road ahead for capitalism in china

Works Cited

Jinglian, Wu. "The road ahead for capitalism in China." McKinsey Quarterly (Special Edition 2006): 116-120. Business Source Premier. EBSCO. [Library name], [City], [State abbreviation]. 5 Apr. 2008 <http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=22060439&loginpage=Login.asp&site The road ahead for capitalism in China Having undergone over 20 years of steady and fundamental economic reform, China has taken big steps toward its goal â&#x20AC;&#x201D; creating the framework for a market economy under the rule of law.

However, an evolving China faces a number of challenges: solving the remaining problems of the old system, resolving the contradictions generated during the period when the new and the old systems coexisted, and establishing a suitable environment for the new one.

China's problems include a stagnant rural economy, poor rural people, and a backward rural society, the incomplete restructuring of the state sector and of state-owned enterprises, serious unemployment in cities, a fragile financial system, polarization between the rich and the poor, social disorder, and widespread corruption. The country could have either of two starkly contrasting futures. One road leads to a market economy under the rule of law, with a civilized political order; the other leads to crony capitalism. In view of the complicated contradictions and the possibility of an economic and social crisis, the way ahead for China lies in furthering economic, social, and political reform and in comprehensively establishing and improving the free-market economic system.

First, the country has a long way to go in improving the structure of corporate ownership, though nonstate sectors have made great progress.

At present, state-owned enterprises still control the most important resources â&#x20AC;&#x201D; especially capital.

We should make an effort, as soon as possible, to adjust the structure of the state sector and to transform SOEs into market-oriented corporations. Moreover, we should enthusiastically explore, audaciously experiment, quickly assess our experience, and blaze a variety of new trails to introduce public ownership in a form that is compatible with production for the benefit of the whole country.

Meanwhile, all policies promoting the private sector's development must be implemented seriously, since they benefit the national economy and the people's livelihood; all rules and regulations that discriminate against nonsrate companies must be abolished to help them develop. In this respect let's remember that administrative power still intervenes in market transactions in many ways, so owners of private businesses often take the mistaken path of crony capitalism. That is what the government must take effective measures to prevent.

Second, apart from a small number of SOEs in special industries, businesses controlled or partly owned (but not controlled) by the state should not have any special privileges and should be required to compete fairly, in the same legal environment, with businesses owned in other ways.

Under the planned economy, state enterprises undertook many social functions that should not have been their responsibility and received preferential treatment, in many respects, from the government.

That made it difficult to measure the performance of these enterprises fairly and objectively. In the new economy they should all conduct their businesses as incorporated entities that are responsive to the market in order to help them make decisions independently and assume sole responsibility for profits or losses, as well as to separate the Communist Party's leadership from day-to-day administration.

Third, the constitution and the law must declare that property gained legally will be protected and that all economic sectors will receive equitable treatment, without discrimination. Laws and regulations should be reviewed comprehensively to eliminate differences in the treatment of various economic sectors and discrimination against nonstate sectors in regard to pricing, taxation, financing, market entry, and legal and social status. Great efforts should be made to create a suitable environment for fair competition: everyone ought to be equal before the free market, all economic sectors ought to be based on honest labor, and lawful operations ought to function within a unified national legal framework.

Fourth, China officially entered the World Trade Organization in December 2001, so after a five- to six-year transitional period the country will participate in global economic cooperation and

competition under the principles of free trade, represented by the rules of the WTO. China's government, enterprises, and people, however, have not yet regulated their behavior according to the norms of the global market and international cooperation. To adapt to the new situation China must abolish laws and regulations that do not conform to WTO rules and establish laws and regulations that promote fair competition. Likewise, China must eliminate restrictions on foreign investors and foreign companies under the commitments it made upon acceding to the WTO. Special preferential treatment for certain foreign companies should also be abolished so that the national government treats all businesses, with or without foreign investment, equitably as soon as possible.

Fifth, the socialist principle of social justice and common prosperity must be observed. Currently, income gaps among the people and between urban and rural dwellers have grown to such a dangerous degree that they might cause social instability. The state should use laws and policies to prevent most public property from falling into the hands of a few wealthy people during the early stages of the country's new ownership structure. Meanwhile, to improve the standard of living, the government must make full use of its policy tools (such as taxation for the benefit of social-welfare institutions) to assist widowers, widows, orphans, the childless, the aged, the disabled, and the ailing; to prevent the concentration of personal wealth in a small number of people; to prevent polarization between the rich and the poor; and to ensure the gradual achievement of the socialist goal of common prosperity.

Sixth, the government must regulate its own behavior to regulate the behavior of economic entities in the market and to create a good market environment. So far, government reform has not kept pace with the development of the market system. As the provider of public goods in a market economy, the government should only serve society, not order about ordinary businesses and people; it should play the role only of referee, not coach or player. Governments at all levels should try their best to conduct their own business: namely, to provide society with low-cost public goods rather than meddle in issues that should be dealt with by businesses, such as the country's human, financial, and material resources, as well as production, supply, and marketing.

Seventh, as a country with a "strong tradition of feudal autocracy and a weak tradition of democratic legality,"[1] China has a great and formidable task in implementing the rule of law and creating a constitutional democracy. Time and tide, however, wait for no man. Establishing the rule of law is a vital step for China, which must stand on its own two feet among the multitude of nations in an era of constant progress. Therefore, in this new historical period, the main themes of reform will be comprehensively improving the free-market economic system, promoting a civilized political order, establishing a democratic system, and building a society under the rule of law.

1 Deng Xiaoping, "On the Reform of the System of Party and State Leadership," in Selected Works of Deng Xiaoping, 1975-1982, Volume 2, revised edition, Beijing: Foreign Languages Press, 1984, p. 332.

Article at a glance Two starkly contrasting possible futures exist for China: a market economy under the rule of law or crony capitalism.

The right way ahead lies in furthering economic, social, and political reform and comprehensively establishing and improving the free-market economic system.

To achieve these goals, China must force stateowned enterprises to behave more like private companies, end the discriminatory treatment of private companies, and ensure that the social system protects the weakest members of society.

Building a democratic society under the rule of law will be a main theme of reform in the years to come.

The constitution and the law must protect property gained legally, and all economic sectors should receive equitable treatment This essay is adapted from the concluding chapter of the English-language version of Understanding and Interpreting Chinese Economic Reform, translated by Wang Jianmao, professor of economics and academic director of the MBA program in the China Europe International Business School.

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PHOTO (COLOR): One of China's leading economists and a longtime champion of its transition to free markets says that it faces two starkly contrasting futures: a market economy under the rule of law or crony capitalism.

PHOTO (COLOR) ~~~~~~~~

By Wu Jinglian