China tries privatisation to cure economic woes

Press, 25 February 1989, Page 24

China tries privatisation to cure economic woes

From the ‘Economist,’ London

COMMUNISTS who have concluded that communism is dead still have the problem of arranging a decent burial. The biggest difficulty is that the two main economic weaknesses of the system — State ownership and distorted prices — worsen each other.

can pass almost unnoticed. The idea is this. Each year China’s central Government transfers money, in exceedingly complicated and non-uniform ways, from its own control to that of provincial and local authorities, research institutes, universities and the like. Under Mr Hua’s proposal, the central Government would substitute for some of this cash new instruments called “asset certificates.” They could be used only to buy shares in State companies (which account for 70 per cent of industrial output). The central Government’s budget deficit would go down, thus helping to reduce inflationary pressure. More important, the Government would begin to auction off shares in the vast numbers of enterprises it owns throughout China. The shares could be bought only with asset certificates. Localities could acquire no more than 15 per cent of enterprises under their own jurisdiction, and 20 per cent of enterprises elsewhere (if, for example, Canton wanted to buy into Shanghai’s Number 3 Button Factory). The first desirable result would be to make it harder for a factory’s decisions to be influenced by local political bosses: their influence declines when they own only 15 per cent of you. The second would be to make those local bosses care more about the profit-and-loss statement of the factory than about whether it employs enough of their friends and relatives: if cash from Beijing has been cut back, it has to be made up somewhere. Such incentives would make it easier to ignore the howls of protest from workers made unemployed because nobody bid

No reformers have been bold enough to tackle both at the same time. But if that is not done, which should be dealt with first? Until last year the Chinese were putting their faith mainly in freeing prices. Their thinking is changing. Three economists at the Chinese Academy of Social Sciences make the strongest case for a reform policy based on attacking state of ownership. The main one, Mr Hua Sheng, a few years ago backed the present “dualtrack” policy of half-free, halfcontrolled prices as the way towards reform. He now thinks price reform will not work without a huge divestiture of state enterprises — because this is essential to stop politicians interfering with business, and because inflation will otherwise be uncontrollable. Mr Hua and his colleagues have come up with a clever plan for privatising China. It is clever partly because it deals with one of the main obstacles to privatisation, the lack of even a rudimentary capital market in China. It also plays tb one of China’s strengths — the diffusion of political power among provincial and local bodies — as a way of attacking one of the economy’s crippling liabilities: the strong role of local politics in firms’ decision-making. It does something else which, as good communists, Mr Hua and his colleagues would deny: it introduces capitalism in a gradual way that

for shares in Button Factory Number 2, which should have gone bust ten years ago. The howls will be the less because workers in state-owned factories will get asset certificates themselves, which they can use to buy enterprise “assets” (such as the homes, technically owned by the factory, they have been living in) when the enterprise is sold off. Once the initial sell-off is complete, it will be possible for shares to be sold for plain old cash — and by then China’s vast savings, and an embryonic capital market, should do the rest. That might make owners (and political bosses) more efficiencyminded, but what about the firms themselves? Something to take care of that is already in place, called the "asset-responsibility system.” This gives anybody who thinks he can run a factory better than it is run at present the chance to bid for the right to manage it for a five-year period on the payment of a fixed sum to the state; any profit over that is in his pocket. China has already experimented with this, to little popular enthusiasm. The lack of interest, says Mr Hua, has been due to the control exercised by local political bodies. Under Mr Hua’s plan that, presumably, would go. None of this would help if China were under a strict planning regime, with no prices as such. In the present murk of half-plan, half-price it might well get somewhere — and provide the needed spur for a total freeing of prices. But would this not be capitalism under another name?

“You may want to call it that,” says Mr Hua, ‘but we think it satisfies the true aims of socialism.” So, for a change, it does. Copyright — The Economist