You are on page 1of 9

Halaman 1

Generated by Foxit PDF Creator Foxit Software For evaluation only.


Thomas G. Rawski

University of Pittsburgh

September 1999

As the People's Republic of China celebrates its fiftieth anniversary, economists look back on a remarkable kaleidoscope of events and policy shifts
that, despite episodes of vast suffering and waste, have brought enormous material benefits to China's teeming masses. The economy inherited by
China's new Communist leaders in 1949 was overwhelmingly agrarian, ravaged by twelve years of warfare, and wracked by hyperinflation.
Despite the strains imposed by China's participation in the Korean War, the new government quickly resolved difficult short-term economic
obstacles and embarked upon a long-term process of socialization and development.

China's experience of socialist planning, which roughly coincides with the period from 1949 until the death of Mao Zedong in 1976, left a mixed
economic legacy. Like other socialist regimes, China's new leaders poured resources into activities and industries linked to the expansion of
national power. Production of steel, machinery, and building materials multiplied prodigiously. China succeeded in fabricating nuclear and
thermonuclear weapons. Although these advances relied initially on technical and financial support from the Soviet Union and its East European
allies, China's success in penetrating new industries and mastering new technologies following the withdrawal of Soviet aid demonstrated that a
succession of Five-Year Plans had propelled China to a new level of development.

In addition to steel and locomotives, socialism delivered important material benefits to China's citizenry. Although economists are still struggling
to map out the exact dimensions of national product and other economic aggregates, demographic figures tell a remarkable story of improved
welfare. Comparison of the census results for 1953 and 1982 shows that average life expectancy rose from just over 40 years to nearly 70 years
during less than three decades. The census figures, especially for 1953, are hardly precise, but there can be no doubt that Chinese socialism
produced large gains in life expectancy and, furthermore, that these gains were not confined to China's (relatively) prosperous urban minority, but
extended to the farm populace as well. Chinese socialism anticipated the World Bank's strategy of emphasizing providing "basic needs" to entire
low-income populations as a foundation for socio-economic development.

These gains, however, came at a high cost. The "Great Leap Forward," a series of political campaigns that disrupted normal economic life during
1958-60, triggered an immense famine that may have claimed 30-40 million lives. Shortly after China's economy recovered from this cruel blow,
Mao Zedong unleashed a fresh barrage of political campaigns, known as the "Cultural Revolution," which again dislocated economic life,
although less severely than the "Great Leap."

We must add to these episodes of largely self-inflicted damage the toll of stifled incentives, productivity shortfalls, and wasted resources inherent
in any system of central planning. "Storming" or "shock work," in which enterprises race to fulfill monthly, quarterly, or annual plans creates a
peculiar (and costly) pattern of seasonal output fluctuations that two decades of reform have failed to eradicate. Excessive vertical integration is
another hardy legacy of the plan system. Suppliers are least reliable as important deadlines approach -- because their attention is focused on
satisfying their own plan requirements -- so firms and agencies struggle to create captive suppliers. These efforts cumulate to vast and costly
duplication of component manufacture, repair services, even whole networks of schools and telecommunications.

Growing awareness that economic growth among China's East Asian neighbors had far outdistanced China's economic achievements contributed
to muted but widespread dissatisfaction with China's economic performance. The extraordinary economic gains of Taiwan and Hong Kong, both
with large populations of recent migrants from China, were particularly galling. Many Chinese found themselves wondering why their supposedly
superior socialist system lagged far behind the achievements of nearby Chinese populations laboring under the burdens of British colonialism or
the defeated remnants of China's prewar Kuomintang government. As one Party official put it: "just because we are socialist does not mean we
must remain poor!" These sentiments made many Chinese highly receptive to Deng Xiaoping's reform slogans that targeted ideological rigidities
("Black cat, white cat, who cares as long as it catches mice?") and egalitarian preoccupations ("Let some people get rich first").

In reviewing the astonishing outcome of the economic reforms begun during the late 1970s, it is essential to recall their modest scope. The initial
reforms included three components. China's reform leaders allowed impoverished localities to experiment with household farming. This innovation
spread like wildfire, evidently because most Chinese farmers welcomed the chance to escape from collective agriculture. By the time China's
leaders formally ratified the "household responsibility system," local initiative had transformed the vast majority of Chinese farmers into tenants
who now leased plots from local collectives.

A second reform exposed China's largely autarchic economy to expanded flows of international trade and investment. Policy initiatives were
initially confined to four "Special Economic Zones" in the southern coastal provinces of Guangdong and Fujian. The minute scale and remote (from 26/11/2012 9:06:00

Halaman 2
Generated by Foxit PDF Creator Foxit Software For evaluation only.
Beijing) location of these zones suggests that the initial phases of China's "Open Door Policy" aroused sharp controversy within China's policy

The urban industrial sector was the third item on China's early reform agenda. Again, the policy initiatives were small and hesitant. Industrial
firms were allowed to retain a modest share of profits as an incentive device to "enliven state assets." Limited market allocation of industrial inputs
and products was then initiated to provide an outlet for retained profits.

The agricultural reforms were an instant success. Massive (and completely unexpected) output increases raised farm incomes and improved the
diet (and hence the energy and productivity) of millions of farmers. Rising farm output swelled exports and curtailed food imports, eliminating
long-standing concerns over the adequacy of foreign exchange supplies. The farm boom disgorged new supplies of materials (grain, cotton, sugar,
fruit, etc.) and revealed vast surpluses of rural labor. Together with rising rural demand and increased access to urban markets and expertise, these
changes fueled an explosive boom in rural industry.

The trade initiatives, like the farm reforms, delivered results that dwarfed all expectations. Initial prospects seemed limited, especially because the
managers of Chinese special zones, unlike their counterparts in Taiwan, the Philippines and elsewhere in Asia, had little knowledge or experience
of the international economy. However the establishment of Chinese special zones coincided with growing wage pressure on labor-intensive
exports originating in Taiwan and Hong Kong. The fortuitous combination of abundant Chinese labor with the technical knowledge, managerial
skills, and market experience of Hong Kong and Taiwanese entrepreneurs propelled China's trade reforms with astonishing force, and transformed
China from self-imposed isolation into the developing world's largest recipient of foreign investment. Reforming agriculture was comparatively
easy - it required only that farmers be assigned plots and freed from official directives. What was special about the special zones was their
exemption from standard regulations. Urban reform was far more complex. Unlike the farm sector, vast swathes of the industrial economy were
creations of the plan, with no experience of independent market operation. Furthermore, urban reform cuts to the core of Chinese socialism, which,
despite its rural background, has long focused its attention on the development of cities and the welfare of urban residents. Since Chinese leaders
entered the reform process with no clear objectives other than vague notions of improved economic performance, and since entrenched Party and
bureaucratic interests eliminated any possibility of sweeping reform, the transformation of China's urban, industrial economy was of necessity a
lengthy process.

It is this process that has spawned the distinctive features of Chinese reform. Although economists now recognize that market-oriented reform
must be slow and gradual, many initially believed that instant reform was both necessary and feasible. As an International Monetary Fund
publication famously observed:(1)

Ideally, a path of gradual reform could be laid out which would minimize economic disturbance and lead to an early harvesting of the fruits of
increased economic efficiency. But we know of no such path..."

China's gradual reform, which delivered "the fruits of increased economic efficiency" on a scale that eclipsed the achievements of even the most
successful bits of the former Soviet Union and its erstwhile European satellites, flummoxed orthodox economists, who cannot comprehend China's
success in extracting good outcomes from flawed institutions and policies.

Whatever China's economic future holds, there can be no doubt that two decades of economic reform delivered immense material gains. Every
conceivable indicator of economic well-being: income, output, exports, employment, productivity, longevity, height, and weight, shot upward.
Never before has economic growth boosted so many humans out of dire poverty. China's recent economic gains represent a significant event in
world macroeconomic history.

The question of how these changes evolved will fascinate generations of economists, not simply because of the scale of material gains, but because
China's reform experience permits researchers trace the expansion of market structures, the penetration of market forces, and the impact of market
culture with a depth and precision that economic historians can rarely attain.

We see many illustrations of market forces at work. Of particular interest is the remarkable emergence of "socialist market economy" as the reform
objective of China's government and Communist Party.

The novel spectacle of Communist leaders championing the market system is clearly a result of intellectual shifts arising from the experience of
economic reform. The career of Chen Yun illustrates the rapidity of change. Mr. Chen, a veteran Communist who had long specialized in
economic affairs, compared China's planned economy to a caged bird. Without suitable expansion of the cage (of planning), the economy could not
spread its wings. In the early days of reform, this analysis made Chen Yun into a somewhat daring reform guru. By the time of his death in 1995,
Mr. Chen had become a hidebound conservative, not because his own views had changed, but because the elite perspective on reform objectives
had moved far beyond the timid explorations of the 1970s.

The present consensus on the evolution of Chinese reform focuses on a sequence of policy initiatives, decentralized responses, and official
reactions. At the outset of reform, China's leaders had no clear vision for China's post-reform economy. In addition, China's planned economy was
relatively decentralized, with provincial and local leaders enjoying greater authority and control than in the Soviet Union. As a result, central
reform initiatives focused on enabling measures that broadened the opportunities and choices available to enterprises and lower-level governments
rather than enforcing compulsory measures. Thus China did not eliminate price controls, but gradually raised the share of sales transacted at
market prices. Instead of privatization, we find a growing range of firms issuing shares. Production planning did not vanish, but its span of control
gradually contracted.

This open-ended approach invites decentralized reactions that the center can neither anticipate nor control. The steep decline in government's share
of national product illustrates the importance of unforeseen outcomes. Governments at all levels become participants, sometimes even followers, as
well as leaders of reform. Reform unfolds as a process replete with interactions among governments, enterprises, workers, and consumers rather
than a sequence of events in which the state makes decisions to which businesses and individuals react. 26/11/2012 9:06:00

Halaman 3
Generated by Foxit PDF Creator Foxit Software For evaluation only.
The heterogeneous nature of China's pre-reform system meant that the impact of central reform initiatives was far from uniform. The uneven effect
of enabling reforms destabilized outcomes and intensified competition. Competition reduces profits. In socialist China, government agencies and
state-owned enterprises, which controlled the bulk of capital assets, suffered mightily. Some enterprises reacted to financial pressures by
developing new products, trimming costs, and raising productivity. Others bombarded their official sponsors with claims of "unfair competition"
and pleas for financial assistance. Supervisory agencies, themselves short of funds due to slow growth of their own revenues from profits (or taxes
on profits) often found it easier to respond with further reform initiatives than with cash. Thus a coal mine complaining that it lacked sufficient
funds to meet its wage bill might be allowed to raise the proportion of its output sold at (high) market prices.

Chinese reform thus created a "virtuous cycle" that enabled myriad small reforms to cumulate into enormous institutional change. Reform
expanded competition and created financial pressures that spurred some participants toward innovation, resulting in further intensification of
competition. Even when financial pressures resulted in lobbying (rather than innovation), the typical response involved further partial reform,
which meant further intensification of competition, and so on.(2)

How far has this reform process pushed China in the direction of a full market system? Here is a brief scorecard:

Product markets are now governed primarily by market forces. Major distortions of relative prices, such as the long-standing underpricing of
energy and industrial materials, have virtually disappeared. Even in sectors dominated by state enterprises, sales, prices, and profits respond to
national and global market trends in ways that exactly parallel observations from market systems. Thus we read that "China's steel imports
skyrocketed" because of "the plunging price of steel products on the international market"(3) and that "diesel fuel prices have risen to their highest
level" following "the reduction in diesel fuel imports" after "prices on the international market . . . reached their highest point" in several years.(4)
Official intervention, although still common, now attracts vociferous opposition from free-market advocates. When government sought to curb
deflation by imposing impose minimum prices, critics argued that "the true danger"comes not from price-cutting, but "from all forms of monopoly
under the backing of administrative power singing enticing tunes like 'safeguarding the normal market order'."(5)

Allocation of services. Gradual reform has cumulated into extensive commercialization. Housing, education, health care, telecommunications,
transport, wholesale and retail trade, meals, entertainment, personal care, banking, finance, insurance, law, and accounting -- all formerly the
exclusive province of systems controlled by government officials and state enterprises -- are increasingly available through parallel networks of
market-based suppliers accessible to anyone willing to pay the going price.

Labor markets, long viewed as a lagging segment of Chinese reform, have expanded rapidly during the late 1990s. The emergence of mass
layoffs in state enterprises, steeply rising unemployment among previously tenured urban workers, virtually uncontrolled mass migration of rural
workers seeking non-farm employment, the rise of private business as the largest source of new formal employment, and a large and growing
differential between women's and men's wages illustrate the penetration of market forces.(6) The depth of official commitment to market outcomes
is evident from advice offered during the spring festival holiday season by the Minister of Labor and Social Security, who encouraged state
enterprises "afflicted with the scourge of low efficiency and surplus employees" to "lay off redundant labourers to pull the companies out of the

Allocation of ownership rights. Restructuring of ownership rights via merger, divestiture, bankruptcy, or liquidation of corporate assets is a
central component of any market system that hardly existed in China's pre-reform economy. The scale of property-rights transfers remains modest,
with annual volume of perhaps RMB 1 billion in the late 1980s and RMB 10 billion during 1990-1995. Yet shareholding corporations, which
accounted for only 5.5 percent of industrial assets in 1995, contributed 44.2 percent of the reported asset transfers in that year.(8) With the
proportion of assets held by various forms of shareholding entities rising steeply, we may anticipate rapid major expansion in the frequency and
scale of property rights transactions.

Technology. China has achieved great strides toward commercialization of research, development, and technology transfer. New patent and
trademark systems provide rudimentary protection to entrepreneurs. Research institutes and universities face stringent financial pressures that
compel efforts to produce marketable products. Despite well-documented complaints about theft of intellectual property rights, we now see that
contractual transfer of specialized equipment, proprietary technologies, blueprints, and knowhow across China's international borders, provincial
boundaries and administrative systems have become routine features of commercial life. Success stories associated with companies like Haier
(appliances), Changhong (televisions), and Baosteel demonstrate that Chinese firms can acquire new technology and use it to improve product
quality and enhance their domestic and international competitiveness.

Market-supporting institutions. Chinese newspapers and journals are filled with information about the (often incomplete) development of
market-supporting institutions, which have expanded immensely over the past two decades. The legal system illustrates this history of massive,
though uneven progress. China's legislatures, long dismissed as "rubber stamp" bodies, continue to expand their influence and power. Legislative
seats, previously regarded as devoid of influence, are fiercely contested. Legislators regularly challenge, and occasionally reject official reports and
proposals. The courts, formerly meek recipients of government and party instructions, display growing independence. Business periodicals inform
readers about contracts and lawsuits, evidently because managers and entrepreneurs increasingly require such knowledge in their everyday work.
Demands that government itself submit to the "rule of law" now come to the fore, as legislators contemplate measures that would "require
government officials to meet . . . legal standards" and People's Daily intones that "All are equal before the law. . . . No government department or
worker has the privilege to supersede the Constitution or the law. All must follow the law. . . and accept the supervision of the people's congresses.
. . "(9)

Capital markets also appear to have progressed toward market operation. China now boasts new exchanges for stocks and bonds. Banks, while
not fully autonomous, now treat many clients on commercial terms. The combined share of official grants and domestic bank loans in investment
finance, which might provide a crude measure of official involvement in capital allocation, is surprisingly small - just over one-fourth in the state
sector and less than one-sixth elsewhere.(10) 26/11/2012 9:06:00

Halaman 4
Generated by Foxit PDF Creator Foxit Software For evaluation only.
With more than three-fourths of investment spending funded through retained earnings, share offerings, bond issues, inter-enterprise transfers,
individual subscription, foreign borrowing, and direct foreign investment -- channels that respond primarily to profit expectations, investment
appears to qualify for the list of economic categories in which market forces prevail. This impression turns out to be mistaken. Indeed, limited
reform of investment spending emerges as the chief source of China's present economic difficulties.

Evidence that investment behavior remains largely unreformed comes from three categories of economic statistics: seasonal fluctuations, profit
rates, and capacity utilization. Chart 1 shows quarterly GDP figures (including some projections), in current prices, for 1995-1999. The data reveal
a pattern of enormous seasonal fluctuations. We see that the world's fastest-growing economy actually grows only half the time -- GDP plunges
during the first three months of each year and stagnates during the third quarter. No market economy produces fluctuations of this magnitude.
United States data going back to 1875 show that quarterly GDP fluctuations are limited to plus or minus nine percent.(11)

[insert chart 1 about here]

There is nothing mysterious about the fluctuations revealed in Chart 1. The seasonal profile is typical of a socialist economy driven by planned
investment. The socialist calendar is punctuated with regular bouts of "storming" or "shock work" as firms and government agencies rush to meet
plan deadlines. Indeed, backward extension of the data in Chart 1 (not shown) reveals that seasonal fluctuations during the reform period are no
different from those experienced under China's pre-reform plan system. These matters offer few mysteries to Chinese economists:

Many basic components of a 'pure' market economy are still in their incipient stage in China, although market-oriented reform started two decades
ago. Government-guided investment mechanisms, a State-controlled banking system and dominant State-owned enterprises. . . still run in a
framework molded primarily on the previous planned economy.(12)

Anyone who visits China or reads Chinese publications encounters frequent reference to capital scarcity. Elementary economics teaches that if
capital (or anything else) is scarce, profits will be high for the lucky few who gain access to the scarce resource. But profit rates in China have
fallen almost continuously for the past two decades. The tribulations of state enterprises are all too familiar. But we also observe steep declines in
the profits of rural collective industries, where after-tax profit rates plunged from above 20 percent of total capital during 1978-82 to less than 10
percent in nearly every year since 1987.(13) The unexpected combination of scarce capital and falling profit rates offers added evidence of serious
defects in China's capital allocation mechanism.

Chinese investment spending may generate weak financial outcomes, but what about product flows? Here again, we encounter unmistakable
evidence of difficulty. In 1995, the utilization rate for China's steel refining capacity, which then amounted to 169 million annual tons, was only 56
percent.(14) Even though output never came close to 1995 capacity, new investment pushed refining capacity to 190 million tons, nearly double the
expected 1999 output of 104 million tons.(15)

This history of excessive investment recurs in sector after sector: steel, glass, cement, chemicals, machinery, motor vehicles, fertilizer, textiles,
garments, beer, cameras, film, appliances, paper, coal, oil refining, and many others. Evidence that industrial investment projects often fail to
produce commodities as well as profits underscores the extent of capital misallocation. The magnitude of waste -- including roughly 100 million
tons of excess capacity in both steel refining and cement manufacture(16) -- far exceeds anything that might be attributed to individual
incompetence, theft, or fraud. After two decades of market-leaning economic reform, why does China continue to direct vast quantities of
investment funds into ill-considered projects?

Chinese analysts and external observers point to a number of institutional factors, such as soft budget constraints and "investment hunger." There is
also a long history of negative real interest rates, which make it profitable to attempt projects with low payoffs. But none of these factors can
explain either the scale of mis-allocation or its persistence throughout a reform process that has hardened budget constraints, denied investment
funds to growing numbers of weak firms, and, most recently, produced steep increases in real interest rates.

The influence of government administrators over investment decisions stands out as the most likely explanation of long-standing low returns to
capital. At the macro-level, government agencies use annual investment and credit plans to control the size of overall investment. And at the micro-
level, efforts to expand the independent management capabilities of enterprise managers and bank executives have failed to eliminate the key role
of government offices in investment decisions.

While government agencies value profits, which remain the leading source of tax revenue, many other motivations influence their view of
investment alternatives. China's provinces lay out development plans that specify future economic structure in great detail. Governments at all
levels attempt to direct resources into "pillar industries" and "key projects" that often have no visible economic rationale. Officials may support
projects to create or preserve employment, to stave off bankruptcy or closure of important client enterprises, or to advance regional or ministerial
priorities. Political motives often come into play, as when officials ordered the rebuilding of stonework to remove designs that happened to
resemble symbols associated with the banned Falungong movement or when Beijing welcomed "the completion of five new office projects in
celebration of the 50th anniversary of the founding of the People's Republic of China" even though a surplus of office space, with a 30.2 percent
vacancy rate at the end of 1998, meant that "they are unlikely to be sold or rented out in the short term."(17)

These matters are well understood by Chinese economists:

It is widely recognized that the root cause for the low efficiency of China's economy lies in overly duplicated industrial structures and overflowing
similar products. . . . Behind the duplicated industrial mix is a diseased investment decision-making mechanism. Most investment projects are
funded not based on an investors' pursuit of profit maximization, but on administrative power [sic].(18) 26/11/2012 9:06:00

Halaman 5
Generated by Foxit PDF Creator Foxit Software For evaluation only.

Despite China's impressive economic accomplishments of the past two decades, information about seasonal fluctuations, declining profits, and
excess capacity shows that China's reforms have not yet altered crucial features of the traditional socialist system. China's economy is in trouble,
and it is these socialist legacies, and not the Asian financial crisis, which underlie China's current economic difficulties.

After two decades of astonishing high-speed growth, the growth rate of China's economy has fallen sharply. The magnitude of the fall-off in
growth is obscured by a wave of statistical falsification ignited by the government's 1998 campaign to achieve 8 percent growth. Zhang Sai, a
former head of the State Statistical Bureau, commented that "the challenge of keeping statistics accurate was particularly difficult" in 1998.(19)
Another account, obviously referring to the 8 percent growth target explains why:

Some of the targets that come down from the higher levels are objectively impossible to reach. . . . The plan targets or indicators have no
possibility of being realized from the very day they are sent down. The plan indicators that are based on the requirements sent down by the upper
levels in reality are forced on the lower level statistical figures and then returned upwards in the documents.(20)

Although no Chinese economist has openly challenged the reported growth figures for 1998, the appearance of terms like "glut" and "depression,"
along with occasional comments such as "per capita income in urban and rural areas continued to fall in the first quarter of [1999]" indicate
widespread skepticism about recent official growth claims.(21) Pending a detailed reconstruction of recent statistics, it is clear that the range of
possibilities must include growth amounting to less than half of official claims of 7-8 percent output gains for 1998 and 1999.

Many commentators attribute growing signs of weakness in China's economy to the impact of the Asia's 1997 financial crash. While the 1997
crisis certainly is responsible for halting the growth of Chinese exports and of incoming foreign investment, labor figures show that China's
capacity to create new employment, which reached unprecedented levels during 1990/95, suffered a dramatic drop-off in 1996.(22) Formal
employment declined in 1997 and again in 1998, with more to come as China's factories, mines, banks, railways, and government agencies
continue to place redundant workers on semi-paid furloughs (xiagang) and begin the delicate process of cutting ties with formerly tenured staff
now languishing on extended furloughs.

The accumulated effect of wasted investment is the principal cause of the collapse of job creation. Every economy wastes resources. The experience
of Japan and Korea illustrates the capacity of dynamic economies to sustain rapid growth despite massive waste. Assigning valuable resources to
occupations that deliver no returns effectively partitions the economy into two components, one dynamic, the other stagnant. As the share of the
stagnant component grows, a constant overall growth rate requires ever-faster growth from the dynamic sector. This is increasingly difficult
because a large stagnant component not only consumes resources, but disrupts the operation of dynamic firms, for example by choking the banking
system with non-performing loans. The result is an eventual falloff in growth.

This process is now visible in China, where protracted waste of investment funds has inflicted frightening financial pressures upon governments,
who are the main owners of capital, and upon their clients: publicly-owned state and collective enterprises, state-owned banks, and public sector
employees. These pressures take the form of dwindling profits, slow growth of tax revenue, accumulation of bad debt and, most recently, dismissal
of millions of urban workers.

China's government, frightened by the sudden emergence of mass unemployment, has deployed deficit spending in an effort to stimulate aggregate
demand and restore rapid growth. But Keynesian "pump-priming" cannot resolve structural difficulties. Chinese economists recognize that the
anticipated "multiplier effects"of recent infrastructure spending have not materialized. Official media credit short-term interventions with adding
1.5 percentage points to overall growth in 1998.(23) The costs associated with this modest gain are large. Efforts to ramp up aggregate demand
promise fresh cohorts of hastily selected and poorly implemented investment projects. Bankers admit that, with government pressing them to
expand loans, "sometimes we were forced to act without due diligence."(24) Predictably, the quality of bank assets and the proportion of loan
obligations fulfilled by borrowers continued to decline in 1998.(25) Worse yet, the administrative measures that accompany short-term efforts to
boost spending obstruct long-term reform by reversing efforts to commercialize the state-owned banks and to reduce ad hoc official interventions in
the management of economic enterprises.

Current policy concentrates investment funds in the very sectors responsible for the overhang of excess capacity that is dragging the economy
down. To escape structural difficulties, China must reduce the resources available to the old, failed investment mechanism. But with the economy
sagging and mass unemployment on the rise, it is not feasible to curtail spending in any major sector, however incompetent, in the absence of fresh
sources of demand. With former "growth poles" -- rural industry, exports, joint ventures, foreign investment -- largely dormant and with little
prospect for rapid revival, what is the alternative? The surprising answer is that private business currently offers the only feasible opportunity for
an investment boom that could rekindle China's dwindling economic momentum.

This observation is rooted in economic reality, not ideology. Officially recognized private businesses (excluding family farms and other sources of
informal work) have created more jobs since 1994 than the combined efforts of state, shareholding, collective (rural and urban), and foreign-
invested businesses. The policy issue is simple. Private business is already the most dynamic sector of China's economy. How much investment
resources could private business absorb, and how much additional employment could private entrepreneurs create if the government initiated a
sweeping assault on the obstacles that currently limit the flow of resources into private economic ventures?

No precise answer is possible. We know, however, that formidable barriers confront would-be entrepreneurs. Private businesses have little access
to credit. They are easy targets for predatory officials. Government agencies and state-run banks are permeated with an anti-business culture. Even 26/11/2012 9:06:00

Halaman 6
Generated by Foxit PDF Creator Foxit Software For evaluation only.
though private sector borrowers repay 90 percent of bank loans (26) - far above the figure for state-sector debtors - bankers eschew loans to private
borrowers, evidently because defaults by private clients are more dangerous to their careers than defaults from public sector borrowers.(27)

Local governments, particularly, but not exclusively in the south, have begun to pour resources and energy into the promotion of private business.
Growing attention to the potential of private business is visible at all levels -- note the passage of a constitutional amendment recognizing the
legitimacy of private property and the contribution of private entrepreneurship to the national economy, followed by preparations for implementing
legislation.(28) But enthusiasm for such efforts seems to decline at the higher levels of the administrative ladder. Advocates of pro-business
policies feel constrained to hide behind euphemisms. Shanghai's inducements for private business are described as "policies to promote the
development of local small enterprises," while new legal protections hide under the cover of "solely-invested enterprise law."(29) This is partly
because no national leader has stepped forward to champion the cause of the private sector. News that "China will launch a nationwide campaign
to clean up all the random charges and fees imposed on foreign-invested companies" prompts an obvious query: what is preventing China's leaders
from supporting employment growth with a concerted effort to "stop all unnecessary fees and fines" and "to administer severe punishment to those
held responsible for any unauthorized fee collection from" businesses established and operated by Chinese entrepreneurs?(30)


Despite immense progress toward the creation of a market system, a largely unreformed investment mechanism tilts China's whole economy
toward distinctively non-market behavior patterns, most visible in the continuation of huge seasonal fluctuations driven by investment plans.
China's economic downturn, which appears far deeper than official statistics would indicate, is structural, not cyclical. Its sources are domestic,
not international. A long history of wasteful investment spending is the root cause of China's present economic woes. Current policy seems short-
sighted, inconsistent, and poorly aligned with economic realities. Without major policy shifts, the chances of rekindling high-speed growth seem
remote. Accelerated development of private business stands out among available economic options. Promoting private business, the most dynamic
sector of China's economy, offers the unique prospect of boosting short-term demand while advancing (rather than obstructing) long-term reform
goals. Official policy offers growing recognition and support to private business, but the legacy of anti-business ideology dictates a cautious
approach, especially in Peking. The resulting ideological constraint on the pace of private business growth could prove very costly to China's
economy over the coming years.

After five decades that have witnessed remarkable gains, frightening setbacks, and cataclysmic institutional shifts, China's economy faces many of
the same issues that preoccupied the new regime fifty years ago. In both 1949 and 1999, we observe China's government wrestling with saving,
investment, and changes in the price level: inflation, under-saving, and low investment in 1949; deflation, high saving, and excess investment in
1999. In both 1949 and 1999, we see Chinese reformers striving to engineer massive changes in economic institutions: establishing socialism in
1949; replacing socialism with a "socialist market economy with Chinese characteristics" today. In 1949, China's leaders aspired to "put politics in
command." Today, China is flirting with the possibility of reversing this arrangement.

China leads the world in economic experimentation. The past fifty years of Chinese economic experience, which includes elements of centralized
micro-management, unregulated capitalism, and a vast array of intermediate structures, offers a treasure trove of opportunities that economists
have barely begun to exploit. There is every reason to anticipate that the coming decades will be no less exciting, no less surprising, and no less
productive of insights into the formation, evolution, and consequences of alternative economic structures and policies.


*Names of Chinese authors appear in the Chinese fashion, with surname first, for materials written in Chinese, and in the English fashion, with
surname last, for materials written in English.

1. International Monetary Fund et al, The Economy of the USSR: Summary and Recommendations. Washington DC, 1990, p. 2.

2. For elaboration, see Gary H. Jefferson and Thomas G. Rawski, "How Industrial Reform Worked in China: The Role of Innovation, Competition
and Property Rights." In Proceedings of the World Bank Annual Conference on Development Economics 1994, pp. 129-156; and Thomas G.
Rawski, "Implications of China's Reform Experience," China Quarterly, no. 144 (December 1995), pp. 1150-1173.

3. Yan Zhang, "Steel Import Rise Causes Concern," China Daily Business Weekly 31 May 1999, p. 2.

4. Wei Gao, "Profits Fall as Record Diesel Price Makes Mark," China Daily 25 December 1996, p. 5.

5. Jianlin Li, "Let Market Function According to Its Rules," China Daily 4 May 1999, p. 4.

6. See Thomas G. Rawski, China: Prospects for Full Employment (ILO Employment and Training Papers, no. 47; Geneva, 1999) and Margaret
Maurer-Fazio, Thomas G. Rawski and Wei Zhang, "Inequality in The Rewards For Holding up Half The Sky: Gender Wage Gaps in China's
Urban Labor Markets, 1988-1994," China Journal, no. 41 (1999): 55-88.

7. Zuoji Zhang, "Social Security Instrumental to SOEs Reform," China Daily 6 February 1999, p. 4.

8. '96 Zhongguo guoyou zichan nianjian [State Assets Yearbook 1996; Beijing: Jingji kexue chubanshe, 1997], p. 76; Zhongguo tongji nianjian
1996 [China Statistics Yearbook 1996; Beijing: Zhongguo tongji chubanshe, 1996], p. 414.

9. Yang Xu, "Supervision Law Urged by Deputies," China Daily 13 March 1999, p. 2; "Officials Urged to Follow Law," ibid. 8 July 1999, p. 4. 26/11/2012 9:06:00

Halaman 7
Generated by Foxit PDF Creator Foxit Software For evaluation only.
10. Based on 1997 data from Zhongguo tongji nianjian 1998 [China Statistics Yearbook 1998; Beijing: Zhongguo tongji chubanshe, 1998], pp.

11. "Taking the Business Cycle's Pulse," Economist, 28 October, pp. 89-90 (citing Victor Zarnowitz, Business Cycles).

12. Jianlin Li, "Uneven Results Raise Questions," China Daily, 12 February 1999, p. 4, with emphasis added.

13. Charles C. L. Kwong, "Property Rights and Performance of China's Township-Village Enterprises," in China: Economic Growth and
Transition, Macroeconomic, Environmental and Social/Regional Dimensions, ed. Clement A. Tisdell and Joseph C.H. Chai (Commack NY:
Nova Science Press, 1997), p. 496.

14. Chen Jiagui, "China's Industry Has Entered the Crucial Period for Raising Quality," Guangming ribao [Guangming Daily, Beijing] 2 June
1997, p. 7.

15. "Steel Output Cut to Boost Development," China Daily 23 June 1999, p. 4.

16. According to Dashan Xu, "Cement, Glass Firms to be Closed," China Daily 11 June 1999, p. 5, 1998 cement production and capacity were
536 and 700 million tons.

17. Craig S. Smith, "In China's Religious Crackdown, An Ancient Symbol Gets the Boot," Wall Street Journal 8 September 1999, p. B1; Dashan
Xu, "Surplus to Grow in Office Market," China Daily Business Weekly 19 April1999, p. 5.

18. Jianlin Li, "Economy Good, Despite Severe Crisis and Flood," China Daily 30 December 1998, p. 4.

19. "Corruption Should Be Opposed in Statistics Too!" Keji ribao [Science and Technology Daily], 7 March 1999. Internet translation courtesy of
David Cowhig.

20. Gan Xinmin and Li Tongyin, "To Control Falsification, We Must Control its Foundations," Zhongguo tongji [China Statistics], November
1998, p. 21.

21. See Jie Lu, "Glut of Commodities Keeps Prices Low," China Daily Business Weekly 16 August 1999, p. 4; Qiwen Zhu, "Fiscal Policy Needs
Adjustment," China Daily 15 July 1999, p. 4; Chuandong Wang, "State to Bolster Demand," ibid., 29 April 1999, p. 1.

22. Rawski, "China: Prospects for Full Employment."

23. "Treasury Bond Issuance Aid to Economic Growth," China Daily 1 September 1999, p. 4.

24. Kathy Wilhelm and Trish Saywell, "Mission Critical," Far Eastern Economic Review 9 September 1999, p. 76.

25. Xie Ping, "Challenges Facing China's Financial Reform," Zhongguo gongye jingji [China Industrial Economics] no. 4 (1999), p. 24; Kan Ren,
"Central Bank Chief Reaffirms Money Policy," China Daily 30 July 1999, p. 5.

26. According to Professor Dong Fureng, in a July 1999 lecture at the University of Melbourne.

27. This is the apparent point of Fan Gang, "Overcoming Credit Crunch and the Reform of the Banking System," Jingji yanjiu [Economic
Research], no. 1 (1999), p. 7, note 1.

28. Yan Meng, "Draft Law May Help Individual Enterprises," China Daily 25 August 1999, p. 5.

29. Nei Guo, "Legal Stage Improves for Small Firms," China Daily 18 September 1999, p. 2; Yi Yu, "Solely-Invested Enterprise Law Debated,"
ibid., 25 June 1999, p. 1.

30. Yan Zhang, "State Acts to Abolish Random Fees on Foreign Firms," China Daily 26 August 1999, p. 1; Dan Su, "Investing Climate
Examined," ibid., 5 January 1999, p. 1; "Plan to Curb Wrongful Fees," ibid., 27 August 1999, p. 4. 26/11/2012 9:06:00

Halaman 8
Generated by Foxit PDF Creator Foxit Software For evaluation only. 26/11/2012 9:06:00

Halaman 9
Generated by Foxit PDF Creator Foxit Software For evaluation only.
Gambar 26/11/2012 9:06:00