【摘要】
European Journal of Political Economy 7 (1991) 141-157. North-Holland
Socialist economic growth and political
investment cycles*
Heng-fu Zou
Public Economics Division, The World Bank, Washington, D.C. 20433, USA
Accepted for publication October 1990
Treating social planners as self-interested bureaucrats. this paper offers a positive growth model
to understand (i) why rapid capital accumulation is directly towards the social planners’ own
interest; (ii) why investment hunger is an inevitable consequence of social planners’ rational
choice; and (iii) how investment cycles are related to political changes in the centrally planned
economy. Preliminary empirical work on China has provided strong support for this modeling.
1. Introduction
In traditional optimal growth models for a centrally planned economy, see,e.g., Cass (1965) and Koopmans (1965) social planners maximize an intertemporal social welfare function defined on per capita consumption,subject to the dynamic constraint of capital accumulation. The results from these models have become the folklore of modern economics: there exists a unique optimum path converging asymptotically to the unique equilibrium;the optimum capital stock in the long run is determined by the famous modified golden rule, i.e., marginal productivity of capital is equal to the natural growth rate of population plus the time discount rate of social planners. In these models, social planners all act in the interest of the society.
They do not have any objective function other than the welfare of the people,
and their personal images are only reflected in the time discount rate. Cass
(1965) provides a typical picture of the central planners:
‘The central planning authority’s concept of social welfare is related to
the ability of the economy to provide consumption goods over time. In
*I am grateful to Bela Balassa, Richard Caves, Janos Komai, Andrew Newman, Dwight
Perkins, Yingyi Qian, Jeffrey Sachs and Xinsheng Zeng for very helpful discussion and
comments. The first version of this paper was presented in Janos Komai’s workshop at Harvard.
I thank the seminar participants for their suggestions. Responsibility for the contents of the
paper is solely mine and not of the World Bank.
01762680/91/SO3.50 0 1991-Elsevier Science Publishers B.V. (North-Holland)
142 Heng-fu Zou, Socialist economic growth and political incestmenr cycles
particular, welfare at any point of time is measured by a utility index of
current consumption per capita . . . . The central planning authority
recognizes that consumption tomorrow is not the same thing as
consumption today. For this reason, it takes the politically pragmatic
view that its planning obligation is stronger to present and near future
generations than to far removed future generations. This view is
implemented in practice by discounting future welfare at a positive rate.’
This approach to socialist growth suffers from serious limitations when
compared to socialist reality. First of all, traditional optimal growth models
are based on an insufftcient understanding or indeed, a misunderstanding of
the nature of the social planners. This point has been emphasized by Janos
Kornai in his various studies [Kornai (1982, 1986, 1988)]. With both
political power and economic resources in their control, social planners are
not constrained or directed to choose the optimum feasible growth path with
respect to the only criterion, which is to maximize social welfare.
‘Such an unworldly bureaucracy never existed in the past and will never
exist in the future. Political bureaucracies have inner conflicts reflecting
the divisions of society and the diverse pressures of various social
groups. They pursue their own individual and group interests, including
the interests of the particular specialized agency to which they belong.
Power creates an irresistable temptation to make use of it. A bureaucrat
must be interventionist because that is his role in the society; it is
dictated by his situation.’ [Kornai (1986, pp. 17261727)]
In practice, social planners are often investment growth rate maximizers
[Grosfeld (1987)], and their personal interests are more connected to the
persistent expansion of their organizations than to the increase in people’s
consumption. In their investment strategies,
‘the highest priority is placed on industry, and within industry on heavy
industry, and within heavy industry on the part related to the military. . . .
Among the neglected, non-priority sectors, one typically finds agriculture,
and even more so all the branches of the tertiary or service sector,
such as transport and telecommunication, housing, other communal
services, domestic trade, and health. This diversion of resources from
consumption to investment takes place not provisionally for two or
three years, but for decades, for twenty, thirty, or forty years.’ [Kornai
(1988, p. 244)]
In this paper, we intend to offer a simple alternative model to capture
certain essential aspects of socialist economic growth. The most important
Hen&u Zou, Socialist economic growth and political investment cycles 143
feature of the model is in defining the social planners’ objective function in
both per capita consumption and per capita capital stock. The model is
justified and set up in section 2. In its abstract form, this modelling was
presented by Mordecai Kurz in 1968. That paper has long been neglected in
the economics profession partly because, we guess, Kurz has not offered any
justification for the so-called wealth effects model. In this paper, we are able
to find a realistic setting for the Kurz model in socialist economic growth.
In section 3, we demonstrate that this simple model provides good
framework for the understanding of ‘investment hunger’ and ‘expansiondrive’
studied by Kornai (1980). Section 4 derives a theory of political
investment cycle from our basic model. It is shown that the investment rates
(or accumulation rates in the terminology of socialist economics) are related
to different political regimes in socialist countries. In section 5 we will look
at the empirical data on investment rates from 1952 to 1985 in China. The
variations on investment rates throughout those years can be substantially
explained by the change of political power at the top level of government,
evidence supporting the theory of political investment cycle.
2. The model and its justification
We define the instantaneous utility function of social planners at a given
time t as the summation of two parts: u(c,) +nu(k,), where c, is consumption
per capita, and k, is capital stock per capita at time c. Social planners derive
positive utility from both consumption enjoyed by the people and capital
stock owned by the state, so the first-order derivatives of functions u(s) and
u(.) are positive. The Greek letter IZ is a positive constant that measures the
importance of capital accumulation from the point of view of the social
planners. In later sections, we will allow x to take different values, and its
effects on capital accumulation, the investment rate and consumption will be
studied. Furthermore, for technical reason, we assume that the second-order
derivatives of u(e) and u(e) are negative, and that:
lim u’(q) = co,
C*L 0
which guarantee the sufficiency of the first-order conditions for optimization,
and exclude the corner solution of zero consumption.
In modelling the social planners’ preference, we maintain that social
planners do care about people’s consumption, and the improvement in the
living standard of the people seems to justify their manipulation of political
power and economic resources in a socialist economy. But it is more
important to note that social planners’ own interest lies more directly in the
expansion of the firm and public organization of which they are in charge.
144 Heng-fu Zou. Socialist economic growth and political incestment cycles
Social planners are not just a group of persons in the central planning
bureau, they consist of all persons involved in formulating the plan, from the
managers at the bottom to the ministers at the top. According to Kornai
(1981, 1986, 1988), the first and most important motivation for accelerated
capital accumulation is the identification of social planners with their own
jobs. An expansion of the firm or organization under their direct control is
always a source of satisfaction. The second motivation is prestige. ‘A larger
organization brings more prestige, and also more power’ [Kornai (1981)].
‘The simple urge to exert power over people, and to exercise some discretion
over the allocation of physical resources can also make managers strive for
higher investment levels for their firm’ [Kornai (1988, p. 264)]. So
‘it is important to note that investment hunger and expansion drive
characterize not only the behavior of the top manager and his subordinates
in a particular firm, but also rhe attitude of economic agents at all
levels of the bureaucratic hierarchy in a socialist system . . . the general
ideology of the system favors expansion, and no claimant’s application for
funds is ever regarded as unreasonable or unethical by anyone in the
hierarchy. On the contrary, everyone considers such a request as the
natural and normal behavior within the system.’ [Kornai (1988, pp. 26&
265, emphasis added)]
This assessment of socialist planners is essentially the same as the one used
in the analysis of bureaucrats in western democracies. For example,
Orzechowski (1977) defines the bureaucrat’s utility function directly on the
output produced by his bureau and the capital stock or labor in his control.
And the striving for more budget revenue in western public sectors resembles
the investment hunger and expansion drive in socialist economies.
With these discussions, we might call K, which appeared in the social
planners’ utility function, the measure of the degree of expansion drive. A
large value of II means that the social planners are highly expansion oriented;
and a zero value of 7c brings us back to Ramsay-Cass-Koopman’s mathematical
utopia of socialism. [Phelps (1961) presents the golden rule of capital
accumulation in ‘a fable for growthmen’. In reality, where can we find the
King of the Kingdom of Solovia?].
To proceed with our model, we assume that the social planners maximize
the following intertemporal utility with discounting (for notation convenience,
we omit the time subscript t of all variables from now on):
$ [u(c)+nv(k)]e-P’dt, p>O, (1)
where p is the social planners’ subjective rate of discount.
Heng-fu Zou, Socialist economic growth and political investment cycles 145
There is a standard neoclassical production function f(k) in the economy
with f’(k)>O, and f”(k) CO. Capital is subject to a depreciation rate 6. The
population growth rate is exogenously given as n. So capital accumulation in
per capita term follows the dynamic equation:
r;=f(k)-c-(n+d)k. (2)
Social planners maximize (1) subject to the dynamic constraint (2). The
current value Hamiltonian H is defined by
H=u(c)+nu(k)+1[f(k)-c-(n+@k]. (3)
The optimal paths for consumption and investment are
d= & Crru (k)+u (c)(f (k)-n-6-p)1,
i=f(k)-c-(n+d)k,
lim e- Pri.k = 0.
,+m
(5)
(6)
We are going to make a detailed analysis of above dynamics in the next
section.
3. The dynamics of the model and the properties of the equilibrium
As noted by Kurz (1968), the dynamic systems (4) and (5) may easily result
in multiple equilibria, and some equilibrium points are saddle-point stable,
while some are totally unstable. To see this, denote the equilibrium values of
consumption and capital as c* and k*, and linearize the systems around
these values:
d (n+d+p)-f’(k*)
II,
nv”(k*)+u’(c*)f”(k*) c_c*
- u”( c*)
= (7)
r; -1 f’(k*)-n-6
II I
k-k* .
Denote the 2 x 2 matrix as M. The trace of the matrix is
tr(M)=p>O. (8)
As the trace is the sum of the two characteristic roots of the systems, at least
146 Heng-fu Zou. Socialist economic growth and political incesrmenr cycles
one of the roots is positive. Therefore we cannot have a stable equilibrium
point.
Next, the determinant of the matrix is
A = Cn + 6 + p _f’(k*)] [f’(k*) _ n - ,j] _ IrO”(k;,*,); ;zJ*)f”‘k*). (9)
The second term on the right-hand side of (9) is negative; the first term is
positive or negative depending on whether the capital stock is smaller or
larger than the golden rule capital as pointed out by Kurz (1968). If the
steady-state capital stock is equal to or larger than the golden rule capital,
f’(k) is equal to or less than n+6; the first term on the right-hand side of (9)
is also negative because [n + 6 +p - f’(k*)] is positive as shown below in
proposition one. In this case, A is negative. For A is the product of two
characteristic roots, negative A implies that one root is positive and one
negative. If A is positive, then both roots will be positive as the existence of
two negative roots contradicts (8). For this section, we will focus on the case
that A is negative, that is to say, there exists a unique optimal path in the
neighborhood of the equilibrium. Furthermore, we assume that there exists
only one equilibrium for the systems. A numerical example is presented in
the next section before we go on to discuss the political investment cycle. Of
course, if the time discount rate is very small, the first term on the right-hand
side of (9) is negative; so is A.
The properties of the unique saddle-point equilibrium follow in order:
Property 1. The equilibrium capital stock is larger than the modified golden
rule one.
To show this, note that, in a steady state, we have
& {nu’(k*)+u’(c*)[f’(k*)-n-d-p]} =O,
f(k*)-c*-(n+@k*=O.
From (10):
f’(k*)=n+d+p- $<n+g+p=/‘(k”),
(10)
(11)
(12)
where kmg denotes the modified golden rule amount of capital. From (12), it
is clear that k* > kmg as f”(*) is negative. The explanation is simple. Since
Heng-fu Zou, Socialist economic growth and political inoestment cycles 147
social planners benefit directly from the expansion of the economic organization
and since the welfare of consumers over the infinite horizon is not the
only criterion for planning, the short-run consumption will be partly
sacrificed for the expansion drive. It is quite possible that, as shown in the
next numerical example, consumption is permanently sacrificed in this kind
of models: equilibrium consumption is lower than the golden rule one and
capital is over-accumulated.
Property 2. The higher the value of 7c, the higher the steady-state capital.
Totally differentiating eqs. (10) and (1 1), we have
(13)
It is simple to show that
dk 1 u’(k*)
-= 9
drr A u”(c*)
(14)
which is positive as the economy is on the unique optimal convergent path.
As for the steady-state consumption, the sign is ambiguous depending on
whether the equilibrium capital is higher or lower than the golden rule
capital.
The effects of II on investment and consumption on the unique optimal
path can also be analyzed. From (7), the solutions of the linearized systems
for the behavior of the capital stock and consumption are
k,=k*-(k*-k,)ee’, (15)
ri=, - fl(k* - k,), (16)
c,=c*+(f’(k*)-n-6-B)(k,-k*), (17)
where 0 is the negative root of the dynamic system:
&&I-&zzi]. (18)
From (16) and (17), it is clear that, through its positive effect on
steady-state capital, k*, the high value of II leads to high investment and low
148 Heng-fu Zou. Socialist economic growth and political investment cycles
consumption on the optimal path for all k, less than k*. But we should note
that n may also affect 8 and c*. If the increase in rr tends to lower 8, in other
words, 8 becomes more negative, then the investment will be unambiguously
high as a result of IC being high.
Property 3. The higher the value of IC, the higher the steady-state investment
rate (or saving rate).
In the steady state, investment is just (n+6)k*. Let the investment rate (or
saving rate) be s, then
(n+d)k*
S=m’
ds (n+d)
-=p [f(k*)-f’(k*)k*] 2,
drt (f(k*)*
(19)
(20)
which is positive since dk/drr is positive and [f(k*)-f’(k*)k*] is also
positive for any concave function.
The three properties stated above reveal how social planners’ preferences
affect the growth pattern in socialist economies. In the Cass model, we know
that the form of social welfare functions does not enter into the determination
of equilibrium capital stock. Even if we interpret the social welfare
function as the social planners’ own preference, the equilibrium capital and
consumption are still independent of the social planners’ preference as long
as their preference is defined only on consumption. Recall from Cass (1965),
that in equilibrium:
f’(kmg) = n + 6 + p, (21)
f‘(kmg)-C-(n+6)kmg=0, (22)
so the social welfare function itself plays no role in the determination of kmg
in Cass model. [Please compare (21) and (22) with equilibrium conditions
(10) and (1 l).] The invention by Kurz (1968) provides us a rich picture for
the link between preference and economic growth. Of course, as a positive
approach, the Kurz model with proper justification is much more realistic
than the Cass model when applied to a socialist economy.
Heng-fu Zou, Socialist economic growth and political incestment cycles 149
4. A numerical example and an illustration of political investment cycle
Even though the modified Kurz model gives us interesting results, the
existence of multiple equilibria brings about complicated dynamics even with
simple preferences and technology. Here we show that, if preference is the
popular logarithm functions of consumption and capital and if technology is
standard Cobb-Douglas, there exists a unique equilibrium and a unique
optimal path.
Now the social planners maximize
7 [logc+nlogk]e-P’dt,
subject to
k=k”-c-nk,
(23)
(24)
where 0 <a < 1, and we have set 6 equal to zero for simplicity. The
corresponding optimal conditions are:
f=f [xc-srk’-(n+p)k], (25)
&=k”-nk-c. (26)
Set the time derivatives of c and k equal to zero in (25) and (26) the
unique optimal equilibrium point is:
(27)
c* = k*= - nk*. (28)
The determinant of the corresponding matrix M is
Upon substitution:
150 Heng-fu Zou, Socialist economic growth and political investment cycles
d=(n+p-na)(nn+n+p)C~(a- I) 41 -@I,,
(71+ a)* (30)
as O<a < 1. So there is one negative characteristic root and one positive root:
the equilibrium is saddle-point stable.
It is straightforward to check that
$(l -a)k*‘-~$0.
(31)
(32)
Next, we are going to see under which circumstances a high degree of
expansion drive leads to dynamic inefficiency. In Phelps (1961), the golden
rule capital stock at which consumption is maximized is given as (for Cobb-
Douglas technology):
kg = [a/n] ‘h 1 - =). (33)
For k* is larger than kg, it is required that
7T+LY >r
m+n+p n’ (34)
which is the same as to require that
7~ > ap/( 1 - an). (35)
For a =0.25, p =0.05, and n =O.Ol, rr should be larger than 0.0125, which is
not a strict requirement. So, in this case, the people’s consumption is not
only sacrificed on the dynamic path converging to the steady state, but is
also sacrificed in the steady state.
Suppose there are two groups of social planners in the economy. Following
the convention, we may call one group ‘softliners’ or the ‘right’, and the
other group ‘hardliners’ or the ‘left’. They alternatively control the process of
making the plan. It is known that in socialist countries such as Hungary,
Heng-fu Zou, Socialist economic growth and political incestment cycles 151
shifts of resources towards consumption rather than investment always come
about as a result of ‘softline’ rule; the ‘hardliners’ or the ‘left’ are always more
expansion oriented [see Kornai (1988, pp. 283-284)]. In our model, if we
denote nc as the expansion desire of the ‘left’ and II, as the expansion desire
of the ‘right’ and let rrL>c rr, > ap/( 1 - rn), then the ‘left’ maximizes:
m
i [logc,+a,logk,]e-P’dt (36)
subject to
k,=k;-cd-nk,. (24)
The ‘right’ maximizes:
$ [logc,+n,logk,]e-P’dt (37)
subject to
li,=kf-c,-nk,. (24)
The initial capital stock is the same for both groups: k,=l To avoid the
problem of time inconsistency, we assume that the ‘left’ and the ‘right’ both
commit to the optimal programs they calculate at time zero, and make no
changes later on.
From the calculations above, it is easy to obtain that in steady state
k; > k:, cc <CT. (38)
From (32), the steady-state investment rate for the ‘left’ is always larger
than the one for the ‘right’. If the ‘left’ is in power, the economy experiences
higher investment and lower consumption; if the ‘right’ is in power,
consumption is relatively high and investment relatively lower. The cyclical
change in consumption, investment and the investment rate is shown
diagramatically in fig. 1, where E, and E, are equilibrium points for the ‘left’
and the ‘right’ respectively. If the economy is currently in E,, the power shift
from the ‘left’ to the ‘right’ results in an immediate upward jump in
consumption and in a reduction of investment; the new long-run equilibrium
is E, where capital stock is lower than, but consumption is higher than, the
equilibrium levels at Et. The investment rates fluctuate following the political
power shifts. This is a demonstration of political investment cycles at steady
states. Investment cycles can also happen on the paths converging to the
steady states. In fig. 2, P, and P, are the optimal convergent paths for the
152 Heng-fu Zou. Socialist economic growth and political incestment cycles
d = 0 for the “right”
Fig. 1
6 I 0 for the “right”
i = 0 for the ‘left”
k
Fig. 2
‘right’ and the ‘left’ respectively. If the economy is initially on the path for
the ‘right’ P,, a change in political regime from the ‘right’ to the ‘left’ leads to
an immediate downward jump from the path P, to the path PC. Throughout
time, the economy follows a zigzag path, and investment rates fluctuate
accordingly on the path.
5. Historical evidence
In this section, we present a preliminary empirical study of the effects of
political change on the investment rate in China. The labels for different
wings of the communist party, the ‘right’ and the ‘left’, are well known in
China. The ‘left’ consists of strong, dogmatic adherents of socialism; they
advocate the centralization of economic activities, the rapid abolishment of
private ownership in the industrial sector, and the rapid transition of the
agricultural sector from private ownership to collective ownership and then
to state ownership. Chairman Mao is the symbol of the ‘left’. Those on the
‘right’ are more often associated with economic policies with a capitalist
flavor, such as relying on market mechanisms and material incentives in the
Heng-fu Zou, Socialist economic growth and political incestment cycles 153
planned sectors and allowing private plots and contract systems in agricultural
production. The prominent members of this group are Liu Shaoqi and
Deng Xiaoping. They were known as the capitalist representatives in the
communist party during the Cultural Revolution. The power struggles
between the ‘left’ and the ‘right’ have shaped the history of China in the past
four decades, and their effects can be seen in every aspect of Chinese society.
Our present focus is on the effects of these struggles on the investment rates.
Table 1 contains relevant data for our analysis; the power over economic
planning is represented by a dummy variable; a value of zero means that the
‘right’ controls the planning board, while a value of one means that the ‘left’
controls the planning. The term ‘productive investment’ is special to Marxist
and socialist economics, and needs some explanation. It refers to investment
that directly serves material production or meets the needs of material
production. Its counterpart is non-productive investment, which includes
investment on public utilities, housing, public health, social welfare and
education. Since non-productive investment is more or less related to
people’s consumption, especially durable and public consumption, the
percentage of productive investment in total investment outlay is a more
accurate measure of accumulation. The fluctuations in investment rate and
in productive investment rate are depicted in fig. 3.
Fig. 3
Year
d
During the period 1952-1957, economic decision making was more under
the control of the ‘right’ as Mao did not totally dominate the planning
processes and political life was more democratic in the communist party than
it subsequently became. The investment rates were in the range of 21.4% and
25.5%. The average share of productive investment in total investment was
55.3%. Both production and consumption went up rapidly in those six years,
and those investment rates were later regarded as the optimal or normal
ones.
154 H~vI~-~u Zou, Sociulist rconomic growfh und politicul incestmenr cycles
Table 1
The data.
Investment Consumption Productive Power regimes
rate as oA rate as 7; investment as y0 of as a dummy
Year of GNP of GNP total investment variable
1952
1953
1954
I955
1956
1957
1958
1959
1960
1961
I962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
I974
1975
I976
1977
1978
1979
1980
1981
1982
1983
I984
1985
21.4 78.6
23. I 76.9
25.5 74.5
22.9 77. I
24.4 75.6
24.9 75. I
33.9 66. I
43.8 56.2
39.6 60.4
19.2 80.8
10.4 89.6
30.6
11.5
21.3
22.2
27. I
21.1
23.2
32.9
34. I
31.6
32.9
32.3
33.9
30.9
32.3
36.5
34.6
31.5
28.3
28.8
29.7
31.2
33.7
69.4
78.7
82.5
78.9
76.8
77.8
67. I
65.9
72.9
68.4
67.1
67.7
66.1
69. I
67.7
63.5
65.4
68.5
71.7
71.2
70.3
68.8
66.3
50.8
49.4
50.3
51.4
71.0
58.8
82.3
86.9
97.4
18.5
63.6
63.9
60.8
70.7
68.9
82.2
78.5
76.2
71.8
76.2
78.7
13.7
75.4
73.4
79.3
70.9
71.8
64.1
54.5
46.8
46.4
52.5
58.6
57.7
I
I
I
Source: Statistical Year Book of China, 1986.
The year 1957 was a turning point in the political climate of China. The
anti-‘rightist’ movement launched by Mao had a fundamental effect on the
political and economic life of China. With the beginning of the ‘Great Leap
Forward’ in 1958 and of the movement of people’s communes some time
later, economic planning was dominated by the ideology of the ‘left’. The
investment rate jumped up to 33.9%, 43.8% and 39.6% in 1958, 1959 and
1960 respectively. The average share of the productive investment for those
three years was up to 88.3%. High investment rates and natural calamities
during this period caused poverty, hunger and death all over China. Facing
economic disaster, Mao retreated from economic planning and even admitted
to having made a mistake in 1962. The power over planning shifted back
into the hands of the ‘right’, and the Chinese economy entered a period of
adjustments.
Heng-fu Zou. Socialist economic growth and political investment cycles 155
From 1963 to 1965, the average investment rate was set at 22.7% and
productive investment only accounted for 64% of total investment. President
Liu Shaoqi even introduced many programs in agricultural production which
later under Deng Xiaoping became important ingredients of economic
reforms.
The reign of the ‘right’ was short-lived. The next 10 years, 1966-1976, were
those of the ‘Great Cultural Revolution’, and Mao and the ‘left’ were in
absolute control of economic planning. Except for the years 1967-1969 when
the economy was almost paralyzed by destructive political turmoil, the
investment rate on the average was above 31’4, and 75% of which was for
productive purposes. After Mao’s death, his chosen successor, Hua Guofang,
continued the expansion drive of the ‘left’, and even started a ‘Foreign Leap
Forward’ from 1977 to 1979, importing large amounts of foreign technology.
The average investment rate was above 34%.
In 1979, political power began to shift back to the ‘right’, and Deng
Xiaoping and the ‘reformers’ came to the forefront, though the ideology of
the ‘left’ still deeply affected planning and the effects of the ‘Foreign Leap
Forward’ still kept the investment rate at a high level of 34.6%. But in that
year, the proportion of productive investment in the total investment began
to decrease. From 1981 to 1985, the average investment rate went down to
30.3x, and the average share of productive investment was at an historical
low level - 52.4%. That is to say, a large proportion of investment was
diverted to the improvement of residential conditions, service sectors, public
health and education.
So we can see that the investment rates and political changes are closely
related in China. It is convenient to test how much fluctuations in investment
rates and productive investment rates can be explained by the political
changes in China’s socialist history. Here we report results of a few
regression equations:
I,=11.23+4.060,+0.551,_,, R2=0.50,D W=1.13, (39)
(2.84) (2.05) (3.36)
PI,=31.25+12.360,+0.45PZ,_,, R2=0.73,D W=1.93,
(4.47) (5.17) (4.35)
(40)
where I, is the investment rate at time t, D, is the dummy variable of political
change (a value of one refers to the ‘left’ regime and a value of zero the
‘right’ regime), and PI, is the share of productive investment in total
investment.
Eqs. (39) and (40) both show that political changes have substantial effects
on the investment rate and the productive investment rate. The positive
156 Heng-fu Zou. Socialist economic growth and political incestment cycles
coefficients say that a ‘left’ regime causes high rates, and a ‘right’ regime
leads to low rates. As investment projects often last for a few years, the
lagged variables also help to explain the rates.
If we exclude the politically abnormal years 1967-1969, then political
changes alone can explain about half of the variations in the investment
rates:
I, = 25.36 + 8.90,, R2=0.43, DW=0.74, (41)
(18.17) (5.19)
PI,=58.32+ 19.120,, R2=0.57, DW=0.93. (42)
(28.14) (6.51)
Two points should be added to our analysis of political investment cycles
in China. First, the ‘right’ and the ‘left’ are both expansionists by definition
because they are both social planners, the difference being only a matter of
degree. Throughout time, there is a tendency for social planners to increase
the investment rates; this can be seen from regressing the investment rates
against a time variable:
I,= 5.07 +4.220,+0.481,1_+ O.l14TIME, (43)
(1.02) (2.21) (2.56) (1.135)
R2=0.52. DW= 1.13.
Second, political factors as an exogenous variable cannot fully explain all
fluctuations in investment rates; a theory espoused by Bauer (1978) and
Kornai (1980, 1988), which we may call a model of endogenous investment
cycles, has developed to explain investment cycles under the same
political regime. The focus of this theory is to relate the investment rate to
the intensity of shortage in the economy. Social planners will reduce the
investment rate when shortage intensity is high, and raise the investment rate
when shortage intensity is low. For a model developed in this line, see Zou
(1990). These two theories of investment cycles should be taken as complementary,
and
‘they can be usefully and effectively placed side by side and, taken
together, they do a good job not only of explaining the regular pattern
of the cycle, but also of explaining its irregularities’. [Kornai (1988, p.
284)l
6. Summary
In this paper, we have offered a positive growth model that sheds
considerable light on the ‘norms’ of socialist growth, such as investment
Heng-fu Zou. Socialist economic growth and political investment cycles 157
hunger, expansion drive, chronic shortage and investment cycles. This model
also provides an analytical framework within which to study the relationship
between investment fluctuations and political changes in socialist countries.
Preliminary empirical work on China has provided strong support for this
approach.
References
Alesina, A., 1988, Macroeconomics and politics, in: S. Fischer, ed., NBER Macroeconomics
Annual 1988 (MIT Press, Cambridge, MA).
Alesina. A. and J. Sachs, 1988. Political uarties and the business cvcle in the United States.
19481984, Journal orMoney, Credit and Banking 20,63-82. _
Bajt, A., 1971, Investment cycles in European socialist economies: A review article, Journal of
Economic Literature 9, 53-63.
Bauer, T., 1978, Investment cycles in planned economies, Acta Oeconomica, 243-260.
Cass, D.. 1965, Optimum growth in an aggregate model of capital accumulation, Review of
Economic Studies 32. 229-243.
Grosfeld, I., 1986, Endogenous planners and the investment cycle in the centrally planned
economies, Comparative Economic Studies, 42-53.
Grosfeld, I., 1987, ,Modelling planners’ investment behavior: Poland, 19561981, Journal of
Comparative Economics 1 I, 180-191.
Ickes, B., 1986, Cyclical fluctuations in centrally planned economies: A critique of the literature,
Soviet Studies 38, 3652.
Koopmans, I., 1965, On the concept of optimal economic growth, in: The econometric approach
to development planning (North-Holland, Amsterdam).
Kornai, J., 1972, Rush versus harmonic growth (North-Holland, Amsterdam).
Kornai, J., 1980, Economics of shortage (North-Holland, Amsterdam).
Kornai, J., 1981, Some properties of the Eastern European growth pattern, World Development
9, 965-970.
Kornai, J., 1982, Growth, shortage and elfciency (University of California Press).
Kornai, J., 1986, The Hungarian reform process: Visions, hopes and reality, Journal of Economic
Literature 26, 1687-1743.
Kornai, J., 1987, 1988, Lecture notes on socialist political economy (Harvard University,
unpublished).
Kurz, M., 1968, Optimal economic growth and wealth elects, International Economic Review 9,
348-357.
Orzechowski, W., 1977, Economic models of bureaucracy: Survey, extension, and evidence, in:
T.E. Borcherding, ed., Budgets and bureaucrats (Duke University Press, Durham).
Phelps, E., 1961, The golden rule of accumulation: A fable for growthmen, American Economic
Review 51, 638-643.
Roland, G., 1987, Investment growth fluctuations in the Soviet Union: An econometric analysis,
Journal of Comparative Economics 11, 192-206.
Statistical Year Book of China, 1986 (State Statistics Bureau, Beijing, China).
Zou, Heng-fu, 1990, A model of Bauer-Komai investment cycle theory, Mimeo. (The World Bank).
|
