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Economic Reform in Post-Deng

China : What to Expect

A R Chowdhury writes from Wisconsin, USA
THE economic reform pro -cess initiated by Denn Xiaoping in 1978 has vaulted the Chinese economy into the modern age. The impact of the reform and the opening up of the economy is felt worldwide. The US market is flooded with Chinese-made consumer goods. In 1996. US import from China exceeded $50 billion, a' 13 per cent increase from 1995 and up from almost zero in the mid-1970s.
What kind of economic policies can we expect in post-Deng China? There is unlikely to be a reversal of Deng's economic policies-, however. - his death' could open the way for a slowdown in the pace of economic reform. Jiang Zemin and his government will face their toughest tests in this area of economic liberalisation.
In late 1995. the Chinese Communist Party endorsed the major recommendations of the Ninth Five Year Plan (1996-2000) at the Fifth Plenary Session of the Fourteenth Central Committee. The plan calls for achieving a nine per cent growth rate in economic activity. raising the level of per capita income to $1300 at 1980 prices, and attaining at least a 35 per cent annual increase in fixed asset investment. The government of Jiang Zemin will continue with the economic reforms hoping to achieve these objectives within the plan period.
However, the current leadership also understands the importance of consolidating their political base, even if that means slowing down certain provisions of the market reform process which could precipitate social and political unrest.
The government faces four immediate concerns in the areas of income inequality, state-owned enterprises. World Trade Organisation, and inflationary trend. Several recent steps suggest that the Beijing government has finally realised the extent of their problem in some of these areas.
Though China's economy is among the world's fastest-growing. the disparity among the rural and urban population is clearly evident. Using the international poverty standard of $ 1 a day in income. China has about 340 million poor people, a vast majority of whom live in the rural areas. During Deng's reform-obsessed era. hundreds of millions of farmers re-. claimed land from agricultural collectives, and made it prosper by selling their own produce on free markets. As the reform process has moved to the cities in recent years, the rural peasants have fallen behind. The increasing gap between the urban and rural population has been the biggest source of inequality and political tension in China.
This has led to a large-scale migration to the cities threatening the already fragile urban infrastructure. The post-Deng administration has to make this their first priority.' The government can be expected to continue with their fupin or save the poor' campaign which was started in early 1994. This campaign has already helped to reduce the number of population below the poverty line by about 10 per. cent.
We may also see a scaling back of reforms which are responsible for increasing the disparity between the poorer inland provinces and the rich coastal provinces of eastern and southern China. The central government use money from its own treasury in order to achieve some kind of economic parity between various regions of China. The western and central part of China would benefit from such a transfer.
The government needs to emphasise the Importance of increasing agricultural production by encouraging foreign investors to help modernise the agricultural sector. They have already started a goal-oriented programme under which each province is to satisfy the State Planning Commission's targets on rice, wheat, and cotton production. Expect the government to put more emphasis on such policies. The success of these measures would help the Jiang Zemin administration in regaining the confidence of the rural population.
Another major problem fac-
ing the Chinese economy is the condition of the state-owned enterprises (SOEs). Majority of these enterprises are losing money and domestic banks are forced to finance their losses. In the early 1990s. the government proposed radical policy changes regarding these enterprises. These initiatives included quasi-privatisation of SOEs and converting them into share-holding companies in which foreign and private investors could hold substantial stakes. Expect these initiatives to be scaled down in the near future in order to pacify the conservative theoreticians in the government who believe that these radical initiatives would lead to massive lay-offs and initiate political unrest among the workers. I expect the government to carry out internal changes witbin the SOEs in order to improve their internal management skills.
The present government is keen in its effort to gain membership in the Worla Trade Organisation (WTO). It wants more cooperation with the western world. The US and China-are currently negotiating over conditions for Beijing's entry into the WTO. The rise in the US merchandise deficit with China, to about $40 billion in 1996 compared to about $34 billion in 1995 is likely to raise new demands that Beijing open its vast markets to more US products. Expect the Chinese Foreign Trade Ministry to be more conservative in their ne-
gotiating approach.
A balanced growth strategy with equal emphasis on agriculture. industry, and the infrastructure is expected. Jiang Zemin wants to further develop the export-oriented industries in China. In this respect, his approach is more cautious and nationalistic than Deng Xiaoping. Zemin would like to mln-intise the negative impact of inflationary pressures on the domestic industry due to the opening up of the economy.
Price reform has been one of the mainstay of Deng's economic liberalisation policy: We eyi expect Jiang ZCmin.to scale back on these reforms and introduce price controls. On several occasions, the government has blamed western-style economic policy for the increase in the inflation rates. The success of the current government depends on how well it can generate economic growth’ without accelerating the inflation rate.
New measures initiated in the areas of poverty alleviation, balanced sectoral growth, state-owned enterprises, price control. and target output for agriculture must quickly prove effective if China's leadership is to regain the confidence of both the rural and urban population. The government will follow short-term policies in order to placate various Interest groups within the ruling party. Given the lack of complete control over various political factions, do not expect the present leadership of Jiang Zemin and his supporters to introduce any long-term economic reform policy in the near future.
While Deng's influence on the economy has waned steadily since he retired in 1989. the long-term political survival of Jiang Zemin and his political supporters will depend on his handling of several crucial economic and political issues. The next few days are very crucial for Jiang Zemin and his government. The National People's Congress, which convened March 1. is likely to review the economic restructuring process extensively. Dissatisfaction is already evident among many Chinese over unemployment. rising price level, and a widening wealth gap created by economic reforms. The conservatives within the Communist party, who want to slow economic restructuring and China's opening to the West, are likely to block any immediate change in the reform process. The stop-gap measures being adopted by Jiang Zemin and his economic Czar. Vice Premier Zhu Rongji, must receive formal endorsement from this session of the country's legislature before they can be implemented.
If the succession struggle within the Congress goes smoothly, the government may want to ultimately speed up the reform process. It would be interesting to see how Dengs successors try to effectively manage the world's fastest-growing major economy.
The writer is an Associate Professor of Economics at Marquette University, Wisconsin. USA. Last year, he spent about six months in China as a visiting Professor at Johns Hopkins University.