China Economic Reform: Achievements, Strategies and perspectives

Development Research Center of the State Council, P.R.C DRC China Economic Reform: Achievements, Strategies and perspectives Junkuo Zhang Chile-China Conference Santiago, Chile June 9, 2004

Main Contents • I. Background of Economic Reform • II. Major Achievements of Economic Reform • III. Major Strategies of Economic Reform • Ⅳ. Perspectives of Economic Reform • Brief Summary Santiago

I. Background of Economic Reform Santiago

China began to practice highly concentrated planning economy after 1949 • Basic features of Planning economy: a. Almost all enterprises are State-owned or quasi-State-owned. b. Main production decisions are made by central planning authorities. c. Degree of openness to the outside world is very low. • Although this economic system demonstrated some advantages in the quick economic recovery in its early stages, it eventually obstructed economic development. • Since 1978, China has been in a period of economic reform and opening-up. Santiago

II. Major Achievements of Economic Reform Santiago

1. Rapid and Continuing Economic Growth • During the 25 years from 1979 to 2003, the average annual GDP growth rate was about 9.3%, very rare in economic history for a big developing country. • In 2003, China’s GDP has reached USD 1405.6 billion , No. 6 in term of total economic volume. • But due to the huge population, GDP per capita is still very low. In 2003, it is only a little bit more than USD 1000. Santiago

2. Remarkable increase in people’s living standard • China’s poverty population decreased from 250 million in 1978 to 29 million in 2003. • The Engle Coefficient of urban and rural family decreased from 67.7% and 57.7% in 1978 to 45.6% and 37.1% in 2003 respectively. • Per Capita Floor Space of Residential Buildings in urban and rural area increased from 6.7 M² and 8.1 M² in 1978 to 27.2 M² and 23 M² in 2003 respectively. • By the end of 2003, major durable consumer goods per 100 household: color TV, 130; refrigerator, 88.7; washing machine, 94.4; mobile phone, 90.1; fixed phone, 95.4. Santiago

3. Notable changes in ownership structure • In manufacture sector in 1978, 78% of output was produced by state-owned enterprises, 22% produced by collective enterprises, no private enterprise existed. But at present, only less than 30% come from state-owned enterprises, more 70% come from non-state enterprises. • In term of employment structure, 78% of total urban employees working in state-firms or organizations, while in 2003, only 26.8% of urban labors working in state sectors. Santiago

4. Market plays fundamental role in resource allocation • The scope of mandatory plans reduced greatly. For example, in manufacture sector, the number of products on which the state still set mandatory plan targets reduced from 120 in 1981 to 5 at present. • Before 1978, almost all prices of commodities and services were set by the government, while at present, 97% of total retail commodities sales, 94% of total farm products sales and 91% of total capital goods sales are traded at market-determined prices. • Generally speaking, both State enterprises and non-state enterprises now have autonomy to decide the “what”, “how” and “to whom” problems according to the markets. Santiago

5. The degree of openness of the economy increased markedly • Currently China has 5 SEZs, 56 state-level ETDZs, 53 state-level HIDZs, 15 state-level FTZs and 36 state-level EPZs. • In 2003, China has a total export and import volume of 851.0 billion USD, accounted more than 60% of GDP, meaning quite a high foreign trade dependence of Chinese economy. • Export structure also improved remarkably. In 1980, export of manufacture goods only accounted for 8.6% of China’s total export value, while in 2003, the situation is reversed, the share of manufacture goods has reached the high level of 92.8%. Santiago

III. Major Strategies of Economic Reform --why China reform relatively successful? Santiago

1. Promoting SOE reform by developing non-State economies • SOE reform is both crucial and difficult for all transitional economies. • In the early stage of reform, when it was too difficult to carry out the SOE reform on a large scale, stress was put on promoting the development of non-state economies • In China, the concept of non-State economies includes both the private and the collective enterprises; for example, the township enterprises are a typical form of collective ownership firms. • This policy gained quite a big success. The rapid development of non-state economies has been a remarkable feature of China’s economic development in the past more than two decades. Santiago

1. Promoting SOE reform by developing non-State economies (Cont.) • The development of non-state economies benefits the SOE reform in three aspects: • (1) Making SOEs less important and therefore easier to be reformed • (2) Playing as a competitor to SOEs and therefore forcing the latter to reform • (3) Preparing some preconditions for the SOEs reform(e.g. absorbing laid-off works) Santiago

2. Promoting domestic reform by opening up to outside world • China’s opening up policy was put forward at the same time with the domestic reform policy. The original idea of the opening up policy is to attract foreign investment by formulating a series of favorable policies. • Usually the extent and scope of these kinds of favorable policies were different among regions and industries. Generally, SEZs, ETDZs, coastal cities etc are more open than other places, while ordinary manufacture industry is more open than other industries. • Interaction between opening up policy and domestic reform is another important factor to the reform success. Santiago

2. Promoting domestic reform by opening up to outside world (cont.) • The opening up policy benefits the internal reform in three aspects: • (1) Broadens people’s mind and makes the reform irreversible. When the door opened, Chinese people were shocked when they realized how far China has been lagged behind. The more the door opens, the bigger the reform pressure. • (2) Most convenient and effective way for reformers to get necessary knowledge and information in formulating development and reform plans. • (3) Provides strong and constant push to advance reform. Santiago

3. Promoting total reform by conducting incremental and partial reforms • By incremental reform, it means, when some reform policies seem to have too significant an influence on the whole economy and the people’s lives, and therefore a comprehensive reform plan is difficult to be adopted, then those policies may usually be first practiced incrementally. For example, “old (existing) people old (existing) system, new people new system”. • By partial reform, it means, when a reform policy, for some reasons, cannot immediately be carried out over the whole country, it then may be first practiced in some areas, for example a province(s), a special economic zone(s) or even one or more cities. Most of the past reform policies had first been practiced in some areas before they were adopted as universal policies. Santiago

3. Promoting total reform by conducting incremental and partial reforms (cont.) • Incremental and partial reform strategy has both negative and positive effects: • Positive: (1) Helps to reduce resistance to reform. (2)Helps policy-makers to acquire experience and to reduce errors in making reform policies. • Negative: some policies became economic roots of corruption, for example, the “Dual Track Price System”. Santiago

It should be noted that these three strategies are not something clearly described in government reform plans. Instead, they are actually implied in various reform practices. To some extent, these strategies reflect the acting styles of Chinese people, and also reflect some features of the so-called gradualism reform. Santiago

Ⅳ. Perspectives of Economic Reform Santiago

1. Goal and phases of China economic reform • The overall goal of China’s economic reform is to build a “Socialist Market Economy”, which was first put forward in 14th National Congress of the Communist Party of China (CPC) in 1992. • According to 16th National Congress of CPC in 2002, the basic framework of the socialist market economic system has been established by the end 2000. The task for the future is to further complete the existing framework, so as to establish a full-fledged socialist market economy by around 2020. Santiago

2. Major tasks facing future economic reform • In 2003, the 3rd plenary of 16th CPC Congress approved Decisions on Issues relating to the Completion of Socialist Market Economic System. According to the Decisions, there are 12 aspects of tasks facing China’s future reform, among which, the most important ones include: • (1) Further promoting SOE reform • (2) Reducing development difference between urban and rural areas and among different regions. • (3) Completing competition policies and promoting fair competition • (4) Consummating social security system Santiago

(1) Further promoting SOE reform • Currently China has about 170,000 SOEs, of which, only about 5% are large ones. Major measures for SOE reform are: • Most small and medium-sized SOEs are to be transferred to private management through various ways. • For large SOEs, the goal is to pluralize their shareholders and to establish effective corporate governance structures through IPO, reorganization, etc. • For those large SOEs in monopoly industries such as telecommunication, electricity, railway, post, etc, the major measure is to loose entry restricts and to introduce competition. Santiago

(2) Reducing development difference • While the economy as a whole grew very rapidly during the past more than 20 years, there are big differences in development levels between urban and rural areas and among different regions. For example, in 2003, income per capita in urban area is 3.23 times that in rural area; GDP per capita in Zhejiang, a southeast-coastal province, is 5.5 times that in Guizhou, a southwest-mountainous province. • To gradually establish a coordinating development mechanism and to accelerate economic and social development in the West and rural areas has now become one of key tasks of the Chinese central government, and a series of plans and policies have also been developed to fulfil the task. Santiago

(3) Promoting fair competition • Anti-competitive conducts in China today include both business and administrative conducts, for the former, such as Cartels, abuse of market dominance, and various unfair competition behaviors, and for the latter, such as regional protectionism and complicate approval procedures. • Two aspects of efforts are needed to promote fair competition: • One is to enhance competition legislation and law enforcement. • Another is to deepen administrative reform and to eliminate various administrative anti-competitive conducts. Santiago

(4) Consummating social security system • China’s existing social security system has two major problems: one problem is that its coverage is very limited, it only covers urban business sector; another problem is that the fund is not enough. • To consummate the social security system, the government has decided to gradually expand the coverage of the system and to explore different ways, including selling out some state shares, to replenish the fund gap. • China is also exploring effective ways for managing social security funds, and in this regards, Chilean experience is very worthy to examine and to learn. Santiago

Brief summary • 1、During the past 25 years, through economic reform and opening up policies, China has not only established the basic framework of the socialist market economic system, but also realized rapid growth in the national economy and the people’s living standard. • 2、Three strategies, among others, contributed to the relative success of China’s reform: a combination of promoting development of private economy and reforming the state economy, a combination of opening-up with domestic reform, and a combination of partial (incremental) reform with overall reform. • 3、The task facing China’s reform in the next 15 years is to establish a full-fledged market economic system. Santiago

Thanks Santiago

China Economic Reform: Achievements, Strategies and perspectives