CHINA
AND RUSSIA
How should China handle their rising unemployment
and increased social discontentment and how does their labor market compare
to Russia's?
I.
Introduction
II. Historical
Overview: the reform of State-Owned Enterprises (SOEs)
A.
Pre-1978 China and the current SOE situation
B.
SOEs under the Former Soviet Union and
the
current situation
III China and Russia: a comparison
of the effects of
SOE
reform on LABOR
A.
Attitudes of the people toward reform
1. Differing histories
2. Current political situations
B.
Mobility
C.
Wages
D.
Recruitment and incentives
E.
In search of a social safety net
IV.
Theories and proposed solutions
concentrating
on the LABOR Market
V.
Conclusion and personal reflection
VI. Works
Cited
Introduction
The ability to balance efficiency with equality
in an economy is a predominant focus of economic development. Typically,
income inequality in developing countries has increased with economic growth.
China, following the reforms of 1978, has encountered rising inequality
as well, and economists attribute the growth in inequality and social discontentment
to the large amount of state-owned enterprises (SOEs). A country
with a command economy has the option to continue to provide equal benefits
to its people inefficiently in SOEs, which impedes growth, or to adopt
an efficient market structure, which includes SOE reform and results in
massive unemployment in the interim (9). China and Russia are both
making the transition to a market economy, although in very different ways.
One consequence of economic transition that the countries have in common
is that their people, who have always had access to equal benefits and
secure jobs, are now being forced to ensure their own personal security
and well-being, due to the closing of state owned enterprises (SOEs).
The following research focuses primarily on the reform of SOEs in China
and their effect on the labor market in relation to such aspects as wages
and mobility, and with a comparison to the transition in Russia (8).
My hypothesis is that China must continue on
its steady pace of reform, but must concentrate more on developing needed
sectors of the economy such as infrastructure and private housing to create
more jobs and build opportunities for the masses; China must be careful
not to increase the speed of reform too much, in order to safeguard the
well being of the people and not end up in a state of social turmoil, as
in Russia.
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Historical Overview: the SOE problem
Pre-1978 China and the
current SOE situation
Modernization has given China the fastest growing
economy in the world, but with it great challenges in supporting a population
of 1.22 billion through the transition to a market-based economy and the
transition from a rural to an urban society. With the pre-1978 economy,
the government controlled all aspects of production and allocation of resources,
as well as the "iron rice bowl" of workers who maintained a guaranteed
lifetime job tenure. However, with the reforms of Deng Xiaopeng and
the gradual privatization of SOEs, which is necessary tomaximize efficiency,
unemployment has grown rapidly. 
Although
statistics from China show an unemployment rate of 3% for 1998, most believe
this figure be understated because it does not account for the millions
of Chinese workers who have been laid off, people still "employed" by companies
that have stopped paying salaries, and the underemployed and rural migrants.
Economists estimate unemployment is in the 17-30 percent range; of the
110 million workers in the state sector, restructuring could cause 30 million
to lose their jobs (3).
The reason for the massive numbers of unemployed
stemmed from the failures of SOEs, which employed all of the urban work
force prior to 1978. SOEs have failed due in part to the large number
of blind investments made by the government during periods of high growth.
When the economy is presumably growing due to the subsidizing of state
industries, the state is encouraged to expand SOEs, which creates an overload
of duplicate industries (8). Production was often vertical with little
sharing of resources across firms, and because of central control there
was no specialization. Even though China's economy has sustained
an 8% growth rate over the last several years, it is not enough to save
growing number of impoverished people (3). (See
charts on the the number of people employed in SOEs compared to the sector's
share of the GDP.)
For those SOEs hanging on by government subsidies,
they are constantly faced with problems of inefficiency. Wage rates
are never certain, and managers most often possess little autonomy in an
SOE other than over basic allocation of funds (5). These SOEs which
still comprise 40% of China's industries, now have to compete with the
increasing number of successful private firms. It is very difficult
for SOEs to compete because of the higher profits earned by private firms,
who are in turn able to offer higher wages, better incentives, and room
to expand. The privately-owned businesses also take full responsibility
for their success or failure (10).
Approach to reform in China
Overall, the country is ready for privatization,
but there are many obstacles. Although the people have supported
the scope and pace of the reform program, there exists a necessity to deliver
material results to the masses amid economic experiments and mounting inflation.
China has implemented a dual-price system as a gradual step towards freeing
market prices, but results have varied (3). Efforts to transform
failing state factories into efficient enterprises responsible for their
own profits and losses have been hampered by the lack of a legal framework
for contracts, a consistent taxation system, and the growing discontent
among the millions unemployed. Reform of the labor market and social
infrastructure are necessary to maintain support for economic reform. Although
China has a history of local-level reform and leadership, the government
has not relinquished a lot of power to localities because of their influx
control over population, which restricts migration to cities. (8)
China has taken the gradual pace of reform, which so far has
sustained a high growth rate as well as political stability.
(See
Chart) In 1978, Deng Xiaopeng
began the first step by implementing reforms under the Third Plenum of
the 11th Party Congress Central Committee. Under the dual tract price
system, which China adopted as a means to gradually liberalize prices,
a market for state controlled prices exists and one for market-controlled
prices. SOEs must sell a certain quota of production at the controlled
prices and any excess production can be sold at market prices. However
if the growth rate of the market sector is exceeding that of the planned
sector, then resources (capital, labor, etc.) leftover after state apportionment
are not enough to supply the market sector. (13) Agricultural
prices were liberalized first, which caused serious financial problems
for SOEs. With the price liberalization, which caused agricultural
prices to rise, there was so much pressure on industries that purchased
the raw materials, that they could not spend on development and technology,
much less allocate expenses for individual pension plans or guarantee wage
rates (8).
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SOEs under the Former Soviet
Union and the current SOE situation
Central planning is much more deeply rooted in Russia than in China,
going back to 1917 and the Bolshevik Revolution (2). Russia has had
similar problems as China with regard to SOE reform, but also additional
grievances due to the rapid pace of reform which resulted in the unstable
political situation. At the end of 1990, Gorbachev announced a full
move to market capitalism, which triggered the end of the Soviet Union
and the overnight jump into a free market system, with no social safety
net or other market infrastructures in place to ease the transition.
Gorbachev's policies of glasnost ("openness") and perestroika ("restructuring"
) lead to greater economic freedom, but also encouraged greater political
freedom which Gorbachev was unable to control, especially after the rapid
switch to capitalism (14).
Similar problems to China include low production,
shortages, income inequality, corruption, and inflation. In addition,
Russia still accepts 19 different forms of currency because of price controls
which lead to forced savings and repressed inflation, which are typical
affects of rapid decentralization (8). Russia is also more industrialized
than China (See Chart),
so the dying SOEs have held a larger share of Russia's GDP, which has caused
the shock of liberalization to be more intense (14).
In addition to typical socialist transition problems,
Russia also now faces tariffs among republics of the Former Soviet Union
(Newly Independent States), a decline in oil production and sale (dropping
oil prices), and a constitutional crisis and lack of consensus on reforms
(2). Government disputes within the country reflect the damaged economy
as well as a lack of unified support for reforms (14).
Approach to reform
As in China, without privatization in Russia, all gains
are lost. It is difficult to assess portion of SOEs in the economy
in relation to the private sector, because of the way in which the privatization
process occurred. In 1992, the Russian Government announced the privatization
of ALL SOEs, to be turned into joint stock companies. This meant
that the government could remain a significant shareholder. In a
sense, the government acts as a primary owner in a private enterprise,
which makes it difficult to classify the enterprise as private. However,
the Russian privatization process alone has been one of the most successful
attempts to place ownership in the hands of the people, despite the tremendous
social consequences that were not foreseen (1).
Russia was lacking in the development of important
sectors of their economy, similar to China, throughout the reform process
and still today. Russia lacks an accurate and transparent data system,
so statistics are probably understated, as in China. With Perestroika,
most SOEs did not gain more control over production, but sometimes only
wages, which has not increased efficiency. Unemployment, although
officially has increased to around 11.5%, is probably closer to 20% and
foreign visitors are not encouraged to travel alone outside of major cities,
because of the high rate of bandits and robbery. Resources are scarce,
and although Russia's population is only a fraction of China's (147.5 million)
there is also a large income inequality and wealth disparity between urban
and rural regions (8).
Because of Russia's rapid jump into capitalism,
as well as differing backgrounds, the two countries differ significantly.
China has had an 8% real economic growth annually and a decline in poverty
level in 1998, while Russia has had to negotiate a $22 billion emergency
aid package with the International Monetary Fund (IMF). The government
of the Former Soviet Union simply let everything go free to market forces
all at once and thought that the managers of entities at the time would
always own what they owned before privatization. However, this was
not the case, and Russia was faced with hyperinflation, increased poverty,
and a loss in output and employment. There are no corrective measures
in this approach, which meant the government cannot adjust policy during
implementation. The people in the cities and in the country are suffering
with insufficient food, housing, and basic health needs. One of the
reasons for their different approach to reform was that Russia lacks a
background for reform. (14)
Throughout the reform process, Russia has done
many steps similar to China, but they also have taken different routes.
Russia has much tighter controls on entrepreneurs, which hurts the labor
market. On the other hand, they have tried converting military bases
to civilian production of defense complex goods, which creates more jobs.
(1)
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China and Russia:
A Comparison of the Effects of SOE Reform On Labor 
Attitudes of the people
In both countries, a sound ideological base is needed
to ensure the support of the people for the reform program. For China,
Deng's political idioms, such as "seeking truth from facts" and "socialism
with Chinese characteristics," were reminiscent of reformist formulations
of centuries past and had underlying practical ramifications. The supporters
of Deng held that theory and practice should be combined to have success,
and they emphasized the position that the Marxist-Leninist doctrine is
not only valid but is adaptable to China's "unique" situation. The ideological
conviction that China was still in the "initial stage of socialism" was
a declaration reaffirmed at the Thirteenth National Party Congress in 1987
(2). The viewpoint offered an even greater ideological basis for
continuing the development of the Deng's reform program in the late 1980s
and early 1990s. Following this ideological presumption, there is also
the acknowledgment that certain tasks undertaken by the previous government
may not have been the best plan for the country. Mistakes such as
the Great Leap Forward and the Cultural Revolution had kept China from
emerging from the initial stage of socialism, and kept millions below the
poverty level. The very failure of these leftist campaigns may have
helped pave the way for the reforms of the 1980s (6).
China also has a history of capitalistic reform.
In Russia there has always been a lack of regional level autonomy and privatization.
Even when attempts were made to privatize the agricultural sector, they
failed because manufacturers remained state owned. 1992-1996 (8).
Deng Xiaopeng, on the other hand, permitted regional experiments in liberalization
in cities and published findings in newspapers for others to learn from.
Economic reform over the past decade has come through "partnerships" with
local authorities, gradually expanding the autonomy of the people at the
community level. In Russia, there was no market infrastructure
and price regulation was only inside and among agricultural production
complexes (14). The comparison as the reform movement progressed
was that Deng Xiaopeng emphasized competition measured by economic development
as towns conducted experiments, while in Russia it was a bargain for central
resources; if you got a good deal with Moscow, you were doing well.
In Russia, they had no experience with private
ownership of farmland, which must accompany SOE reform in order for resources
to be shared most efficiently. The ideology of privately owned land
was popular among urban intellectuals but rural society has remained in
socialist thought and pro-collectivists have been persecuted. This
lead to poor attitudes towards farming and privatization (14), while the
occupation of a farmer has always been deemed very important in China.
Other roots of ideology for SOE reform for the
people of China include the nearby examples of Hong Kong and Taiwan, and
the support of overseas Chinese. China had two ideal economic models
to observe (Hong Kong and Taiwan), while Russia never did. From those
two models today as well as from around the world, there is an influx of
investment and return of people to China's mainland (3).
The Russian ideology, by comparison still retains the identification
with communism. Although communism for both counties was imposed
over many decades, it was essentially a Russian invention. China
never had a commitment to the Russian invention but now the Russian's have
overnight lost a sense of identity, which has hurt peoples' commitment
to reform, especially with the large unemployment rate and lack of a social
safety net. Many still hope to regain the lost empire and think Russia
should expand, which strains reform. (9). Russia is
also experiencing a constitutional crisis and lack of consensus on
reforms, while in China it is accepted that political reform will come
only from the central government (2).
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Mobility 
The people of China and Russia did not have the opportunity
to move jobs under the centrally controlled economy before reform, which
leaves most with the lack of resources to move and the knowledge of how
to accomplish it. However, Russia has always had more of a labor
market at its base and China has only recently begun to expand labor mobility.
In China, the government tightened control on rural-urban migration going
back to the famine of 1959-1961, in order to guarantee a certain amount
of agricultural production. Other reasons included the incapability
of cities to support a large influx of migrants (especially spreading social
benefits to thin), and the fear of the government that the rapid migration
would cause unrest and instability. Since the reforms of 1978 and
the introduction of the Household Production Responsibility System, peasants
have gained control over farming operations, and migration controls have
lessened somewhat, but migrants are still not permitted to enter urban
areas as official residents (8).
As SOE reform instigated the shift from employment
for life to unemployment and limited mobility, the labor contract system
was introduced to promote mobility. As of 1986, new workers were
hired on fixed contracts to SOEs, and were in theory permitted more mobility
(12).
In both countries, there
is a great disparity between the east and the west in income and development.
In China, Deng Xiaopeng first began the policy of coastal-led development
in 1993, which included five main economic zones. The plan has been
very successful in that the economic zones have received large amounts
of foreign investment, but as a result, the gap between the income level
in the western outskirts of China is drastic. There are few paved
roads outside of the coastal cities of Shanghai, Beijing, Guangdong, etc
(11). (See Chart)
In Russia, the area known as the "Russian Far
East" is rich in resources and land, but it is the cities of the west,
such as Moscow and St. Petersburg, that are the centers of development.
However, Russia already has the longest railroad in the world, the Trans-Siberian
Railroad, which has been extended several times over the years. The
East and the West are connected, and the labor market has begun to benefit.
The success of the railroad presents a policy implication for China, who
must improve transportation infrastructure to sustain the growth of their
labor market (2).
Also unlike China, Russia does not restrict migration
between the city and countryside, which has allowed for a more efficient
allocation of resources and labor. It is very possible for China
to do the same, which combined with more investment in transportation infrastructure,
could create more jobs and more efficient allocation of resources, thus
easing the transition for the unemployed as SOEs are privatized (8).
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Wages 
With an incomplete labor market in China due to a
lack of labor mobility and an emphasis on industrialization within designated
economic zones, China maintains the gap between urban and rural wages (12).
With SOE reform, the gap has widened as well between wages of SOE employees,
and wages of private enterprises, which are higher due to greater efficiency.
The Chinese government has attempted to give more autonomy to managers
in regard to wages, but many firms lack the funds and cannot raise wages
or social benefits (14).
With regard to the urban-rural income disparity,
an effect of reform has been that there has been an increasing number of
"floating migrants" due to the easing of mobility restrictions (8).
Even though they are not considered official residents in the cities where
they work, they do bring some wealth back to the countryside. Of
course, this also contributes negatively to the standard of living of those
migrant workers who send over 50% of their income (which is not great to
begin with because migrant workers typically work low-wage jobs) back home
(11). Many provinces have come to depend on the income from cities.
With Perestroika in Russia, instead of more control
over the production of items, most enterprises merely received more control
over wages, which is not sufficient to maximize profit. This meant
that only wages grew and with the rest of the economy not liberalized under
state control, the result was a large nominal demand (8). Then after
the shock of rapid privatization and skyrocketing prices, the consequences
were heavy inflation and profit losses (8). Thus, without privatization
of SOEs, any improvement in wages is futile.
Neither China nor Russia has progressed to enforcing
a minimum wage, which is also impossible without the reform of SOEs.
In China, with the state still supporting inefficient industries, there
cannot be a single minimum wage across the public and private sectors.
The situation calls for a welfare system to support those unemployed in
both countries, but without privatization, price controls and wage controls
will not succeed. The concerns over social instability that has resulted
from SOE reform has lead the Chinese government to prevent the streamlining
of payrolls to efficient levels (13).
Both countries have also experienced problems
with wage arrears, because although people may still be "employed" in failing
SOEs, they have not received a salary for months.
| RUSSIA |
1997
|
1998
|
| State wage arrears |
$0.8 billion |
$1.3 billion |
| Enterprises' overdue
receivables |
$77.1 |
$92.8 |
| Enterprises' overdue
payables to suppliers |
$58 |
$67.7 |
| Enterprises' overdue
payables to budget/ non-budget funds |
$53 |
$64.3 |
| Enterprises' wage arrears |
$6.7 |
$9 |
| Total wage arrears= |
$7.5 |
$10.3 |
Data source: Economist Intelligence Unit Country
Report, Russia, 3rd Quarter 1998.
Consequently, there have been many riots in the cities of Russia.
In China, protests have occurred, but often the government has managed
to pay off the discontented workers to maintain the peace. No one
knows how long the Chinese government will be able to afford to do this.
In Russia, the government has promised to pay at least part of the massive
wage and pension arrears it has accumulated over the past few years due
to the devaluing of the ruble and loss of foreign exchange. Faced with
declining revenues and a growing budget deficit, the government may be
tempted to fulfill its promises by increasing the money supply by printing
money (8)!
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Recruitment and incentives
In China and Russia prior to reform, the state did
not promote incentives within the workforce to maximize potential because
the state controlled all management decisions and wage controls, and subsidizes
the firm's losses. In China before 1978 and in Russia before 1990,
all employees were supposed to be working for the good of the whole population,
so there should not have been a need for incentives and rewards.
However, since the state controlled SOEs from afar, as is the case still
today, decisions were not made efficiently or with optimum knowledge, and
the responsibility for the success or failure of the enterprise was with
the state alone. In China, SOEs have not been able to compete with
the growing number of private enterprises that support an efficient work
force to maximize profit (3).
China's method of recruitment includes co-oping
new elites emerging from reform movements to work with local party officials.
The reason for promoting relations with the leaders in the reform movement
is twofold: the government advocates cooperation as well imposes party
influence on entrepreneurs as soon as possible. There is no method
of recruitment from schools, or a means of providing incentives to improve
within the workplace, which hinders the pace of privatization. SOE
reform has created a great need for more responsibility to lie with the
managers and employees of each individual firm (8).
In Russia, the situation is similar. Although
they have been successful in privatizing, the control over the joint stock
ventures is still usually with the government. There is also a predominate
lack of trust in the efficiency of private ownership because of the suffering
of the country since the Soviet Union collapsed. Overall, there is
a disregard for the persecution of pro-collectivists, which also hurts
incentives for self-improvement within SOEs as well as in the agricultural
sector (10). In Russia there are more controls on entrepreneurs,
and the nomenklatura still holds the dominant role in society, which makes
a fair recruitment method difficult. In both countries, to FULLY
PRIVATIZE there must exist the same rules and regulations for recruitment
and incentives across similar industries to optimize the spread of labor,
resources, and information (8).
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In search of a social safety net
The Russian social safety net is currently "hidden."
As stated previously, Russia did not prepare any means to support the millions
of displaced workers that inevitably followed the "big bang" of privatization.
Now they are faced with an economy in transition that has been so shocked
and unprepared that resources flowing into the country as well as support
for reforms has diminished. The IMF gave a $22 billion dollar bailout
package to Russia in 1998, under the conditions of increased reform of
financial and legal sectors of the economy, but the it is uncertain if
the funds are reaching the programs they should reach.
Russia's social safety net has always included
the policy of full employment and low priced subsidized goods, which comprised
40% of the national budget. They are now in need of an explicit system
including unemployment compensation and ration coupons, because of SOE
reform. According to the Russian Government, the cost of the change
theoretically would be zero because the money that would normally include
40% of the budget would instead be routed to unemployment benefits. (8)
With SOE reform in China and the rising number
of layoffs, an increasing number of workers fell outside the existing social
security system. In 1986, China passed the National Labor Law, which
has become the first step in creating an unemployment insurance system
(1). The system is to be funded by a one percent payroll tax on all
kinds of enterprises and allocates money for up to two years to various
categories of unemployed workers. The funds are typically combined
at the provincial level to be distributed, but unfortunately have provided
minimal relief so far with the unprecedented growth in unemployment.
The categories of unemployed that qualify under the National Labor Law
include workers:
1) laid off by bankrupt enterprises
2) released from enterprises in anticipation
of bankruptcy
3) who completed contracts under the labor
contract system or resigned under conditions allowed for in contracts
4) laid off for violating SOE regulations
Within the next couple of years in China, it is
estimated that the number of retirees will be 35 million. As early
as 1984, at the provincial level there was a pooling of SOE pension funds,
which has expanded over the years. However, these "pools" exist on
funds donated whenever possible by participants, and are not very extensive.
The National Labor Law maintains that individual contributions be made
to mandatory pension plans, and provides for the future expansion of the
national plan. In order to secure the formation of a sound labor
market, China must have a pension and social security system, which the
Ministry of Labor attests to. The Ministry of Labor announced in
1997 that such a system would go into effect near the end of the ninth
five-year plan in 2000 (13).
Two steps the government has already taken
to aid the growing number of surplus labor from SOEs is to lower the retirement
age and expanding retraining programs. The former transfers part
of the burden of the surplus labor, mainly those workers who are older
and lack needed skills, to pension plans. Offering training and retraining
programs is necessary to enable laid off workers to compete for jobs in
the public and private sectors (3). The Ministry of Labor, which
has policy leadership in the area, is calling for a divided national system
including the mandatory national social security scheme, additional insurance
programs created by individual enterprises, and combined with individual
savings accounts (13).
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*
*
Theories and Proposed Solutions Concentrating
on the LABOR Market
Shatlin Plan (Russia) - The Shatlin 500-Day Plan is a prime example
of a method that China can look to as it is continuing to speed up
their SOE reform. The Shatalin plan was a 500-Day Plan that was supposed
to have transformed the Soviet economy to a market economy starting October
of 1990, but failed to be pass through the Duma due to social discontent.
The plan advocates the privatization of SOEs before price liberalization,
as a way to ease into the transition. This would eliminate monetary
overhang so that commodities are not so expensive when prices are liberalized
and the plan creates a retail trade and service sector which would promote
competition and home ownership. Unfortunately, a drawback is that
it would be impossible to value firms for sale with the current prices
wrong. However if privatization is on a lease basis and estimation
of the real values are based on world prices or auctions, the problem could
be eliminated. (8)
Basic industries in China are being ignored. Agriculture is
the most important link in the economy because it is the basis for most
all production. However, industry is growing much faster than agriculture
in China, and the basic industries are not even being developed, such as
energy and transportation. The government could give incentives to
workers and managers in these industries such as tax incentives and higher
retention rates. Successful duplicate industries should then invest
their surplus in these sectors (5), and incentives should exist for people
to retrain and seek new employment throughout the reform process.
Incentives include opportunities to own shares in the company, mergers,
and investments (3). This would increase productivity on an individual
basis because of increased financial incentives, as well as benefit the
economy as a whole.
There is such a tremendous need for a solid
infrastructure, which has been reiterated throughout this paper, that by
supporting more efforts to employ people in these types of projects could
also be the most efficient means of allocating capital and labor resources.
China could open its doors completely to foreign investment to acquire
more infrastructure projects that would benefit the economy as well (2).
The services and housing industries must be developed as a means
to employ more people and cushion the transition of SOE reform. The
services industry, although not high in productivity, could compliment
the increase in technology and productivity from foreign investment to
provide millions of more jobs (3). (See
Chart of the number of employees by sector.) The housing
industry, although it has progressed slowly in Russia and Eastern Europe,
can progress in China with the establishment of private property rights.
This would also be an added incentive for the workforce to save and invest
(8). On the U.S. Secretary of Commerce, William Daley's, trade mission
to China in March of 1999, there were key contracts signed for insurance
services, housing development, and hotel and resort development, which
will aid in the development of these sectors.
More jobs can be created by developing the transportation and transportation
infrastructure sectors. The World Bank and IMF have encouraged Russia
to develop these areas to be able to reach resources such as oil in the
East, as well as improve labor mobility (8). China must do the same,
by concentrating more efforts of the public and private sectors on transportation
to enable labor mobility and aid the development of all sectors of the
country and economy. Developing this sector, along with having a
social safety net in place will ease the economic transition for labor.
The SOEs that remain as China's economy is in transition, the managers
and employees MUST have responsibility for the success or failure of their
business to maximize productivity and fair recruitment practices.
Contracting and leasing would improve management by tapping internal potential
and competition.
Having a special task force in each
company (separate from government) to make certain heads of department
responsible will also help. The task force would monitor employees,
issue reports, set goals, give technical assistance, visit the grassroots
of the company, and learn about the company more to make better decisions.
All employees must know their options with mergers and bankruptcy, and
must invest freely. These "think tanks" within the company should
also explore policy and be in charge of recruitment for jobs. (13)
The World Bank has encouraged China as well as Russia to increase
the retirement age in their countries to 65 for men and women, which lessens
the burden of retirees on future generations and stimulates the economy
with more jobs as the life expectancy increases. However, the Chinese
government recently lowered the retirement age for the opposite reason.
The government should raise the retirement age and offer rewards payments
to SOEs that restructure operations successfully, helping them to stay
afloat and keep their workforce (3).
The Ministry of Labor, which has policy leadership in the area, is
calling for a divided national system including the mandatory national
social security scheme as stated under the National Labor Law and additional
insurance programs created by individual enterprises, combined with individual
savings accounts (13).
There must be more investment in education to sustain China's growth
for the future--a mandatory education system is part of the basic market
structure needed and will also create jobs. With increased investment
in education for men and women, the gender gap will lessen. There
should not be mandatory equal pay for both sexes, which could encourage
bias against hiring women, but the government should offer incentives to
firms with services such as child care facilities. Firms may also
develop the means for permitting women to pay for the child care and health
benefits by receiving lower wages or less employee benefits in other areas.
(8)
Other General Solutions:
SOE subsidy solutions: Doomed industries developed without
foresight should be allowed to go bankrupt, those with good technical equipment
but poor management should be on a contraction system to improve these
areas, small enterprises with little technology and outdated equipment,
auction, leasing or merging. For enterprises suffering because of
state policy, the state should change the policy, reduce taxes, etc.
Subsidy targets: For enterprises unable to reverse losses, targets
should be set. Losses beyond the target amount would not be compensated
for and companies with profits would keep them. Enterprises with
potential but uncertainty should be given subsidy norms, where losses beyond
the norm are not compensated and profits are shared with the state according
to contract. Enterprises able to reverse losses would not be subsidized
for any losses and would keep profits (8).
Husnu Kizilyalli, a professor of economics in Istanbul, Turkey
advocates
a new method for a transition country that would combine a "big bang" reform
of price and trade, and a gradual reform of SOEs. Prerequisites
for the "new method" include a tax system, Central Bank, commercial banks,
and legal system. The method requires the leadership of four institutions:
1) the Central Plan Bureau (CPB) 2) enterprises, mainly SOEs
3) a policy making body 4) fiscal and monetary institutions.
The CPB would provide multiple estimates of foreign exchange rates, tariff
rates, and wage rates, to be entered under one computer database to be
accessed by all enterprises. They would also prepare alternatives
to policy decisions for review. A policy making body, on the basis
of the alternative scenarios of the CPB, would decide the exchange rated,
tariff levels, wage rate, etc., while considering the results of scenarios
in terms of their affect on unemployment, income levels, and standard of
living. Private enterprises may participate, but would not have
to, because it is assumed they can already survive in the free market system.
Kizilyalli's proposed method allows
for immediate transition into an open market system after an initial preparatory
phase, insures free prices, and a stable foreign trade balance. Under
the speculated exchange rates by the CPB, wage rates and protection levels
are chosen, taking into account negative consequences of every option with
regard to labor. The method approaches reform by planning in stages
and making computations through transparent data, so there is a means to
revise plans in the middle of the process. The methodology reports
what can be produced and where, through a medium-capacity computer.
For more information on the equations used to
derive economic reform plans for an economy, refer to the 1998 book, Economics
of Transition, by Husnu Kizilyalli, detailing his "new method" as well
as opinions of other economists (8).
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Conclusion and Personal Reflection
China and Russia are very different in many ways,
but by viewing the effects of each country's SOE reform methods, policy
implications can be drawn for the future of China. Zhu Rongji has
recently stated that reforms are going to come faster. From Russia's
experience and present state of chaos, one can see that an overnight switch
to privatization is not the answer. The effect on the workforce in
terms of unemployment, wages, and support could be too great. The
waning support and standard of living of the people could then force the
country into a critical political situation, as seen in Russia (1).
However, the steps that the World Bank and other experts are pushing for
in Russia are the same steps that China should be pursuing, and as steadily
as possible. While China has implemented the dual-price system and
other gradual efforts at reform, China's economy is expanding inefficiently
like Russia's (8). From the research I have done, I believe that
to best provide for the unemployed during the transition to a market economy,
China must have quicker reforms of their state-owned enterprises, grant
more control of enterprises to local employees and managers during the
transition, and invest more in basic industries and services.
Of course there are prerequisites that need to
occur either before or alongside a faster transition to privatization,
such as a working social safety net and solid legal structure. In
China and Russia, it is obvious that stipulations such as these have to
be in place for the economy grow. In China, experts attest that the
establishment of a social insurance system cannot happen without tax reform
and a genuine capital market and banking system. However, these reforms
cannot proceed without the progression of SOE reform and the reduction
of SOE staff, but this cannot occur successfully without a social safety
net. The circle will continue unless one sector of the economy is
able to trigger the rest to start moving (12).
First of all, local control must be given
to the managers and employees of a firm to be efficient. As seen
in Russia where only the ownership has been allocated to the manager but
not the control of operations, private ownership is not always the most
important aspect of running a business. Although this partly refutes
my hypothesis, I also believe that private ownership must also be achieved
in the end, which means that it is better to do it now, when China's economy
is already hurting. with China's rapid growth and high savings rate,
the easiest time is now for the country to be able to absorb the costs
of reform (11). It will be harder as times progresses, because more
and more workers will move to non-agricultural jobs. During the interim,
the government should allocate more responsibility, or control, to employees
and managers, but at the same time the privatization process as a whole
should be hastened. The sooner it is over with, the quicker the people
can move out of the difficult social transition period (13). In regard
to wages, wage arrears, recruitment, and incentives, local control over
operations will help to improve all of these areas by promoting competition
and the efficient allocation of resources. Wages will increase with
more competiton, helping the entire economy.
However, the sector of the economy that I believe
can "trigger" the reform process will be the development of the basic industries
such as private housing development, transportation, and services.
These industries must be developed in China to sustain its people (support
the increasing population with adequate housing and allow for urban-rural
mobility within the country.) If these industries need to be focused
on anyhow, the government should offer incentives or tax breaks to people
investing in these areas to encourage their development. Training
programs can also be offered, either by the government or by foreign investors,
to train employees in these industries and reallocate the surplus labor
to a productive part of the economy. If the base of the economy is
not productive, which includes agriculture in addition to housing, roads,
and other types of infrastructure, then the rest of the economy will not
stand for long. As Russia has developed its railroads, the country
has been able to expand beyond its major western cities, but without further
expansion, resources will not be acquired and shared fruitfully.
In the area of services, developing the education sector will also provide
jobs as well as a needed basic sector of the economy to sustain China in
the future (8).
Developing railways and roads has begun to be
addressed by the Chinese government as well as housing development.
Recently, U.S. Secretary of Commerce Daley went on a trade mission to China,
where he advocated on behalf of a small U.S. firm and two large U.S. firms,
seeking to develop housing projects in China. Some contracts were
signed and others are pending for later this year, when another delegation
from China will be visiting the U.S. In Russia, of course, foreign
investment is scarce, but for China's place in the reform process at this
time, policies such as these should be implemented (7). Overall,
the increase in available housing and transportation will allow the economy
the impetus to sustain growth, as well as allow a channel for the millions
of unemployed during the difficult transition to a market economy.
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Works Cited
(1) Brock, Gregory J. "Foreign direct investment in Russia's regions
1993-95. Why so little and where has it gone?"
The Economics of Transition. Vol. 6. No.2.
(November 1998). pp.349-360.
(2) "China and Russia: central vs. regional control," International
Research and Exchanges Board/Huang Hsing Foundation Lecture. February 24,
1999. Speakers included:
Gilbert Rozman, Director, International Studies
Program, Princeton University
Bruce Dickson, Director, Asian Studies Program,
George Washington University
James Millar, Director, Institute for European,
Russian & Eurasian Studies, George Washington University
Tamara Troyakova, Senior Researcher, Far Eastern
Branch, Russian Academy of Sciences
Martin Whyte, Professor or Sociology and International
Affairs, George Washington University
(3) China 2020: Development Challenges in the New Century.
The World Bank. Washington, D.C. 1997.
(4) Daniels, John D. and Lee H. Radebaugh. International Business:
Environments and Operations. Massachusetts:
Addison-Wesley. Eighth ed. 1998. pp. 33-65, 121-190.
Economist Intelligence Unit resources:
(5) China Mongolia Country
Report. 3rd Quarter 1998. United Kingdom. pp.1-50.
(6) China Mongolia Country
Profile. 1997-98. United Kingdom. pp. 14-16, 20-32.
(7) Russia Country Report.
3rd Quarter 1998. United Kingdom. pp. 1-50.
For online information,
www.eiu.com/
(8) Kizilyalli, Husnu. Economics of Transition: A new methodology
for transforming a socialist economy to a
market-led economy and sketches of a workable
macroeconomic theory. Brookfield: Ashgate. 1998.
(9) Koslowski, Peter, ed. The Social Market Economy: Theory and
Ethics of the Economic Order. Springer, NY. 1998. pp.82-130.
(10) Kwong, T.M., 1994, "Markets and urban-rural inequality in China,"
Social Science Quarterly,
vol.75 no.4, pp.820-837.
(11) Park, Albert and Scott Rozelle. "Reforming state-market relations
in rural China," The Economics of Transition.
Vol. 6. No. 2. (November 1998). pp.461-480.
Stat-USA/Internet, a service of Stat-USA, U.S. Department of Commerce.
www.stat-usa.gov:
(12) "Foreign Labor Trends:
China Labor Trends." U.S. Department of Labor, Bureau of International
Labor Affairs.
(13) "Background Notes
on China." U.S. Department of State. October, 1998.
(14) "Background Notes
on Russia." U.S. Department of State. October, 1998.
Photographs courtesy of http://members.xoom.com/jacob_bax/
Animations courtesy of http://members.tripod.com/~gifs123/transport.html
By Meredith Brown
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