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Three essays on China's state owned enterprises: Towards an alternative to privatization

Minqi Li, University of Massachusetts Amherst


A common theme in the analysis of the contemporary Chinese economy is that the Chinese state owned enterprises fail to operate efficiently because of ambiguous property rights, soft budget constraints, and government intervention. These authors advocate an economic reform program based on large-scale privatization. This dissertation advances an alternative perspective on the state owned enterprises. In the first essay, I argue that the state owned enterprises have made an important contribution to China's macroeconomic stability. This view draws from Hyman Minsky's argument that a large government sector is indispensable for a capitalist market economy to maintain macroeconomic stability and avoid deep recessions. I argue that in the Chinese context, the state owned enterprise sector must be sufficiently large so that public sector investment accounts for about 50 percent of the total capital formation. In the second essay, I argue that the performance of the state owned enterprises can be enhanced by promoting workers' participation in management. I conducted a survey of workers' participation in management in large and medium-sized industrial enterprises in China's Henan province. Using the data collected from this survey, I performed econometric analyses to explore the relationship between workers' participation and firm performance, finding evidence that participation does improve performance. The third essay addresses what is now termed “disguised unemployment” in the state owned enterprises. The existing literature argues that the state owned enterprises fail to use their labor force efficiently. In this view, a high percentage of workers in state owned enterprises are redundant and unemployed in a disguised manner. These workers have to be laid off for the sake of efficiency. I argue that much of the disguised unemployment in the state sector may be due to insufficient aggregate demand rather than technical inefficiency. My econometric analyses find that an increase in aggregate demand leads to substantially higher productivity in the state owned enterprises, allowing a substantial part of the redundant labor force to be efficiently employed. I argue for active aggregate demand policy rather than layoff of workers as the primary solution to the problem of disguised unemployment.

Subject Area

Economics|Finance|Labor economics

Recommended Citation

Li, Minqi, "Three essays on China's state owned enterprises: Towards an alternative to privatization" (2002). Doctoral Dissertations Available from Proquest. AAI3068576.