Meeting the Challenge of
Globalization in China
by Chi Fulin
Globalization is exerting great
pressure on Chinese policymakers to make fundamental changes to the
administrative system, accelerate enterprise reform, and open up the financial
system to foreign competition. Accession to the World Trade Organization (WTO)
has brought economic reform in China to a critical stage. Further progress will
require deep structural changes and an acceleration of the process toward a
market-oriented economy.
WTO membership will further integrate China into the world
economy, enabling it to participate in setting the rules of international trade,
not just standing on the sidelines. It will also force China to gradually reduce
tariffs in the next five years and open up its finance, insurance,
telecommunications, accounting, consulting, and tourism sectors to foreign
competitors. This schedule lends particular urgency to reform efforts.
The government will have to further relax control of the
economy, including restrictions on foreign trade and investment. At the same
time, it will have to enact new laws and regulations and establish new rules.
China’s many years of central planning preserved too many direct and arbitrary
interventions, which still restrict many economic activities. The institutions
needed to promote the enactment and implementation of new rules that have been
lacking. Accelerating the reform of government agencies and their operations
will thus be very important.
WTO membership will profoundly affect the government’s
maneuvering space in regulating the economy. As current accounts become more
open, capital outflow may increase. Foreign banks will be allowed to make
renminbi loans, complicating control over capital accounts. At the same time,
the WTO requirement to gradually remove nontariff barriers means that China will
become more dependent on indirect regulatory means of controlling the balance of
payments (monetary, fiscal, and exchange rate policies). To respond to these
challenges, Chinese policymakers will need to take several steps immediately.
Develop the Rural Economy and Improve Farmers’ Living Standard
The lack of a well-functioning social security system and a
rational income distribution system are lowering public expectations as to the
benefits of reform. Increased unemployment has led to new social problems.
Corruption should be eliminated at its roots, but administrative control over
resource allocation and the lack of an effective supervision mechanisms make
doing so difficult.
Separate Government from Enterprises
Administrative interventions by party organizations and
government agencies endanger sound corporate governance. Reorganization of the
state sector according to market principles requires several steps:
· Large
and medium-size manufacturing enterprises should be converted into joint stock
companies.
· The conversion of public
service sector companies in the telecommunications, railway, civil aviation, and
electricity sectors into joint stock companies should be accelerated. Reforms
that promote investment and financing on commercial terms, eliminate excessive
concentration, break up monopolies, absorb nonstate and social capital, and
encourage competition should also be implemented.
· State-owned commercial
banks should be restructured. This reform will have a major impact on the entire
economy. Opening up the financial sector and adopting market-oriented interest
rates is also urgent.
Develop the Nonstate (Private) Economy
Private investment in China failed to reach the desired level in
the past two years, despite the government’s expansionary policy.
Institutional barriers should be eliminated and legal protection extended to
nonstate enterprises, including private property. Barriers to market access must
be eliminated, financial support to private enterprises increased, and
investment of private capital in the financial sector promoted.
Expand Social Policy Reform
Policymakers need to address at least four issues:
· Policies need to be
implemented to help narrow the huge income disparity among different
professional and social groups.
· Individual social security
accounts should be introduced, reducing state involvement. Pension reform should
be financed through floating special treasury bonds. The government should play
a leading role in strengthening the social security system, at the same
encouraging private capital to invest in social security funds.
· Human capital development
should become a major focus of structural reform. In a knowledge economy and
information age, human capital development is decisive for the competitiveness
of a nation.
· Urban development and
rural reform should be coordinated. Rural reform—which affects 800 million
people in China—is at a critical stage. Farmers need long-term and secure land
use rights. In the next 10–20 years, rural reform is expected to help 100–200
million farmers to leave the agricultural sector. To absorb this influx, the
process of urbanization needs to be accelerated.
Proceed with Political Reform
Economic reform calls for grassroots democracy. Political reform
could also help eliminate corruption, which results from rent-seeking, lack of
an effective management system for state assets, lack of an effective
supervisory system to check power, the way public sector employees are hired and
awarded. The relation between the government and the public should correspond to
the relation between China’s socialist market economy and the people—its
major beneficiaries. The wide participation of the public in the reform process
could be the most important driving force to stimulate vigor in Chinese society.
Such participation requires transparency, a continuous information flow, and
accountability of those in positions of leadership. If civil society is well
informed and can participate in the decisionmaking process, reform can be
carried out even if means temporary belt-tightening.
Reforms will determine China’s future. If successful, they
will lead to economic development and social stability and ensure that China
enjoys the benefits of globalization.
Chi Fulin is Executive Director of the China Institute for
Reform and Development (CIRD) and Vice-Chairman of the Chinese Research Society
for Economic System Reform.
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