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Market reforms enter new era

Market reforms enter new era

By Nakao, Takehiko

7th April 2014

With the introduction of reform and opening-up in 1978 and its deepening since 1993, the People's Republic of China has been successfully accelerating its economic development. Over the past 35 years, China has imported know-how and reaped productivity gains by shifting underemployed workers in agriculture to export-oriented manufacturing, to become the second-largest economy in the world, while substantially reducing poverty. More recently, after the global financial crisis, growth has depended more on domestic consumption and investment. There has also been impressive progress in many social areas, such as education, healthcare, pensions, and gender equality, to name a few.

However, for any economy, the period of high growth through industrialization does not last forever. Eventually, the pool of underemployed rural labor will be drained, and the advantage of catching up on technology diminished. Changes are needed to restructure the economy and diversify the sources of growth. Countries that fail to adjust their growth pattern face the risk of stagnation, a phenomenon known as "the middle-income trap".

This challenge is especially relevant to China today. Chinese policymakers are therefore planning the implementation of far-reaching reforms to restructure the economy and build a "moderately prosperous society by 2020". In this context, the reform plan released after the Third Plenary Session of the 18th Central Committee of the Communist Party of China in November is comprehensive and full of profound ideas. I particularly support the plan to provide the market a "decisive role" in the allocation of resources. If we look closely at the scope and implications of this seemingly rather simple policy statement, we can see that the successful implementation of the forthcoming reforms will indeed bring China a new era of socioeconomic development.

Given that the private sector is always a driver of innovation and change, I welcome the emphasis on promoting greater private involvement in the economy. Private initiatives in China have so far been often overshadowed by the presence of the large public sector. This results in fewer financial resources, smaller market shares, and narrow growth opportunities for the private sector, inhibiting the economy's ability to generate employment and improve efficiency. China's new vision will unleash the dynamism of the private sector and its potential as an engine of growth, facilitating the country's transition to a higher income status.

Advanced economies with strong private sectors rely on well-functioning financial services and capital markets. As the economy matures, the financial sector instead of the state should play an essential role in allocating resources. A liberalized and robust financial sector will discover growth areas, allocate needed resources, and monitor the effectiveness of resource deployment.

Despite significant progress in financial sector liberalization, there is an urgent need to deepen reforms, particularly by liberalizing the deposit interest rate, gradually opening the capital accounts and promoting internationalization of the Chinese currency. These are exactly the areas that the Chinese authorities are focusing on.

With regard to the labor market, the Third Plenum highlighted reform of the household registration management system to bring in market forces through greater labor mobility. The Party's Urbanization Working Conference held on Dec 11 and 12 reiterated the clear message that rural migrant farmers can be registered as urban residents more easily in future, starting in some medium-sized and small cities, and can enjoy social benefits equal to those of other urban residents. At the same time, the land use rights of farmers will be made tradable in the market. This land reform will enable interested rural farmers to become permanent urban residents. Reforms in land and labor markets are needed for social fairness; they also contribute to sustainable economic growth.

Contrary to the popular perception, the strengthening of markets does not mean the weakening of the government. A well-functioning market relies on a capable and efficient government. To promote the role of the market, the government has pledged to give high priority to ensuring macroeconomic stability and the adequate provision of public services, while limiting the scope of government intervention to areas of "market failure". It is an essential role of the government to deal with externalities - chief among them, pollution and climate change - by encouraging more efficient use of natural resources and promoting alternative energy sources. This would help create an "ecological civilization".

Governance reform and promoting the rule of law are key for realizing the expected decisive role of the market. In this regard, I welcome the plan to modernize the fiscal and taxation system by setting up a multi-year budgeting framework; ensuring fair, efficient and transparent taxation; and providing a clearer delineation of responsibilities between central and local governments. It is particularly important for local governments to develop a well-designed revenue structure by introducing property tax, resource tax and environment tax instead of selling land. I appreciate that the piloting of the conversion of business tax to value-added tax has achieved some success.

The Asian Development Bank has been supporting the development of China for the past 27 years through a number of loans for electricity, transport, urban development, education and other projects, amounting to $28 billion. ADB has also provided grants for knowledge work in areas such as the environment, economic planning and fiscal policy. We are committed to providing the strongest possible support to China to implement the reform plan decided at the Third Plenum by enhancing knowledge cooperation with various key government agencies. At the same time, we look forward to sharing China's experiences with ADB's other developing members with a view to achieving our shared goal of inclusive, sustainable growth, and building a better world for all.

Source: Asian Development Bank

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