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Challenge of Reform: Moving from Challenge of Reform: Moving from a Command Economy to a Global a Command Economy to a Global MarketMarket
Ren MuRen MuGeorge Bush School, Texas A&M University
Nov 30, 2007Nov 30, 2007
China Today K-12 Teacher Workshop College Station, Texas
22
IntroductionIntroduction
China’s growth performance is impressive over the past 25 years.China’s growth performance is impressive over the past 25 years.
- Average annual GDP growth was 9.6% in the 1978-2005 period.Average annual GDP growth was 9.6% in the 1978-2005 period.
- GDP reached US$2.25 trillion in 2005, and China became the fourth GDP reached US$2.25 trillion in 2005, and China became the fourth largest economy in the world.largest economy in the world.
China is sill a struggling developing country.China is sill a struggling developing country.
- 2005 GDP per capita is $1,700, compared to $40,000 for the U.S.2005 GDP per capita is $1,700, compared to $40,000 for the U.S.
- 8% of China’s total population was in absolute poverty in 2001.8% of China’s total population was in absolute poverty in 2001.
Dual transition and two types of challenges Dual transition and two types of challenges
- the transition from a socialist command economy to a market the transition from a socialist command economy to a market economy, and the challenges of market transitioneconomy, and the challenges of market transition
- the transformation from a rural to an urban society in the the transformation from a rural to an urban society in the industrialization process, and the challenges of developmentindustrialization process, and the challenges of development
33
Outline Outline Understanding the last twenty-five yearsUnderstanding the last twenty-five years
- three phases in China’s economic reform
- major institution changes: decentralization, rural reforms, and experimentation and innovation with new enterprises
- successful evolutionary approach to the transition, in contrasts to less successful reforms elsewhere.
New challengesNew challenges
- poverty and inequality
- ability to cope with external shocks
- environmental issues
- ……
Policy implications for the U.S.Policy implications for the U.S.
55
The first phase (1979-1985)
The agriculture reformThe agriculture reform: from commune production to household responsibility system
-bottom-up experiments and scaled-up by the government (in contrast to “legislate” approach)
- impacts on rural poverty
66
Incidence of Rural Poverty in China
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Perc
ent o
f Rur
al P
opul
atio
n
Chinese Official Estimates
Ravallion and Chen (World Bank) Estimates
77
The first phase (1979-1985) (cont’)
Initial economic opening policy: the establishment of Initial economic opening policy: the establishment of special economic zonesspecial economic zones
first four SEZs (1979)
88
The first phase (1979-1985) (cont’)
The establishment of The establishment of special economic zonesspecial economic zones
- foreign investment encouraged by lower tax rates, foreign investment encouraged by lower tax rates, fewer regulations, duty-free imports of inputsfewer regulations, duty-free imports of inputs
- a strikingly visible signal of commitment to a strikingly visible signal of commitment to economic openingeconomic opening
- test beds for domestic economic reform under test beds for domestic economic reform under dualistic systemdualistic system
99
The second phase (early 80s to mid 90s)The second phase (early 80s to mid 90s)
The fast development of rural industry: the township-village The fast development of rural industry: the township-village enterprises (TVEs)enterprises (TVEs)
- TVEs increased rural incomes, and absorbed rural labor released TVEs increased rural incomes, and absorbed rural labor released from farms. from farms.
- The entry of TVEs provided competition to state-run industrial The entry of TVEs provided competition to state-run industrial enterprises.enterprises.
- TVEs played the catalytic role in transforming the economy from a TVEs played the catalytic role in transforming the economy from a command economy to a market economycommand economy to a market economy
1010
The second phase (early 80s to mid 90s)The second phase (early 80s to mid 90s)(cont’)(cont’)
The development of rural industry and the township-village enterprises is The development of rural industry and the township-village enterprises is another example of “build the road as one travels” another example of “build the road as one travels”
In the June 13, 1987 People's Daily, Deng Xiaoping said: “Generally speaking, our rural reforms have proceeded very fast, and farmers have been enthusiastic. What took us completely by surprise was the development of township and rural industries. All sorts of small enterprises boomed in the countryside, as if a strange army had appeared suddenly from nowhere. This is not the achievement of our central government. Every year, township and village enterprises achieve 20% growth. This was not something I had thought about. Nor had the other comrades. It surprised us.”
[Quoted in: Becker, Jasper 2000. The Chinese. New York: Free Press. p. 68]
1111
The second phase (early 80s to mid 90s)The second phase (early 80s to mid 90s)(cont’)(cont’)
More opening to foreign trade and capitalMore opening to foreign trade and capital
more SEZs (1984 and later)
1212
The third phase (mid 90s to present)
Transforming corporate governance in the state sectorTransforming corporate governance in the state sector
Pure Plan 1996-current Pure Market
Organization Form element of hierarchical bureaucracy
reorganized into corporations
multiform strategic corporations
Managerial objective plan fulfillment
profit, but with qualifications profit
Price systemplanned price
market prices, with government invervention
market prices, with regulation
Budget constraintsoft
hard, but with qualifications hard
Industrial enterprise transition
1313
The third phase (mid 90s to present):
Deeper opening to the global economyDeeper opening to the global economy
Exports and Imports (Share of GDP)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
-H1
Perc
ent o
f GDP
Exports
Imports
Source: Naughton (2007)
Summary of China’s achievement Summary of China’s achievement and its approach to transitionand its approach to transition
1515
Annual GDP Growth, 1978-2006
0%
2%
4%
6%
8%
10%
12%
14%
16%
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
An
nu
al P
erc
en
tag
e In
cre
as
e
Source: Naughton (2007)
Summary of China’s achievement: sustained Summary of China’s achievement: sustained economic growtheconomic growth
1616
Summary of China’s achievement: progress against Summary of China’s achievement: progress against povertypoverty
Poverty In China (1981 – 2001)Poverty In China (1981 – 2001)
52.84
75.6
6.017.9712.49
0.50
10
20
30
40
50
60
70
80
China Rural China Urban China
Headcount index (%)
1981 2001
Source: Ravallion and Chen (2006)Source: Ravallion and Chen (2006)
1717
Economic reforms in China: an evolutionary Economic reforms in China: an evolutionary approach to the transitionapproach to the transition
Step-by-step progressStep-by-step progress
- Is this approach too “gradual” or “slow”?Is this approach too “gradual” or “slow”?
Build the road as one travels Build the road as one travels
- Is the process of following fixed blueprint better?Is the process of following fixed blueprint better?
Climb the mountain by a Zigzag pathClimb the mountain by a Zigzag path
-Should the reform path be more linear?Should the reform path be more linear?
2020
Where are the poor?– Sectoral and gWhere are the poor?– Sectoral and geographic eographic characteristics of poor peoplecharacteristics of poor people
Source: Stern (2001)Source: Stern (2001)
2121
Poverty and inequalityPoverty and inequality
Poverty reduction is related to a focus on income growth, but it requires more Poverty reduction is related to a focus on income growth, but it requires more than that. than that.
Bringing greater opportunity to lagging areas and excluded groups is Bringing greater opportunity to lagging areas and excluded groups is
crucial for poverty reduction in China and remains a challenge.crucial for poverty reduction in China and remains a challenge.
2222
Increasing inequalityIncreasing inequality
Evolution of Gini Coefficient
0
5
10
15
20
25
30
35
40
45
50
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Gini
Coe
fficie
nt
National
UrbanRural
Source: Naughton (2007)
2323
How to make economic growth more inclusive? How to make economic growth more inclusive?
Raising agricultural productivityRaising agricultural productivity
Creating more job opportunitiesCreating more job opportunities
Expanding educational opportunity Expanding educational opportunity
Establishing an well-functioning social safety net, in particular Establishing an well-functioning social safety net, in particular pension systempension system
2626
Potential external risks facing Chinese economyPotential external risks facing Chinese economy
Sudden stop or reversal of capital inflowsSudden stop or reversal of capital inflows
- This phenomenon has been associated with a large This phenomenon has been associated with a large number of emerging market crisesnumber of emerging market crises
-How serious it could be to Chinese economy?How serious it could be to Chinese economy?
Plunge in the value of the US dollarPlunge in the value of the US dollar
- relative depreciation of RMB?relative depreciation of RMB?
- slowdown in us demand?slowdown in us demand?
Collapse of external demand from the USCollapse of external demand from the US
U.S. trade sanctionsU.S. trade sanctions
2727
Environmental issuesEnvironmental issues
Degradation of farm land is a substantial cause of the Degradation of farm land is a substantial cause of the reduction of farm land.reduction of farm land.
High energy consumption along with industrial High energy consumption along with industrial development in general has major implications for the development in general has major implications for the environment. environment.
-Air pollutionAir pollution
-Water pollutionWater pollution
-Costs of pollution (World Bank 1997)Costs of pollution (World Bank 1997)
Broad impact of pollution and global warmingBroad impact of pollution and global warming
2828
Implications for Unites States PolicyImplications for Unites States Policy
China will be on the regular agenda of American trade China will be on the regular agenda of American trade negotiators. negotiators.
-Probably no revaluation of RMB could solve the Probably no revaluation of RMB could solve the U.S. trade deficit.U.S. trade deficit.
-Negotiation of property rights is in the interest of Negotiation of property rights is in the interest of both, but may involve tension.both, but may involve tension.
The environmental situation require government The environmental situation require government action, and the US has the widest economic and action, and the US has the widest economic and technological discretion to help.technological discretion to help.
Whether or not continued rapid growth in China is Whether or not continued rapid growth in China is itself in America’s interests? ---YESitself in America’s interests? ---YES
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