Owned Enterprise under China as a Centrally Planned Economy

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Table of Contents

Historical Context
The Great Leap Forward
The Nature of Centrally Planned Economies
The First Lathe Factory of Beijing
Conclusions
Works Cited

China is a global contender for superpower status. The position China occupies in the second decade of the twenty first century is remarkable. Less than a century ago, China was emerging from a feudal past. The country lacked economic and political stability. In its history, the transition of one dynasty to another was Darwinian.

Whenever the ruling dynasty became weak, a rebellion took place and a new dynasty rose power. Throughout its history, China has gone through periods of unification and periods of disintegration. The current socioeconomic profile of the country is a reflection of its rich cultural heritage. It is a consequence of the decisions taken by various leaders of the country across time.

The study of the First Lathe Factory of Beijing took place during the reign of Mao. The study, which took place in 1961 by Ma Hong, became public in 1980. It is a very insightful view into the working of the centrally planned economy at the time in history. This is because no scientific literature exists regarding the actual outcomes of the management initiatives undertaken by the Chinese government in the period.

The information available refers to plans and self-reported results from the operations of industries. The report by Ma Hong gives a unique view to the dynamics that governed the operations of the First Lathe Factory of Beijing. Since the rules the factory operated under were the same for the entire economy, the findings are valid as a generalized review of the Chinese economy at the time.

This paper explores the operations of a centrally planned economy based on the report provided by Ma Hong concerning the First Lathe Factory of Beijing. The paper will put the operations of the factory in historical context in view of Mao’s economic policies. It will also explore the general nature of centrally planned economies, as a basis for the analysis of the operations of the First Lathe Factory of Beijing.

Historical Context

To understand the importance of the analysis provided in this paper, it is essential to put into historical context the First Lathe Factory of Beijing. The actual factors at play in the factory’s operations reflected the unique cultural history of the Chinese people and political realities of the time.

Philosophically, the most influential thinker in Chinese history is Confucius. Confucianism is still predominant in the thinking of modern day China. His enduring legacy is the codification of Chinese ethics. This thinker still serves a unifying personality in the Chinese society.

The events of the first half of the twentieth century also provided context for the operations of the factory. China did not have an effective central government during this period. Warlords led the country, with a few personalities trying to unify it. The result was persistent war and vulnerability to attacks by foreigners.

Mao rose to power in 1949 as the leader of the People’s Republic of China. For almost fifty years prior to Mao’s rule, China went through internal wars and international conflicts. No leader had found success in unifying China. When Mao rose to power, he succeeded in quelling all internal rebellion and ending most external wars.

Thereafter, he only fought in wars which China had a realistic chance of winning. Mao’s rise to power came at a time when the Chinese people needed a unifying leader. They wanted someone with the capacity to bring together the entire Chinese people. No leader had succeeded in this effort in almost one century. Therefore, when Mao started establishing communist rule in China, he did not find credible resistance.

After all, other leaders had had the opportunity to resolve China’s internal problems to no avail. The Chinese people were willing to risk a socialist approach to government. Mao became very powerful because of his popularity as a politician, and his reputation as a strong military leader.

The Great Leap Forward

Mao attempted to industrialize China rapidly starting in 1958 to 1961 in a program known as the Great Leap Forward. The basis for the Great Leap Forward was to exert greater control over production in China in order to have rapid and coordinated economic growth. Mao believed that this would increase the productivity of the Chinese economy. If Mao was right in theory, he was wrong in practice.

However, literature suggests that he was also wrong in theory. At the time, China was not yet a communist state. Therefore, China had a mixed system of capitalist operations with socialist undertones. When Mao started implementing the Great Leap Forward, he upset the traditional economy of China. For instance, Mao’s government outlawed private farming.

While the intention of this move was to aggregate Chinese agricultural production to allow for greater control, the result was that the country’s food production fell. In fact, the entire Chinese economy faltered during the three years of the Great Leap Forward. The country experienced negative growth in its economy.

In the industrial sector, the government started institution controls relating to the flow of goods and services. Initially, factories sought their own raw materials and found markets for their finished products. During the Great Leap Forward, the government started controlling the flow of raw materials and the rate of production.

Government statisticians calculated the required levels of growth and implemented measures aimed at delivering the products needed to support the required levels of growth.

The assumption was that if China can sustain a certain level of production, then it would be able to grow economically in order to catch up with the developed world. This large-scale control of raw materials and labor led to serious inefficiencies in the Chinese economy. Raw materials did not move freely. The controls also usurped market forces leading to supply and demand distortions.

The Nature of Centrally Planned Economies

Centrally planned economies such as the one in operation in China in 1961 have several characteristics. The main feature of centrally planned economies is the control of the flow of raw materials, labor, and markets. The central authorities allocate raw materials to all manufacturers and monitor the distribution of the materials. The allocation of raw material is in tandem with the production quota given to each manufacturer.

The central authority also determines how many people the manufacturer can employ. This way, the authority controls the movement of labor across various sectors. If there is excess production, the central authority approves the exportation of the surplus products.

The quantity of products manufactured in a centrally planned economy is not demand driven. The central authority uses historical data and trend analysis to determine the optimum level of production to meet the demand.

However, meeting the demand here does not connote a reliance of the forces of demand and supply. The production quotas reflect the desired level of economic productivity. For instance, if the central authority wants the economy to grow by 5%, it makes projections regarding the required levels of productivity to meet this demand. It then passes on these quotas to manufactures.

One problem associated with centrally planned economies is that the policies developed do not conform to demand and supply patterns.

This can lead to overproduction or underproduction of goods and services. Secondly, planned economies tend to stifle entrepreneurship. There is no incentive to improve products because there is no reward for quality. Control also affects profit margins and kills initiative in the part of manufacturers.

A benefit that can accrue from a planned economy is that it can help a country to overcome specific challenges such as food production. It is also a good approach to use in the establishment of an industry. The risks of establishing a new industry are usually very high. Therefore, central control can ensure that the outcomes are more predictable.

The third advantage of central planning is that it can help in the rapid development of an industry. When left on their own, industries grow slowly based on economic realities, competitive advantage, and the time it takes to establishment a market. Central control can help to create the requisite conditions for the success of an industry much faster than organic growth.

The First Lathe Factory of Beijing

The First Lathe Factory of Beijing was the amalgamation of three companies. The three companies combined to form one of the largest factories in Beijing. It produced industrial machines. From its name, it is clear that its main products were lathe machines.

However, the company had a long list of industrial machines it its product catalogues. In addition, it provided repair and maintenance services for its clients in various parts of China. The company mass-produced many machines, but it also handled individual orders. At its peak, the company was one of the largest employers in Beijing.

The administrative structure of the company evolved to reflect the changes in the Chinese political landscape. The administration of the factory during the Great Leap Forward consisted of the factory administrators running the operations of the factory and power brokers in the power structure of the communist party.

In fact, as the government increased its control over the affairs of industries in China, the company experienced power struggles. The management was not sure how much of its administrative duties were in violation of the edicts of the communist party. As such, there was tension at all times between the industry administrators and party leaders.

The factory was initially under the First Ministry of Machine Building, but it ceded control to the Government of the Municipality of Beijing. The managers of the factory were generally in charge of administrative decisions such as scheduling of work, allocating houses for the workers and ordering of materials. The political leaders of the communist party developed the production quotas needed to meet the economic objectives of the country.

Party officials had a lot of say on matters like the people who would hold offices in the factory and the overall economic objectives the factory needed to fulfill. Government officials on the other hand implemented the policies developed by the party.

The operations of the factory before the rise of Mao were capitalist in nature. The three companies that eventually became the First Lathe Factory of Beijing had international investors in their shareholders list. One of the companies received start up funds from American investors. The financing for the second firm came from Chinese investors, while the third one was a government project.

The tumultuous period that ended in 1949 also happens to be the time when the country made the most effort towards achieving a political democracy. As such, the country’s economy as at 1949 had strong elements of capitalism.

After the rise of Mao, the Chinese government started tightening controls over many sectors. The Great Leap Forward came with an increase in the controls exerted over companies operating in China. The First Lathe Factory of Beijing was no exception. During the Great Leap Forward, the factory received production quotas from the party.

There were controls relating to the raw materials it could use the number of people it could employ and the markets it could sell its products. Getting raw materials became difficult with time. Irons smelters sold iron directly to the government. The government warehouses distributed the iron to factories.

In theory, this was supposed to help to optimize the resources of the country. The result was that factories did not receive the raw materials they needed in time. The companies started sending several people to the government warehouses to negotiate for raw materials.

Things worsened because of government red tape that made the process of acquiring raw materials very lengthy. The inefficiencies introduced by the restriction of raw materials led to huge economic losses. Lack of access to markets also made Chinese manufacturers uncompetitive because it was impossible for them to determine what the customers wanted.

One of the fundamental problems associated with the quota system is that because of the reliance on the factories to provide production data, the factory officials had no option but to lie about their production patterns and capacity to cover for the poor decisions made by government officials.

After the failure of the Great Leap Forward, Mao orchestrated the Cultural Revolution that lasted from 1966 to 1976. During this period, Mao institutionalized government control over all factors of production, in the direction of a pure communist state.

The main problems that are of interest to business management in the operations of the First Lathe Factory of Beijing during the Great Leap Forward are the role of government in business, and the choice between supply-driven and demand-driven management models.

The case of the First Lathe Factory of Beijing demonstrated that the successful involvement of government in the running of businesses depends on the level of autonomy given to the factory administrator. The involvement of the government in the affairs of the factory took away its capacity to negotiate with suppliers and to respond to consumer demand. The government ought to remain as a regulator.

The pursuit of policy for development should encourage industries to innovate and to become competitive because this guarantees long-term stability. China is still fighting to redeem its image because of the reputation it acquired as a manufacturer of poor quality products. Japan on the other hand is a respected producer of high quality products.

The Japanese manufacturing industry developed the Kaizen systems to increase the operational efficiency of manufacturing facilities, and to improve the quality of the products sent to the market. Such a philosophy could not emerge if the Japanese government made the same decisions as the Chinese rulers in 1961.

The second fundamental issue to business management is that the forces of demand and supply are more reliable than policy pronouncements regarding demand. Demand cannot emanate from policy pronouncements. Manufacturing lathes for a country that does not need them will not create a demand for lathe machines. Rather, demand for lathe machines should guide the production quotas of lathe machines.

In all businesses, demand ought to be the guide and not supply. Demand is dynamic, and it is best to leave individual factories to gauge demand and to respond to consumer needs. It is impossible to control resources and labor at factory level from the level of the central government.

Conclusions

The creation of state owned enterprises took place by nationalization of existing industries, and merging of small entities into larger ones. When Mao took power, he sought to reform the Chinese economy. He relied on Marxist philosophies and decided against open capitalism. He merged smaller industries to create larger ones, and in the process nationalized industries.

The government started demanding that factories conform to the party position in economic matters, and went as far as deciding on the levels of labor for use in a factory. The government also decided on the appropriate production quotas of each factory based in party economic goals and not based on market conditions. Thirdly, the government controlled the distribution of products manufactured in the country.

The Organization and operation of Chinas state owned enterprises led to the disastrous consequences of the Great Leap Forward. China lost its competitive edge because of the party’s focus on production as opposed to the financial performance of companies. Presently, the country is struggling to overcome the consequences of the poor reputation it developed in the international market as a producer of low quality products.

Governments should never micromanage any industry because of lack of expertise, and the emergence of unintended consequences. The experts in the operations of a factory are the workers in that factory.

Making decisions regarding the level of staffing and production on behalf of the factory cannot lead to growth. It robs the factory of the opportunity to innovate, to find new markets for its products, and to remain competitive in the international market.

Finally, the organizational structure used to manage the Chinese economy show that bureaucratic approaches to economic issues can stifle growth. There were three levels of management of the industries in China. First, the party developed laws and economic policies.

Secondly, government official enforces these policies according to the guidance of the party. Thirdly, the management teams from the factories exercised operational control over the factories. These managers had very little space to make strategic decisions because of the policy declarations of the party.

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