Chinese Economic Reforms-A Fundamental Contradiction

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Manjari Shankar's picture

Plenary sessions are important events in China. China Daily, a popular English newspaper in China, has neatly summarized the structure of reforms adopted in the recently concluded four-day plenum in the country: Five thousand words, ten highlights, three emphases, two goals and one objective. However, the intricacies and complexities of the report are worth exploring. This, in essence, is the objective of this paper. The Third Plenary Session of the 18th Communist Party of China (CPC) Central Committee has several historical and ideological manifestations for the rise of China as an economic superpower. Even as this gathering celebrated the first anniversary of the coming to power of Xi Jinping, it was a reflection of the developmental priorities of the new leadership. (Brunswick Group, 2013) The proceedings, referred to popularly as Communiqué, are a detailed exposition of the country’s market-oriented reforms, viewed as an attempt to determine key economic outcomes (Salidjanova & Weser, 2013) over the course of the next decade. However, the Chinese leadership and the global economy are not new to such policy reform measures. In fact, the expansive literature on the nature of economic reforms in China has recognized the role of Comprehensive Economic Reforms (CER) as crucial to the trajectory of the economic history of the Chinese republic and the world as a whole since 1978.  (Hou & Hou, 2002) The prospects for change in China have been the focus of several discussions and debates across various strata of society-researchers, scholars and media houses. And these in turn, add substantially to the existing studies on the nature and effectiveness of such path-breaking reforms.  In the words of Dr. David Dollar, a Senior Fellow in the John L. Thornton China Center at the Brookings Institution, these reforms are ‘fundamentally contradictory’-there is an inherent difficulty in adopting a free-market approach while refraining from political reforms. Realistically speaking, this is one of the primary barriers to adoption of economic reforms in the world’s second largest economy and this will be evident as this essay elaborates on the proceedings of the Plenum.

 

One of the key reform areas is with regard to sustaining a mixed economy and this brings to the fore the CPC’s unflinching emphasis on the continued importance of public sector enterprises. However, it is necessary that one views the positive developments brought about by the Plenum in light of the increasing participation of China in the political and economic affairs of the world. Despite the continued presence of PSEs, markets have been assigned the decisive role (jueding xing) of allocating resources and this is indicative of a moderate shift in the ideological stubbornness of the establishment since the 1980s. The Committee seeks to reform State-owned enterprises and facilitate the entry of private firms by eliminating excessive regulations and invisible barriers. Pricing reforms include deregulation for energy and resource inputs. The document stated that both public and non-public sectors form important components of the socialist market economy and form significant bases for both economic and social development. (Xinhua, 2013) A notable exclusion is a mention of the industries in particular where private sector involvement could be encouraged. (Salidjanova & Weser, 2013)

 

Financial liberalization also found emphasis in the document and this covered the critical reforms with regard to banking and monetary policy.  Private firms find encouragement to establish small and medium sized banks while a market-based exit mechanism has been outlined for financial institutions. Alongside this, a scheme that is laudable is the deposit insurance scheme to protect depositors against bank defaults. Other points worthy of mention include a multi-tier capital system, currency liberalization and the share issuance registration system, which enables companies to launch IPOs without official approval. (CPC, 2013)

 

The communiqué seeks to establish a modern fiscal system that encompasses improvements in taxation and budget management policies so as to increase accountability and transparency and in the process, optimize resource allocation and long-term stability and social equality. (Xinhua, 2013) Increased market access and Foreign Direct Investment are key reform areas that focus on greater openness and relaxation of entry requirements. The strategy of ‘bringing in’ and ‘going global’ is the recurring mantra of the communiqué even as it clearly prioritizes cultivation of competitive advantages to bring about economic cooperation. The Shanghai Free Trade Zone (FTZ) is an attempt at piloting such a venture and examining the outcomes of an FTZ in a particular region. Empowering farmers through a new agricultural operating system and granting of more property rights, the move to weed out corruption, reforms to the hukao system and innovative environmental regulations and ecological civilization are some of the positives emerging from the Plenum.

Two new institutions have emerged as an outcome of the plenary session. One of them is a ‘small leading group’ that shall oversee general planning and the implementation of the above-mentioned reforms while the other is a ‘national security committee’. (APCO Worldwide, 2013)  The former would find mention in examining the potential of these reforms and the possible barriers to their implementation.

 

If examined closely, two major principles arise out of the Communiqué: centralized decision-making and economic liberalization. In spelling out reforms centered on these, Xi Jinping has clearly demarcated his ideologies and administrative doctrines from that of his predecessors. Historically speaking, the Hu-Wen era is often referred to as the lost decade despite positive measures such as the elimination of the agricultural tax and the introduction of the World Medical insurance and several poverty alleviation programs. Even as the Xi-Liu administration hopes to rectify or build upon earlier measures, it remains to be seen what will emerge out of this. The fundamental contradictions are apparent in each policy measure and the challenge to the incumbents lies in balancing stability and reforms.  Even as the Chinese leadership has reaffirmed its support for a market-based economy, growing social unrest in the rural and remote areas over growing inequalities among the urban and rural areas has hindered its adoption over the years. (Thakur, 2014) Also, in the absence of an independent judiciary and clearly defined private property rights, it is difficult to establish a rule of law and identify the nature of justice-whether it is a fair prosecution or a politically motivated one. This in turn hampers and delays the move towards a free market economy. It will be interesting to note as to how the political leadership will resort to newly instituted measures and surpass any form of bureaucratic opposition to achieve the desired objectives.  

 

Another possible factor that could determine the implementation of such reforms could be the political and cultural boundaries in a vast geographical space like China, which can potentially cause the fragmentation of economies. A recent study has shown that in China, the effect of politics clearly dominates that of culture. While provincial borders seem to have a strong influence disrupting economic ties, economic linkages across provinces, even if the regions fall into the same linguistic zone, are rather weak and, on the contrary, linguistic differences within provinces do not prevent economic integration. (Herrmann-Pillath, Libman, & Yu, 2013) Implementing economic reforms would demand a complete overhaul of the existing political and social framework in the state and this in turn depends on the ability of the political leadership and the efficacy of the leading group.  The Chinese approach to reforms is often described a ‘gradualist’ wherein incremental and partial reforms are experimented locally and which thereafter spread gradually to eventually replace a centralized planning process. (Buck, Filatotchev, Nolan, & Wright, 2000) A Shanghai Free Trade Zone is a favourable addition to the plenary agenda. However, reforms need to be inherently national to gain favor and establish efficiency. A gradualist approach to FTZs might delay the accrual of nation-wide benefits as opposed to the introduction of an FTZ policy, which is nation-wide in nature. The burgeoning population is a major concern but with an improved welfare system that encourages free movement of labor and a relaxation of the one-child policy that seeks to support an ageing population, the objective is clear: the need to move towards a consumption-driven economy. Overall, the reforms are progressive with regard to a redefining of the importance of the non-public sector and the emphasis on environmental sustainability. However, the report has also been criticized for being awash with rhetoric and robbed of details.

To decipher the long-run outcomes of the plenary reforms is a task next to impossible. However, one can safely conclude that the significance of these reforms will unfold in the years to come as and how President Xi sees them through, consistent with the Party’s ideology. The extent to which the reforms take shape and establish China’s supremacy in the global economy will largely depend on how the administration will disentangle or combine various dimensions to the ensuing discourse-political, social, cultural and economic. What will guide the reforms over the years is perhaps President Xi’s ‘China Dream’ (Zhongguo meng), which is a signature of his reform drive and his resolve to arrive at issues to reform and the answers to them.

 

References: 

Brunswick Group. (2013). China & the Third Plenum- A Review of the Third Plenary Communique.

Salidjanova, N., & Weser, I. K. (2013). Third Plenum Economic Reform Proposals: A Scorecard. U.S. - China Economic and Security Review Commission Staff Research Backgrounder.

Hou, C., & Hou, J. W. (2002). Evolution of economic institutions and China’s economic reform . The Social Science Journal , 39, 363-379.

China Daily. (2013, November 20). Infographics on China Reform. Retrieved February 15, 2014, from China Daily: http://www.chinadaily.com.cn/china/2013cpctps/2013-11/20/content_1711925...

Dollar, D. D. (2014, January 9). China's Economic Reforms. The Diplomat. (S. Tiezzi, Interviewer)

Xinhua. (2013, November). China advances diverse forms of ownership: communique. Beijing, CHina: China Daily.

CPC. (2013). Decision on Several Major Questions on Deepening Reform.
Xinhua. (2013, November). China to establish modern fiscal system: communique. Beijing, China: China Daily.

Thakur, D. R. (2014). Third Plenum : The Market for the Economy and Maoism for Politics. Policy Brief, Delhi Policy Group.

Herrmann-Pillath, C., Libman, A., & Yu, X. (2013). Economic integration in China: Politics and culture. Journal of Comparative Economics .

Buck, T., Filatotchev, I., Nolan, P., & Wright, M. (2000). Different Paths to Economic Reform in Russia and China: Causes and Consequences. Journal of World Business , 35 (4).

APCO Worldwide. (2013). An Analysis of China's Third Plenum.