Xue Muqiao's Late Years Writings

Author: Xue Muqiao / Country: Mainland China
Publisher:
Publishing Date: 1999-03-01
Features: Now, more and more people agree that to revitalize large and medium-sized state-owned enterprises, an important aspect is to implement the separation of government and enterprise, giving enterprises full autonomy. Since reform, various forms of exploration have been conducted to achieve this separation. Contracting, which was introduced into industrial and commercial enterprises based on the ideas of rural reform, was piloted in some regions and enterprises before 1986 and was fully implemented nationwide after 1986. Contracting has played a certain role in revitalizing enterprises and stabilizing financial revenue, but it also has many significant problems that should be addressed. It is not enough to think that everything will be fine just by implementing contracting. In my opinion, contracting has at least the following unresolved issues:
1. The issue of preserving and increasing the value of enterprise fixed assets. Although some places now implement audit systems at the end of the contracting period, China lacks scientific evaluation methods for fixed assets, making it difficult to accurately assess asset depreciation, especially intangible depreciation.
2. The lack of initiative in technological advancement and product development. Technological progress and product development are time-consuming, costly, and labor-intensive. This is crucial for the long-term development of enterprises, but the short contracting period makes operators less interested in long-term issues.
3. Contracting effectively means "profiting without bearing losses," leading enterprises to favor higher dividends and lower savings, consuming all profits.
4. Uneven conditions among different enterprises. The determination of contracting bases primarily relies on one-on-one negotiations, often lacking standardized criteria. As a result, enterprises focus on competing for bases rather than improving production and operations. A lower base benefits the enterprise, while a higher base results in losses. The income of enterprise workers is closely tied to the level of the contracting base.
Due to these issues, many worry that our enterprises may be "emptied out" within a few years of contracting. The short-term behavior of enterprises under the contracting system fundamentally fails to resolve the relationship between the state, enterprises, and workers. I disagree with some who call contracting a major innovation. In fact, contracting existed even in feudal China. In Dream of the Red Chamber, the 56th chapter "Min Xiangchun Revitalizes Profits and Eliminates Old Habits" describes how Jia Tianchun used contracting to break the "communal potluck" in the Rongguo Mansion. However, methods effective under low levels of productivity and socialization of production may not work in modern large-scale industry. What works in the countryside cannot be simply transplanted to the city.
In the future, the management systems of large and medium-sized state-owned enterprises must continue to be reformed. The direction of reform is to enable enterprises to become independent, self-operating, self-accountable, fair competitors, and subject to survival of the fittest as commodity producers and operators. To achieve this, the prerequisite is to rationalize prices. Severe price distortion creates an uneven market, hindering accurate economic accounting and fair competition, leading to "profiting without bearing losses" and preventing survival of the fittest. Without competitive pressure, large and medium-sized state-owned enterprises struggle to compete with non-planned local enterprises, rural enterprises, foreign-invested enterprises, and private enterprises, let alone with those in developed countries. China's labor productivity is far lower than in Western countries, sustained only by low wages. Rationalizing prices and leveling the market to allow all enterprises to compete on an equal footing is a critical issue for deepening reforms.
Recently, there has been much discussion about the upheaval in Eastern Europe. I believe that simply attributing it to the "peaceful evolution" policies of capitalist countries is insufficient. In my view, the main reason for Eastern Europe's setbacks is the failure to implement thorough reforms, repeatedly trapped in the cycle of distorted prices, soft finances, and soft credit. These countries attempted to patch up the traditional system or implement piecemeal reforms, which at most delayed the outbreak of contradictions, plunging the national economy into chronic crises rather than achieving fundamental improvements or winning the competition with capitalism. When these countries' leaders finally realized the need for reform, they found that the public had lost confidence in reforms within the socialist system and was unwilling to offer basic support, leaving them with no choice but to regret. Recognizing this point is key to seizing the opportunity to "mend the fence after the sheep have escaped." We must accurately assess the situation and act decisively. By "acting decisively," I mean seizing the current opportunity, achieved at great cost, when supply and demand are relatively balanced, to launch comprehensive reforms aimed at establishing a planned management system based on a commodity economy. Fundamentally, this means rationalizing prices through price liberalization while strengthening macro-control over finance and banking, allowing enterprises to compete fairly and be subject to survival of the fittest, rather than relying on the old methods of "communal potluck" or "iron rice bowls," where the state "controls" and "covers" everything.
Currently, urgent reforms are needed, at least in the following areas: price reform and enterprise reform. The 1984 Resolution of the Central Committee of the Communist Party of China on Economic System Reform stated, "Rationalizing the irrational price system is the key to the success or failure of the entire economic system reform." Without this, the entire economic relationship cannot be rationalized, and reform cannot succeed. The first five years of reform gradually moved toward price liberalization. Consumer goods, due to the rapid development of agriculture and light industry, entered a buyer's market, and even after price liberalization, prices remained stable. Meanwhile, as construction scales were compressed, the supply of means of production was eased, and the black market price trended downward, gradually aligning with state-controlled prices. Unfortunately, after 1985, amid increasingly severe inflation, not only did the dual-track price gap widen, but prices that had been liberalized were also strictly controlled, causing the gradually rationalizing price system to become severely distorted again. Under these conditions, requirements such as independent accounting, autonomous operation, self-accountability, fair competition, and survival of the fittest could not be realized. Currently, many long-line products are highly profitable, while short-line products are low-profit, failing to guide enterprises to adjust their industrial structure and improve overall social efficiency, instead creating reverse regulation. Over the years, the production and construction of high-profit products, from the "old three" to the "new three" (e.g., ethylene, latex products), have been in vogue, while key sectors like coal, electricity, oil, and transportation, which are bottlenecks, have been neglected due to lack of profit. As a result, long lines grow longer, short lines grow shorter, the structure becomes increasingly distorted, and efficiency remains difficult to improve. Meanwhile, "official speculation" and unscrupulous merchants thrive, exploiting price gaps to make huge profits. Corruption, involving the exchange of power for money, has deeply infiltrated the ranks of cadres. While the situation has improved somewhat, the industrial structure has shown no signs of fundamental improvement despite market sluggishness. Moreover, as long as the distorted price system remains unchanged, new long lines will continue to emerge, and the severe waste of resources and low efficiency will not be significantly improved.
In the past, hesitation to boldly adjust or liberalize prices stemmed mainly from fears that liberalization would trigger severe inflation under expanding aggregate demand. However, the current conditions have changed significantly, with market sluggishness paving the way for price rationalization. Therefore, I suggest seizing this favorable opportunity to shift price policies from control to adjustment—raising prices for short-line products and encouraging price reductions for sluggish goods. Subsequently, most commodity prices should be fully liberalized, aiming to rationalize prices by the early stages of the "Eighth Five-Year Plan."
Socialism is built on the foundation of highly developed large-scale production. Large-scale production requires a highly developed commodity economy as its prerequisite. In rural areas, natural economy still dominates, and in cities, except for large cities like Shanghai, large-scale production has not been fully developed. As a result, the socialist economy built on this foundation retains many traces and remnants of the old society. For example, in cities, large collective-owned economies and a certain amount of individual economies must be developed, while rural collective-owned economies must adopt diverse operational forms, leveraging both the advantages of collective labor and individual labor. As long as manual labor prevails, collective, individual, and manual labor each have their strengths, and they must be combined to achieve maximum economic efficiency. This is an objective law unaffected by human will. Organizing large-scale collective labor in mountainous areas is merely a waste of labor and reduces economic efficiency. Allowing individual economies to exist in cities and small handicrafts, petty trade, and various sideline production in rural areas is necessary. State-owned industrial and commercial enterprises are also diverse and cannot adopt a single operational form. They should not be monopolized, with all revenue and expenditure centralized and state-controlled procurement and distribution. During Stalin's management in the Soviet Union, heavy industry was prioritized, development was rushed, and economic construction scales were too large, leading to tight supplies of both means of production and consumer goods. As a result, centralized management and distribution became necessary, with only planned regulation possible and no room for market regulation. China adopted the Soviet economic management system in the 1950s and, starting in 1958, also faced overly high production targets and excessively large construction scales, leading to the same phenomenon of "stretched tight and managed rigidly." This situation did not change until the Third Plenary Session in 1978. The session proposed adjusting the national economy, reducing industrial production targets to 8% in 1979 and further to 6% in 1980. Capital construction allocations under state plans were cut by 20% in 1979 and 30% in 1980. After this adjustment, supplies of means of production and consumer goods loosened, creating conditions for management system reform (multi-channel operation of consumer goods and entry of means of production into the commodity market). The supply of consumer goods also began to adopt a combination of planned and market regulation, expanding distribution channels and reducing intermediaries. This reform has just begun, but it has found the right direction. Our "initial proposals" are based on the principle of combining planned and market regulation, fully utilizing the role of market regulation under state guidance.
Socialist countries, with public ownership of means of production as the absolute advantage, have a socialist commodity economy different from capitalist one. It cannot do without state planning and must be guided by it. Based on 30 years of experience, state plans must first allocate the scale of economic construction and the improvement of people's living standards. This means correctly determining the ratio of accumulation to consumption, ensuring that the total accumulation and consumption funds do not exceed the national income. Over the past 30 years, many years saw overly high production targets and excessively large construction scales, not only hindering improvements in people's lives but also reducing the economic efficiency of production and construction. Recent years of national economic adjustment began with this aspect. In this regard, strict adherence to state plans is essential, and management must not be relaxed. If this aspect is managed well, maintaining balance in fiscal and credit accounts, material supply and demand, and foreign exchange transactions will prevent major economic chaos. Other aspects of management can then be relaxed. Gradually reducing directive plans and replacing them with indicative plans is advisable. Indicative plans do not force enterprises to strictly comply but allow flexible adjustment based on enterprise capabilities and market needs. If an enterprise's economic activities deviate from state plans, the state should use economic tools such as prices, taxes, and credit to regulate rather than resorting to administrative orders. The transition from pure planned regulation to a combination of planned and market regulation aims to expand the autonomy of local governments, especially enterprises, enhancing their initiative, creativity, and enthusiasm. Since last year, we have begun pilot programs for fiscal decentralization and expanding enterprise autonomy, primarily focusing on revenue sharing and enterprise profits. In the future, production planning, product management, personnel management, and price adjustment powers will be gradually expanded. Especially, the unreasonable price system, a major obstacle to market regulation, must be addressed to continue expanding enterprise autonomy. Reforms in planning, material, labor, and price management are necessary.
The current fiscal management system treats banks as mere cashiers for the treasury, failing to fully utilize their role. This must also be reformed to make banks an important lever for market regulation under state plans. Price reform must be coordinated with tax system reform to ensure roughly equal profits across industries and products. Products requiring high or low prices, as well as enterprises with varying profit levels due to objective conditions, should be regulated through different tax rates. When expanding enterprise autonomy, democratic management systems must be established to enable the working people to truly "rule." Enterprise leaders should genuinely become "public servants" rather than masters riding on the heads of laborers. The current system of profit submission by enterprises also forces them to be managed, becoming appendages of central ministries or local governments. This system hinders cross-industry and cross-regional specialization and cooperation, leading to sectoral segmentation and regional protectionism, and protecting competition and promoting integration. To fundamentally solve this problem, it is best to replace profit submission with tax submission. In addition to original industrial and commercial taxes, enterprises should pay income tax based on profits, with additional levies on resource taxes, differential taxes, and the creation of various local taxes. Some taxes are submitted to the central government, some are shared between the central and local governments, and others are submitted to local governments. This way, governments at all levels can reduce excessive intervention in enterprises' economic activities, making it easier to divide revenues and expenditures, and truly establish a two- or three-tier fiscal management system. After submitting various taxes to governments at all levels, enterprises can operate independently and be self-accountable. This is a fundamental reform in the economic management system and requires thorough preparation, with pilot programs gradually expanded. Next year, each province with conditions should designate one county (or city) for piloting, and major cities should select several enterprises for pilot programs.