China’s Other Economic Agenda: Priorities, Progress, and
Policies
By
Jean-Marc F. Blanchard, Ph.D.
China’s
troubled state-owned enterprises (SOEs) and state banks, its unemployment
woes, and the pressures unleashed by its World Trade Organization
(WTO) accession tend to dominate conversation when China’s
economic difficulties are discussed. These problems present genuine
threats to the country’s economic prosperity and political
stability. They are, however, only three of the many economic
challenges that China confronts as it moves to a market-based
and globally integrated urban economy.
The interlinked nature of China’s economic problems means
that the leadership cannot deal with the more visible economic
threats in isolation from lesser-known problems. A recapitalization
of the banking system, for instance, will not spur growth unless
the government succeeds in fostering a more favorable business
environment for private firms. China’s less familiar economic
difficulties include private sector constraints, rural underdevelopment,
and public finance problems.
The private sector is a ray of light on China’s contemporary
economic landscape. It produces about one-third of China’s
GDP, dominates the service sector, and, more importantly, is a
major source of job creation. Yet private enterprises operating
in China face substantial obstacles. These include a lack of access
to capital, underdeveloped markets, too little or too much market
supervision and regulation, restrictions on market entry and access
to government resources, inadequate infrastructure, and corrupt
officials. Currently, many SOEs that are trying to become normally
functioning private businesses cannot get the investment they
need, the managerial training they require, or the asset divestment
powers they seek.
In rural areas, underdevelopment has many facets: poverty, high
levels of income inequality, inadequate health and education,
energy shortages, and ecological crises. If rural areas cannot
provide adequate opportunities, rural residents will migrate to
urban areas. This places great strains on local governments, job
markets, and the urban infrastructure. Additionally, rural underdevelopment
implies a lack of money to support education, health care, and
environmental programs. Either this money will come from higher
government levels or these programs will remain underfunded. This
will make it extremely difficult to create an educated workforce,
to deal with costly health problems like HIV/AIDS, and to reduce
air pollution, water shortages and farmland losses.
We should not forget that rural underdevelopment has provoked
political unrest in recent years. This is one reason decision
makers gave it great attention in the 10th Five-Year Plan (2001-2006)
and last November’s 16th Party Congress, and repeatedly mentioned
it at the ongoing National People’s Congress. It would be
farfetched to assume that just because rural areas served as the
base for the 1949 Revolution that rural problems will once again
become the wellspring of another revolution. Many of the conditions
present in 1949 are simply are not there today. Nevertheless,
severe problems exist. Ironically, development programs may fuel
the fire if they cause rural inhabitants to feel they are entitled
to more, but fail to deliver and do not furnish political channels
for them to pursue any resulting grievances peacefully.
It is not well known that government units beneath the national
level account for almost three-quarters of public expenditures
in China. Furthermore, government units below the provincial level
account for more than half of all public spending. Unfortunately,
these sub-national units are spending far in excess of their resources.
To restore balance, they need to cut spending, raise taxes/fees,
or draw more money from an already hard-pressed central government.
Aside from their adverse consequences in terms of social spending,
cuts could diminish spending on the infrastructure that promotes
growth and sustains the creation of a national market. Moreover,
tax and fee hikes may stifle business creation, causing corruption,
and encouraging wasteful efforts to evade taxes and fees.
Cognizant of these problems and the risks of inaction, Chinese
leaders have embraced numerous initiatives. They have worked to
establish a functioning legal and judicial system, to create additional
financing options for small and medium enterprises, to open previously
closed sectors like energy, and to improve transportation and
logistics. They also have striven to increase access to education,
to encourage the production of higher-value crops, to produce
better socio-economic indicators, and to protect natural resources.
Finally, they have endeavored to stabilize the financial situation
of the country’s subnational units through increases in general
and project specific transfers, new revenue sharing arrangements,
and shifts in expenditure obligations.
Going forward, the economic agenda remains packed. The government
needs to improve the business environment by eliminating internal
trade barriers, reducing government monopolies, and increasing
import and export privileges. On the public finance front, policymakers
must balance subnational spending obligations with subnational
resources, improve information and management systems, and establish
more effective tax systems. In the realm of rural underdevelopment,
officials need to do more with respect to health and education
spending, the creation of non-farm employment opportunities, and
the protection of individual property rights.
To address these outstanding items, the government is pursuing
various options. For instance, it is giving space to private financial
institutions in the insurance, banking, and securities industries
and considering reforms in the tax laws applied to financial institutions.
It also is reducing the footprint of SOEs in many markets. It
is also accepting market prices for energy and transport, which
reduces government subsidy burdens and creates new opportunities
for private entrepreneurs. Furthermore, it is curbing special
fees and user charges and strengthening land-use rights. Moreover,
it is dramatically streamlining the bureaucracy and allocating
more resources to infrastructure, environmental, and education.
Finally, it is enacting additional business and environmental
laws and creating more transparent regulations and guidelines.
There is no reason to doubt the new Communist Party leadership’s
commitment to these and other reform initiatives. Past economic
crises have discredited administrative economic solutions. The
internal and external pressures for continued economic reforms
are great. The new leadership and China’s power brokers are
pragmatic and uniformly support a reformist agenda. And these
elites have the support of powerful patrons including Jiang Zemin
and Zhu Rongji. Nevertheless, their reformist zeal will be tempered
by government fiscal constraints and their wariness of potentially
destabilizing change.
Successful progress on China’s other economic issues could
offer many opportunities to businesses that operate in, or want
to conduct business with, China. First, it should create new buyers
and suppliers. Second, it should increase investment opportunities,
either individually or in partnership with domestic companies.
Third, it should increase the country’s overall rate of economic
growth. Fourth, it should stabilize the rural, ecological, and
government fiscal situation. Fifth, it should allow progress on
the country’s more visible economic problems. Where China
is concerned, then, 2+2 indeed may make 5.
