From: "Rosser Jr, John Barkley" <rosserjb-AT-jmu.edu> Subject: Re: Hyperinflation & Investment Controls in China Date: Thu, 17 Oct 1996 17:27:35 -0400 () Louis G. and I are converging, probably much to his dismay (don't worry, LG, I'll try not to lead you into any cow patties, :-)). A few minor disagreements with his post below. 1) The de facto federalist structure in China is a continuation or expansion of something that has essentially been in place all along, with the possible exception of a brief period in the 1950s, at the height of imitating the Stalin-Soviet model, the remnants of which form the core of the current centrally-owned-controlled SOE sector. The old saying, increasingly true now is, "The mountains are high and the emperor is far away." Starting with the Great Leap Forward and continuing later, Mao encouraged a decentralization of industrialization which coincided with a much looser form of central planning than took place in the USSR. This was partly motivated by fear of military aggression from the US and later from the USSR as well. Much of this was really botched in its initial inception, especially in the disastrous (up to 30 million dead, possibly) GLF. But in the longer run this played an important foundational role in the current success of the TVEs. I think that there is a problem with Louis's analysis of inflation and decentralization. One can hyperinflation in a transitional economy in almost any case. Certainly we have seen cases (Yugoslavia, arguably parts of the FSU at certain stages) where some mishmash of political decentralization fed hyperinflation in soft budget constraint environments. But it is perfectly possible for a fully centrally politically dominated market socialist economy to hyperinflate via the soft budget constraint. Poland in the late 1980s is an example and Ukraine in recent years may be also. It is simply a matter of the central authorities playing the soft budget constraint game very loosely and the firms overinvesting, borrowing excessively, etc. Finally, Louis G. says that all of this "must" occur within "Chinese Communist culture and traditions," etc. Well, authoritarian regimes from Singapore to Beijing are now justifying authoritarianism on "Asian" and "Confucian" traditions (there is a big neo-Confucian revival in China going on). But this may be just an excuse for suppressing the democratic movements that are popping up in various countries. An especially embarrassing pressure point in this regard right now for the PRC leadership has been the recent assertiveness by pro-democracy activists from Hong Kong and Taiwan, asserting greater nationalism than the Beijing leadership in the territorial dispute with Japan over the multiply named islands lying to the northeast of Taiwan. Barkley Rosser On Thu, 17 Oct 1996 15:26:09 -0400 (EDT) Louis R Godena <louisgodena-AT-ids.net> wrote: > > Professor Rosser, obviously, is continuing to insist on that old > totalitarian model to explain the evolutionary changes occuring in Chinese > political society. Perhaps a lifetime spent among cows has inured him to > the possibilities of change in unfamiliar cultures. > > It is clear that China now has a de facto federalist system in which the > central government specializes in political responsibilities and the local > governments specialize in economic responsibilities. > > This has a number of important normative implications. Under the > condition of political authroritarianism, this combination of economic and > fiscal decentralization with political centralization may be an optimal > governance structure. Economically, a degree of political > centralization is useful to alleviate coordination problems when economic > agents lack financial self-discipline and when indirect macroeconomic > policies are ineffective. Premature political decentralization in the > presence of soft-budget constraints may have contributed to runaway > inflation in other reforming centrally planned economies. Politically, > the Chinese style of federalism can also be optimal because fiscal > decentralization helps check the enormous political discretion in the hands > of the central government, on which the Chinese political system itself > places no formal constraints. > > We have already seen that the origins of inflation arise from the incentives > for over-investment that arise at the local level and the difficulties faced > by the center in monitoring and sanctioning profligate local behavior. > Indeed, I would argue that the present configuration of Communist Party > relations at virtually every level is more or less predicated upon the > salient economic fact of the reforming economy; namely, the all important > need to control a robust economy (meaning, primarily, the need to keep > inflation under control) while maintaining both robust economic growth and > the political supremacy of the Party. This of course has to be done > within the context of the culture and traditions of Chines Communist > society. That the Chinese have thus far done so (and rather successfully) > is a continuing source of bafflement, envy and perplexity to the rest of > Asia and the US. > > Louis Godena > > -- Rosser Jr, John Barkley rosserjb-AT-jmu.edu
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