Travails of transition

Print edition : August 04, 2001

Economics Blue Book of the People's Republic of China, 2000: Analysis and Forecast Sun Wenbin and Michelle H.W. Fong (eds.); Centre for Asian Studies, University of Hong Kong, 2001; pages 508, HK$280 (paperback).

THE Chinese are discovering that negotiating the transition (or "the track alteration" as they designate it) from a predominantly state owned, controlled and closed economy to a socialist market economy open to global influences is not an easy task. One of the contributors to the official publication under review (the third in the series) puts it thus: "...Economic growth continues to slow down... Effective demand in the domestic market is insufficient. The government has undertaken a strong proactive fiscal policy to increase the amount of treasury bonds for government investment. However, it has had a limited effect in stimulating non-governmental investment, and the multiplier effect is small. The result of the financial policy is also poor. Several large-scale reductions of interest rates have failed to produce any noticeable stimulating effect on investment. Prices continue to fall. All these facts show that the Chinese economy is stuck in a special state" (p. 171).

These macroeconomic features reflect more disturbing microeconomic factors, some of which will be examined subsequently. But first let me detail some of the macroeconomic aspects.

In 1999 the growth rate of China's gross domestic product (GDP) was a little over 7 per cent. By international standards it was indeed a very high rate, but for the Chinese it was a disappointing performance. This is because for several years since 1978 the growth rate was over 10 per cent per annum, touching 15.2 per cent in 1984 and 14.2 per cent in 1992. Growth began to slow down from 1996 onwards. Because of factors both domestic (an unprecedented flood which caused much destruction) and external (the financial crisis in the East Asian countries in 1997) 1998 was a bad year for the Chinese economy. The expectation was that there would be a recovery in 1999. But the growth rate in 1999 was lower, though only marginally, than in 1998.

The deflationary tendency has also continued. In 1998 it was described as a "mild deflation". In 1999 professional opinion was divided with one group holding that continuing deflation was emerging as a prominent issue requiring serious attention. Investment was not picking up either. Of greater concern was the fact that the government's proactive fiscal and monetary policies were not showing much positive results. This must have been more frustrating to the Chinese, who tend to think that with determined political will any problem can be tackled.

The fact of the matter is that the Chinese, who have recently come under the influence of Western macroeconomic theories of adjustment tend to overlook the microeconomic foundations of their economy. Some aspects of the microeconomic transition are dealt with in the volume, but it is doubtful whether they are getting the attention they deserve.

Since enterprises are the basic units of microeconomic activity, consider first the enterprise profile of the Chinese economy. The enterprises are divided into large ones and small and medium ones. While in terms of numbers the latter account for close to 98.5 per cent, in terms of employment they account for about 70 per cent, and in terms of assets less than 50 per cent. What is more important is that while over two-thirds of the large enterprises are owned by the state, state ownership accounts for only about 15 per cent of small and medium ones. The ownership structure itself is undergoing change. The withdrawal of various forms of state support has adversely affected the small and medium enterprises and the persisting deflation has rendered many of them loss-making. A good number of enterprises in this category have been abandoned and people engaged in them have become unemployed. This growth in unemployment and the consequent loss of income and purchasing power certainly account for part of the deficiency of demand that is recognised as a macroeconomic problem.

Here is one of the paradoxes of a market economy. It cannot tolerate loss-making enterprises; and yet it cannot be sustained when the abandoning of loss-making enterprises results in loss of spending power. This must be engaging the attention of Chinese scholars and policy-makers. But there is little evidence of it in the volume. Some statistics provided are quite revealing, though. In 1997 the GDP growth rate was 8.8 per cent and employment rose by 1.1 per cent. In 1998 the GDP growth rate was 7.8 per cent, whereas employment rose only by 0.5 per cent. The preliminary estimate of the 1999 GDP growth rate was 7.2 per cent, but employment was expected to increase only by 0.36 per cent (p. 213). Jobless growth is a characteristic feature of capitalist economies. Should a socialist economy follow the same path for the sake of marketisation?

There is a similar adjustment problem specific to agriculture. It is expressed thus by one of the contributors: "The unchanged policy of the contract system for farm land for 30 years provided farmers with stability. This has unfortunately created a long-term problem of a small-farm economy and divided farm land. This development actually runs against the trend of the market economy and the industrialisation of agriculture. Consoli-dation of farm land and separation of most farmers from the land are necessary prerequisites for farmers to eventually go for market economy, and allow them to leap from poverty to prosperity" (p. 153). Sure, if farmlands are consolidated and some farmers are enabled to operate larger farms, they may move from poverty to prosperity. But what is to be the nature of ownership? What is to happen to the displaced farmers? There is a suggestion that the dislocated farmers who have lost or will lose their land can be grouped into a corporate farmers' organisation and that it can then engage in agriculture-related activities. But the market will not do such reorganising. Who else will do it? Is it possible that in the preoccupation with macroeconomic adjustments, these issues of microeconomic restructuring are not receiving enough attention?

There are some related issues as well. During the early years of reforms and opening up, the rural economy as a whole received considerable stimulus. But since then for various reasons the rural economy has missed many opportunities. The rural-urban divide has, therefore, become more pronounced. Rural incomes generally have not kept pace with the growth of the economy. Regional disparities have also widened and the less developed western and interior regions lack the strength to leap forward.

Finally, some matters relating to the external sector may also be referred to. In 1999 a decline in the absolute amount of foreign investment was recorded for the first time. One reason for it is that foreign investors are beginning to have doubts about the ability of the Chinese economy to generate and sustain the kind of high growth rates that it had shown in the past. Achieving high rates of growth carries a penalty with it. If the high rate is not sustained, it is interpreted as indicative of some hidden weakness! Foreign investors also feel that some opportunities they are interested in are not available or not accessible in China at present. In order to stimulate domestic demand, the government undertook investment in infrastructure in 1998 and 1999 which, apparently, made it difficult for foreign investment to move into that area. Foreign investors, especially from the West, are also interested in entering the service sector, but the Chinese have been slow in opening up this sector. It may be noted, too, that globally floating capital is currently much more interested in mergers and acquisitions (M&A) than in direct investments. Here, too, the Chinese terrain, as of now, is not particularly attractive. This has, in fact, led to a sharp fall in foreign investment received by developing countries in general, from 37 per cent of the total in 1997 to 28 per cent in 1998 and still less in 1999.

China's experiences of marketisation and globalisation are of interest not only to the Chinese. The whole world is watching these experiments, some with great expectations, others with growing apprehensions. We in India too have much to learn from the Chinese experience.

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