Search topics

Sunday, March 13, 2011

Chinese Economy - Thorough Lookup

The extraordinary emergence of China during the past three decades has been a hallmark  of the global economy,  heralding  a 21st century  world that  looks quite different from the previous  one. This book  serves as an introduction to  the  economy  of  China  during  its  reform  period  since
1979. The aim is to explain  China’s  remarkable transformation from  a centrally planned  to a more market-oriented economy  through the insti- tutional reforms  utilised  to  support  such  marketisation and  eventually global integration. This is a challenging process, as China  is not only in transition but  is also a developing  economy  with many of the problems associated with being a primarily rural, poor country.

The theme is that China’s marketisation process is one that entails a gradual introduction of market forces into areas of the economy, which also requires both dismantling the structure of the centrally planned economy and developing market-oriented incentives. The creation of various types of institutions  to support  this process of establishing markets will be examined closely. Foinstance,  these include corporate  laws to establish private firms, reforms to the wage structure to incentivise labour productivity, and industrial policies designed to attracforeign investment. China under- took much dismantling of institutions from the centrally planned period, but it also must now build the additional  institutional foundations to support a more market-oriented economy. This book seeks to explore the interplay between growth and institutionin China, a topic which is of relevance to China and also to the economic development and growth literature.
The  structure   of  the  book  covers  the  transformation of  the  major sectors in the Chinese economy and the reforms associated  with the main economic growth factors, such as labour, capital, and technological innovation. The second chapter  analyses China’s growth  model in terms of transition from  central  planning,  economic  development  challenges, and  eventual  integration with the global economy.  Institutional reforms have underpinned the gradual  marketisation process,  and  legal reforms look to be increasingly important as China becomes a global player. The next four chapters  focus on the reform of the factors that drive economic growth, namely, enterprises, labour, entrepreneurship and capital markets (banking and financial sectors). The latter chapter also touches on China’s indirect  role  in  the  2008 global  financial  crisis  as  a  pointer  to  future

reform.  In each of these chapters,  institutional reforms  are highlighted. For  enterprises,  the  mixture  of  ‘institutional innovations’  such  as  the Contract Responsibility  System (CRS) and corporate laws accompany the process of reforming  state and collectively owned firms as well as helping to establish privately owned ones and attract foreign investors. In terms of labour  and  entrepreneurship, reforming  the wage structure  and  disman- tling the lifetime employment system fed into the development of a labour market that was driven by supply and demand, and allowed entrepreneurs to operate.  Governance of capital  markets  and  the restructuring of the banking system constitute  a good illustration of the importance of institu- tional reforms of markets.  The global financial crisis of 2008 provides an unmistakable impetus for further cross-border regulation  of international capital markets  that involves China as a major economy.
A  detailed  exploratio othe  interplay  between  legal  and  economic reforms follows in a chapter  dedicated  to this central  quest on as to how laws and markets evolve in China. The subsequent chapter explores the key issue for long-run growth innovation and patents covering the domestic and some of the international aspectof the intellectual  property  rights system. The penultimate  chapter turns to the social foundations of growth, including education,  pensions, the health system and lingering inequality, as well as poverty. It points to the ongoing institutional reforms in progress to support  China’s marketisineconomy in those areas. The final chapter concludes the book with an examination of China’s external sector develop- ment, namely, policies concerning  trade,  investment,  and exchange rates. An assessment of the impact of China’s re-emergence in the global economy is also included. The legal and institutional backdrop  was most apparent in the ways that China treated foreign investors early on in its reform period, and the chapter  concludes with an assessment  of how China  will fare in an increasingly rules-based international economic system. Thereforethe book assesses China’s marketisation process in terms of how major sectors of the economy have been transformed and the areas in need of continuing reform to sustain its transition  and continuedevelopment.  The gradual injection of market-oriented incentives coupled with institutional reform is the approach highlighted throughout the book.
China’s  reform  path  can  be  roughly  divided  into  three  parts:  rural reforms in the late 1970s, urban  reforms in the mid 1980s and opening up to the global economy, which took off in the early 1990s and culminated in accession to the World  Trade  Organization (WTO)  in 2001. The fol- lowing provides  a brief overview of these pillars of China’s transforma- tion as an introduction to the volume  and  begins first with an analysis of the centrally planned  period (1949–78) that  provided  the backdrop to market-oriented reforms which started at the end of 1978.


The impetus  for introducing market-oriented reforms  in China  stemmed from the structural imbalances that favoured  industry over consumption, deriving from the centrally planned  economy from 1949 to 1978. Despite the high levels of investment  and rapid  growth (estimated  to be 12.3% in real annual  gross domestic  product (GDP)  growth)  in 1978, the Chinese economy  by the end of the 1970s had  standards of living that  were not much  better  than  in the 1950s. In the indicative  category  of grain  con- sumption, average per capita  food grain availability  in 1977 was similar to the 1955 level. Average grain consumption of the rural population for
1978–80 was actually lower than that for 1955–57, whereas it was slightly higher in urban  areas (Riskin 1987).
Within  the state-owned  sector which encompassed  nearly all of indus- trial  output during  the command  or administered economy,  the general freeze on wages after 1957 and the entry of new workers  into the lowest rungs  of the wage ladder  caused  the average  wage in real terms  to fall
17% between  1957 and  1977. Only a large increase  in the  labour  force participation rate   from  30% of the urban  population in 1957 to 55% in  1980 enabled  the  average  per  capita  income  of  wage  and  salary earners to increase  by 62% in real terms  within  that  period.  Neglect  of
‘non-productive’ investment caused the small housing space of 4.3 square metres per urban  resident in 1952 to decline to 3.6 square metres in 1977 (World Bank 1983).
However,   China   did  achieve  numerous   economic   and   technologi- cal triumphs, including industrialisation, which had eluded so many developing  countries.  On  the  innovation front,  these  included  a  large machine-building industry,  satellites,  nuclear  weapons,  large  ships  and giant hydraulic  presses, and synthesis of insulin. However, these achieve- ments did not translate into an improvement in the real standard of living, technological  advances  or  improved  productive  efficiency (Chow  1994; Borensztein and Ostry 1996).
Most of China’s industrial  growth had come from increases in factors, especially fixed capital,  rather  than  an increase in the efficiency of use of inputs.  Even the growth  in labour  productivity was achieved mainly  by increases  in the  amounts of physical  capital  per  worker.  For  instance, estimates of the capital-labour index indicate an increase from 100 in 1952 to 373 in 1978 (Riskin 1987). This was due to the structural shifts towards more capital-intensive  heavy industries  following the Soviet model which were later reversed.
This was the crux of the problem of ‘structural  imbalance’ that required reform. Another  part  is due to  systematic  reasons  familiar  to  centrally

planned  economies, stemming from the deficiencies in the system of eco- nomic  organisation, planning  and  management. This tension  became  a principal  theme  of the  new economic  strategy  announced at  the  Third Plenum of the 11th Central  Committee  in December 1978, which marked the start of the reform period in China (Chang 1988).
Finally,  there was also a problem  of high urban  unemployment which reappeared in  1978. In  1979, the  urban  unemployed  were  thought to number upwards of 10 million or about  9.5% of the estimated non- agricultural labour   force  of  104  million  (China’s  National Bureau  of Statistics (NBS) 1999). Before 1976, unemployment was largely avoided, by such means as some 20 million urban  residents being sent to the coun- tryside after the Great  Leap  Forward of the late 1950s and  early 1960s. Their return  likely contributed to the subsequent  rise in unemployment figures. The estimated  17 million youth  who were sent out  to the coun- tryside from 1966 to 1976 were urban  residents (Chang 1988). Moreover, during  this  period,   job  placement   was  handled   by  the  state  labour bureaux,  which were responsible  for placing school-leavers,  demobilised soldiers,  returned   youth  from  the  countryside,   and  released  convicts. The burden  on the already disorganised  state apparatus resulted in many job-seekers spending long periods of time ‘waiting for work’. Enterprises were forbidden  to recruit workers  and individuals  could not seek jobs in compliance with the state’s goal of providing  full employment.  This com- mitment  resulted  in general overstaffing (a form of ‘disguised unemploy- ment’) (Knight  and  Song 2005). This problem  was perhaps  exacerbated by a continuing  gap between urban  and rural  incomes which resulted  in an oversupply  of labour  at existing wages. The numbers  were dependent to some extent on administrative suppression  of the movement  of labour through a prohibition on rural-urban migration. Other contributing forces include the favoured  sector in China’s development  strategy being heavy industry, which is capital-intensive.
Therefore,  high urban  unemployment, stagnating  levels of food  con- sumption,  deteriorating urban   housing  conditions, falling  real  wages, widespread rural poverty resulting from the emphasis on industrialisation in urban  areas and  sluggish productivity growth   all despite rapid  eco- nomic growth  conventionally  measured   could be viewed in the context of the deficiencies of central  planning.  A reassessment  of the structural imbalances  and  systematic  flaws flaws in the  planning,  management, and incentive systems under the planned  economy pointed  to a number of problems  in the economy.  These included  high levels of capital  accu- mulation, coupled with a lack of efficiency and low levels of consumption. There was a neglect of agriculture  and light industry  as well as of main- taining  living standards. The struggle  to overcome  these structural and

systematic imbalances led to the introduction of market-oriented reforms, whilst retaining  a planned  portion  of the economy consistent  with a high degree of governmental control,  since unlike other  transition economies, China  did  not  embrace  marketisation alongside  political  reform.  This became known as the ‘dual track’ transition path of the Chinese economy, in which a planned  segment was maintained alongside the market sector.

No comments:

Post a Comment

Related Posts Plugin for WordPress, Blogger...