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OECD study on China, an eye-opener for India

G. Srinivasan

The nub of the OECD study is that the Chinese economy must undergo fundamental adjustments to reap the full benefits of further integration into the world economy. This amounts to a "substantial reallocation of resources among economic sectors and a major restructuring of the business sector''.

NEW DELHI, March 19

FOR a nation stung by the Chinese success in the post-reform period in wooing foreign investors and posting consistently higher GDP growth, it is high time that those in seats of power got themselves updated on what is in store for this giant neighbour after winning entry into the World Trade Organisation (WTO) recently.

For the beleaguered Indian industry, the threat from Chinese products in inexpensive range and bewildering variety is not imaginary, but indubitably real if the former does not get its act together to meet the challenge in earnest.

The Paris-based Organisation for Economic Co-operation and Development (OECD) released a study on China, which takes due stock of the results of its "engagement'' with China since 1995 in the framework of a comprehensive programme of cooperation managed by the Centre for Co-operation with Non-Members.

China has become the world's seventh largest economy and second largest recipient of foreign direct investment with its cumulative total of FDI since 1979 being $350 billion. China's performance stands out because "its reforms have been gradual and its development has occurred despite extensive, though declining, state ownership and intervention in the economy''.

The nub of the study is that the Chinese economy must undergo fundamental adjustments to reap the full benefits of further integration into the world economy. This amounts to a "substantial reallocation of resources among economic sectors and a major restructuring of the business sector to correct widespread inefficiencies''.

The OECD study highlights three goals as the key to the success of China's overall reforms in the next decade:

  • The first and most immediate is to lay the foundation for improving the utilisation of China's resources, by removing present obstacles to business sector restructuring and achieving better integration among various segments of the economy that have been developed separately under different sets of rules;

  • The second is to improve competition law, property rights, enterprise governance and other frameworks that are essential to efficient market functioning so that resources are efficiently allocated in the future; and

  • To improve the capacity of the Government to support economic development, by strengthening the effectiveness of macro-economic policies while refocusing the role of regulatory policy on establishing and enforcing rules for market behaviour.

    OECD points out that in achieving these aims, reforms need to be both "concurrent and carefully sequenced'' and cautions that preferential development of individual sectors to "lead'' the overall economy is likely to have much lower pay-offs and pose greater risks of negative outcomes. The key to achieving the triple goals which the study identifies as needed to break through the vicious circles now impeding reforms and establish the pre-conditions for sustained progress in the future include, among others — restore solvency to the financial system; bolster market-based mechanisms as the dominant force for restructuring of the business sector and establish public finances on a sound and sustainable basis.

    In Chinese agriculture, market forces have largely replaced Government plans and targets. And with the important exception of grains, the Government's intervention in the production, pricing and marketing of agricultural products is now limited. The changing role of agriculture within the rural economy has provided a second major source of China's growth and development. Local Governments were encouraged to foster the growth of rural non-agricultural enterprises (REs). But Chinese REs in recent years suffer from financial problems and operating inefficiencies nearly as severe as those afflicting the state-owned sector.

    The OECD study reckons that as in agriculture, the dynamism to industry imparted by structural shifts seems to be attenuating. Industry financial performance has deteriorated sharply since the early 1990s. Profits fell to nearly zero in 1998, with more than one-third of enterprises making losses and despite noticeable improvement during 1999-2001, financial performance remains weak in many sectors.

    The poor industry performance can be traced to the accumulation of `policy burdens' arising from the long-standing use of enterprises to accomplish social policy goals. The biggest problem is widespread inefficiency in enterprise operations. China's industry is characterised by widespread sub-optimal scale in production facilities, fragmentation and duplication.

    OECD further states that there are 200 separate producers of automobiles, most of which complete only a few thousand units per year. Economies of scope are also poorly exploited as illustrated by the nearly 8,000 independent cement firms in China, compared to 110 in the US, 51 in Russia, 58 in Brazil and 106 in India.

    The study says said weak financial discipline, which has effectively presented firms and their government backers with a zero cost of capital, has been a major impetus to the development of unproductive and redundant capacity. China devotes proportionately fewer resources and produces less scientific outputs such as patents, than OECD countries, as well as other large developing countries such as India.

    For India, the OECD study on China is apparently an eye-opener provided the authorities take the cue and rescue the reform process from disarray and put it in proper sequence so that our competitive strengths and comparative advantages are duly exploited to ensure higher growth over the long haul.

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