INTERVIEW WITH HU ANGANG

Director - Centre for China Studies - Chinese Academy of Sciences

ON CHINA REFORMS AND THE GO-WEST POLICY

Laurent Malvezin.- Today most of the Asian economies are on their way to recovery. For China, the challenge was to avoid a recession at all cost while maintaining the yuan at its level. It seems that both objectives have been achieved but how?

Hu Angang.- Some Asian Countries are indeed slowly recovering from the crisis, but recovery does not mean that their economies are growing at the same high-growth rate as before. They have come out of recession and are growing again, but that is all. China went through a different patch. When the crisis struck, we were enjoying a continuous high-growth rate, but since then, the economy is growing more slowly. In 1997, the economy grew 8.8%, in 1998, it was down to 7,8% and in 1999, to 7.1%. My Research Centre estimates that since 1978, China has the potential to see its economy grow at yearly rate of 9.5%, the potential is in fact even higher since the nineties, yet we got only 7.1%. Obviously, we lost ground compared to our potential, which, in theory, could be as high as 11% or 12%.

LM. - Is the slow-down a direct result of the Asian crisis?

HG. - I don’t think so. It is a structural problem between demand and supply. On the supply side, we are entering into a period of tremendous change. For instance, agriculture is facing a strategic adjustment: from the 1950s to the early 1990s, the Chinese peasants were struggling to keep up the production level. Then in 1993, the production registered a great leap forward and it did so for the next five years. The original official target of production was to get an harvest of 500 million tons of cereals in 2000, but that level was reached in 1998, two years earlier! Ironically, it was an embarrassment. The government didn’t release the figures for a while.

LM. - But what was the problem? After all, it is better to out-perform rather than under-perform.

HG. - The embarrassment came from the fact that such level means that there is an surplus of about 45 million tons per year, and that has been the case since 1996. There is not enough demand. The result is falling prices both in the domestic and international markets where there is also over-supply. That situation put a lot of pressure on our peasants who rely on farming revenue for the livelihood. The result is that their income grew in 1999 a meager 3.5% in 1999. And in some part of China, farming revenues are about 60 to 70% of the global income, so they were hit harder than elsewhere. To encourage the rural population to diversify their production in order to cap the production and reduce the surplus, the government decided then not to guarantee prices for cereal and so it engineered a slow-down of the sector because demand could not keep up with production! Similarly in the energy sector, at the beginning of the nineties the original objective was to extract 140 million tons of coal in 2000, but in 1996 it reached already 139.1 million tons. Actually the production capacity of the sector is already in the range of 150-160 million tons a year taking into account the numerous new small coal mines that have appeared in townships (xiangzhen qiye). So in 2000, the government decided to bring down the production by 87 millions tons. More than 30 000 small and medium coal mines closed down and we expect that a further 20 000 will follow and may face bankruptcy. As you see there is a tremendous effort of structural adjustment.

LM. - In other words, the industrial capacity of China far exceeds its needs in some sectors, but does it explain the general slow-down?

HG. - Take the manufacturing sector. It is also struggling with over production. In textile sector, the over-production is 100% and in the electrical appliance sector about 90 %! This problem is basically due to many years of blind investments, some of them vowed to fail from the very first day. I must add that, except the retail and food and beverage sectors, the other sectors have not yet been opened. The lack of competition is the main cause of the apathy of the consumers. Over-production means also that the related enterprises do not recruit massively. We face here a kind of vicious circle. We will see what is going to happen after the WTO rules take effect but for the time being it is difficult to know what will happen in those sectors.

LM. - When the crisis struck Asia, the main worry for the outsiders was that China would enter into recession as other countries did, but actually what you mean is that China had already its own production crisis unfolding and the Asian crisis did not add up more pressure to the one already existing?

HG. - Yes, I think that for the case of China, some experts may have overestimated the effects of the external factor that the Asian crisis was. The domestic situation, basically an increasing output gap, has been the determinant factor in our slow-down. The external situation was only adding to the difficulties but was not determinant. The result was that the unemployment rate reached in 1997-98 an unprecedented level.

LM. - There is the rural and urban unemployment, which are two different realities. There are the laid-off workers, the early retirees, the self-employed doing little and many other terms to qualify jobless people. How are you able to gauge the real level of unemployed people in China that are actually looking for a job?

HG. - In 1997, the official “Annual Statistic Yearbook” estimated the jobless at 5,5 million, about 3% of the urban working population. But it is true that it reflects only the declared or registered unemployed people. Furthermore the statistics don’t take into account the workers who have left their companies, the so-called laid-off workers. Actually, when you include them, the number is close to 7% of the urban working population.

LM. - Why are the official statistics hiding the true size of the unemployment in China?

HG. - To some extend, you have a gray area where you have many workers who have not completely terminated their employment contract, or let’s say, are still administratively under a labour contract with an enterprise while actually they are no longer working. At best some receive a fraction of their original salary but most of them actually receive nothing (1). In that context, for the year 1998, I calculated that the total unemployment is at least 15,4 million and at worst 16 million, including 9 million laid-off workers who have not yet returned to work. It represents an unemployment rate of 7,9 % - 8,3%, the highest sudden peak in the history of the PRC.

LM. - How has the government been coping with the problem?

HG. - Its first reaction, in 1998, was to boost the domestic demand in the hope that it will induce job creations. In a report to the Central authorities (2), I had listed five priorities to be implemented at the same time. I pointed out that an employment policy must be at the core of all strategy. The second and third priorities are social welfare and population safety. When people feel insecure about the future and their livelihood, there is no point to talk about consumption or whatever: they are only worried about their situation, their well being and the well being their parent, grand-parents and children. The fourth priority is to have efficient and equitable public services. They need to be efficient because their investment policies have to be adapted to the market rules; they also need to be equitable because the government has the obligation to provide the people in key areas like basic education, family planning, health protection the same standard everywhere For example, in 1997, if half the total rural population in China have access to running water it also means that 430 million don’t have it. And finally, the fifth priority is that any policy must benefit to the poorest. .

LM. - In 1994, you have raised the problem of preferential treatment for the South, under the Special Economic Zone format (SEZ). You were strongly opposed to the privileges that those SEZ got while other regions were not yet assisted by the central government. Would it be different for the West region (3) ?

HG. - The situation is not the same. For the coastal areas at that time, it was necessary to have a special duty-free zone for imports and exports because the raison d’Ítre of the SEZ are their reexportation capability for both domestic and foreign companies. For the Western region, what needs to be done to develop the Western region is to create a better market environment. The question of preferential treatment or privilege does not arise. We plan to open almost all economic sectors to both domestic and foreign investors.

LM. - People have doubts about the rational of this new policy. Did you take part of the decision making process which lead to the final decision of the Go West policy?

HG. - Actually, my first and most important contribution among my academic works and books is definitely this project. I did raise the necessity of the urgency of its implementation since 1994. In 1995 (4), we were wondering if we needed to solve the region development disparities. The government took up my proposal in 1999. Basically, the west needs more FDI.

LM. - Certainly but knowing those areas, I have the feeling that the Government will have to be very persuasive, because the existing deficit of infrastructure, skilled people, and so on and so forth is enormous and will scare the foreign investor.

HG. - Yes. The fact is that the West has to desenclave itself. How can you persuade foreign and even domestic enterprises to come if telecommunication network, wired network and Internet have not reached an international standard?

LM. - You mention Internet. The Chinese government seems to be ambivalent about it. The sector is heavily regulated which is not going to be a very good selling point for high-tech innovative investments in it, don’t you think so?

HG. - The government is afraid by the number of pornographic sites that are available on Internet that is why it is regulated. But I don’t think that the foreigners spend their time putting on-line pornographic shows. So, let them come and do their business! In the long term, we have to open all the sectors and make them attractive to foreign investments. In that context communication between the western areas and the eastern part of the country is crucial.

LM.- Earlier this year, the central government has set-up a new task force to supervise the Go West policy (5). What should be the first step to make the investment environment more attractive for foreign investors?

HG. - For example, we have to liberalize the patent rights, and accelerate the procedure for its registration. Currently about 62 % of the applications for an innovative patent come from foreigners or individual, compared to 31% in 1991. However the rate o approval is a dismal 13 %! In other words, some technologies used probably for quite a long time in Europe or the United-States are kept in a drawer here in China. Why? The delay is engineering an enormous economic loss. So in that respect, we have to do our utmost to facilitate and accelerate their approval. The Government Technological Commission has to accept that qualified foreign companies compete with local ones if we want to sort out the bottleneck. We are working on it.

LM. - The Go West policy is a long-term vision and it will be implemented stage by stage. How do you see it evolving?

HG. - The Go West policy has many goals but they can be summarized in four strategic axis: the first one is the South-East axis, which is the backbone of the region, where we need to develop the infrastructure such as water pipelines to supply the region. The second axis is towards the South that represent a huge potential market for the region but which means that you go through Myanmar. The third one is the Central Asia axis. We need to boost cooperation with the Central Asia region and have common projects such as a gas pipeline (6). The fourth one is the East and North-East Asia axis where we need to open up means of communication between the regions.

LM. - All this requires in fact a high level of international cooperation and clearly China cannot manage such a scheme without the involvement of the neighbouring countries as well as the international agencies.

HG. - That is correct, That is why a couple of weeks ago, I was asked by the MOFTEC and the SDPC (7) to explain my view to a domestic as well as international audience. The IMF and the ADB were there. I emphasize that an important element of the project is that it will not only benefit China and its Western provinces, but it will also contribute to enhance the integration and the competitiveness of the South and South East-Asia markets as a whole. Once the ASEAN region becomes in 2003 a free-trade area, the balance of the region will be different and we will have to follow up. That is the thinking. So, if we see the whole picture, you can easily imagine that in a foreseeable future, railway, highway communications will go from the Western regions through Southeast Asia until Singapore! That’s the strategic perspective of the plan!

LM. - When foreigners talk about political reform in China, they have in mind some kind of pluralistic political party system with a total separation of the Legislature, the Executive and the Judiciary? When I read Chinese essays about “political reform”, they focus on administrative reforms and some sort of democratization of the sociopolitical framework, in particular at the grassroots level (8)? What is your view of the role of political reform in China?

HG. - As I wrote in some articles, political reform is to promote and further economic reforms. Regarding the question of the difference of perception in China and outside China, I want to make things clear. What is what we consider “reasonable” in our country is perhaps not “reasonable” elsewhere. There are many reasons for that difference: historical, cultural, and political. They are in fact entrenched in every country. That is why I call the subject the “China domestic Studies” (9). In the sphere of political reform, it is interesting to observe that in China where we have a rapidly changing society and a fast growing economy, the role and position of both the government and the CPC are changing too. Nowadays, what we call an efficient government team is closely link to its adaptability to the rule of the market economy. And in that new context of reforms, the role of the authorities fluctuates (10). To be more explicit, I listed in 1993, and it is basically still valid in 2000, the 9 spheres of intervention that the government should preserve. One of them is the urgency to balance the unequal development between the coastal region and the hinterland. We are also suggesting that the provincial governments participate to the central decision making process.

LM. - Even in budget matters?

HG. - Certainly not. The local governments should not and cannot actually interfere with the central taxation and financial policies. The central government has, however, to encourage localities to regulate themselves their income flow and affectation of resources. China is too big to become an absolute centralist government led political system, but it cannot for the same reason fall into a complete decentralized system. The repartition has to be well balanced.

LM. - Is the relationship between the government agencies and the CPC organs also changing?

HG. - I see the problem differently. I would rather say that the most urgent task is to transform the “Revolutionary” CPC into an “in office” empowered CPC. Somehow it is not really a problem of separation of prerogatives, but rather a more basic governance problem. How do you exercise your power with high efficiency? In that process, you have to eliminate all kind of disparate interest groups and influence. The daily preoccupation has to be do my policies benefit the largest segment of the society? Do my policies help first the poor, then the rest of the population? The question of the separation of the Government tasks and those handled by the party is an old story. Now, I don’t care if you are secretary and governor or at the Standing Committee. I look at what you deliver.

LM. - What about transparency and accountability then?

HG.- You touch the point! The system needs more transparency in order to make sure that the policies are conceived for the welfare of the people, because, after all, politics is a matter of compromise. If you manage among all sort of divergent interests to sort out a political program which is the most representative and fruitful for the population, you are on the right track.

LM. - What is the current role of the People’s National Assembly?

HG. - Actually, the People’s National Assembly’s Standing Committee members and the deputies do have so far much weight in the political decision making process. The PNA has to be more professional in its work. The relation between the Assembly and the State Council have to be adjusted, to give to the Assembly the possibility to fully exercise its political role, as the highest State organ of the country. Moreover, the deputies must have an individual office, with an assistant who can collect information regarding some specific matters, like in the US or Taiwan for example, where they have a good system. That is the only way to avoid talking about crucial political issues without the necessary information.

LM. - Do you mean that you advocate to import some US political practices in the Chinese political structure?

HG. - That’s not what I’m saying. My point is that some mechanisms and practices have to be implemented in PNA to increase its professional level and efficiency. It has nothing to do with the US. China had come through twenty years of reform successfully only because it has respected its own political culture and inherent logic. We can even say that China has developed itself that way because it had chosen the best configuration for it to sustain, naturally and without any cogitation about the “why” and “if” or whatever. The road China has traced for its development was and is definitely the only one, which correspond with its human, economic and political context. So, the only thing I can say is that the China you see today is the direct product of Deng Xiaoping reign, and its policy never forgot the very fundamental and only element that matter: the land and its people.

LM. - If you were in charge of the reformist agenda of the government, what would be your priorities?

HG. - China must handle three major reforms, in the social sector, in the State-owned enterprises sector and in the finance sector. However these three reforms cannot be considered at the same level of priority. As far as social stability is concerned, amongst the triangular relationship and interaction feature between reform/ development/stability, stability comes first. On that point I am not exactly in accordance with the 15th Congress statement - I argue that China needs first a new social welfare system. Secondly, the SOEs reform and restructuring has to be cut off from the social welfare system, which actually is a burden for enterprises. To do that will enhance the SOEs’ ability to change their management style. Third, the finance sector reform has to take into account China’s specificity and development constraints.

I would like to add that in that process, our political leaders, whoever they are, should increase transparency in the implementation process of the reforms. They should allow or encourage local cadres, PNA members, and experts to participate more actively in it. Zhu Rongji, the Prime Minister, has already stressed in his political statement earlier in March during the PNA session that the social welfare system is to be overhauled completely. In 3 or 4 years China should be able to reach a new stage of virtuous development capability. Even though we have 20 years of reforms behind us, there is still so much to do that you feel everything is going too slowly!

LM. - Some countries doubt about the willingness of China to fully play the game of globalization. Since the earlier 1990s, this kind of vision has led to the so-called “China threat” theory, regarding the increase of both its economic and political, as well as military power on the international scene. What’s your own vision of China in 2000?

HG. - I don’t agree with the so-called “China threat”. Let’s say on the subject of the role and place of China in today’s world that the word that applies is “contribution” and not “threat”! China has a GDP growth that is three times the average world growth. The World Bank has calculated that out of a 3% worldwide growth, China contributes 0.3%. Then among the trading nations, China has an average of 14% of growth of its trade exchange volume, while the average world growth is around 4 or 5 %. Finally, China’s contribution in agriculture products, like cereals, is developing much faster than many western countries. Here, I’m talking about new achievements, compared to industrialized and advanced countries like the United States or Europe. Of course, in absolute, we are not at the top, but you have to see our progression, from where we started and where we stand now and our contribution to the world economy at large.

Summer 2000

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Notes:

1.- Workers wages can be reduced (jianfa) or cut off (tingfa). It depends mostly on the employer’s policy. For those who leave, they receive once and for all a compensation package of several ten thousand Yuan (i.e. several thousand USD) which more or less to an early retirement pay-off. However, past 50 or 55, they are not going to benefit from any social cover from their employer even if they have worked 25 years for the company. The situation is rapidly evolving and some kind of retirement scheme or retraining program is currently experimented at a local level.

2.- “The policy to expand domestic demand should not only serve the purpose of stimulating economic growth and preventing economic recession, but, more importantly, should embrace the principle of enriching the population. This means first resolving the livelihood problems affecting 1.25 billion people, such as redundancy and unemployment, the release of pensions, delays in payment of salaries, financial hardship among the lowest-income families, employee medical insurance, etc. To achieve this requires the implementation of ‘Five Priorities’, as outlined below.

a) Employment. It should be given top priority among the various development objectives. This entails central and local governments making job creation and a reduction in the high unemployment rates the key objectives of economic growth and social stability. Since the 1990s, the relationship between economic growth and job creation has been severely weakened in our country. The elasticity coefficient of national job creation in the 1980s was 0.323, but it dropped to 0.109 during the ‘Eighth Five Year’ period. In 1998, the number of newly employed increased by only 3.57 million people and the employment growth elasticity coefficient fell to 0.064. This reflects a model of growth without employment. China’s labour resources account for 26.3 per cent of the world total, but its capital resources make up just 3.4 per cent. In 1998, the urban unemployed population in China was between 15.4 and 16.4 million and the actual unemployment rate was in the range of 7.9 to 8.3 per cent. This was equal to the total number of unemployed in the European Union (EU), where employment has become a common priority which all members of the EU must pursue. Based on the above, China decides to choose an economic growth model which is centered on employment. The creation of more employment opportunities and expansion of the newly employed population are prime tasks of governments at all levels. Employment should be given the utmost priority among economic and social policies, and in the short term, we should aim to keep urban unemployment down to 5 or 6 per cent.

b) Social Security. The second priority is reform of social security systems during the implementation of various other reform proposals. The reform of retirement pensions, unemployment benefit and employee medical and health insurance systems should take precedence over the reform of state-owned enterprises.

When tackling problems in large and medium-sized state-owned enterprises, priority should be accorded in relation to the impact of retirements, redundancies, medical insurance expenses and other social burdens. The success of state-owned enterprise reform will depend largely on the successful reform of external elements, especially that of social security systems.

c) Social Stability. Our country is now entering a new period of social instability. When handling the relationships between reform, development and stability, the maintenance of social stability must be given priority. The implementation of reform measures that threaten stability or offer little benefit to the public may be carried out cautiously, while the implementation of more beneficial measures can be prioritized and accelerated. If the benefits cut across different levels of the population, for example in telecommunications and higher education, then the reforms should be boldly undertaken. In order for reforms to receive wide political support, we should not undermine existing benefits and we should try to help as many people as possible. Even if it is only a minority, who are adversely affected by a certain reform, we should compensate them appropriately and promptly (in both economic and non-economic terms) so as to alleviate social injustices and eliminate destabilizing factors.

d) Fairness. The fourth priority is that of fairness in public services and income distribution. When exploiting market mechanisms and stimulating economic growth, we should follow the principle of prioritizing efficiency. However, when it comes to providing basic public services, we should adopt the principle of prioritizing fairness. To this end, we should aim for a consistent standard of basic public services across the whole population. This should include elementary education, basic sanitary services, family planning, a potable water supply for rural residents, a rural power supply network, and other basic services that everyone is entitled to enjoy. In 1997, for example, only half the rural population enjoyed the use of tap water, and about 430 million people had no drinkable tap water. This is an important area in which the government can improve the livelihood of the people and expand domestic demand, as the social benefits of these public services greatly exceed personal benefits. This is precisely the area where public expenditure should come into play.

d) Low-income Families. The expansion of domestic demand and the stimulation of consumption should benefit first and foremost the low-income population in urban and rural areas. Increasing the income of these people and stimulating their consumption should be our priority. Public investment should be directed initially to the public services, public engineering and construction projects needed by them, and the social security system should protect their basic interests as a matter of priority”. This article (extract) is taken from the Seminar Paper presented at the Economic Situation Expert Seminar hosted by Premier Zhu Rongji held on 2 June 1999. (Translated from the Chinese: “Prospects of China”, Zhejiang People’s Publishing House, 2000, P78-85.

3.- The “go West” policy aims to reshape the economies of nine north-western provinces: Xinjiang, Qinghai, Tibet, Gansu, Ningxia, Shaanxi, Sichuan, the Autonomous City of Chongqing, Yunnan, Guangxi and Guizhou. Ningxia, Qinghai and Gansu are among the most backward provinces in the country: 50 to 70 per cent of the population are engaged in agriculture. 6 per cent of Gansu’s 25 million people live below the official poverty line. In 1999 the nine provinces plus Chongqing have only attracted US9.9 billion in investment.

For the provincial top leaders, the most crucial issue are reaching in the coming years a double-digit high economic growth and recruit new talents, including well-trained government cadres in the region. It was declared that “extra-preferential” terms would be granted to foreign investors. Some provincial authorities of the concerned provinces would like to match all preferential terms offered by the SEZ of the coastal provinces.

4.- In the earlier 1995, the 5th plenary session of the 14th Central Committee of the PCC was concerning the reduction of inequalities of regions’ development.

5.- The Leading Group for Western Region Development. Its Director is Zeng Peiyan, and its vice-Director Li Zibin. Both have a ministerial ranking.

6.- A gas pipeline project of 120 billion Yuan from the province of Xinjiang Tarim Basin to Shanghai (4200 km) is considered to add up as much as a 3% growth potential to the western province. It would add 7.2 billion Yuan a year to Xinjiang’s industrial production by 2010, supplying an annual 21 billion cubic metres of gas to Shanghai. In July, Beijing announced that it would allow foreign investors to take up a controlling majority in the project.

7.- SDPC: State Development and Planning Commission of the State Council. Its Director is Zeng Peiyan, with rank of minister. The SDPC is a commission of the State Council, and is comparable to a minister but because of its size and covered areas, it appears to be in fact a super-minister despite its appellation of “commission”. The State Council’s organisation has been reorganized several times since the 1950', but keeps its fundamentals: 29 Ministries or Commissions (bu wei), 19 organs directly under the State Council (zhishu jigou), like the Customs, 7 offices of the State Council (banshijigou), like the Overseas Chinese Bureau, 10 Specialised Units directly under the State Council administration (shiye danwei), like Xinhua News Agency, 19 Departments under the administration of the Ministries or Commissions (guojiaju) like the Department of domestic Trade under the Commission of Economy and Trade.

8.- There are fundamentally two specific approaches of the political reform as a system in China and abroad among scholars. The so-called “zhishang erxia” approach and the “zhixia ershang”. The former one describe the processes of political changes from the top of the establishment which means a “democratization” of the decision making process with emphasis on public policy transparency. For some of the foreign scholars, it implies also introduction of a multi-party system. The latter deals with “democratization” of the system first at a grass root level, aimed at progressively reaching the top. One of the experiences in that area is the “ villages elections” process experienced since the 1990s. For many Chinese scholars, the problem is seen differently: one of the political reform target is to reach the so-called “rule of law” and for that to make first the government become in accordance with this legal framework. In Chinese this process is called: “standardization of Government’s behavior and action” (zhengfu xingwei guifanhua).

9.- “Zhongguo guoqing yanjiu”.

10.- The 9 sphere of intervention as mentioned in “The Government and Market” (zhengfu yu shichang), by Hu Angang and Wang Shaoguang, January 2000 are as follow: 1. Develop an unified and healthy competitiveness ruled market, 2. Encourage public investments, especially in infrastructure, 3. Implement a proper industry structural reform policy, 4. Resolve disharmonious development of the regions, 5. Maintain the control of the population growth path, and explore human resources, 6. Protect the environment and natural resources, 7. Prevent and manage the natural disaster, 8. Regulate and control the public capital , 9. Implement the anti-poverty plan

Summer 2000

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