftires per car

Taking markets out of picture leads to massive control andcoordination problem

- Soviet-Type Planning system (Planning)o Planning is a means of coordination and control in where government agencies

issue orders to each agentprescribing that agents activities Agents are households and producers Orders issued to individual agents are addressed, they are binding, and

they are detailed Addressed, each agent gets his own set of instructions

What happens if you dont follow instructions You end up doing something distatsteful in the wasteland These are legally binding and the force of government is behind

these instructions, and the instructions are detailed This is the meaning of soviet type planning


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Agents recieve binding, detailed instructions and act in accordancewith instructions

All of the instructions have to be coordinated with all the otherinstructions

o You cant produce fertilizer unless other organizations areproducing the components

Planning does not mean just general five-year plans, it means specificsoviet instructions

o Soviet planning is the inverse of ideal market economy Ideal market economy:

agents make own decisions, buyers look for best price, producerslook at inputs and decide what and how much to produce

What is the motivation? Private. People can do whatever theywant, profit, altruism,

How does the deal works: you bid. Grocery store provides price,and you provide grocery store with a bid, you decide to buy some

Information flows horizontally, amongst separate agents Role of government: referee, if you enter into contract, government

forces you to carry contract, deals with cases where market couldnot be expected to work properly

Soviet type system Highly centralized Soviet planner decides what agents will do Information does not flow horizontally, agents dont talk to each

other, they talk to planners

Planner then tells them this is what they will do in the coming year,all the communication between the agent and the planner

Motivation is not left to the individual agent, you may be altruistic,the planners preferences will be subsitituted for your own

Instituions that deal with control of overall activities seto Why would anyone want to put in soviet-type planning

On the surface, it looks like a headache to coordinate But, There are market inperfections There are reasons to believe there are so many issues that the market

solution would be terrible

planning could deal better with the poverty problem, you cant dothat with market

externalities, you can deal with pollution in planning system by tellingfirms not to pollute

markets are closely associated with capitalists, who in many parts of worldthat have a bad name,

soviet system displaces markets and thus capitalistso There is no such thing as a pure soviet-type economy nor is there a pure market

economy, governments tend towards specific ends- Why would china be attracted to soviet system?

o Who were the big economic powers in 1949?


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No such thing as the east-asian modelo Atlantic economieso Soviet Systemo In 1949, soviet socialism looks pretty good, only later does soviet socialism fall

into declineo

China, during 1950s, makes transition from market system to soviet model- Planning a soviet economyo The flows of activities and economices by individual agents are a rats nesto Planning using an input output account

We dont want to describe that activity, we want to prescribe thoseactivities

Sequence of yearly plans, plans for one year, as part of the sequence Writing down a plan for a soviet-type economy We have lots of individual agents/economies Checkmarks are not sufficient Xij, amount of commodities that goes from I to J

A list of individual commodity flows

X12, amount of flows between agent 1 and 2 Flows of wheat, for instance, from farm to flour mill

Object of planning is to fill in table of inputs and good flows Why do we have to all these flows?

Why cant we just look at farm to flower mill, one flow Planner has to tell farmer what to send to flour mill, wheat, rye, all

its outputs

You cant just give it one number, you have to send specificnumbers

How many numbers does the planner need to generate year over year? 108bits of information If you can fill in table completely, then you can easily issue orders

to agents

Plan for each agent is implicit for each table Problem is amount of information and computation

Some of the table numbers will be easy: farms dont produce peterolumand steel mills dont produce bread, so their outflows or inflows will be

zero There are no entries in table that say consumption or consumer sector There are no investment columns, since all investment is dealt with by

individual agents

If you want to see how wheat flows through economy, looking at numberin cello The planner faces certain givens, each agent has a certain technologyo The economy has certain resources, you cant tell agents in economy to produce

steel if theres no coal in the economyo The agents in the economy have certain preferences

You can override preferences to an extent but planners need to takeaccount of preferences


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o Wants activities of agents to be particularly feasibleo Activities of agents must be consistento The planner is trapped in the middle

He is trapped from what economy can do He is trapped by political overlord by what constitutes an acceptable plan

Annual plan is a sequence of annual plans, you want to get from there tohere, you cant do it from there to hereo Five year plan

Only have five tables in front of you Satastifce: Instead of looking for best plan, you could look for one that

satisfies

Overlord will give broad numbers: increase GDP per capita by 5%and build new steel mill

You dont need to find best plan, you just need to find a plan thatsgood enough, there may be better plans

Aggregate across commodities Instead of discerining varieties across steel sheets, you willaggregate sheets of different variteis

o Partitioning Unplanned sector

Very thin interaction agents who are small producers You can put them into unplanned sector with minal consequence When you partion the plan, how do you make sure pieces fit

togethero How do you get the plans to get together

2-16-10

First exam: Febuary 25th

Instillation of Soviet Planning

- What is soviet planning?o Planning and controlling economyo Government issues commands and tells people what to produce week by weeko Soviet economy is an ideal much like markets are an ideal

It is the opposite of the market economy, Decisions are forced by a higher authority Motivation of planners are generally substituted for those of consumers

Government decides actions, it is the key actor in decision making Communication vertical

- Planning, soviet-typeo We used an input-output framework, holisowsky frameworko Comprehensive plan, every player gets a row

If there are m agents, table is m by m If there are n commodities, each entry has n numbers

Subscripts and superscripts show where goods flow


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- Planning is feasible at agent level, consistent at economy levelo Planning is very complex, feasible for agents, and consistent amongst agents

- This takes a lot of paper, if there are 1000 agents and 100 commodities, thats 1 millioncells, and each cell has 100 numbers, 108bits of information

o Much of that information is zero, farmer wont be sending steel around economyo

Planned economy simplification Satasfice: planner looks for a good enough plan, he doesnt look for a way

that will maximize economy, he just looks for a plan that is decent Truncate Horrizon: planners think in small bytes, planners think five years

down the road. Operative plan is the annual plan, within framework offive year plan

Aggregate: reducing the number of each cell. 3 commodities, commodityone may be 1 mm sheet, commodity 2 may be 2 mm sheet, andcommodity 3 may be 3 mm sheet

These three ideas shrink the plan Partial unplanned in planed:

Reduce to key planned agents, and a remainder catch-all of smallplayers in economy

Purpose is to make it more digestiable and comprehensiveo Instead of one planning office, there will be numerous planning offices,

Second tier deals with individual agents, state planning commission onlytalks to local regional planners

Problem: communication and flow interruption Result, minimize impact by putting similar industries under same

umbrella

Inter-ministry good flows dealt with by the state planningcommission

o Planning commission will receive a surplus of goods fromone ministry and move it to another ministryo State planning commission does not deal with agents, but it

deals with good flows between ministries, allocationso State planning commission doesnt need to worry about every player, it needs to

worry about inter-ministry flowso Simplifying the plan, much of information youve thrown away is useful in

planning economy Aggregation trick

Since were aggregating steel sheets, shipbuilders and automakersmay not get the right thickness sheet

Planners must worry about future- Refining the crude plano It is crude plan, but the plan is filled with holeso As plan is being carried out, details will be filled in over time, will be trying to

recover some of the details lost over time Process of refining plan is best studied in a specific context

While in theory, there should not be any communications, there iscross-talk between the players without state planning commission


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o Instutitionalized Supply bureaucracy

Charged with hands-on delivery of materials This group is specialized in knowing what inputs factories need

Planning is an overwhelming problem, the plan you produce before thenew year, is filled with holes

During the planned year, you will be instating numerous institutions torecover some information

- Building the plano Theoretically, it is possible to plan within the context of the table, using the

input/output frameworko Planners use a different device, planners use a different tool and then transfer

numbers into input/output matrixo Material balance

Instead of looking agent by agent, they look at the plan commodity bycommodity

Attempt to balance commodities

When you mess up one balance, youre likely to unbalance manyothers, its a simultaneous equation

All of the balancers need to be working simultaneouslyo Technical coefficient

aij, if coefficient is three, everytime you want to produce an additional

J unit, you will need 3 units of I

technical coefficient attempts to rebuild balance, if production isincreased by one unit, shows how much more supplier needs toproduce

shows how much changing one balance screws up other balanced technical coefficients are based on observing needs in recent years,

normso encapsulation of recent historical usage

planning from achieved level plan from where it was last year

planners use technical coefficient and plan toward achieved levelo Balancing one commodity

One ministry, steel ministry, is only looking at balances for the enterprisesit controls

Suppose it needs to import, perhaps it imports from other nations or fromrest of nation

Similarly, when it exports, it exports to rest of world or it exportsto other parts of china to other ministry

Machine building industry will have imports of steel from rest of world,and from steel ministry

Every ministry that uses steel will have a steel balance When you have multiple ministries, theyll be multiple balances, they will

be balancing that same material


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- Is this the entire planning problem:o In pure theory, yes, if you had a compreneisve plan, youve told every agent what

to doo But, in fact, the real world economies bueraracy proliferate

There is a supply burerarcy

There is a financial plan There is an investment plan which is extracted from material balances There is an r & D plan

o To think of a real soviet-type economy, think of it as the first piece This is the heart of soviet-type planning

o Worry of Enterprise managers Worried about getting inputs

If there is an issue with factory A, he will be screwed to receive hisgood,

He will be responsible for carrying out plan He is continually coping with getting appropriate supplies

Worried about hitting periodic targets, frantic toward end of planningperiod Attempt to influence planners

Plan is based on planners knowledge of technology, resources on-hand,

Manager will attempt to manipulate planer to get easiest plan While manager is cast in a passive role, it is not an easy job

The Chinese Case

- Chinese portioningo Identifying agents outside the plano The ones inside the plan will be inside ministryo Clearly Chinese planners think in terms of planned vs unplanned, they think of

unplanned enterprises As a first-cut, the line is very roughly corresponding to state vs. non-state If an entity is state owned, its likely to be in the plan, if its not state-

owned, its outside the plan This is coincidently outside plan

- Material supply involves transfers between planned agents, when planner allocates steelfrom a steel mill to a machienbuilding plant, that is not commerce, that is material supply

- Exchanges involving unplanned supply include commerceo transfers between material supply are commerce

- Where is boundry between planned and unplannedo State vs non-stateo Material supply vs commerce

- Planned economyo Urban industry and modern sector

Important agent will remain under control


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Important factory will be assigned a central ministryo Suppose we look at agent that isnt important,

We ask where is the agent, and assign provential planning authorityo If central, allocate on a general basiso If non-central, allocate on a regional basis

-

Central bureaus would create offices for specific products, i.e motor vehicles

2-18-10

The Chinese Case of Soviet Planning Economy

- Partitioning the plano Most important agents are within plano Those that are not important, they are outside plano Take set of planned agents and break it into subsetso State planning commission would divide groups into agencies

Local planning agencies would report to state planning commission State planning commission determines overarching contours of the plan aswell as makes sure plans fit together State

- Chinese Hierarchyo Non-Central

Commission Provential planning authority

Local office Local bureau

o Central Ministry Central bureau- Central enterprises get broken up on a industry basis

- Non-central enterprises get broken up on a regional basis- How does the planner determine if an agent is important enough to stay central

o Big steel mill that has a lot of effect- If the agency is non-central, agency will assign it on a regional basis

Non-central organizationo Looking at provential planning authority

Important industries stay with provential authority Often times, there are specific bureaus that deal with specific

industries Non-important industries move down to local bureau- Central organization

o Divides them up by industry, branch basis Under major ministry, there would be an even more specific bureau

Under machinebuilding ministry, a motor vehicle and machine toolbureau

- Result: Awful mess


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o Taking all parts of plan and put them together, it was broken into so many piecesno one had real control of putting them together

o There were about 50-60 planning offices, each provential authorityo China decentralized in 1950s

It could not effectively control economy with central bureau

More provential planning areas than central planners Share of total output by central planners (those that are allocated by

ministries)

1978, Ministries are importation for some goods,o Timber has large share of central planning, 80%o Cement, central government only controls 33%, rest is

controlled by local authorities Machine tool is also controlled mostly by local

authority Vast majority of Textiles controlled by locals

In china, central planning is a misnomer

By later part of planned era in china, most is locally controlled inprovential planning officeso This is a mess: Heres why

Consider the motor vehicle industry In a centrally planned economy, one would expect a centrally

planned motor vehicle industry,o There was a motor vehicle bureau in china

But, the local authorities also had motor vehicle factorieso Almost every provence set up motor vehicle factories, coal

ministry set them up for their work, etco 35 planning bureaus controlled motor vehicles,

While China produced very few motor vehicles,there were many factories and a lot of differentplanning

Shenyoung, industrial enterprises in the city answered to 53different planning offices

Things have spiraled out of central control This an inefficient mess

o No one is in controlo Fact: China has a very fragmented planning systemo Central planning office could constrain what lower bureaus could do

Means of central control existed, but central planning commission oftendid not do that

Did not impose the constraint that a good planning system would have- Planning new annual plan

o Government tells planning commission to find a plan that matches certain targets Provential planning authority has to adhere to state planning commissions

goals and that of provincial government Ministry gets control figures that will be built into its balances for the

coming year


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Once they have control figures, they can begin working controllingyear

After initial planning and calculations, central bureaus send revisions thattells them to redo plans that fit in with constraints, close the gaps

State planning commission has a national planning conference They not only collect plan, they collect planners Chinese innovatioin

They will essentially hash out another version of the plan face to fact They are shouting matches, because no one wants to revise their

own plans

As the planners change their balances, it screws up all the otherbalances, they need to revise their plans

At the end of the year, the different provences/ministries changebalances

On December 31st, government says stop, and hopefully everythingis in balance

o Nothing, however, is ever in balance, and the greatest hopeis that the biggest flaws are revised

National government approves plan at beginning of plan yearo Once plan is approved, it becomes legally binding

All pieces of plan that are particularly assembled would bedistributed to agents

This is a very big operation Its a frustrating endevour, because your work is interrelated with

everyone else, its a constant battle, knowing that your work will

be screwed up by others

Everyone has to keep working together Its contentious

o In the abstract, everyone would be working for the nationalinterest

o There are people with ministerial interest, there is anenergy lobby, then there are other provincial interests

o National planning conference were very contentious In planning process, keep in mind that there are lots of T accounts

for a particular commodityo If the state planning commission comes up with control

figures, planning may proceed very smoothlyo There are surprisingly few commodes planned in china,

600 is very few, given the number of steel commodies alone there are in afunctioning economy

They are planning in crude, coarse terms Soviet union was planning 5-6 thousand commodities Chinese economy, in terms of detail was much less than the soviet plan

o Furthermore, Chinese planning is fragmented into a large number of planningoffices,

Provential planning authroties control small portions of total output


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o Chinese planning, on December 31st, is very crude By the soviet union standards is almost laughable, and sometimes, those

few commodities dont always balance There are reports of large gaps of the shortage gaps, sometimes 30-40%

short of availabilityo

Dual Leadership For limited purposes, ministries could issue orders to enterprises it could

not control

Water works, electrical plants that needed to supplymanufactoruers

Provences could often get dual control of centrally planned enterprises Small share of total fell under dual leadership

This was a way to overcome planning process If you never solved the coordination process, you allow planner A

and B to talk to each othero Material Supply Bureaucracy

Material supply system is important in refining crude plans When one ministry asks another ministry for good, there must be anallocation from good one to good two,

Then, those who deal with the physical commodities must take over, whatspecific product does factory a need?

o What happens if there is a gap? That means theres not enough steel plate to go around, and the material

supplier knows the plan will likely have gaps, so they build up productionreserve

o The Chinese economy, and soviet economies, ran with huge inventories, just tomake sure that shortages, if they do occur, are smoothed over

Material supply system would try to draw down reserves if there areshortages or attempt to replace it with goods

o In china, there was fixed supply, year after year, two factories would be paired,even though they were in different ministries,

Linkages did not need to be reestablished year over yearChinese Pricing and Finance

- So far, nothing has been said about pricing of Chinese goods, its all been in physical units- Planning is first and foremost about physical units, its an afterthought

o When you think of a comprehensive plan, we had a plan with M agents, Mcommdoties, every commodity was written into the plan, you didnt really need

prices at all, everything is planned perfectly in terms of physical commoditieso The need for prices arises only because the plan is not comprehensive

Prices have three main uses in a soviet-type economy The most obvious concerns unplanned agents, these are the agents

outside of the plan

These are the agents that do not receive the big list of commandsyear over year, to an extent, they do look after prices


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Collective farm: subject to procurement planning, they had to sell acertain amount of grain

They would certainly be concerned about state selling graino Aggregation

Plan is pretty small, how do you add up different commdoites, add up tonsof commodity a and commodity B

o Think of a producer that produces clothing You will need to put so much value on a coat, on a pair of pants, etc you will need to figure out terms of value in plan

o prices are useful in implementing plan Chinese banking system was all about monitoring plan pefformance, an

econ 4690 review note prelim 1

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