11/30/99

Kathleen O'Toole, News Service (650) 725-1939; e-mail: kathleen.otoole@stanford.edu

China: How far across the river has it come?

As a river with boulders and precipitous falls runs through China, scholars on both sides watch from the banks as waders battle its currents as they try to cross from the communist to the capitalist side.

"It's definitely a risky venture into the unknown," says Larry Lau, one of those observers at Stanford who uses the metaphor of a river crossing to describe China at the end of the millennium. "Each step involves trial and error, but you have to cross ­ there are no alternatives."

Lau, who counts himself among the optimists, offered his remarks at a Nov. 18 to 20 meeting of leading scholars of China, including some from China itself, convened by Stanford's Center for Research on Economic Development and Policy Reform. In the wake of a China-U.S. agreement to permit China's entry into the World Trade Organization, many were optimistic that the agreement would help the Chinese government curb protectionist tendencies in the provinces and encourage the demise of inefficient stated-owned enterprises. But others said the ripple effects of these reforms and earlier ones still make it difficult to stay the course.

"China's government over-invests in bricks and mortar and under-invests in the education of girls and boys, especially in the countryside," said Gale Johnson of the University of Chicago. Without more educational investment, it will not be able to continue economic growth indefinitely, he contended.

Nicolas Lardy, a senior fellow at the Brookings Institution, said the central government's debt is mounting as China's banks still make bad loans to state-owned enterprises and few to the more efficient private sector. "China's financial system is unlikely to meet the needs of a modern economy unless the balance sheets of the existing financial institutions are rehabilitated and a commercial credit culture takes hold," Lardy said.

Wu Jinglian of the Chinese State Council's Development Research Center said China has moved into a second stage of reform, one that emphasizes institutional reforms to better support the growth of a market economy. He proposed that China's leaders create a set of circuit courts, beyond the control of provincial courts, whose judges tend to protect local businesses rather than follow the rule of law. The circuit courts would be something like the federal court system of the United States, which enforces the commerce clause of the U.S. Constitution and has prevented states from excluding competitors from other states, said Stanford's Ronald McKinnon, who called the idea a "novel" and "worthwhile" approach.

"I agree it's a good idea," said Pieter Bottelier of Johns Hopkins University, "but what will be the power base for the Communist Party if it surrenders economic and judicial authority?" He questioned whether it could be accomplished politically, given the special interests involved.

"The Chinese Communist Party doesn't trust the private system" of enterprise, said Michel Oksenberg of Stanford's Institute for International Studies. "There is a growing bifurcation between the political elite and the economic elite, and how do you establish a tax-paying ethic?"

Stanford political scientist Jean Oi said the national Chinese government has made more political adaptations than is often recognized outside the country. The government still has the power to crack down on dissidents and sometimes does, she said. But it also has attempted to mollify workers and farmers when they protest against corrupt local officials or managers who owe them back pay. "The important point is that instead of mass arrests, the state is trying to placate protesters," she said, and even has fired or fined factory managers whom protesters have accused of corruption or of filing false profit reports. "Although there are still some very hard lines that are not to be crossed, the regime is allowing the sphere of legitimate political activity to expand," Oi said.

Lau said China's problems are surmountable. China can continue to have public ownership of enterprises if it stops bailing them out when they lose money, he said. "I tell my Chinese friends that the U.S. government owns virtually nothing, but of every dollar I make, about 50 cents goes to the government. The difference is that when I lose money, the government doesn't share the loss."

The inefficient state-owned enterprises "will not cross the river. They will fade away in a generation," he said. China cannot phase them out quickly because of their massive employment, but the government can assume the cost of their workers' pensions over time, he said, and institute a private social security system for newer workers.

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By Kathleen O'Toole