In the last chapter we examined reforms in the agricultural sector. We now examine reform of Chinese industry and particularly of the so-called state-owned enterprises (henceforth these will be referred to as SOEs). A number of concepts explored in the last chapter will re-emerge in the discussion of SOEs — in particular ideas such as principal-agent relationships, monitoring costs, and incentive compatibility. This should not be a complete surprise. The pre-reform institutional structure in industry, and the incentive system which flowed from that structure, was not unlike that which pervaded the agricultural system prior to reform.1 What is noticeably different is the proffered ‘solution’ to the problem of poor economic performance. In agriculture the solution was to essentially privatise farming, with each household becoming a decision making unit able to pursue its own goals, primarily maximisation of profit. In industry, there has been no attempt at privatisation of the SOEs. The result has been to produce a rather strange paradox, which is that far from reducing the involvement of the state in the running of industry, the reforms have, if anything, increased the amount of state intervention in industrial production (Fan, 1994).
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