China’s Reform and Economic Growth

Citation

Li, X. (2000), "China’s Reform and Economic Growth", International Journal of Social Economics, Vol. 27 No. 11, pp. 1132-1141. https://doi.org/10.1108/ijse.2000.27.11.1132.1

Since the inauguration of economic reform in 1978, China has achieved a more rapid rate of growth than any other country. It is now widely suggested that, by the early part of the twenty‐first century, China will have the world’s largest economy. Thus the need to re‐conceptualise our understanding of China’s economic reform and development has become increasingly acute. A collection of selected conference papers, this volume can be seen as epitomising the new research by the conference participants who have long been working on the Chinese economy. The book contains nineteen chapters grouped in five parts with topics on macroeconomic management, foreign trade, regional development, township and village enterprises, and rural and urban economies. The breadth of the topics was chosen to reflect the many facets of the Chinese economy that have experienced, and will continue to experience, amazing changes.

The first two chapters of Part 1 present a nice historical review on macroeconomic reform and management in China. Following a summary account, by way of background, of the boom‐bust cycles since 1978, Professor Li’s workmanlike survey deals with the 1993‐1996 targets, measures and efficiency of China’s macroeconomic control. In Li’s view, the experience and lessons that can be learnt from the 1993‐96 period for better macroeconomic control include: a combination of controlling aggregate demand on the one hand and improving aggregate supply capability on the other; a proper balance between monetary and fiscal policies, with the former being used to curb the level, while the latter is used to regulate the structure, of aggregate demand; and redressing the problem of multiple policy goals (economic growth as well as macroeconomic stability) assigned to the central bank. In Chapter 2, Professor Harvie approaches the issue by breaking the process of economic reform into a number of phases, and then associating them with periods of stop‐and‐go macroeconomic cycles. He notices that “[e]conomic reform stimulates rapid growth which fuelled inflationary pressure, requiring the use of administrative measures to cool the overheating economy” (p.37). The narrative account and empirical analysis of the close ties between phases of reforms and cycles in prices and output are skilfully blended, and quite in‐depth in the sense that the root, institutional causes are examined. This gives rise to the insightful conclusion that, for China to achieve sustainable growth with low inflation, state‐owned enterprises and the financial sector would require urgent and successful reforms. Chapter 3 draws on the research of others in analysing the process and state of economic disintegration in terms of widening regional disparities in China, a theme which seems to fit better in Part 3 than in Part 1. Nevertheless, it does convincingly emerge from the study that reforms, mainly those for decentralisation, have made China integrated more to the outside world than internally.

Concurrent with domestic reforms, the promotion of external trade and integration into the global economy has been central to China’s efforts to modernise its economy. The reason that China’s external sector reform has met with remarkable success has been addressed extensively in the literature focusing primarily on special economic zones, the trade regime and the exchange system. Chapters 4 and 5 add to the literature by considering issues largely neglected in previous studies. First, what are the effects of unilateral, regional and global trade liberalisation on China? This is a question of increasing importance to the Chinese policy‐makers, particularly when negotiating for membership in the World Trade Organisation. Yin H. Mai et al. examine this question using an intertemporal general equilibrium model, MEGABARE. Four forms of trade liberalisation are hypothesised. Based on simulation results, the authors believe that China would benefit from all these four scenarios of trade liberalisation albeit to varying degrees. The second issue is related to the observation that trade reforms and macroeconomic adjustment have proceeded in parallel with each other in China during the transition period. Then one would naturally ask: Does there exist a uni‐directional or bi‐directional relationship between the two? Using official figures, Ligang Song documents in detail China’s macroeconomic performance and gradual trade reforms. He shows that “[t]rade liberalisation and exchange management have contributed to macroeconomic stability in China in recent years, in turn creating a favourable environment for carrying out further reform and liberalisation programs” (p. 118). This finding contrasts with the view that macroeconomic stabilisation and adjustment should precede trade policy reforms.

At odds with the other two chapters in the same part involving the trade issue, Chapter 6 attempts to estimate and test the correlation between the industrial‐structure change and economic growth. The correlation allegedly appears not only in China but also elsewhere. However, the formulation of the model is flawed. The most noticeable problem is that all the first‐difference variables in equation (4) on page 132 are virtually forced to be positive, which greatly attenuates the applicability of the model. For example, when the government decides to maintain, or to even reduce, the level of its expenditures on those items listed by Tian, the change in human capital (ΔH_C) would become zero or negative and its logarithm (lnΔH_C) undefined, rendering the model unworkable. Accordingly, the results generated by that model may not be taken too seriously.

Part 3 of the book is mainly a collection of five case studies of two municipalities and three provinces: Tianjin and Shanghai; Guangdong, Jiangsu and Jiangxi. Chapter 7 distinguishes Professor Chen’s study from other similar work by trying to uncover the less‐known “public‐ownership income distribution inverted‐U curve” (p. 149). It uses evidence from Tianjin, in support of the Kuznets inverted‐U theory. It is found that parallel with the rapid economic development in China have been increased income disparities across urban residents and households to the extent that the top of the inverted‐U curve is now nearly touched. Professor Chen then suggests that “the emphasis of policies should be transferred from relative income inequality to reduction of poverty and abnormal income”. Unlike the Tianjin case study, the Shanghai case study serves the purpose of testing the export‐led growth hypothesis by VAR modelling (Chapter 10). Whereas Gary Tian and Jordan Shan claim that this is the first attempt in the literature, Liu, X. et al. (1997, Applied Economics, Vol. 29, No. 12, pp. 1679‐86) also had investigated the causal relationship between openness and economic growth in China using data at the national level. Tian and Shan find a uni‐directional causality running from GDP growth to export growth in Shanghai, in contrast to Liu, X et al. where a bi‐directional causation is identified between the nation’s GNP and exports plus imports. The former result could probably be due to the fact that the VAR technique sometimes cannot detect sources of causality which would emerge through the additional channel – the error correction term.

The case studies for Guangdong and Jiangsu, best‐known for their extraordinary growth performance in China, are aimed at discovering the factors underlying their achievements. The authors spare no pain in spinning off solid and detailed empirical analyses of the post‐reform productivity performance of the two provinces, all based on the estimation of the Cobb‐Douglas production function. According to Kui‐yin Cheung and Chenze Simon Fan, the total factor productivity growth in Guangdong witnessed two significant jumps in 1984 and 1991; and this can be explained by putting Guangdong in the context of three distinctive phases of economic reform demarcated by these two particular years. In the case of Jiangsu, Soon Ben Chew et al. examine the productivity of different categories of labour and capital with micro data from 140 township and village enterprises. Their findings show that the greatest contributing share in output comes from capital; that there was a higher rate of return to capital than the loan rate of state banks; that highly educated labour became more productive; and that a positive role was played by invited personnel. These findings shed some light on the development and significance of rural industry in Jiangsu province as one of its most dynamic sectors and growth sources.

Readers will also be amused by Zhang‐Yue Zhou et al.’s study on the integration of rice markets in Jiangxi, a rice surplus province and the second largest rice exporter in China. The approach adopted is the recently developed cointegration analysis. The basic idea is that, if rice prices in different markets are cointegrated, then long‐run market integration would be implied. However, Zhou et al. find a lack of integration between rice markets within Jiangxi province, in contrast with what people would normally expect. The authors did not stop here, however, and went further to explore the reasons through “extensive discussions with researchers and government officials” (p. 231) and studying some official documents. It appears that heavy government intervention in the grain market and small price differentials between markets within Jiangxi province are to blame for the lack of rice market integration. The consequence of such government intervention, if continued, would be rather detrimental, as argued persuasively in the study (Chapter 11).

The Town and Village Enterprise (TVE) sector has been not only the most powerful engine driving the unprecedented growth of the Chinese economy, but also the most important feature distinguishing the Chinese transition path from those of Eastern Europe and the former Soviet Union. Part 4 is devoted to the study of TVEs in China. Resorting to both macro and micro analyses, Chapter 12 pays special attention to how, without private property rights, the allocation structure of the residual rights affected resource allocation and the incentive mechanism in the TVE sector during the 1980s. As a supplement, Chapter 14 looks at the new development in restructuring the ownership system of TVEs since 1992 (when the shareholding cooperative system was introduced). TVEs’ property rights structure in the 1980s was featured by incomplete exclusiveness, but in Jianbo Chen’s view it was this institutional arrangement that catalysed their initial, rapid growth. As its impetus to TVEs’ growth gradually abates, however, the old property rights system needs to be replaced by a new one that separates government from enterprises; and the property rights reforms since 1992 in local collective enterprises have proceeded with this as one of the main aims. Probing into the question of whether the aims of such reforms have been achieved, Jian Zhang presents a case study on rural collective enterprises in Hangzhou city of Zhejiang province. The conclusions drawn from it seem to be quite pessimistic, in that “the reforms have not led to a reduction of local government control over enterprises. Instead, by manipulating the reform process, local governments have further enhanced their control over rural collective enterprises and have secured their economic interests” (p. 302). However, does such an outcome arise because, as argued by Zhang, marketisation (such as property right reforms) does not necessarily undermine the power of local governments (p. 302)? Or does it arise because the property right reforms pursued since 1992 have been put on the wrong track which then derailed the central government’s plan for further marketisation? This question still merits further careful consideration. Apart from the property rights reform problem, the effects of different factors on the labour absorption in TVEs are also explored (Chapter 13).

The final part of the book addresses some specific problems in China’s rural and urban economies, and there is a mix of well‐researched and under‐studied topics. These include rural‐urban income differences (Chapter 15), the effects of educational attainment and household size on the consumption behaviour of rural households (Chapter 16); the evolution of steel industrial policies as epitomised by Baoshan Steel Mill (Chapter 17); urban housing reform (Chapter 18); and household saving behaviour (Chapter 19). These studies provide a remarkable amount of information on the issues under investigation, and some of them (Chapters 15 and 16, for example) apply formal theoretical models and hypothesis‐testing procedures as useful tools.

Due to the nature of this book as a conference proceedings, it is not easy to organise it in a coherent manner. However, the editors could have attempted to do a job of focusing the readers’ attention on key issues among the mass of information by prefacing the book with an introductory chapter. Regrettable omissions from the book are chapters on reforms of state‐owned enterprises and the financial sector. This may be understandable if there was a lack of contributions to the conference on these important issues. The peer‐reviewing in selecting papers for the collection should have been stricter, and discussions in some chapters (especially Chapter 17) are packed with descriptive stories and could be better streamlined. Despite these criticisms, this volume is a useful addition to the literature on the Chinese economy in transition. It is informative, with new coverage of a broad range of aspects, and readers looking for information in a range of topics related to China may find the book a good reference.