Painful transition but bright prospects to follow after WTO
By Tianshu Chu
(14 August 2001) After 15 years of a "Long March" to membership in
the World Trade Organization, it seems more likely than ever that China will
formally join the trade body by early next year.
The 16th meeting of the WTO-China Working Party in Geneva from June 28 to July
4 of this year brought breakthroughs in major differences, leaving only the
disagreement between the European Union and United States on insurance unresolved.
It is understandable that WTO negotiations with China have lasted longer than
any other. Not only will agreements open up a giant and lucrative market for
Western companies, but they will also lay the blueprint for further radical
economic reform.
The reforms that began in 1978 are remarkable in the history of economic development.
China resisted established economic theories that pushed for property rights
and institutional reforms.
Instead it insisted on an experimental approach to restore economic incentives
for businesses and farmers by re-linking rewards with effort and performance,
and inducing competition by allowing private business to grow.
At the same time it retained the old institutions, relying on administrative
tools and rather than the market to guide economic activities. This experiment
has produced one of the fastest economic growths in history, averaging an annual
9.5 percent for two decades.
The total Chinese gross domestic product has risen to the seventh largest in
the world. Per capita GDP has reached US$800, which, although still very low,
indicates that China is no longer among the poorest countries in the world.
China is now ranked 84th among 143 countries and regions in the world in per
capita GDP and the second largest economy based on purchasing power parity.
Problems in the state sector
Nevertheless, since reform has not touched many core institutions, massive
and pervasive state intervention continues to distort China’s economic behavior.
One of the most severe problems includes the nonperforming state-owned enterprises
(SOEs), with the entire sector showing a net loss from 1996 through 1998. The
financial sector has remained mostly a policy tool to channel resources to the
SOEs, causing a serious credit crunch for the private sector. At the same time,
the banks are plagued with bad loans from the SOEs.
In production terms, excessive capacity and bloated administrations afflict
the state sector. Over half the SOEs reported idle capacity of at least 50 percent.
An estimated 18 percent of total employees in the state sector are redundant
workers. These problems will lead to serious unemployment and more bad loans
as reform continues.
Further reforms are needed for the state sector to get rid of inefficient firms
and for the financial service sector to channel funds to more productive units
that cannot presently get loans. Equal treatment must be administered to the
private sector so it can unleash its potential and create more jobs.
Just so many people
China’s economy has thus come to a turning point; remaining reform has become
urgent and yet politically difficult. The fundamental medium- to long-term benefit
of WTO accession for China is that it provides an effective external force to
push these necessary changes and reduce political resistance to further institutional
reforms. By joining the WTO, China must now complete the reforms or lose out
to foreign competition.
This type of dramatic change toward a free-market economy is usually impossible
without a radical change in the government. Reform-minded Chinese officials,
however, can push forward peacefully through WTO entry.
Of course, some of China’s plate will be quite bitter to swallow. While it
may be good to let inefficient SOEs die, jobs will also disappear. The estimated
unemployment rate in cities and towns is already above 15 percent and this number
is likely to increase.
The re-employment prospect is very bleak because those who are laid off are
often older and unskilled. Furthermore, decades of the iron rice bowl have formed
poor attitudes toward working that are not welcomed in a profit-oriented business.
To make the picture worse, an estimated 30 percent of the agricultural labor
force is redundant, meaning 120 million farmers will have to look for jobs in
the cities. This creates another source of unemployment pressure.
While the picture looks bleak, there is hope that if China survives this radical
transformation, a new economy will emerge that is much more affluent, market-oriented,
rules-based, transparent, orderly and efficient.
The problems that China faces are those shared by many other developing countries.
What is comforting in China is that WTO represents a visible, tangible and well-defined
path leading to a modern and prosperous future.
Gradual reform
Several factors offer China a good chance to succeed. First, the integration
into the world economy will occur over a period of five to eight years. Gradual
integration lessens the shocks and makes them more endurable. The exit of inefficient
firms will also be gradual, and some may even be able to become competitive,
creating new jobs.
Second, China has formally started social security and unemployment insurance
reform. China, in its 10th Five-Year Plan (2001 to 2005), has decided to establish
a social security system independent of the enterprises.
Traditionally SOEs paid for pension, health care and unemployment benefits.
However, laid-off workers from troubled enterprises had difficulty collecting
any benefits. Establishing an independent social security system and unemployment
insurance system will make sure all people that are eligible will be covered.
Labor power
Third, labor market and administration reform, necessary for the efficient
allocation of workers, has also started. Last April the Chinese government issued
a new regulation on "Deepening the Internal Reform of State-Owned Enterprises
on Human Resources, Labor, and Distribution Regulations," which for the
first time allowed SOEs with severe operational difficulties to lay off employees
and pay professionals more flexible incentives in the forms of stock options
and other rewards.
This new regulation also treats employees according to their jobs and contributions,
not according to their status. Focusing on political status has long distorted
working incentive and labor market behavior. With the new law, all employees
will be managed and rewarded according to their job performance, not their status.
Finally, the WTO allows private companies to fully unleash their potential.
The private sector, despite serious constraints, has always been one of the
key engines of growth. With WTO accession, which will result in improvement
in finance and distribution services, the private sector can grow more rapidly
and spill over to other industries through better return on investment, better
services to other sectors and new jobs.
In a country so diverse and dynamic as China, anything from extreme dismay
to extreme hope can be found. But the dust will start to settle in three to
five years and the likelihood of a bright future is quite positive.
About the author:
Tianshu Chu is a fellow at the East-West Center in Hawaii, specializing in development
economics in transitional economies. She wrote this commentary for ChinaOnline
and can be reached at ChuT@EastWestCenter.org.
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