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G. Srinivasan

China in the World Economy: The Domestic Policy Challenges Publishers: Organization for Economic Cooperation & Development, Paris Price: Not mentioned

That the Middle Kingdom has been a blend of curious and serious fascination for lay and learned alike is by now an acknowledged fact. With China's recent accession to the World Trade Organisation (WTO) and its consistently splendid record of robust economic growth for two decades, the interests on China have only increased, leading to larger contributions from various sources, both authoritative and exaggerated. But since 1995, China and the inter-governmental think tank of 30 rich industrial countries constituting the OECD have engaged in a fruitful dialogue on many policy issues of common interest in the framework of a comprehensive programme of cooperation managed by the Centre for Cooperation with Non-members.

The book under review synthesises the main findings and observations of the OECD horizontal study of the domestic economic policy challenges posed by China's further trade and investment liberalisation (TIL). It comprises 22 exhaustive reports made by as many as nine OECD Directorates encompassing the adjustments and policy challenges confronting the key sectors of the real economy over the next decade and their implications for the policies that would be critical to success in meeting these challenges.

The OECD monograph rightly stresses that in today's China's condition, the outcomes of particular reforms depend increasingly on the interaction among measures taken by the economy's key factors — Government, enterprises, workers and the financial system — acting in markets whose functioning is shaped by key framework conditions such as competition, property rights and corporate governance. Instead of emphasising particular sectors, reforms now need to focus more on economy-wide policies to promote efficient allocation of resources and to underpin the effectiveness of markets.

Stating that China's economy has undergone a metamorphosis over the past two decades, OECD states that the characteristic feature of the Government's economic strategy has been to create separate channels for development outside the State sector, operating under different rules and conditions, in order to progressively increase the scope for market forces while phasing out central planning.

This process, which has been termed "growing out of the plan" has been highly successful, but it has become very clear that its ability to push China's economic development further is coming to an end. In essence, structural problems in the real economy have deteriorated progressively during the 1990s, leading to growing under-utilisation of labour and a protracted slowdown is real growth. These structural problems are largely ascribable to a lack of integration in factor markets, among business segments and among regions.

No doubt, China's average tariff rate has fallen from above 40 per cent in the early 1990s to 15 per cent in 2001. Since 1979, China has received a cumulative total of $350 billion in foreign direct investment (FDI) and in recent years, foreign investment has averaged 4-5 per cent of GDP. Yet, China's economy is clearly operating below its productive potential. Human, capital, land and other resources are under-employed, misallocated among economic sectors and inefficiently used. Achieving better resource utilisation is the most basic challenge China faces in seeking to meet its developmental objectives.

An interesting point touched by the OECD study refers to the need for domestic integration in China, which is crucial to achieving better utilisation of labour and other resources as well as to ensure that resources are efficiently in the future integration of the domestic economy, entails the elimination of internal barriers to mobility in factor and product markets. Integration among Chinese regions, and between rural and urban areas, needs to become a major priority. Interestingly, OECD says that development of interior province have to depart somewhat from the model suggested by China's coastal development, with the stress on integration with the rest of the country and improvement in the local business milieu, rather than on special zones or other government preferences.

Underlining the urgent need to strengthen the framework conditions for efficient market functioning, the OECD study has zeroed in on five priorities which are to clarify property rights and strengthen exit mechanisms, so that State-owned as well as other assets could be allocated to their most efficient uses; to improve competition and, in the process, breakdown regional and other protectionist barriers; to bolster enterprise governance by making managers and their boards more independent and accountable while strengthening external discipline; to buttress the powers and capabilities of financial supervisory authorities; and to underpin reforms generally by improving the independence and enforcement capabilities of the judiciary. Alongside, government financial resources need to be bolstered in order to provide the ballast needed to enable these and other reforms that would need to be made in the medium-term.

In short, the book under review is replete with a wealth of details on China's micro and macro economic problems and solutions, which make an interesting reading to gain a clever picture of this important economic power on the world scene.

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