As 18th Congress Ends, a Peek into the Process

An Interview with Economist Zhang Zhuoyuan

Over the past twenty years, economist Zhang Zhuoyuan has witnessed and actively participated in building the nation’s economic policy.

He participated in the drafting of reports at each of the Communist Party’s three previous national congresses, setting broad policy and reform agendas and laying the groundwork for discussions at subsequent meetings of the party’s Central Committee.

In an interview with Caixin, Zhang reflects on how these important political events have shaped China’s development, and discusses his hopes and policy suggestions for the years to come.

Caixin: How have national congress meetings since Reform and Opening-up started contributed to economic reform?

Zhang Zhuoyuan: In essence, the party congress has, since opening up and reform began in the late 1970s, gradually developed and deepened the groundwork for a socialist market economy.

The 12th Party Congress established the general principle of a “planned economy complemented by the market,” a significant breakthrough at the time, which began to apply market principles to government policy. The 12th Central Committee went further during their third plenary session by defining a socialist economy as “a planned commercial economy built upon the foundations of public ownership.”

The 13th party congress then proposed improving this economic model by following the principle that the “state regulates the market, the market leads businesses.”

During this period, late 1989 to 1991, China saw a general trend of market-oriented reform and a consistent expansion for the role of the market.

In 1992, under the guidance and support of Deng Xiaoping and Jiang Zemin, the 14th National Congress made “establishing a socialist market economy” the official goal of reform. Earlier, state-led talks with economists reached a general consensus that a “socialist market economy” implies that the market plays the fundamental role in allocating resources, but is supplemented by government macro control over the economy.

The third plenum of the 14th Central Committee in 1993 gave a more concrete direction to reform by passing a resolution on issues including macroeconomic adjustment, reforming income distribution and social security, modernizing SOE management, and establishing a unified and open marketplace. I believe that this Resolution on the Issues in Establishing a Socialist Market Economy remains a good, top-level plan for reform even to this day.

In 1994, the central government launched tax reform and has progressively streamlined the tax code.

The 15th National Congress in 1997 made many contributions to continued economic reform, notably by endorsing shareholding as a form of public ownership and acknowledging that the state should withdraw from non-key industries to allow for competition particularly among small and medium-sized enterprises.

In 2001, China became a member of the World Trade Organization, an important milestone for the Chinese economy.

The 2002 16th National Congress, which presided over the previous leadership transition, established the goal of creating a “basically well-off” middle class society by 2020. Key measures discussed included reform of state asset management and corporate governance. The congress also promoted a new form of industrialization with a focus on technology, science, and education.

Of major importance was the approval of the Resolution on the Improvement of the Socialist Market Economy at the third plenum of the 16th Central Committee in 2003, which began to put more weight on the social issues of economic development. Along with continuing to deepen ongoing reforms, the “five balances” were central to the resolution: balancing urban and rural development, development among regions, economic and social development, man and nature, and domestic development with opening up to the outside world. Protecting property rights was also emphasized at the plenum and establishing a modern property right system was discussed.

Most recently, the 17th National Congress in 2007 laid out Hu Jintao’s Scientific Development Concept, which seeks to engineer sustainable development through a scientific approach to policy and governance.

In general, each national congress has provided a fitting growth strategy in accord with the circumstances and phase of development at the time. The central theme of these meetings is to progressively expand the role of the market, urbanize, industrialize, globalize, and ultimately modernize China.

Caixin: Based on your experience, can you describe the drafting process for us?

Zhang: My involvement began with the drafting group for the third plenary session of the 14th Central Committee, which was composed of twenty or so people. The group was led by a central party leader and subdivided into numerous work groups, including a market group, of which I was a member. Since then, the scale of the drafting groups has grown, with more than fifty people helping draft the report to the 17th Party Congress.

Group members generally come from key central government departments as well as numerous advisory bodies such as the State Council Development Research Center and the Chinese Academy of Social Sciences, although senior cadres from local governments also participate. The report usually takes ten months to complete.

Before drafting the report for each national congress, a speech is made by the general-secretary to provide guidance and direction, after which the drafting group is generally given free rein to draw up and outline the report’s specifics. The draft report is delivered to the central committee for reviews numerous times. It is then circulated around the country for input from more than one hundred provincial-level officials and institutions.

There are normally twenty to thirty revisions before the report is ultimately presented to the national congress, which makes further revisions. Through open debates among drafting group members and by welcoming involvement of officials at many levels of government, the collective wisdom of the party is embodied in a final report.

Caixin: What are your hopes for the 18th National Congress?

Zhang: I think after the 18th Party Congress, there will still be the need to push for continued improvement and implementation of two resolutions on a market economy in order to deepen reform. Each resolution is a very good, top-level plan, but the key is to move forward with practical implementation.

The goal is to build a perfect socialist market economy by 2020. As was the case with Deng Xiaoping’s opening up and subsequent major reform movements, a specific policy plan for how to achieve this goal is likely to emerge only during the third plenary session of the new committee in 2013.

I believe that in order to move to a new development model and adjust the structure of the economy, there is a need to break up industrial monopolies, reform the distribution of welfare, and most importantly push forward with political reform. The boundaries between the market and the state must be distinguished clearly. Wherever the market can be effective, it should be allowed to work. The main role of the state should be to regulate the market and provide public services in order to create favorable market conditions.

In recent times, China’s market has grown more open and competitive, yet the marketization of services and factor markets still lags behind. Distortions are present in the factor pricing of land, labor, capital, and the environment, which along with energy and resource constraints have started to limit economic growth. The need for quality over quantity becomes more pressing by the day.

A vibrant private sector has emerged, and yet it remains cut off from entering many industries controlled by state-led monopolies. The bodies needed to administer the economy have been created, and yet regulation and oversight are lacking while public services remain inadequate. Society’s overall wealth has soared, yet the income gap continues to grow and the social welfare system lags behind the country’s level of development.

As such, there remain many key challenges in pursuing economic reform. For exampled, breaking up monopolies and reforming state-owned enterprises requires separating government from enterprise management. Reforming the state-owned assets management system requires separating public institutions and state funding from the administrative arm of government. The creation of a unified national marketplace requires dissolving market divisions created by local governments. Strengthening the factor and energy markets requires eliminating state-administered pricing. Providing equitable public services requires expanding the government’s social welfare role. Perfecting a modern financial system requires effective regulation. Allowing the market to function efficiently requires that the government no longer take the lead role in allocating resources, but instead complement the “invisible hand” through improved macroeconomic policy.

Finally, all successful and effective policy initiatives must be promptly implemented through law in order to guarantee continued reform and legitimize China’s socialist market economy.

Caixin: There are conflicting views among economists as to whether China can continue to sustain high economic growth rates. What is your view?

Zhang: At present, continuing to demand that the economy expand at double-figure growth rates is detrimental to reform.

The old development model led to resource shortages, damaged the environment, and created an imbalance between investment and consumption. Worker salaries have risen too slowly, ultimately resulting in problems of insufficient demand and excess productive capacity that are far from being resolved. We cannot continue to follow the old road of blindly pursuing high-speed growth at any cost. Instead, China must follow a sustainable development path, but transforming the economic growth model first requires an appropriate slowing of the growth rate.

If China can sustain a growth rate in the region of 7 percent, it will be a pretty good outcome for such a large economy. Furthermore, it should be possible for China to maintain such a level of growth up until 2020 as it continues to undergo urbanization and industrialization.

Caixin: Beyond urbanization and industrialization, what conditions are needed to maintain 7 percent growth until 2020?

Zhang: Technological innovation is important. Yet a reformed system is required to foster such innovation, and so the key is continue reform.

Caixin: What key factors are required to guarantee the successful transformation of the economy?

Zhang: Essentially, we must adjust the current structure of the economy. This involves breaking up monopolies, accelerating technological progress, improving labor productivity, and avoiding indiscriminate investment in highly polluting and energy consuming projects.

Caixin: People are speculating that following the 18th National Congress, government departments that are deterring healthy market economy development will be reformed. Do you see this happening?

Zhang: I expect that such institutional reforms will only begin to take place after a new leadership lineup is formed at the first plenary session of the 18th Central Committee. On the second plenary meeting, the plan of departmental reform might emerge.

The existence of powerful state departments has led to continuing, even growing, administrative monopolies. Not only has this slowed the process of reforming SOEs, but it has contributed to the trend of a growing state at the expense of the private sector, which is at odds with further market-based reforms.

Necessary SOE reforms involve separating government from enterprise management and breaking up industry monopolies, which are the most problematic consequence of SOEs today. However, reforming such monopolies is incredibly difficult, since the whole industry has in itself become a vested interest group. As such, despite the State Council promoting competition and private ownership, little substantive progress has been made. The key to reforming such monopolies lies in reforming the role of government.

Caixin: You once said that reform requires top-level design, but most importantly top-level implementation. What about cooperation among various levels of government?

Zhang: Cooperation is beneficial to promoting reform, but the key remains a top-level design. This is because it is very difficult to overcome the power of vested interest groups unless a decree is issued from the very top. Of course, pressure must then be exerted, both bottom-up and top-down, to bring about cooperation.

Experience has shown that a top-level design, unless it is rigorously pushed for, will be delayed or shelved. An example is the tentative reform of the dual-track pricing of production goods in 1990 and 1991. Just as the planned price and market price of building materials were within a 20 percent margin of each other, and most observers believed the ideal conditions for the merger of the dual-pricing had been met, relevant departments disapproved the merger on grounds of avoiding market turmoil. Only when the State Council stepped in and backed the reform was the merger finally carried out.

Caixin: How can the deadlock be broken so as to further reform?

Zhang: I believe crises will force reform. The circumstances have already reached this stage, putting pressure and leaving no choice but reform. For instance, China’s economy has already developed to the point where a new development model is required, leaving no other way to sustain growth but to deepen reform.

The government must take the lead in reform. Conflicts pitting the individual interests of government officials are inevitable; hence a top-level plan that forcefully implements daring new measures is required.

Currently, China is entering into a crucial period in adjusting the social interest structure, and it faces a policy gridlock that is hindering reform. The central government should strengthen its leadership of reform, emphasize a top-level design and overall plan for implementation, and remain vigilant about the reform process being derailed by the influence of interest groups in certain departments and regions.

Caixin: How do you view the Bo Xilai scandal?

Zhang: Of most pressing importance is for China to move closer toward the rule of law. Moreover, laws must be good laws that promote progress rather than bad laws that encroach upon the collective benefit of society. A market economy can only be built on a good legal system.

Currently, many good laws and policies drawn up by central government policy-makers are not being successfully implemented at lower levels.

The sums of money involved in the many cases of corrupt official uncovered over the years have been shocking. Public disclosure through compulsory financial asset declarations remains the most effective way to fight such corruption, but has yet to be implemented successfully. This is largely due to an inadequate supervision network. A stronger inspection system must be developed, along with a transparent financial reporting system for officials.