China's Trapped Transition_ The Limits of Developmental Autocracy - Minxin Pei [78]
Official data also show a close connection between duplication of capacity and loss of economies of scale. Take the most notorious example of full-assembly automobile plants: China had 116 such plants in 1996, with average annual output of 12,600 per plant. Only 18 were making more than 10,000 per year. There were about 6,000 paper mills in the late 1990s, with an average capacity of 4,000 tons per plant (less than a tenth of the international average). Of the country’s 800 beer breweries, only one-tenth reached the minimum capacity of 50,000 tons.147
Another indicator of low economies of scale is China’s low concentration ratio, that is, the market share claimed by the largest firms in a country. More fragmented markets typically have lower ratios, implying a lack of economies of scale. In the Chinese case, official figures indicate that this ratio has been unusually low, compared with both developed and developing economies.148 In 1985, the concentration ratio for the largest one hundred industrial firms in various sectors averaged 14 percent; in 1990, the concentration ratio fell to 12 percent; in 1995, it rose slightly to 16 percent.149 Among the thirty-nine major industrial sectors in the mid-7990s, the largest eight firms in each sector accounted for less than 10 percent of the market share (measured by sales) in eighteen of them (these included paper, timber, and beverages). Econometric analysis performed by Chinese researchers showed that low concentration was responsible for the slow technological progress in Chinese firms.150
International Comparisons
Although it was the first to launch reform among state-socialist economics, China’s slow progress toward building a market economy is evident. A World Bank study published in 1996 showed that China’s economic liberalization lagged behind that of former state-socialist economies in Eastern Europe that had adopted radical reforms (Poland, Slovenia, Hungary, Croatia, the Czech Republic, and the Slovak Republic). For this group, the average liberalization index was 6.9, compared to China’s 5.5.151 International comparative data in 2001 further showed that, if anything, the gap in economic liberalization between China and the same Eastern European countries had remained virtually unchanged. According to an index of economic freedom compiled by the Fraser Institute, China lags behind Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, and the Slovak Republic, but is comparable to other laggards in economic reform, such as Russia, Ukraine, Albania, Bulgaria, and Romania. China’s economic liberalization also falls behind that of other large developing countries, such as India, Mexico, South Africa, the Philippines, and Brazil.152
The above case studies and analysis of China’s progress in marketizing its economy indicate that, despite the enormous gains in output achieved under gradualist reforms since 1979, the hidden costs of this approach are huge and understated. Of course, politically it has been a brilliant success for the CCP because gradualism has delivered all the expected political dividends: it has given the party a new lease on life, helped maintain its patronage system, and even provided it with more means to hold on to its power. But economically, a quarter century of gradualist reform has only modestly raised the efficiency in some of China’s most important economic sectors. Instead, important sectors such as grain procurement and banking have become weaker, not stronger. Consequently, two factors threaten the sustainability of gradualist reform. First, the massive build-up of financial deficits in these sectors (all remain