Lecture Notes on Transition Economics and Public Services

Transition Economics: Control and Dual-Track System

• Overview of Transition Features:
  • The lecture uses the concepts of "control" and "dual-track system" to summarize key features of economic transition.
• Control Mechanisms:
  • Price and Quantity Controls: These are coordinated, indicating that the government intervenes in both the price and supply of goods.
  • Reasons for Control: Include mercantilism which is the economic doctrine that trade generates wealth and is stimulated by the accumulation of profitable balances, which a government should encourage by means of protectionism; rent-seeking, controlling central bank funding and other financial injections.
• Market Absence and Shadow Prices:
  • Absence of Markets: In planned economies, markets are often non-existent as resources are allocated through central planning.
  • Resource Scarcity and Opportunity Cost: Despite the absence of markets, scarcity and opportunity costs persist. These are reflected through:
    • Underground Transactions: Illegal or informal markets.
    • Shadow Prices: Planners and calculators try to estimate the implicit price of goods, even when no market price exists.
    • Even without official prices, the laws of supply and demand still affect the economy.
• Dual-Track System Logic:
  • Coexistence of Planning and Market: This system involves the parallel operation of planned and market mechanisms.
  • Economic Improvements: The dual-track approach facilitated significant economic improvements, accounting for over 80% of advancements.
• Deregulation:
  • Focus on Monopolies: Deregulation efforts primarily target monopolistic industries, such as telecommunications.
  • Government Incentives: The reasons for government deregulation are aligned with the aforementioned motives for control.
• Mosca's Paradox and Reform:
  • Linking Deregulation to Mosca's Paradox: Discussion connects deregulation efforts with Mosca's paradox, which addresses why governments initiate reforms like property rights changes and deregulation.
  • The lecture transitions into market transactions, setting the stage for a discussion on public services.

Public Service System in China

• Relevance to Understanding China's Economic Transition:
  • Understanding the public service system is crucial for comprehending China's economic transition, even though this sector has less direct interaction with market forces.
• Planned Economy Era:
  • Legacy of Planned Economy: The characteristics of the planned economy era have persisted in the structure of public services.
• Reconstruction Process: The lecture examines the reconstruction of public services (education, healthcare, elderly care, etc.).
• Impact of Mobility and Divorce: Addresses the challenges and pressures on public services due to increased mobility and divorce rates.
• Planned Economy Arrangements:
  • Resource Allocation: In a planned economy, resources are allocated administratively.
  • Low Factor Prices: Element prices are artificially suppressed to subsidize industry.
  • Low Wages and Living Costs: Maintaining low wages and living costs for urban workers is a priority.
  • Grain Procurement and Distribution: The system relies on state-controlled grain procurement and distribution.
  • Restricted Population Movement: Population mobility is limited to maintain the grain supply, enforced partly through the household registration (户籍) system.
  • Social Services: Social services organically form as part of the planned economic system to support the urban population.
• Inertia of the System: Even after abandoning the planned economy, the established social organization and public service provision persist due to institutional inertia.
  • Example: The long-standing 户籍 system contributes to this inertia.
• Urban Public Services:
  • Uniform Low Living Costs: Public services and social welfare are offered to maintain consistent, low living costs for urban workers.
  • Work Unit Organization: These services are provided through work units (单位), not a socialized system.
  • Theoretical vs. Reality: Public services should theoretically be universally accessible, but in practice, they are tied to employment.
  • Residential Organization: Residents are organized by work units within cities.
• Collective Economic Organizations in Rural Areas:
  • Absence of Markets: There were basically no market economies.
  • Cooperatization: The original rural economy was transformed through socialist cooperatization.
  • Welfare Arrangements: Even those with limited capacity or disabilities were provided for through street-level organizations that arranged welfare factories.
• Role of Work Units (单位):
  • Social Organization and Security: Work units were the primary means of social organization and provided comprehensive social security, taking care of virtually everything from cradle to grave (“from Yao’an to the tomb”).
  • Benefits and Entitlements: Access to social security and benefits was mediated through one's work unit.
  • Hierarchical System: The system fostered inherent inequalities and a hierarchical structure where benefits and rights were based on work status, length of service, and professional title.
  • Labor Insurance System (劳保): Enterprises provided extensive welfare benefits (beyond wages), such as:
    • Workers' clubs with amenities like cinemas, recreational facilities, canteens, and even Guo Nong housing.
    • Comprehensive benefits managed through the Laobao system.
    • Medical care (公费医疗) covered by the government.
    • Retirement benefits linked to work history and professional rank.
• Organization in Urban Areas:
  • Urban residents affiliated with a work unit had a corresponding rank, determining the welfare they could receive.
  • Government, military, and large state-owned enterprises provided these benefits.
• 胡同 (Alleys) Organization:
  • 胡同 (traditional alleyways) were organized by street committees and communities.
  • While all government work units had organizations, large compounds enjoyed more complete ranking systems and corresponding benefits.
• Social Contract:
  • Formed an implicit urban social contract under socialism.
  • The state acted as a super-company, functioning simultaneously as an economic system, administrative organization, and provider of public services.
• Broader Definition of Public Services:
  • Basic infrastructure (roads, bridges, public transportation).
  • Public safety (police, etc.).
• State-Owned Enterprise Reform:
  • 剥离 (Stripping Away) Public Services: SOE reforms involve decoupling the public services traditionally offered by SOEs.
  • Policy Burden: Meant SOEs needed to shed policy-related burdens.
  • Downsizing (下岗): In the late 1990s (especially 1998), millions of workers were laid off (下岗), severing their ties with work units.
  • Loss of Benefits: This decoupling meant that laid-off workers lost access to work-unit-based labor insurance (劳保) and public medical care (公费医疗).
  • Pressure for Socialized Welfare: Created strong pressure for the rapid creation of a socialized welfare system.
  • Re-employment Services and Social Assistance: Re-employment services and a basic living allowance system (最低生活保障, 低保) were established.
  • Forced Establishment of Social Security: Social welfare and security systems were established out of necessity when SOEs withdrew from providing public services.

Rural Public Services

• Urban-Rural Divide: There is a significant difference between urban and rural areas in China (城乡二元).
• Land Ownership: Rural land is collectively owned, not state-owned.
  • The state extracts resources from rural areas by trading land rights for agricultural products. This subsidizes industry and urban development through the purchase and sale (统销) system.
• Limited State Provision: While the state's presence increased during communization (公社化), public services did not expand at the same rate in rural areas.
  • Rural areas maintained autonomous organizations responsible for internal resource allocation.
  • The production brigade distributed welfare.
  • The state did not establish a wage system for rural workers.
• Lack of Systematic Arrangements:
  • There was no systematic state planning for rural infrastructure (e.g., roads, water supply) until the 1990s.
  • No standardized requirements for rural roads, lighting, or water infrastructure existed.
• Limited Support and Resources:
  • Some state support was provided during mass campaigns:
    • Funding for construction.
    • Training for rural doctors (赤脚医生) in cooperative medical programs.
    • Assignment of teachers to rural schools during literacy campaigns.
  • However, there was no comprehensive state investment in rural education or healthcare.
• Collective Provision:
  • Rural public services and social security were provided by collectives (公社, 大队, 资产队).
  • Land served as the primary form of welfare, determining residential rights.
  • Land redistribution occurred to balance resources with population changes.
• Limited State Provision Beyond Land:
  • Aside from land, access to public services was limited.
  • No national standards existed for rural education before the Compulsory Education Law (义务教育法).
  • Local wealth determined the quality of schooling.
  • Most rural schools were run by local communities.
  • During communization, individuals with some level of education could become teachers and receive work points (公分) as compensation from the collective, not a formal state salary.
  • Barefoot doctors (赤脚医生) provided basic healthcare after brief government training.
• Continued Collective Provision:
  • Education and healthcare mainly provided by rural collectives, with limited support from the state.
  • This system persisted after reforms, leading to the following regulations:
    • The 1991 regulations on farmers' burden management (农民承担费用和劳务) required peasants to pay for spring planting and autumn harvest, as well as collective village expenses.
    • Farmers were also obligated to provide public labor (10-20 days per year during the slack season) for infrastructure projects, water conservancy, and afforestation.
• Financial Burdens:
  • In 2000, farmers faced multiple fees that included: