The Bangalore International Centre (BIC) organised an interactive session on China’s economic reforms process on 5 June 2006. The lead speaker was Mr Pieter Bottelier, Former Executive Director for China with the World Bank. Mr Bottelier, who has also taught at the Kennedy School of Government and Johns Hopkins University, brought a wealth of academic insight and practical experience to the discussion. The session was chaired by Prof S L Rao, former Chairman, Central Electricity Regulatory Commission, and former Director-General, National Council of Applied Economic Research.
Mr Bottelier started by drawing a historical picture of conditions in China before it embarked on the process of economic reforms. The Chinese economy was characterised by the absence of private agriculture, controlled prices, no labour market, little personal choice, and limited foreign trade. The country’s transition to the third largest trader in the world, with rapid economic growth and tremendous progress in reduction of absolute poverty, is a story unprecedented in history.
Unique features of reforms process
China’s reform process defied conventional Western thinking in that it lacked any master plan or timetable. With Deng Xiaoping as the predominant leader in 1978, the consensus on economic reforms was limited to a “shared horror of the past” rather than a shared vision of the future, and the process could be best described as “empirically driven change”. Its unique features included the delayed move towards privatisation, strong emphasis on preserving employment and social stability, use of the banking system as a quasi-fiscal instrument, early decision to open up to foreign investment, and investment in infrastructure well in advance of economic growth. The Communist Party in China became a “development machine” with a conscious modification in the incentive structure so that the entire Party apparatus was used for development.
The undervaluation of the Yuan has become part of the Chinese strategy, as it has led to continued export growth and massive growth in reserves, hence giving China considerable political power. Technology standards are improving at a rapid pace, with China using FDI negotiations to acquire technology from MNCs, and emphasising high-tech commodity exports in which they can retain competitiveness for longer than in garments, toys, and simple electronics. The old system of controlling labour is now used flexibly, leading to increased labour mobility, steady rise in real wages, and most importantly, high upward social mobility.
Correcting the “social deficit”
In response to animated questions from the audience members, Mr Bottelier pointed out that China has a large revenue surplus in an aggregate sense, but faces serious problems of internal distribution. The social consequences of fiscal mismanagement have become increasingly severe, as manifested in abysmal levels of education and health care in the hinterland. However, correcting this “social deficit” through fiscal reform and targeted measures has become the top priority of the present government.
Unfinished agenda and sustained progress
China’s unfinished agenda includes the reform, recapitalisation, and reorganisation of the banking sector; the reform of the fiscal sector to remove the mismatch between tax revenue and social needs in rural areas; and the building of a legal system from scratch. However, it is questionable whether all this can be achieved and the growth of the non-state sector sustained without a fundamental change in the political structure.