Cato Policy Report, September/October 1997
Market Reforms for China
On June 15-18, 1997, the Cato Institute held its second conference in Shanghai, China. The first was in September 1988. Conference panels dealt with economic development, the rule of law, international affairs, the environment, and the welfare state. Following are excerpts from the remarks of James A. Dorn, Cato's vice president for economic affairs and conference organizer; Ted Galen Carpenter, vice president for defense and foreign policy studies; Jerry Taylor, director of natural resource studies; Yeung Wai Hong, publisher of Hong Kong's Next magazine; Fan Gang, director of the China Reform Foundation; and Kate Xiao Zhou, author of How the Farmers Changed China.
James A. Dorn: The Soviet
system failed because it disregarded reality. It denied that
individuals wish to improve themselves and pursue happiness;
that information is costly, constantly changing, and widely
dispersed and cannot be usefully centralized; and that
voluntary exchange leads to mutual gain. Soviet-style
planning destroyed the institutions of property and contract
that underpin the free market and created a rigid economic
system that ultimately collapsed of its own weight. The fatal
conceit inherent in the Soviet vision was that government
planners could run an economy like a machine and create
long-run prosperity.
Although China has recognized the error of Soviet-style central planning and has introduced a market system, that system is still half-baked. The question is, Will China move all the way to a genuine free private market?
In making that transition, China could learn from the West and also from its own ancient culture. The philosophy of Lao-tzu, found in the Tao Te Ching, written some 2,000 years before Adam Smith's The Wealth of Nations, contains many parallels to Smith's work in its emphasis on nonintervention and the principle of spontaneous order. In 1776 Smith argued that if "all systems either of preference or of restraint" were "completely taken away," a "simple system of natural liberty" would evolve "of its own accord." Each individual would then be "left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or group of men," provided "he does not violate the laws of justice."
In the free-market system advocated by Smith, people get rich by serving others and respecting their property rights. Thus, the system of natural liberty has both a moral foundation and a practical outcome. Private property and free markets make people responsible and responsive. By allowing individuals the freedom to discover their comparative advantage and to trade, market liberalism has produced great wealth wherever it has been tried, with no better example than Hong Kong.
The notion that a laissez-faire system will be harmonious if government safeguards persons and property is the foundation of the West's vision of a market-liberal order, but, as I mentioned before, it is also inherent in the ancient Chinese Taoist vision a self-regulating order--an order we might call "market Taoism." Just as the principle of spontaneous order is central to economic liberalism, the principle of wu-wei (nonaction) is fundamental to Taoism.
"The philosophy of Lao-tzu," writes Wing-Tsit Chan, "is not for the hermit, but for the sage-ruler, who does not desert the world but rules it with noninterference." In the Tao Te Ching, it is written: "Take no action and the people of themselves are transformed. . . . Engage in no activity and the people of themselves become prosperous." Moreover, "when the government is non-discriminative and dull, the people are contented and generous." On the other hand, "the more laws and orders are made prominent, the more thieves and robbers there will be."
Like bamboo, the free market is resilient, and like water, the market will seek its natural course--a course that will be smoother, the wider the path the market can take and the firmer the institutional banks that contain it. The challenge for China is to widen the free market and provide the institutional infrastructure necessary to support private markets.
It's time for China to reclaim her heritage and once again cultivate the idea of spontaneous order. That order is market Taoism, not market socialism.
Ted Galen Carpenter: Relations
between the United States and the People's Republic of China
have become increasingly testy in recent years, with
acrimonious disputes over a variety of issues, including
human rights, trade, and the status of Taiwan. Indeed, there
is a growing sense that a hostile relationship, if not armed
conflict, between the two countries is probable, perhaps even
inevitable. One reflection of that attitude on the Chinese
side is the proliferation of books and articles exhibiting a
tone of strident, even belligerent, nationalism. Its
counterpart on the U.S. side is the growing sentiment in
Congress and elsewhere for a more hard-line policy toward
Beijing.
There are few, if any, tasks facing Washington and Beijing that are more important than preserving a productive and peaceful long-term relationship. Success in that endeavor will provide enormous benefits to both societies and enhance the prospects for peace and stability throughout the Pacific Basin. Failure will damage both societies and create the risk of a catastrophic military collision.
U.S. policymakers need to understand that no country, even one as powerful as the United States, can dictate to other great powers. Washington's policy toward China in recent years, however, seems to consist of a lengthy series of demands to which there is little reason to hope that Beijing will respond positively. Perhaps the least constructive aspect of the relationship has been the annual controversy about whether the United States should extend China's most favored nation trade status for another year.
The annual spectacle does little except cause needless friction in U.S.-Chinese relations. The temptation to link trade and human rights is understandable, since Beijing's intolerance of political and religious dissidents troubles anyone who values individual freedom. Such repression is all too common in the world, however, and the United States cannot allow moral outrage to govern its trade relations with foreign countries. America would have to sever commercial ties to numerous nations if it consistently heeded moral considerations. How could we justify the purchase of oil from Saudi Arabia, for example? Moreover, the freedom to buy or sell products and services without arbitrary government interference is itself an important human right--for Americans as well as Chinese.
Americans who believe that restricting or severing trade relations will coerce the Chinese government into being more cooperative and democratic advocate precisely the wrong policy. Sanctions would primarily injure the sectors of China's economy that are the most dynamic and have the most extensive connections with the outside world. Those sectors are dominated by young, cosmopolitan Chinese who often view the autocratic rulers in Beijing with impatience. We should want to strengthen such forces for change in China, not weaken them by disrupting trade relations.
Washington should end the annual squabbling by granting China unconditional and indefinite MFN status--which should be renamed "normal trade relations" to better reflect what MFN actually gives any nation with that designation. If the United States wants to address such issues as the treatment of political dissidents and the protection of intellectual property rights, those matters should be handled through diplomatic channels.
More attention needs to be paid to security issues, since disagreements in that realm can jeopardize the U.S.-PRC relationship. It is encouraging that, in late 1996 and early 1997, the Chinese government pursued initiatives to improve relations with several adjacent countries, including India, Russia, and Vietnam. One agreement, which outlined troop reductions along China's borders with Russia, Kyrgystan, Tajikistan, and Kazakhstan, was hailed by President Jiang as "a model of security differing from the Cold War mentality." Such actions lend credence to the view that the PRC harbors no expansionist ambitions and is serious about playing a peaceful and constructive role in international affairs.
The PRC can help allay remaining American concerns by matching its conciliatory initiatives toward its major land neighbors with similar moves in the western Pacific. A proposal from Beijing to submit the various island disputes to international arbitration would provide compelling evidence of China's peaceful intentions. A statement renouncing the use of force to resolve the disagreement over Taiwan--unless the Taiwanese authorities issue a declaration of independence--would defuse that dangerous situation and offer even stronger evidence that worries about possible aggressive behavior by the PRC in East Asia are misplaced.
Jerry
Taylor: The worst threat to the environment in China is
not "unregulated" growth but the continuing
existence of severe poverty. For example, deforestation is
caused largely by landless peasants clearing land in frontier
areas where property rights are still undefined. Also
contributing is the fact that 70 percent of the energy
consumed in rural areas comes from biomass, a low-cost but
horribly inefficient fuel that contributes not only to
deforestation but to severe air pollution problems as well.
Economic growth would replace that "poor man's"
fuel with other more efficient and environmentally benign
fuel stocks.
Also, consider urban air quality, one of the most important environmental issues facing China. The widespread introduction of the automobile is one of the main causes of poor air quality. Vehicular emissions from Chinese-made automobiles are about 15-20 times greater than those of comparable foreign vehicles. But the reason that Chinese vehicles are so dirty is not simple stupidity, corporate venality, or social myopia about environmental health. The reason is that only very low-priced transportation is affordable in a society with a $700 per capita annual income. Only with growth will Chinese consumers be able to afford less polluting vehicles. Simple regulatory edicts will only discourage new automobile sales and keep consumers in older, poorly maintained, and heavily polluting vehicles.
It is also important to remember that growing consumer demand for environmental goods, such as parks, recreational facilities, and urban air quality is largely responsible for the improving quality and quantity of both public and private ecological resources. Virtually all analysts conclude that, for the vast majority of consumers, environmental amenities are "luxury goods" that are in greatest demand in the wealthiest societies. Economic growth is thus directly responsible for improving environmental quality because growth creates the social conditions necessary for increased demand for--and the corresponding increase in supply of--environmental quality.
Moreover, it is also a fact that effective environmental protection requires large capital investments. In the United States, for example, the establishment of effective, state-of-the-art municipal sewage treatment facilities has required an investment of $150 billion over the past 25 years. Only a wealthy society can afford such an undertaking. All the regulations in the world can't substitute for advanced technology capable of turning human waste into drinkable water.
So, for China to dramatically improve its environment, it must further free its economy and promote economic growth. It should also pursue the following reforms:
· Disengage from the global "sustainable development" network. · Dismantle domestic agencies dedicated to promoting sustainable development. · Establish legally enforceable property rights to environmental property. · Eliminate government energy and water subsidies. · Replace command-and-control regulations with market-oriented regulatory policies.
Yeung Wai Hong: Hong Kong is
testimony to the efficacy of free trade. By keeping its door
to trade wide open, Hong Kong has squeezed the last drop of
value out of whatever scarce resources it has. By largely
resisting the temptation to intervene, the Hong Kong
government has allowed market forces at home and abroad to
dictate the direction that the economy is to take.
Some observers see that as economic Darwinism raw and pure, while many others have attacked it as a policy of colonial neglect. I for one see it as a policy of tough love. I want to share with you some of the benefits of tough love as policy from the perspective of someone who is at the point of the market stick.
I am in the publishing business, a business that is as competitive as it gets in Hong Kong, where more than 40 daily newspapers and 600 magazines fight over a reading population of just over 5 million. With competition like that, the first order of survival is to keep costs down. Publishing, however, means much more than cost cutting. It is also an industry that tolerates no disruption in production. A magazine or newspaper has to come out as scheduled.
When we went looking for printers, I was struck by the fact that one of them had only one press, albeit a gigantic commercial web. I asked the printer what he had for a contingency plan should something go wrong with his only press. Instead of keeping an expensive web idle merely for backup, the printer told me that the Japanese manufacturer of his machine had a team of engineers standing by to fly out to Hong Kong at a moment's notice should an emergency occur. Impressed by the confidence that he had in his Japanese manufacturer, we selected his company as one of our three printers. That was five years ago.
I am happy to report that in those five years we have suffered no disruption in publication, though the Japanese manufacturer's rapid deployment capability has been tested on several occasions. The fact that international emergency service is literally only a phone call away speaks volumes about the benefits of Hong Kong's being a free port.
If Hong Kong were just another intervention-bent country and not a free port, it would have erected various barriers to protect those sectors that bureaucrats wanted to promote. And had that been the case, the Japanese engineers could not have come so readily to our aid.
On a different front, tourism is an industry that owes its existence entirely to Hong Kong's adherence to an open border in trade. All told, Hong Kong has only 400 square miles with no great natural wonders to speak of. Yet nearly 12 million tourists visited Hong Kong last year. A few of them no doubt came to look at our concrete canyons, but the majority of them evidently came to shop.
Had there been protectionist barriers, those tourists would have had fewer products to choose from. But free trade has turned Hong Kong into one big emporium stocked with merchandise from every corner of the world. Taking advantage of the large presence of shoppers of every creed, race, and nationality, Japanese manufacturers even use Hong Kong as a proving ground to market test their latest electronic gadgets.
What can China learn from Hong Kong? A lot. If the Chinese government can trust the Chinese people's resourcefulness, as the Hong Kong government has trusted that of the people of Hong Kong, if Chinese bureaucrats can resist the temptation to intervene, as Hong Kong bureaucrats have, then there is really no limit to how far the Chinese economy can go. This is Hong Kong's lesson: open yourself to trade and let market forces loose.
Fan Gang: The main achievement
of 17 years of gradual economic reform in China has been, not
the reform of the state sector, but the development of a
dynamic nonstate sector. While state-owned enterprises (SOEs)
are suffering growing financial losses, the nonstate sector
is developing tremendously.
Indeed, China's rapid economic growth has been due mainly to the dynamic expansion of the nonstate sector, which consists of private and semiprivate enterprises, community-owned rural industrial enterprises, share-holding corporations, and foreign joint venture companies. It is that development that makes the Chinese economy now a "dual-track economy."
Reform started in 1979 when the collective "commune" system was replaced by household farming. That single reform made agriculture, which accounted for over 30 percent of gross domestic product and 30 percent of the labor force, private. When farmers became able to decide not only what they wanted to do on their "contracted land" but also what to do with their surplus labor, small private businesses--in transportation, retailing, and crafts--started to develop.
Another important factor underpinning the reforms is increasing capital inflow, particularly investments made by overseas Chinese. Overseas Chinese investors have relatively open access to Chinese markets and invest mostly in the labor-intensive nonstate sectors. From 1979 to the end of 1995, there was $137 billion in foreign direct investment in more than 330,000 projects; $37.8 billion of that was invested in 1995 alone. Approximately 67 percent of foreign direct investment comes from Hong Kong, Macao, and Taiwan. A considerable percentage also comes from the United States and Japan.
Not surprisingly, the nonstate sector has developed more dynamically in regions where reforms were introduced more rapidly. Four southern coastal cities, including Shenzhen and Xiamen, were chosen to be "special economic zones" in 1980, and Hainan province became the fifth in 1988. In addition, another 20 cities were approved as "economic and technological development areas." In most of those regions, the nonstate sector contributes more than 70 percent of GDP.
Moreover, the growth of the nonstate sector has fundamentally changed the face of the state sector, providing new and favorable conditions for the SOE reform. For example,
· The growth of nonstate firms has provided the means for the capital restructuring of SOEs. In the 1990s private individuals have become financially and politically capable of purchasing state assets and state enterprises (at least small ones). Indeed, in some counties of Shandong province, for example, up to 70 percent of small SOEs have been privatized. · The development of the nonstate sector has provided new job opportunities for state employees. That factor has been particularly significant in reducing resistance to reform. · The growing nonstate sector has forced SOEs to face market competition. With the increase of market competition, the institutional weaknesses of the SOEs have been increasingly revealed. · The dynamic growth of the nonstate sector has provided a "domestic institutional example" for the reform of the state sector.
The progress of "bottom-up" small SOE reform in the past three years indicates that China will be ready for similar reform of medium and large SOEs in the next decade.
Kate Xiao Zhou: Most studies of
women and market development stress the negative impact of
markets on the lives of women. Market development in China
has had a different outcome. The baochan daohu
(turning over production to the household) farmers' economic
movement (markets, rural industrialization, and migration) is
the primary cause of the changing position of rural women--80
percent of Chinese women,
Before Mao initiated socialist revolution, rural women's lives were largely confined to the family context. The ideal woman had sancong side (three dependencies and four virtues). Sancong means that a woman depends on her father as a child, on her husband as a married woman, and on her son as a widow. Side requires a woman to be virtuous in morality, mannerly in both speech and appearance, and good at women's work (cooking and sewing). The division of labor was nan gengnú zhi (men farm and women weave).
One of Mao's goals was to eradicate the oppression of women. The state tried to use political means (laws and propaganda) to bring about sexual equality, and the government expanded the education of many rural women. Government policy also encouraged rural women's economic participation in agricultural production.
But the state's anti-market policies also frustrated the desires and aspirations of rural women. Starting in 1952-53 socialist policies curbed markets and exploited the rural people for urban industrialization and to support a rapidly growing bureaucracy. The banning of markets enabled the state to secure a monopoly on grain and cotton at imposed low prices. As a result, every pound of grain the rural people sold to the state represented an economic loss, while the state sold goods to farmers at high prices. To make sure that rural people did not escape from their agricultural slavery, the government imposed the hukou system, under which one's grain ration was tied to one's place of residence.
The change from commune to baochan daohu in the late 1970s and early 1980s was the mechanism for the transformation of occupational and job activities for most rural people, women in particular. Under the baochan daohu system families began to produce for markets, and the rural population became predominantly, if not totally, money oriented. Generally speaking, under the new incentive system women's participation in economic activity increased rapidly. Throughout the 1980s migration destroyed the social immobility imposed on the rural population by the collective system. Most female migrants depend on individual action and are, in fact, more resolute than men. Given the structural discrimination (the persistence of the hukou system), many rural male migrants expressed the desire to go back to villages if things did not work out. Few rural female migrants expressed that desire. Such determined female migrants moved from one place to the next looking for work and business opportunities. Thus rural women contributed to the rise of free labor markets in China.
Migration and relatively free labor markets in turn brought direct benefits to rural women. One such benefit is an increase in women's autonomy. Working in factories enabled many rural women to be economically and physically independent of their male family members. Migrants have to depend on themselves to develop new social relations while sustaining old ties. As one Shanghai migrant told me in 1995, she was learning in shehui daixueu (society university).
The simple fact is that there is no feminism in countries where markets do not play an important role in people's lives. Even in the West, the rise of feminism was linked to the industrial revolution and the development of capitalism. The Chinese farmers' spontaneous apolitical movement has, quite unintentionally, done more to dilute China's age-old patriarchal patterns than has the political leadership of the PRC in more than four decades.
Economic independence increases women's self-confidence and gives them whatever increases in power go along with the control of money. Patriarchy is extremely vulnerable to the control of money by women.
This article originally appeared in the September/October 1997 edition of Cato Policy Report.