Transcript Slide 1
China: The Awakening Giant Eric Hage “Enter the Dragon”- March 10, 2001 • Somewhat recent dramatic increase in Chinese economy • However, China is still poor • Upon accession of WTO, China will rid tariff and non tariff barriers and open certain sectors of the economy • China wants to separate business from government What is the Chinese government trying to do?... • Privatize socialist housing • Develop a tax system • Crack down on local-government corruption • Provide pensions for the elderly • Put together social welfare initiatives Predictions about China • Economy will grow at 9% during 2006-2015 • By 2020, economy will grow to 10 trillion in 2000 dollars • Membership to the WTO depends on foreign direct investment (FDI) • China’s export industries make up the bulk of its FDI • Cheap labor and educated graduates create export machine • China contains advantage cheap labor-intensive areas such as toys, textiles and shoes Continued… • Multinationals are a dominant force in • • • • unprotected sectors of the mainland economy Foreign involvement likely to double with WTO membership Information technology is helping China integrate Financial integration is also improving Chinese government is planning to develop equity markets What does China need to do?... • To continue to separate business from • • • • government Develop capital markets China is a continental economy driven by domestic demand Shutting China out would be detrimental to American interests Chinese reforms could create new wealth “China’s Economy: Celebration and Concern”- Nov 10, 2001 • Chinese GDP estimates are inflated • WTO membership will not fix GDP inflation issue • China is not truly a “safe haven” for foreign • • • • investment Domestic demand contributes 90% to domestic growth China’s economy is continental, not an export driven one Urban consumers worried about investments Freer farm trade in China will hurt farmers In long run, potentials benefits of WTO membership are clear… • It will force state-owned enterprises to become • • • • • more efficient Encourage efforts to reform China’s banking system Put private enterprise on a more equal footing with the state sector Call these changes a painful adjustment 7% growth in economy is not enough to make up for the increase in unemployment Process of reform should be slow “Can India Overtake China?” August 2003 • Foreign Direct Investment (FDI)- fuels export led • • • • • manufacturing industry Investor confidence level in India is not as high as China China’s diaspora vs. India’s diaspora Forbes 200- “best small companies-” India ranked considerably higher than China India has a stronger infrastructure to support private enterprise, more efficient and transparent capital markets than China and a better legal system India relies more on organic growth The Stifling State • China still struggles with free market reforms • • • due to old communist ways India- Fabian socialism- intended to mitigate social ills of capitalism, not destroy it India’s system did not prevent entrepreneurship from flourishing; China’s did China imposed legal and regulatory constraints on indigenous private firms Continued… • China’s state owned enterprises protected by government • Failure of Chinese entrepreneurs in 1990’s • Foreign investors are benefited by system • India calls system of advantaged foreign investors infeasible India is flourishing • Government stopped monopoly over longdistance phone calls,; some tarrifs have been cut; bureaucracy has been trimmed; & a # of industries open to private investment • Indian Firms- wholly private initiatives versus Chinese Firms- significant state involvement Why isn’t India’s superiority reflected in the numbers? • Late start • Small national savings rate and less FDI than • • • • China India’s ethnic and religious tensions India’s dispute with Pakistan over Kashmir Meanwhile, China has been able to concentrate more on economic development India’s growth rate 20% less than China’sremarkable Who is better off: China or India? Depends on… • How well both countries utilize their resources • Answer unknown for many years • Appears that India will surpass China… - ground up approach Indian diaspora potentially increasing FDI homegrown entrepreneurship “The Business of Governing Business in China”- January 2005 - How will China govern its markets? - What form will the new regulatory state take? - Author presents two models: - Independent Regulator - Developmental State The Independent Regulator Model • known as the benchmark of institutional models • originated in the United States • emphasis on administrative restructuring of state • • institutions the regulator is independent from business the regulator must be separate from and impartial toward the firms it regulates Continued… • the regulator should have political independence • • (high degrees of transparency) the regulator must maintain substantial autonomy from political organs such as the executive or the legislative primary job: to create a level playing field for market actors and to apply rules evenly without regard to who these particular actors are, thereby fostering competition and eliminating market failure The Developmental Model • opposite from independent regulator model • based on Japan’s postwar regulatory system • the developmental state model tolerates • • substantial governmental intervention the model favors particular firms whose failure would impose unacceptable social costs government is concerned with who the specific market actors are Continued… • Idea is to create “national champions” • The model discourages “excess competition” • • • that might reduce profits of favored firms and encourages market stability Regulators in this model are highly centralized The regulatory bureaucracy is relatively free from political oversight Regulatory authority held in powerful comprehensive ministries There exist four institutional factors that constrain these new regulatory bodies’ independence… 1. State Ownership – State ownership of key strategic assets – Use regulatory reform to enhance the value of the state 2. State and Party Comprehensive Organizations • Maintain authority over strategic assets • Oversight of government commissions for planning and state asset supervision as well as several parties is actually increasing • These organizations hold most of the power Examples of these organizations - National Development and Reform Commission (NDRC) - State Asset Supervision Administration Commission (SASAC) - Chinese Communist Party (CCP) 3. Bureaucratic origins of regulatory institutions and personnel • The backgrounds and accompanying biases • • • of the leadership and staff of new regulatory agencies is problematic Ministries were formed based on mergers of older ministries thus still keeping the same people Beneficial because old members bring expertise Still, however, a relationship between the incumbent firm, the regulator, and the policymaker 4. Fragmented, ambiguous authority of the regulator • Level of authority are rather undefined, creating • • • • • • confusion on who has the actual power Divisions of labor are generally not defines statutorily easier to grant regulatory authority rather than revoke it Problem of fragmentation is severe in the telecommunications sector Telecommunications sector deals with national and domestic security Numerous actors have vested interests for this particular sector, and as a result, it is hard to distinguish which body has authority over these matters Other sectors: electric power sector, financial services sector (not as fragmented) Metavision gives a reason for controlled competition among a limited number of firms • Need to control and maintain revenue from major state assets • The creation of national champions • The achievement of employment, universal services, and social security goals 2 norms that are central to China’s regulatory system… 1. Preference for orderly competition – competition in strategic, state-owned industries should be “orderly” – since too much competition creates cutthroat pricing, and ultimately lower state revenues, price floors were implemented- minimum set prices Conclusion • Currently between the independent regulator model and the developmental model • Current regulatory system still needs improvement • Overall, China prefers orderly competition and limiting number of firms • Metavision Discussion Questions • From the given information about China’s regulatory system, do you truly believe that China is in the middle of the independent and developmental models or does it lean to a particular side? • Do you think the author’s assessment of India overtaking China eventually is premature?