acknowledged that the total wage bill of workers (wages plus bonuses) is linked to the
rate of increase in profit and tax remitted to the government. However, when questioned
about the elasticity of this link only a few firms responded. The low response rate may
have reflected the sensitivity of the question being asked, as most Chinese enterprises are
keen to keep some discretion from their supervisory bodies. This in itself indicates that
actual incentive payments to workers by sample firms may have been higher than the
government normally allows.
MARKET DEVELOPMENT
Pre-reform China was a "classic" shortage economy (Kornai and Daniel 1989). There were serious shortages of nearly everything, from intermediate goods to consumer goods. Both producers and consumers frequently engaged in forced substitution.
Chronic shortages in socialist countries have often been attributed to the emphasis on expansion and quantity, which in turn can be traced to the persistence of soft budget constraint (Komai 1980; Wong 1986). A number of other economists view the lack of a flexible price mechanism as a key explanatory variable generating shortage (Mao and Hare 1989; Hare 1989). In many cases, they argue, shortage may merely be the outcome of distorted prices, which are pervasive in planned economies.
The introduction of a price mechanism in the Chinese economy proved effective in eliminating or reducing shortages of many products. So far, although price reform has proceeded in a piecemeal way, the cumulative effects have been large. In just over a decade, the Chinese have been successful in converting the market for many consumer products from a sellers' into a buyers' market. A typical example is textile and clothing products. Since 1983, when the ration system was aboUshed, the market for textile and clothing products in China has become increasingly prosperous (Kong 1992).
A puzzling phenomenon, however, has been the continued existence of shortage of many producer goods, including raw materials. In the case of the wool textile industry, shortage has been reflected in low levels of capacity utilisation (Zhang et al. 1991). Because of this, some believe that producers are still facing the type of shortage described by Komai (1980).
While it is true that soft budget constraint is an ongoing cause of the short supply of many producer goods in China, the notion of shortage in the post-reform economy differs from that under the traditional planned economy. In the pre-reform economy, prices were fixed and markets were often in a non-clearing state. When forming theu" initial demand for inputs, producers had to consider non-price signals such as queue length, waiting time and so on. Forced substitution was also a common phenomenon. In the post-reform economy secondary markets are allowed, and any excess demand or shortage will be cleared by prices prevailing on the open market (chapter 2).
Although it can be argued in theory that the existence of a secondary market will eUminate "physical shortage", the extent to which the secondary market has actually developed is important. If the portion subject to regulation by market prices is small, any argument about the absence of "shortage" would still be weak in practical terms. This necessitates separate analysis of the extent to which fibre markets have developed over the past decade.
Wool Market
Up to 1984 the market for wool was tightly controlled, with the Unified Purchasing and SeUing System (UPSS) playing a dominant role. Under this system, producers sold all their products to the state at a specified price, and their consumption requirements for wool were met by means of state allocation. Because UPSS set a low price for wool, shortage of wool was a persistent phenomenon (Du 1992).
The UPSS was formally abandoned by the state in 1985 in favour of a new marketing and pricing system called "Contract Purchasing". Under this system, the state purchased a proportion of wool growers' output at a price stipulated in the contract. After fulfilling the contract, wool growers were allowed to sell their products on the free market. This has effectively resulted in a dual price system in the wool market.
As wool was hberahsed at a time of excess demand for wool and before an organised market was set up, free market prices were under pressure to increase. Farmers and herdsmen were reluctant to sign contracts with the state, whose prices were lower than the free market price, and tried to move as much wool as possible on to the market. The state, finding it increasingly difficult to obtain wool, was forced to increase its purchasing price substantially. In 1984-88, the mixed average state purchasing price of wool"* rose from 3.7 R M B yuan per kilogram to a record level of 10.8 RMB yuan per kilogram (Figure 5.1).
^ The mixed average purchasing price is calculated as: total value of purchased wool / total quantity of purchased wool.
Figure 5.1 Mixed Average Purchasing Price of Wool in China, 1975-91
RMB Yuan per kilogram 12 T 1 0 • • 6 •• 4 •• 2-- 1975 H h 1980 H 1 1 1 1 h 1985 1990
Source: Statistical Yearbook of China 1982-92.
Sharp increases in the state purchasing price did not, however, prevent competition in the purchase of wool. In fact, during 1985-88, the so-called 'Wool War' developed. Actors in the battle for raw wool supphes included various types of enterprises (both state and non-state), various levels of government and various kinds of private dealers (Watson et al. 1989). The origin of the 'Wool War' was a relaxation of central control over wool marketing at a time when regional governments in major producing provinces (Gansu, Qinghai, Xinjing and Inner Mongolia) were anxious to develop their own wool processing industries under the new pohcy of 'own production, own use and own sales' (Watson and Findlay 1992). A direct consequence of the 'Wool War' was a significant decline in the role of the state in wool distribution in China.^ By 1989, the share of state purchases in total wool production had fallen to less than 50 per cent (Figure 5.2).
The 'Wool War' also spread from China to overseas wool producing countries. Wool textile enterprises in coastal provinces and cities, deprived of their traditional sources of supply, turned to the international market for their supplies of raw wool
^ Another m a j o r consequence of the 'Wool W a r ' was the decline in the quality of wool sold and purchased. For an excellent discussion of C h i n a ' s 'Wool W a r ' , see Watson and Findlay (1992).
(Fisher et al. 1990). Competition for foreign wool was intense, leading to enormous increases in the world wool price. In 1988, when the 'Wool War' was at its height, the average price per kilogram paid for wool imported into China was twice that of 1984 (Zhang 1990).
Figure 5.2 Share of State Purchases in Total Wool Production in China, 1981-91
100 J 90 -• 8 0 - • 70 -- 6 0 - - 50 -- 40 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 Source: Lin (1993, p. 39).
In response to the 'Wool War', the government tightened controls from 1989 onwards. Wool moved back into a single government-controlled marketing channel (Shi 1990). A minimum delivery quota on wool production was re-imposed in major wool growing provinces. Controls over wool imports were also tightened, with import quotas and centralised import arrangements being reintroduced. There was concern that these policy changes would cause new supply restrictions for the wool industry (Zhang et al.
1991).
However, the tightening of control over domestic wool did not involve total ehmination of the secondary market. For instance, in the major wool producing region of Inner Mongolia, where tougher controls are believed to have been imposed, farmers and herdsmen could still sell around 20 per cent of their production to Supply and Marketing Cooperatives at a negotiated price determined basically by supply and demand forces. Furthermore, because of the slump in consumer demand for wool products that began in late 1988 and accelerated in early 1989, the negotiated price began to move closer to the