Striking Reforms in Macro Control

 

An objective evaluation of China’s reform progress in 2004 will, to a large extent, be based on analysis and estimation of the macro economic control. This is because the various reforms in 2004 were, to different extents, all affected by the policy. To evaluate the economic restructuring for the whole year of 2004, we should lay special stress on analysis of the following three aspects:

First, the significant role of rural reforms in helping macro control achieve period progress and in maintaining macro economic stability should be affirmed. The rural reforms in 2004 not only boosted the rural economy, they also spurred accomplishment of macro regulation.

 

Second, the macro control reveals that the government-led mode of economic growth must be reformed. The problems exposed during the macro-control period concerning the mode of economic growth, the economic structure and the economic operation mechanism uncover the fact that the mode of economic growth guided by the government is not in step with the pace of growth of the market economy. Therefore, to accelerate the reform and solve the deep-seated contradictions and problems in economic life should be the top tasks and goals of macro control.

 

Third, the macro control also reflected various voices of the masses. There is a demand to re-evaluate the reforms of the past, including the orientation, contents and ways of operation, which cannot be shied away from.

 

In general, most of the problems exposed in the macro-control process are related to the lagging behind or inadequacy of reform. China is a big developing country in a major transitional period. The situation of reform in the new stage shows that it is more and more difficult to depend on development to solve the problems that accompany the advance, and that economic problems should be solved by deepening the reform and the goals of development can only be realized through reform.

 

 

Section 1  Accelerating Reform to Tackle Prominent Conflicts and Problems in Economic Operations:

A Major Goal of Macro Control

 

1.   Fully recognizing the significance of rural reforms for the initial accomplishment of macro control and the stability of the macro economy

 

Rural reforms in 2004, centering on tax-fee reform, greatly stimulated the initiative of farmers, and led to big increases of grain output and farmers’ incomes. This has enormously boosted the growth of the rural economy, the stability of China’s macro economy and the accomplishments of macro control at present stage as well. In the next two to three years, if the country can speed up tax reforms in favor of farmers, further straighten out the relations regarding the land and earnestly implement the policy of “endowing farmers with long-term guaranteed land-use rights,” China’s agriculture will continue its favorable momentum of growth, and have an even better impact on future macro control and macro economic growth. Therefore, we should proceed from the overall situation of the stable development of the macro economy, and fully recognize the significance of rural reforms.

 

2.   Objectively studying the fact that the lagging behind of reform is the major cause of the prominent conflicts and problems which have emerged in economic life and operations

 

Practice in 2004 not only revealed the obvious connection between the problems exposed in the macro control and the existing systems, but also showed emphatically the limitations of the economic system guided by the government. For instance, first, blind investment and low-cost expansion are caused by the serious delay of reform of the investment system; second, the chaos in the land market is caused by the delay of reform of the land system and the immaturity of the land market; third, the credit problems are the direct result of the delayed reforms of state-owned enterprises (SOEs) and the financial system; fourth, the power shortage has much to do with the lagging behind of the reform of monopoly industries; fifth, the imbalance between investment and consumption reflects the delay of reform of the distribution system and the social security system; and sixth, the inharmonious factors in macro control also reveal the lagging behind of reform of the macro-control mechanism itself.

 

3.   Acknowledging that it is high time to reform the government-led mode of economic growth

 

China’s mode of economic growth to a certain extent features government direction. The practice of the past 26 years since China began its reform and opening up have proved that the government-led mode of economic growth ensured the rapid growth of the country’s economy. But the problem today, when China has basically built a market economy framework, is that many economic conflicts and problems brought about by the previous mode are being exposed. For instance, the government still exercises a considerable amount of control over land, capital and other key elements of production, and acts as a major investor in some cases. In 2002, 36.7 percent of the central revenue was invested in competitive industries. Despite the great progress China has made regarding the reform of its administrative approval system, the key power of some administrative organs has been further strengthened during the macro-control period. The government’s macro-control practice has revealed that the government-led mode of economic growth has more shortcomings than benefits. For example, there are a lot of economic risks, especially financial risks; the low-cost expansion has greatly distorted the rational pricing of land and capital; extensive economic growth with low efficiency exists; and the direct involvement of government in capital introduction from overseas has led to the abuse of power and loss of market credit. All these things show that in the circumstances in which China has preliminarily established a socialist market economy and built a basic system with public ownership playing the dominant role and diverse forms of ownership developing alongside, while China is pursuing all-round opening to the world, it becomes imperative to reform the existing mode of structure and government-led mode of economic growth. In other words, the objective foundation for changing such a mode has taken shape.

 

Thus, it can be seen that the problems, exposed in the course of macro control regarding the mode of economic growth, structural problems and operational mechanism, in essence result from inadequacy of reform. It will be very difficult to solve the above three kinds of problems unless great efforts are made to further the reform. So, it should be a major goal of macro control to accelerate reforms to tackle the deep-seated conflicts and problems existing in economic life. What makes the situation different from that in the past is that macro control in the future will combine the basic role of the market with the state macro-regulation to remedy the defects which have emerged in economic life in the past few decades.

 

 

Section 2  Transfer of the Government’s Role:

Key to Reform Progress

 

The Central Economic Work Conference held in early December 2004 outlined the tasks of economic reform for 2005. Since the present economic reforms are either directly or indirectly related to the transfer of the role of the government, they will consequently depend on the actual steps of government reform. For example, to deepen the reform of SOEs and develop the non-public economy will require the government to change its functions, attach equal importance to the development strategy of large enterprises and that of small and medium-sized ones, and create a favorable economic and market environment for enterprises of various types. To reform the investment system is in essence to control and check the investment power of the government, and leave to enterprises, especially private enterprises, more space for free investment. In July 2004, China revealed a reform program for the investment system. However, due to various reasons, the restrictions of departmental interests in particular, no practical progress has been achieved so far. That is why the central economic work meeting proposed that one of the major tasks in 2005 is to implement the program. The acceleration of the reform of the taxation and financial systems, and completion of the market system, will also depend on the transfer of government functions.

 

1.   From engaging in economic construction to providing public services

In a market economy, it is the government’s responsibility to solve public problems that cannot be solved by the main body of the market, safeguard and maintain the normal social and economic order, and realize the harmonious development of the economy and the society by providing public services and basic public products. Proceeding from the actual situation in China, the government should not interfere in the production activities of the main body of the market; rather, it should try to coordinate the re-distribution of the society to bring about equality. It should focus not on economic construction, but on public services, to deal with the serious imbalance between economic and social development. Today, when social conflicts and problems are posing a big obstacle to economic growth, it is especially urgent to realize the transfer of the government’s role.

 

Public service does not conflict with economic construction. It is well known that the governments of northern European countries have set a good example of public service provision. Five of the top 10 global economic giants in 2004 came from northern Europe. International experience proves that the provision of public services is both the essences of government involvement in the economy, and an important condition for reinforcing the economic strength of a nation. In other words, to provide economic public service is the main economic function of the government. So the government should place its focus with regard to economic work on providing economic public services for the whole of society.

 

2.   Shifting from the main body of economic construction to that of economic public services

 

In the conditions of the preliminary stage of the market economy, the main economic function of the government is to provide economic public services. This can be interpreted from the following five aspects: First, the creation of a healthy economic development and financial environment through effective macro control and administration; second, the formulation of scientific long- and medium-term plans to provide scientific economic estimates to enterprises and society as a whole; third, the provision of timely economic and market information to the public; fourth, the building of a sound market environment through effective supervision and administration; and fifth, the provision of complete infrastructure facilities.

 

Regarding infrastructure facilities, China has introduced bidding and other mechanisms of competition. But, as a whole, these mechanisms have failed to play a decisive role in the construction of infrastructure facilities. Because of this, governments at all levels may confuse the roles of supplier and producer, thus causing a series of consequent problems. The auditing conducted by the National Auditing Office in 2004 on the construction effects of some urban infrastructure projects funded by government loans showed that, of the 526 sample projects audited, one quarter had not been completed as required by the construction contracts or plans. Of the 320 completed projects, 32 had not gone into operation, 18 were in the stage of trial operation or had been suspended from time to time for a long time, and another 69 projects in operation didn’t have the designed production capacity. The actual capacity of water-supply projects was only 33 percent of the planned capacity. In 2002 alone, 47.76 percent of the central spending was on infrastructure facilities. The aim of government provision of economic public services is to introduce a mechanism of competition that is transparent, open, fair and just, so that there will be a strict division between the supplier and the producer of infrastructure facilities, to attract non-public participants and encourage decentralized provision of infrastructure facilities under the law of market economy.

 

To provide better economic public services, it is necessary to start by deepening the reform of the administrative approval system and breaking the restrictions of governmental departments which seek administrative benefits. China has speeded up its reform of the administrative approval system since it became a member of the World Trade Organization (WTO). But to protect the interests of their own departments or industries under their supervision, some governmental departments tend to neglect the interests of the state and the public when formulating relevant plans, programs and regulations, and even make administrative decisions that go against the state and public interests, or violate legal procedures. Hence, the key to reinforcing public services lies in deepening the reform of the administrative approval system.

 

3.   From centering on GDP to centering on system innovation

 

(1)                The provision of institutional public products to create far-reaching prospects for economic and social development

 

As China is a big country with its economy in transition, the most important product the government can provide directly to society is not direct investment, but institutional public services. Good institutional public services will bring far-reaching prospects for economic and social development. The World Bank states in the 2005 World Development Report that in developing countries policy risks are the major concern of enterprises, and the government could enhance the probabilities of new investment by more than 30 percent merely by increasing the predictability of its policies. The growth of GDP is important, and so is that of capital. But the maintenance of an institutional environment favorable for the steady growth of GDP and capital introduction is more important and more helpful for social stability. In 2004, the Chinese government kicked off several significant measures concerning rural reforms, which resulted in big-margin increases of grain output and farmers’ incomes. This not only created important conditions for macro regulation and economic growth in 2004, it also laid a sound foundation for the steady development of the macro economy in 2005. If substantial breakthroughs can be made in some aspects of institutional construction, this will provide an important institutional guarantee for the steady and rapid growth of the national economy.

(2)                Providing the most important institutional public products for economic development

 

First, the building of a complete modern system of property rights. A clear definition and sufficient protection of property rights should be part of the contents of market-oriented reform, and the central focus when building a favorable investment environment.

 

Second, speeding up the reform of the rural land system. Several years ago, the central government put forth the idea of “endowing farmers with long-term guaranteed land-use rights.” But the policy hasn’t been fully implemented in terms of either legal documentation or practice. If the farmers are given such rights, quite a number of them will be able to acquire the startup funds to open businesses, and consequently promote both rural and urban development.

 

Third, building a sound and effective financial system. The delayed reform of the state-owned banks has resulted in a large amount of bad loans and the slow growth of privately-run financial institutions. So, it is a must to quicken the construction of mechanisms which fit China’s financial situation, to effectively avoid financial risks.

 

Fourth, building a legal environment that encourages fair competition. It is vital for the coordinated and steady development of the economy and the society to create through legislation an environment beneficial to fair competition. There are four focal tasks at present: First, to accelerate the legislation work regarding state-owned assets so that state-owned resources will be put under the control of law; second, to promote the development of the private economy by means of law, and create an environment for property rights, investment, fund-raising and operation that facilitates the growth of private business. Third, to prevent financial risks through legal construction. Fourth, to carry out the Administrative Permission Law to reduce the uncertainties in the market economy that may be brought about by policy vacillation.

 

(3)                Encouraging system innovation and stimulating the initiative of both the people and the government

 

The system of fixed output quotas to households, which gives farmers a great amount of freedom, has liberated the productive forces and caused gratifying changes in rural areas. However, further efforts are needed to stimulate the initiative of the people and the government for system innovation. The creativity of the general public should be respected, and grass-roots units and enterprises should be encouraged to make explorations of focal problems and reform difficulties, such as wealth management by non-governmental forces. Meanwhile, the government should strengthen its leadership and coordination, and institutionalize good experiences.

 

4.   From merely seeking economic growth to being concerned with the harmonious development of Chinese society

 

(1)                The government should be highly concerned with the problem of unsustainable development caused by social conflicts

 

The backward social development and the problems related to social credit, social culture and social relations have been the least successful parts of China’s reform over the past 26 years. The biggest problem is that the situation of unfair income distribution is worsening, and the gap between the rich and the poor is widening. Studies of sustainable development have tended to concentrate on analyzing the restriction of energy, mineral and other natural resources. But sustainable development is not only confined to the problem of natural resources. The development discontinuity caused by social conflicts deserves more attention. The sharp social conflicts caused by social inequality may also hamper the sustainable development of both the economy and the society.

 

(2)                The government should ensure that the majority of the people enjoy the fruits of reform, and establish the economic working principle of equal attention to efficiency and justice

 

How to properly coordinate interest relations during the reform process is a key issue that needs an urgent solution. Such coordination cannot be left to any individual or major body of interest, especially when it comes to principles and norms. Only the government has the ability to solve this problem. Premier Wen Jiabao said in his 2004 National Day speech that (the government should) “push forward the reform of the economic and political systems and the reforms of other fields, mobilize all positive elements to liberate and develop the productive forces, uphold social fairness and justice so as to let all workers and builders enjoy the fruits of economic development and social progress.” His speech had a strong directive function for tackling the problems exposed in the present reforms. It answers the question of “whom the reform is for” and tells the basic value orientation of the reform process: the aim of reform is not merely to let a minority of people get rich first, but let all laborers and workers enjoy the fruits of economic development and social progress. The reform should reflect the needs of the majority of the people and bring them material benefits, so that the reform efforts can get sufficient popular support.

 

(3)                The government should pay attention to prominent social conflicts, and provide urgently-needed social products and services

 

First, priority should be given to completing the central and local employment systems and making increasing employment opportunities one of the working responsibilities of governments at all levels. In the mid-1990s, the government advocated streamlining policy to support the reform and development of large SOEs. However, experience has proved that the government should make employment and re-employment a more important work goal than the development of large SOEs. When transforming the government into a public service provider, enlarging employment should be made its primary task. The northern European countries have set a good example in this aspect. In Sweden, for instance, the state budget for employment services is 2.7 percent of the GDP.

 

There is much China can do in this field. For example, the government may increase the input, and expand the function and personnel deployment of the state labor and social security organs, adopt tax-reduction and subsidy policies to help laid-off workers open small businesses, strengthen vocational training, support public projects to create more jobs, and reinforce the estimation work and information exchanges to enhance the efficiency and quality of employment services.

 

Second, it is necessary to set minimum standards for public services, to ensure that low-income people have access to them. While providing basic social security, health care and compulsory education, the government should expand the coverage of public services, with the poor and underprivileged being the special targets.

 

Third, it is imperative to provide basic and guaranteed public products and services to farmers. Currently, it is most urgent to popularize compulsory education, and build a cooperative medical-care system in rural areas. The imbalance of public service provision between urban and rural areas is quite serious, with many public services being virtually absent in rural areas. In addition, rural residents have a lower proportion of transferable income than their urban counterparts, and the urban-rural distribution of education and public health resources, and the provision of social security are unfair. At the moment, social security coverage is a mere 3 percent in the rural areas, and the ratio of per capita social security fees in urban and rural areas is 24:1.

 

Fourth, conditions must be prepared for spreading social security to small towns. The continuous perfection of the social security system will eventually give all the people equal access to public services. The imbalance in the distribution of public services in China is caused by the objective imbalance in regional economic development. To solve such a problem, it is very important to build a sound social security system while energetically building a sound public services system. In areas with favorable conditions, such as Shenzhen and other parts of the developed coastal regions, local governments should shield migrant farmers from other parts of the country under the umbrella of their social security system (including living security and unemployment insurance for laid-off workers and the minimum living security for urban residents), and gradually create the conditions for expanding the coverage to other regions and cities.

 

 

Section 3  Re-evaluation of the Reform:

Necessary and Inevitable

 

1. Far from being completed, the reform is in a new stage to tackle thorny problems

 

In recent years, China has made significant progress in its basic reforms, with a framework in which the market holds center stage and plays an elementary role in resource distribution roughly taking shape. But the structural reform focusing on government transformation, which will involve reform of both the macro and micro economies, and of the economic, social and political systems, has not yet started. The reform has come to a tough stage and the situation requires the government to properly and thoroughly coordinate interest relations, accelerate governmental reform, and promote the construction of democratic system to effectively curb corruption, and push forward th e reform of the political and social systems so as to develop democratic politics and build a harmonious society.

 

2. The market orientation of China’s reform is not erroneous

 

Some people argue that the market orientation of China’s reform is wrong, because the reform has caused polarization and corruption. But viewing the problem from the angle of practical reality, serious corruption cannot be said to be the necessary result of marketization reform. In China, it is more the inadequacy of reform that is the main reason for this. China put forth the reform of the social security system in the 1990s. Later, the reform was made a supplementary measure to the reform of SOEs, but no effective practical measures were adopted to implement this idea. This was one of the major causes for many social conflicts and social problems China faces at present.

 

3. Development relies on reform, and reform promotes development

 

There are people who think that many of the current problems are not related to reform, but to development, and can only be solved through long-term development. In recent years, the sluggishness of the reform has resulted in many institutional contradictions and problems, which pose obstacles to today’s economic development and form the background to today’s macro-regulation policy. Thus, the development of enterprises, and the rapid and steady growth of the entire economy will lack an institutional guarantee if the government fails to accelerate the reform. It will become more and more difficult to mitigate, digest and solve the conflicts and problems in economic life and operations through economic growth alone, and institutional conflicts and problems may even worsen. Whether the economy will see healthy operation in the next few years will depend on three conditions: One is a sound economic and market environment; the next is a stable social environment; and the third is the construction and completion of a market-oriented, effective macro-control system. Whether these conditions can be realized will, to a large extent, depend on structural reform that focuses on government transformation. The next step for macro control is to quicken the reform and bring into full play the basic function of the market in resource distribution.

 

4. Reform is an important condition of social stability

 

Some people hold that since there are prominent social conflicts and social problems at the moment, accelerating reform will affect social stability. But that is not necessarily true. The reform aims in essence to adjust the interest relations among various sectors, so that the majority of the people benefit. In fact, most of the striking social conflicts and problems are directly related to the inadequacy of reform.

 

Through macro regulation, it has been clearly seen that the solution to the deep-rooted conflicts and problems in economic life lies in reform. Therefore, people should reach a common understanding of the reform, arouse their enthusiasm for the reform and reinforce leadership over the reform, so as to provide an institutional guarantee for the steady and rapid development of the national economy and the all-round development of private business.

 

The year 2005 is a key year for China’s reform. First, the reform is at the vital moment when the reform of SOEs as well as of the macro economic system, including the investment, banking and financial sectors, will all demand substantial new breakthroughs. Second, the acceleration of the reform will be decisive for gearing the macro control to the market economy. Besides, the reform in 2005 will also have a vital impact on further reforms in the future, especially in the 11th Five-Year Plan period (2006-2010). Consequently, grasping the present opportunity to speed the pace of reform in 2005 and make significant breakthroughs in marketization reform will greatly promote the steady and fast-track improvement of China’s economy and social stability.