Chinese Economists on Economic Reform - Collected Works of Li Jiange

Jiange Li, China Development Research Foundation

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317206972
• Edition: 1
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

This book is part of a series which makes available to English-speaking audiences the work of the individual Chinese economists who were the architects of China's economic reform. The series provides an inside view of China's economic reform, revealing the thinking of the reformers themselves, unlike many other books on China's economic reform which are written by outside observers.

Li Jiange (1949-) is one of the most notable and powerful economists holding office in China at present. He is currently the Vice-Chairman of the Central Huijin Investment Company, one of the most influential financial institutions in China. He is also a member of the National Committee of the Chinese People's Political Consultative Conference, and a Professor at the Chinese Academy of Social Sciences and other academic institutions. He has held many important positions in the state Research Office and the Department of Policies, Laws, and Regulations, and has been Director of the China Securities Regulatory Commission. His work has included major contributions to debates about maintaining financial stability, about achieving equitable income distribution, and about China's overall economic development.

The book is published in association with China Development Research Foundation, one of the leading economic and social think tanks in China, where many of the theoretical foundations and policy details of economic reform were formulated.

1	A debate on the relationship between planning and the market^1
	(1991)

The relationship between planning and the market is an issue that has long been debated in the field of economics. It has been controversial since the very birth of socialist economics. The ebb and flow of the issues can be charted in China’s theoretical circles even prior to the start of reform in 1978. The discussions back then developed from an exploration of the ideas of commodity production and the law of value under a socialist system. We can discern four main periods of debate on the issue.

The first occurred in the year 1953 and revolved primarily around the views put forth in a book by Stalin called, Issues on the Socialist Economy of the Soviet Union. The debate in China attempted to integrate those views with the realities of China, and to evaluate the role of the law of value in a socialist economy. The second was in 1956 and 1957, when the debate focused on the relationship between the law of value and a planned economy. The third was in 1958 and 1959, when the focus was on the role of the law of value given the formation of people’s communes in the countryside. The fourth was between 1961 and 1964, when the focus was on the relationship between the law of value and the management of a socialist economy (including the basis for price formation).

These debates were not merely academic and of little consequence. They were brought on by and carried out in the context of major economic events. They also were not a matter of polite quibbling among scholars. Some of our most courageous elders, such as Sun Yefang, paid a heavy price for their steadfast adherence to the truth. At the time, economists may not have been able to use plain-spoken language to describe their correct views, but they nevertheless were tenacious in pursuing and exposing the truth. In doing so, they were able to create an example for the generations of economists who have followed, and it is an example that cannot be erased.

After the Third Plenary Session of the 11th Central Committee of the Communist Party of China, an approach that called for “seeking truth from the facts” received official policy support, which broke through mental bonds that had held back people’s thoughts and energies. In the sphere of economics, a great debate began about the theories that would support reform of the overall economic system. The key subject of this debate was presented as the relationship between planning and the market.

This debate was to rise to a high pitch several times over the next ten years. At the outset, around 1978, the topics centered on whether or not commodity production and commodity exchange could or should be carried out under a socialist system. Around 1982, the topics focused on which was to be “primary” and which “secondary,” or “supplemental,” as the relationship between planning and the market evolved. The third high point of debate came in 1984, when the subject was defined as “whether or not a socialist economy is a commodity economy with a plan.” The fourth high point came in 1987, when the subject was whether or not “a commodity economy with a plan” could in general be described as one in which “the government regulates the market while the market guides enterprises.”

It is not hard to see the tracks of how the debate proceeded among economists over this past decade or so. One can read the progress in the topics discussed. Colleagues from other socialist countries felt that China’s theoretical explorations in this period were pioneering in terms of the reform of socialist economic systems. The real accomplishments of China’s economic-system reform during this period have been apparent to all. Naturally, there has been an enormous and unanticipated gap between understanding theoretical models and putting them into practical reform proposals. After achieving consensus on theoretical models, we frequently found there were different views on how to implement reform. On the heels of each initial debate on theory, therefore, came the debate among economists about implementation. The most disputed aspects related mainly to the question of whether reform should start with price reform or with enterprise reform. The two sides of this question became defined as those espousing “price reform first,” and those espousing “enterprise reform first.” Debate on this issue began in 1986, after which it proceeded through several periods of moderate intensity.

More recently, the debate within China’s economic circles on “how to integrate a planned economy with regulation by the market” can be seen as a continuation of the four main periods of debate as described above. It marks a fifth chapter. Many, however, feel that this time the debate is going around in circles, without making the kind of progress that the four previous periods of debate were able to make. Many of the articles this time seem to repeat what was said over and over again in recent years. Naturally, correct points of view often do need to be reiterated and expounded upon. The problem is that many concepts and ways of stating things are now being set forth as indisputable and proper, while in fact they deserve reexamination and new understanding. I feel that the term “industrial policy” is one of these. This term began to be used extensively in China in 1987, together with an associated concept that was regarded by some as self evident: “[the prices of] upstream products should be controlled by planning, while the prices of downstream products can be released.” This assumption has become one way to try to integrate planning with the market. I feel that in fact it deserves close examination and further research.

In early 1986, under the guiding spirit of the Recommendations of the Central Committee of the Communist Party of China on the 7th Five-Year Plan, relevant government departments in China gathered their forces to come up with a reform proposal. Centered on price reform, this included sets of complementing reforms in taxation and public finance. At this point, however, some comrades put forth the idea that reform should start with enterprise reform as opposed to price reform. Price reform should be postponed until new enterprise mechanisms were ready and able to handle it.

Given this opinion, which was in opposition to price reform, and given the over-heated economy at the time, the situation was not conducive to price reform. The complementing sets of reforms were therefore also put on the shelf. At the end of 1986, a kind of enterprise reform was gradually instituted nationwide that focused primarily on what was called the “cheng-bao” or contract system for enterprises.

People very quickly discovered, however, that mobilizing this kind of partial reform could not resolve problems of inefficient allocation of resources. Merely stimulating greater production among enterprises, and encouraging their profit seeking, created greater problems so long as it did not also allow for the formation of a real market. Relationships among industries in modern China are quite complex. While reform proceeded to “marketize” and “monetize” some parts of the economy, other parts retained very considerable administrative interference. They retained “administrative special privilege,” and a system of “administrative control.” A “two-track system” was applied to all market parameters, including prices, interest rates, and exchange rates. As a result, the system itself distorted the market and the distortions were amplified by the profit incentive that the system provided to enterprises. The result was an intensification of “rent-seeking” activity which served to corrupt society in profound ways. Due to an improper sequence in reform measures, chaotic and corrupt behavior characterized economic activity. The result aroused dismay and anxiety among people working in the area of economic theory, as well as people heading up the process of reform.

Various alternative ideas then began to arise to meet the needs of the time. These sought to realize an improvement in resource allocation while still retaining the two-track system and still skirting around the idea of complete price reform.

Three proposals were among the more influential at this time: (1) The first was to set up a “system of decision-making prices.” This substituted artificially calculated prices for prices as determined by the market. It evaluated the economic performance of each enterprise by the use of accounting methods and determined the percentage of profits that should go to the State and the percentage that should be kept by the enterprise. Based on the resulting “pricing system,” State economic management departments would formulate macroeconomic policies that rationally allocated resources. (2) The second was to have governmental administrative departments rate industries in accordance with their importance. Then, using a set of “industrial policies” that included such considerations as public finance, tax revenues, interest rates, and licensing procedures (“review and approval procedures” undertaken by administrative departments), the government would “optimize industrial structure.” It would restrict the growth of certain industries and promote the development of others. (3) The third was to abolish the two-track system that allowed for two prices for the same commodity, but to retain the price-formation mechanisms that allowed for two different prices for different kinds of commodities. That is, for upstream commodities, only the planned price would be applied. For down-stream commodities, the market price would be employed. This would allow the formation of a socialist-economy model that integrated both the plan and the market.

At the time, China’s relevant leaders gave support to each of the above three recommendations and ways of thinking to varying degrees. People recommending the first proposal, however, did not buttress it with a clear-cut set of ways to implement it or do the accounting. Moreover, many Chinese as well as foreign scholars felt that this was an “illusion” that had long since been regarded as a kind of “computer-generated Utopia,” so it quickly disappeared. The other two proposals soon became popular among theoretical circles as well as relevant departments, due to the strong support of government leaders. A minority of economists raised objections, but the majority went along with these views without very serious reflection. Among these were economists of various theoretical backgrounds. These two views have therefore become entrenched in recent years, and are among the few that have not caused any notable debate.

I personally feel that these two ideas have serious shortcomings. It is not accidental that they appeared in the spring of 1987. Their appearance is linked quite profoundly to systemic and theoretical causes. The systemic causes relate to the fact that the “cheng-bao” or contract system for enterprises appeared as a “solo reform” without any reform of resource-allocation mechanisms that should have accompanied it. The theoretical causes relate yet again to the issue of the relationship between planning and the market. Naturally, there may well be other reasons this issue continues to this day to provoke a “counter-reaction in people’s understanding.” Discussing such things is not within the scope of this particular article, however.

In what follows, I present my own views on the two concepts as sketched out above.

“Industrial policy” is a concept that China’s economists imported from Japan in the early 1980s. It must be said that this approach did make positive contributions to the high-speed growth of the Japanese economy, as many people in the international community have said. However, one thing has been remarkably overlooked—there is a great disparity between the conditions for implementing industrial policies in Japan and in China. This is true even as China is inclined to have a vastly exaggerated opinion of the role of industrial policy.

Quite a few Japanese economists persist in emphasizing the role of industrial policy in Japan, particularly those who work with government organizations,² but this is by no means the consensus of all economists in the country. Many Japanese economists have consistently had doubts about the role of industrial policy, and even rejected it altogether.³ As representative of this school of economists, Professor Ryutaro Komiya of Tokyo University feels that the fact of Japan’s rapid economic growth is not sufficient to prove that Japan’s industrial policy made the difference. Japan’s economy would have grown even without broadly based intervention. Of course, despite shortcomings, post-war industrial policies did serve the purpose of collecting, exchanging, and disseminating industrial information. They were effective in this, but Professor Komiya has repeatedly pointed out that they had an impact mainly on areas in which the market had ceased to be effective.

In evaluating the role of industrial policies in Japan, I feel that at the very least we should take the following points into consideration.

First, Japan’s industrial policy is not all-inclusive in the sense that it does not include everything within its scope. Japan’s government encourages private enterprises to invest in industries that it feels are important through the use of direct funding, tax policies, and subsidies. In no way does it limit or restrict private enterprises from investing in industries that it feels are not “key” industries. Moreover, Japan’s supportive policies are targeted at entire industries. Because of this, competition among specific enterprises in any given industry is intense. Industrial policy in Japan does not stifle the vitality of the market economy.

Second, industrial policy, like the economic plans of the Japanese government, is the product of coordinated opinions and cooperative actions among government officials, the financial community, the trade unions, and insightful economists. Despite such coordination, neither the national economic plan nor the government’s industrial policy has any binding force. Nobody in Japan feels that he must comply with numbers put forth in the government’s plan, or that he is responsible for the figures.

Third, Japan’s industrial policy has brought on considerable negative side effects in the past. For example, industries that are protected and supported are frequently those that are already well established, not those that are young and in need of help. This has had the effect of creating excessive demand for labor in an economy that is already fully employed. The result has been to damage all industries across the board. This uses preferential policies to develop a particular industry, while forcing other industries, and indeed the entire society, to pay an excessive price.

One cannot overlook the case of the Republic of Korea when talking about the positive and negative side effects of industrial policy. Many scholars are loud in their praise of that country’s industrial policy when they evaluate its high-speed growth, but such an evaluation is not sufficiently thorough in its analysis. Starting in the 1960s, the Republic of Korea gave preference to developing heavy industries and the chemical industry. In addition to various internal and external conditions, this contributed to 20 years of high-speed economic growth. By the late 1970s, however, severe inflation and a heavy external debt forced the country into a profound economic and social crisis. After some bitter struggles, the country transitioned from being “an economy dominated by the State,” to being “an economy dominated by the market.” This enabled it to get through a very difficult period and establish its economy on a stable and more coordinated basis. It began to enjoy more efficient growth. Among other measures, the Republic of Korea resolutely gave up a discriminatory policy that leaned in the direction of certain industries. In a more equal approach, it encouraged investment in all industries, and this is regarded as one of the more significant measures leading to its economic success.

When we discuss the role that industrial policy might play in the economic growth of China, as compared to Japan, we should first look at the differences between the underlying systems of each country—that is, the context within which industrial policy must operate. This is more important than looking simply at the benefits and drawbacks of industrial policy in China alone.

In Japan, the basic principle behind industrial policy is that it “operates through the market to enable the initiative of private enterprises. It respects the autonomous standing of private enterprises.”⁴ Therefore, when people are loud in their praise of the success of Japan’s economic planning and of its industrial policies, they should not forget that “the core of Japan’s economic system is free market enterprise.” “All government measures are carried out under the premise of protecting a free market system. Any interference by the government in the economy is temporary, supplementary, and indirect.”⁵

In China, however, there has been a profound misunderstanding of Japan’s experience ever since we began to import ideas of industrial policy from Japan. Some comrades feel that all we need to do is master some of the specific methods by which industrial policy is applied, and we too can then optimize our industrial structure and achieve high-speed growth. They go even further in believing that the government can now reassert itself in managing economic affairs. China took the initial steps in releasing authority to lower levels of decision-making, they say. Now, in order to address certain shortcomings in the process, such as the “blind” nature of distorted industrial structure, the government can again step in with greater intervention. I regard this kind of thinking as overly simplistic.

First, China’s market is still highly immature. The ability of its market mechanisms to allocate resources is weak. What’s more, the two-track system has created a chaotic situation, in that the market operates with one set of rules, “releasing prices,” while the planned sector operates by another set of rules, controlling prices. The scientific value of any kind of industrial policy that is formulated on the basis of such a situation is suspect. Any such industrial policies are based on distorted information about social and economic behavior.

Second, administrative interference still constrains enterprise behavior in China. This is so even though the country’s enterprises, and in particular its State-Owned Enterprises, now enjoy decision-making autonomy that would have been hard to imagine prior to reform. Such interference weakens the control that any enterprise might have over its own budget. This is especially true given that administrative interference is coupled with the ongoing existence of “State paternalism.” Enterprises are therefore unable and also unwilling to react in a timely manner to changes in the market in ways that serve their own interests or even those of the State. This makes the State unable to use the market as an intermediary in implementing policy. The market is unable to serve the role of “guiding” or “enticing” enterprise behavior. So-called industrial policy therefore becomes nothing less than direct administrative interference in the micro-affairs of individual enterprises.

If industrial policy is understood to mean that the government adopts supportive policies toward certain key industries while placing restrictions on others, or even forbidding the development of others, we should all recognize that this kind of thing is nothing new. Slogans of China’s past reveal an “industrial policy” that leans in t...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Brief biography of Li Jiange
• Foreword
• Preface by the author
• 1 A debate on the relationship between planning and the market
• 2 “Futures” in China: theory, policy, and systems
• 3 On making China’s system of circulation more market-oriented, and on creating institutions to handle the market
• 4 The role, responsibility, and destiny of economists
• 5 On capital markets
• 6 China’s reform and opening up, and the establishment of clean government
• 7 Going beyond the labor theory of value
• 8 Various thoughts on rural employment, rural finance, and rural 104 public healthcare
• 9 Financial innovations, financial stability, and financial regulation
• 10 China’s energy sector: issues of government regulation, and making the sector more market-oriented
• 11 On income inequality and being industrious
• 12 A look at the stock market from a new perspective
• 13 Concepts that underlie market regulation
• 14 Incentive mechanisms, moral hazard, and the basis for a market
• 15 Xue Muqiao: a great master who experienced the vicissitudes of a century
• 16 What exactly do we want to learn?
• 17 A letter on income distribution
• 18 Why are medical costs so high?
• 19 How to pull medical resources together and distribute them in a reasonable way
• 20 China’s evolving industrial policy
• 21 Striking a balance among wages, employment, and efficiency
• 22 A new approach to the old problem of “empty accounts” in pension funds
• 23 NDC: a pension-fund reform model that is worth considering
• 24 Prudent handling of the three main relationships
• 25 On transforming China’s mode of economic growth and speeding up economic restructuring
• 26 Economic development and environmental protection
• 27 Resolving fairness issues must rely on “reform”
• 28 Strategies and goals for a water-conserving society: new conceptual approaches for handling water issues
• Major works by Li Jiange
• Index