The economic reform process

China is learning to tackle a variety of problems in relation to the restructuring of its enterprises, including defending the concept of ownership and property relations, and establishing appropriate legal systems.

C.T.KURIEN

A FLASH-BACK into the evolution of the Chinese economy may give a better understanding of its present set-up and a greater appreciation of the problems it confronts.

The present reform process with the accent on marketisation and the opening up to the international economy started in 1987. But this should not be interpreted to mean that there was a set order prior to it. Indeed, ever since the revolution of 1949, which overthrew the Chiang Kaishek regime and established the People's Republic of China, the Chinese economy has been changing constantly. Initially the tendency was to go back to the Soviet experience of centralised economic planning. Its limitations in the Chinese context soon became apparent. The Great Leap Forward of 1956 radically altered that approach by steering the country towards decentralised administration and local self-sufficiency. As a result of a determined but gradual move in that direction, communes became the units of local administration and economic activity. The communes thus took over agriculture and rural development in general; they also encompassed small-scale industry, health care and education. With the collective and cooperative thrust of the communes it was possible to increase production, build up infrastructure and ensure fair distribution. But soon an innate problem of a communitarian approach began to become manifest - the absence of incentives to sustain effort. The Cultural Revolution of the second half of the 1960s was, in part, an attempt to solve this problem.

However, effective measures to tackle the problem of incentives and to increase efficiency in production came only after Deng Xiaoping took up the leadership, following the death of Mao Zedong. Deng retained the socialist orientation of the economy and the overall control of the Communist Party, but in order to open up the Chinese economy to the international economy he decided to encourage market relations and material incentives and influences. It is this set of changes that the Chinese now refer to as "reforms". The first step was taken in 1984 with the introduction of the Household Responsibility System. This system allowed households to lease out land from the collectives and use it with the help of family labour to produce what they liked and sell the produce in the market subject to the condition that a quota be given to the collective, which retained the ownership of land in this new socialised tenurial system. Gradually the role of the market was enlarged, allowing households to purchase inputs and implements. Similar changes were brought about in the small-scale industry sector also. Market relations were brought in speedily in other spheres as well and the economy was opened up to international trade and capital movements. The impact of it all was striking. "Products of different kinds sprang forth magically from all directions," noted a commentator, and China entered a phase of unprecedented growth. The 14th Congress of the Chinese Communist Party in October 1992 set the establishment of the socialist market economy as the target of the Chinese economic reform.

It is important to note the distinguishing features of the Chinese process of "marketisation". Its background was the period of non-market economic order, which was used to draw the masses, especially in the rural areas, into productive activity, to acquaint them with communitarian productive organisations, in order to use China's abundant labour power to build up rural infrastructure and to ensure a sense of fairness and equity in economic relationships. The reforms were not meant to negate these, but to build on them after removing their limitations. Market relationships were introduced initially in the rural areas where the masses were involved in productive activity and only then were they introduced in the urban areas. Marketisation started with the commodity sector and only then, gradually and carefully, it was taken to the realms of credit and capital. Without imitating any other experience, the Chinese have been "groping their way across the river by touching the stones" as one of their old sayings puts it.

SATURU UHMURI / GAMMA
China initially introduced market relationships in the rural areas where the masses were involved in productive activity and only then were they introduced in the urban areas.

This evolutionary process has not been without its problems. The basic problem has been that in the old order planning was essentially at the micro level, at the level of the enterprises, that is, and top policymakers were sure that the performance of the economy would simply be the sum of such performances. Of course there were problems to be faced and solved. With the introduction of market relationships at the enterprise level, coordination at the micro level is to be achieved through forces over which those who make policies at the micro level do not have direct control. Hence evolving policies for macro balances in the economy is no longer easy. Markets cannot be made to follow the orders of top-level party leaders and bureaucrats and yet the economy cannot be left solely to the forces of the market. That is the crux of the problem.

Enterprise reforms

Naturally the problem can be seen most clearly at the enterprise level. The Chinese divide enterprises basically into those in the public sphere and those that are not. The former consists of enterprises that are owned by the state as well as those that are publicly owned, chiefly the collectives. The "non-public" enterprises include a wide variety, ranging from enterprises owned by individuals and households and private partnerships, to the different forms of companies, including foreign companies which are gradually assuming a critical role.

The changing pattern of enterprises is shown in the table, which provides information about the share of each of the different groups in the gross domestic product (GDP) over time.

The table brings out the tremendous increase in the share of the non-public economy, from just 1 per cent in 1978 to 24 per cent in 1996, and all indications are that in the years ahead its share will go up. But it is equally important to note that the Chinese economy is still dominated by the public sector, which accounts for 76 per cent of the GDP. In other words, marketisation in China does not necessarily mean privatisation. The view is that a socialist market economy calls for a prominent share for the public sector: the social purpose of economic policy cannot be achieved by "leaving it to the market".

However, public ownership of enterprises is not enough; public enterprises must lead the economy by their efficient performance as well. As of now this is one of the biggest problems of the Chinese economy and "reforms" now mean reform of the public enterprises, mainly state-owned enterprises.

The Blue Book states the problem as follows: "A government is a political structure whereas an enterprise is an economic structure. The two differ in nature and operation." To emphasise the principle, one of the earliest decisions was to rid the enterprises of the control of the party. But, again, the Blue Book candidly admits: "Many state-owned enterprises experienced "packaging" transformation and, in fact, only the labels were changed. The party secretary became the chairman of the board, and the factory manager became the general manager." Many of the state-owned enterprises were making losses, especially those producing coal, textiles and defence goods. A determined effort is being made to bring enterprises into the share-holding pattern. But while the share market is picking up, the return from shares still appears to be less than that from savings deposits and so those who go in for shares are doing it to make profit from speculation. Obviously, a variety of problems have to be tackled in relation to the restructuring of enterprises as it involves defining the concept of ownership and property relations, establishing appropriate legal systems and putting into practice accounting procedures fundamentally different from what Chinese society has been used to so far.

Unemployment

A CLOSELY related problem is that of unemployment. In the restructuring of enterprise, it is frequently the experience that a proportion of workers is found to be redundant. Some are retrained and absorbed into other productive avenues. Some are retired ahead of schedule. Some people wait for jobs and others are "diverted to society", an expression that was used until China came to recognise formally, rather late, the notion of unemployment. (Until 1994 it was maintained that there was no unemployment in China, but only the problem of "waiting for employment".) We, in India, can certainly emphasise with the Chinese ambivalence about a concept of unemployment which refers to a context where workers are primarily wage earners whereas in China, as in India, most people employ themselves in their farms or in different forms of petty trade. And yet, we know too that the inadequate utilisation of labour power is a grave economic and social problem.

In the Chinese case the situation is particularly serious because of the social commitment to provide for the basic necessities of all citizens on the one hand, and the rapid disintegration of social security arrangements that the collectives used to provide, on the other. The estimates of unemployed, of course, depend on the conceptualisation of the phenomenon and the associated definition. According to what the Blue Book refers to as "the most pure unemployment" (that is, those in the urban areas who have registered as unemployed) the figure was one million in 1993, 1.8 million in 1994, 2.6 million in 1995, 3.4 million in 1996 and 4.6 million in 1997. For a country with a population of over one billion, the absolute figures may be low, but the rate at which unemployment has been increasing is very high indeed. The number of laid-off workers has also been increasing - 3 million in 1993, 3.6 million in 1994, 5.6 million in 1995, 8.9 million in 1996 and an estimated 14 million in 1997. These figures do not include employees at enterprises that have stopped production completely or partially. And based on measurements by authoritative organisations, the hidden underemployment figure is between 26 and 38 million, of whom 20 to 30 million are in state-owned enterprises. It has been estimated that from the angle of rural economic structural adjustment, there are some 150 to 320 million rural workers who are in excess of the requirement and who, therefore, need to be transferred. Whichever way one looks at it, there is a big problem of labour utilisation in China.

ANOTHER problem that China faces in its attempts at reforms is in relation to the opening up of the economy. As noted already, China has done well in terms of international trade, piling up a comfortable export surplus. Foreign investment in large quantities has been coming in too. Today China is very heavily dependent on foreign investment. Ensuring that year after year there is a satisfactory flow of foreign capital is no easy task. However, that is not the only problem. In the early years foreign capital came in largely in the form of joint ventures with state-owned enterprises. This made it possible for the Chinese authorities to lay down conditions on which foreign capital was allowed into the country. But of late it has not been easy to find matching Chinese funds for joint ventures. Consequently, the number of enterprises solely owned by foreign investors has been increasing. In the first half of 1997, foreign-owned enterprises made up the largest proportion of foreign-invested enterprises. This means that there are industries in which solely foreign-owned firms compete with Chinese enterprises both in the domestic market and in exports. It has not been easy to ensure that such competition is "fair".

There are other problems as well: for instance, the question of capital, for instance. For understandable reasons, foreign capital gets invested primarily in the coastal regions, and this work against China's attempt to bring about greater regional balance. Foreign investors are becoming net buyers of foreign exchange, which can have adverse consequences though at present China has a comfortable foreign exchange reserve. The foreign debt level of enterprises with foreign investments has also been rising. In 1996 it constituted 21.4 per cent of the country's total outstanding foreign debt of $116 billion. In 1997 foreign investors increased their debt by 50 per cent and their debt accounted for as high as 86 per cent of the year's increase. These are not particularly healthy signs in the context of the volatility of foreign exchange markets that other Asian countries, including Japan, South Korea, Indonesia and Thailand, have faced since 1997.

DU DIANWEN/ GAMMA
The "non-public" enterprises in China include a wide variety, ranging from enterprises owned by individuals and households and private partnerships.

ON the basis of their studies of the performance and problems of the economy in 1996 and 1997, Chinese analysts have also ventured to make some forecasts about the prospects for 1998. On the positive side they found that since 1982, restrictions on economic growth due to infrastructure bottlenecks had been greatly eased and that production capacity had been adequately built up in many crucial industries. These, it was felt, could be relied on to facilitate growth in 1998. Labour supply was also plentiful to support growth. The banking system had been put on a sound basis and the difficulties faced by efficient industries and enterprises in obtaining credit had been removed. Along with these favourable supply side conditions, the growth in domestic demand in the immediate past was higher than the GDP growth, which too was treated as a factor facilitating growth.

On the other hand, some unfavourable factors were noted, too. The first was that the goals for industrial structural adjustments, especially in terms of enterprise reforms, had not been achieved. Secondly, the laying off of large numbers of employees of state-owned enterprises had reduced the growth of urban incomes. Rural incomes were also not growing as rapidly as was anticipated and hence it may turn out that the effective demand may not grow sufficiently. Thirdly, it was felt that export growth would face keener competition in 1998 mainly because of the devaluation of many Asian currencies. Fourthly, since agricultural performance was exceptionally good in the past couple of years, it may be difficult to expect similar performance to continue.

Based on these considerations, the expectation was that while the growth rate in 1998 would be lower than than in 1997, the year 1998 could still be a year of "progress with stability". A GDP growth rate of 9 per cent was considered a possibility.

By the middle of 1998 it became clear that the actual performance of the economy was rather different. The growth rate in the first half of the year, it is now known, was only 7 per cent - the poorest performance since 1991. While China had effectively protected itself from the major calamities that confronted South Korea, Thailand and Indonesia in 1997 and 1998, the depression of the Japanese economy in recent months has cast its shadow on China. Japan accounts for close to 20 per cent of Chinese exports and about 10 per cent of foreign direct investments in China. Hence a poor performance by the Japanese economy is bound to affect conditions in China. It is possible, therefore, that the rest of 1998 may turn out to be less propitious for the Chinese economy. China has so far maintained a fairly steady value of its currency in relation to the U.S. dollar, but if the Japanese yen is depreciating against the dollar, can the Chinese yuan hold its position? And if the yuan is forced to be devalued, what kind of impact will it have on the Chinese economy, particularly its capital market? How will these changes, if they take place, influence other Asian economies? These are questions that will come up in the coming months and for which it is not easy at this stage to provide answers.

(The second and concluding part of the article.)

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