BOOK REVIEWS

OECD, China in the World Economy, the Domestic Policy Challenges

This is the most complete study so far of the relationship between China and globalisation, with a particular focus on the consequences for China’s domestic economy arising from its accession to the World Trade Organisation (WTO). A work of 800 pages, published by the Organisation for Economic Co-operation and Development (OECD) and now followed by a French edition, it is divided into two major sections (“Sector Studies” and “Economy-Wide Issues”) in order to deal with a wide variety of issues, such as the problems of agriculture, technology transfer, wealth distribution, competition and the laws governing it, company reforms, sustainable development and regional disparities. More than forty international experts from the worlds of business and research, and attached to nine leading bodies of the OECD, are joint contributors to the 22 chapters presented here. The study itself is an integral part of a programme of dialogue and co-operation with China that has been in effect since 1995, under the auspices of the OECD’s Centre for Co-operation With Non-Member Countries.

The goal of the publication is to help the Chinese government to decide how to draw maximum benefit from its opening-up and reform policies over the next decade, so as to achieve its development objectives. While saluting the economic performance figures reported by China for the last two decades, the OECD emphasises the need to find an alternative to the old forces driving development. The growing fragmentation and diversification of the Chinese economy has led not only to an under-utilisation of resources, but also to inefficiencies in those that are used, and these are problems that can no longer be resolved solely by lifting restrictions on exchange and investment (p. 9). For this reason the work sets out the following three major guidelines: 1) to lay the necessary groundwork for improvements in China’s use of her resources, by overcoming the obstacles in the way of sectoral restructuring, and by strengthening the integration of the different segments into the overall economy; 2) to give priority to the laws concerning competition, property rights and enterprise management; and 3) to improve the ability of the state to support economic development, by strengthening its macroeconomic policies and reformulating its regulating principles, with a view to establishing and implementing norms that are in tune with the rhythms of the market. The authors go on to clarify that these major transformations cannot occur without a respect for the following basic principles: the need to return the financial system to solvency; to encourage the development of market mechanisms, so that they become the driving force behind the restructuring of the economic sector; and to set up a system of public finances on a healthy and stable basis (p. 10).

It must be added that China is a victim of what the OECD calls a “vicious circle of bank and enterprise problems” (p. 21)(1). The poor levels of output achieved by the enterprises, particularly the state enterprises (pp. 163-192), are a contributing factor to the existence of non-performing loans, and these condemn the banks to very low profitability, that is, to insufficient profits to support genuine financial viability. This situation, which is to be found within a good number of developing economies, is aggravated in China by the specific nature of the close relations between the financial institutions and the often indebted state enterprises, and the organs of political power. Moreover, as the work as a whole amply demonstrates, the PRC can no longer rely solely on the influx of foreign capital as a basis for development, if that is to be equitable, long-lasting, and evenly distributed. Therefore it is necessary to put in place “complementary reforms to further reduce trade and investment impediments and to open up domestic markets, to improve the performance of state-owned enterprises, to better protect intellectual property rights, and to strengthen competition, judicial enforcement and other framework conditions essential to the effective functioning of China’s markets” (p. 355). The difficulties reported in this last respect are very revealing. The increased risks imposed by the regulations themselves bear heavily on investment and competition by raising the cost of capital. The Chinese regulatory environment is sometimes arbitrary and frequently lacks predictability, transparency and even-handedness. This has dissuaded quite a few foreign investors, either from entering the market or from expanding their operations there, particularly in view of the risks and uncertainties arising from the country’s endemic corruption. In an excellent chapter devoted to this question, the OECD proposes a number of regulatory measures to be adopted with a view to the gradual institution of a state based on the rule of law (pp. 361-388).

All the chapters are accompanied with multiple statistical tables and charts, and these are also well documented with pertinent footnotes and very useful bibliographical references. The presentation is clear and spacious, allowing the reader to go through the entire 813 pages without feeling exhausted. Moreover the volume contains some very impressive supplementary annexes. The first of these summarises the commitments undertaken by China on joining the WTO. The second provides a general and comparative overview of the main econometric studies from 1996 to 2000 concerning the expected repercussions of WTO membership on the Chinese economy. These serve to highlight in particular the limitations of analyses derived from the Sino-US bilateral agreements, for these only approach the question from the tariff angle, whereas in fact the repercussions of maintaining or doing away with non-tariff barriers, such as the liberalisation of the service sector, will undoubtedly have a larger influence on the Chinese economy(2). The third annex focuses on the progress achieved in tertiary education, and lays out a number of guidelines for further improvement. And lastly, the fourth one draws together the main economic indicators available for China at the beginning of 2002.

This study covers a vast range, precisely in order to enable it to tackle practically all the aspects of the changing economic situation in China, but that very size of the coverage make it difficult to know what overall criticisms might validly be made. But some readers will be struck by the absence of any alternative to the economic liberalism that informs all the analyses, since there is hardly any mention of the social problems that the Chinese government will have to deal with, such as the rise in unemployment following the closure of the state enterprises or the huge rural exodus caused by the cessation of many agricultural jobs. Admittedly, the chapter on the policies and prospects for agriculture does contain a sub-section on the impact of commercial liberalisation on the labour force. This informs the reader that the number of agricultural workers would fall by about 78 million with China joining the WTO, whereas it was expected to fall by 73 million without this accession, but these figures are certainly inadequate (p. 73)(3). Human considerations seem relatively absent from this study, which puts the emphasis on sometimes rather technical macro- and microeconomic concepts. Neither is there any questioning of globalisation, or even any reflection on its costs and limitations. The thinking is basically in line with that of the World Bank or the International Monetary Fund, but this does not mean that it is just a propaganda tract in favour of ultra-liberalism. Each separate chapter gives a measured and personal response to the economic problems shared by all developing countries. In addition, it certainly seems that the lessons inherited from the more or less successful transition by former member countries of the Soviet bloc towards a market economy, have not been forgotten. The OECD’s persuasive force lies in the fact that it has made use of external consultants who have brought with them their own vision of China, while remaining within OECD guidelines. After all, can one reasonably expect an international organisation charged with contributing to the expansion of international trade on a non-discriminatory multilateral basis in accordance with international obligations to assume the role of spokesman for the opponents of globalisation? This would be especially improbable in the face of a Chinese government that has made the political choice (which is admittedly also a risky bet) to base the country’s development on opening up to the outer world(4). But it might also be the case that the absence of a solid political and social vision in this book is attributable to a lack of reliable data(5).

Despite these shortcomings, this work is an indispensable tool for any researcher, consultant, journalist or member of the business community closely concerned with the evolution of China’s domestic economy and interested in a serious introduction to the major issues arising from its membership of the WTO.

Translated from the French original by Jonathan Hall