Goh Keng Swee On China: Selected Essays

Selected Essays

Yongnian Zheng, John Wong

• Publisher: WSPC
• Year: 2012
• Print ISBN: 9789814407236
• eBook ISBN: 9789814407250
• Topic: Scienze biologiche
• Subtopic: Scienza generale

Touted as one of the main engineers of Singapore's economic growth, Dr Goh's collection of writings and speeches seek to shed light on the various challenges that China faced in the early 90s. His arguments and analyses were presented clearly and concisely while being firmly established upon economic principles. Covering a broad range of topics from the growth of industries and enterprises to financial reforms and the difficulties of doing business in China, this collection provides a comprehensive view of problems the Chinese government faced while providing possible solutions. Despite being written two decades ago, the issues raised in these papers and speeches are uncannily relevant to the issues that the current Chinese government faces today.

Contents:

• China's Economic Policies in a Historical Perspective
• America Looks at China Part I — After Deng, What?
• America Looks at China Part II — Future of Reforms
• America Looks at China Part III — Absorbing Modern Technology
• America Looks at China Part IV — Correcting Systemic Weaknesses
• Li Peng on China's State Enterprises
• Into the 21st century
• What's Gone Wrong with China?
• China's Coal Industry: Symptom of a Deeper Malaise of the Economy
• Doing Business in China
• The Awakening of Asia's Giant — China

Readership: General readers, academics, professionals, students interested in China's economy.

1

China’s Economic Policies
in a Historical Perspective^*

Editors’ Note

Goh Keng Swee was addressing foreign investors in 1987 who were unfamiliar with the business environment in China and also unsure of China’s reform policies — Would they stay? For a quick understanding of China’s open-door policy historically, Goh said one need not go beyond 1793, a fateful year, when Emperor Qianlong summarily dismissed the British request (through Lord Macartney) to open up China for foreign trade. But, eventually China was forced by the Opium War to open its door, and that was accompanied by a century of foreign oppression and humiliation. This in turn led to the rise of the Communists to power in 1949, which closed China’s door again until 1978.

Goh also cautioned foreign investors about the unfamiliar institutional structure in China’s newly reformed economy, which gave rise to the dualprice system and many SOEs with non-market behaviour. Taking a more optimistic long-term view, Goh observed that China was in the final phase of its historical transformation from an ancient civilisation into a modern industrial state. This has come true today!

The foreign businessman when contemplating business prospects in China experiences mixed feelings. First, he is dazzled at the prospect of the huge domestic market: one billion consumers. On getting down to the nitty gritty, he soon finds that things are not what they seem to be and he must rid himself of all kinds of preconceptions. The Chinese have their own methods of doing business and he must understand the system if he is going to get anywhere. So one way or another, he acquires the minimum knowledge. If he makes the right contact or has the right product, negotiations are successfully concluded. Then the real work begins. The operating environment is different from the one he is accustomed to. So a major adjustment has to be made in expectations, modes of assessment, methods of planning and in general psychological attitudes.

Throughout this period of adjustment, he is assailed by doubt, not only over small matters of detail but over the large issues. Is China serious about the policy of opening to the outside world? How can one be sure that the policies initiated by Deng Xiaoping will last beyond his departure from the political scene? How reliable are the accounts of the conflict between conservatives and reformers? What happens if the reformers lose? If the reformers win, is China introducing a form of capitalism?

Chinese leaders have gone to great lengths to give assurances that the reforms are here to stay and China will retain its socialist system. The frequency with which such assurances have been given suggests that a communication gap of some kind exists. One reason why the gap exists relates to differences in culture, and this leads to a state of mutual lack of comprehension. It is a human failing to believe that other people think, act and feel just as we do and we get puzzled when they give evidence to the contrary. I think this business of cultural difference can be overdone at the relatively high level of contact which business executives make. Business discussions center around prices, costs, profits, production and supply matters, and reason, rather than sentiment, determines the outcome.

In my view, the main reason for the communication gap is historical. It is trite but nevertheless true that the history of China proceeded differently in the last two or three thousand years from that of Europe or America. And, except for specialists, each side is more or less totally ignorant of the history of the other. To understand China, some understanding of recent, if not ancient history, is a must. This is because the Chinese people have a keener sense of their own history than can be said of most contemporary societies.

Recorded Chinese history extends for more than three thousand years. For most of the period it is a story of a self-contained civilization developing a unique culture and political system. For the purpose of understanding China’s policy of opening to the outside world, however, we need not go beyond the year 1793. That was the fateful year in which Lord Macartney called upon the Chinese Emperor Qianlong with the request from his monarch, King George III, that the celestial kingdom open its doors to trade with the outside world.

The British envoy was received by the Qing emperor Qianlong in his summer residence. But his request for the opening of regular trade and the stationing of a mission in the capital was rejected. Qianlong was a strong emperor and the Qing dynasty had reached its peak under him. In refusing Lord Macartney’s proposal on trade ties, Qianlong was reaffirming the traditional Chinese view that the empire was self-sufficient in all the requirements of the people and had no need of the manufactures of the West. Thus the doors to trade with the outside world were closed. It took five more decades before the doors were forcibly opened.

It may be interesting to compare China’s early contact with the West with Japan’s experience. Japan’s first brush with the West came in a less pleasant form than a visiting aristocrat. In 1853, the United States dispatched Commodore Perry’s warships to Tokyo with the demand that the country be opened to trade. Unlike China of 1793, Japan’s government, that of the Tokugawa shogunate, was tottering on its last legs. In 1858, it signed a treaty for setting up ports through which the Japanese would trade with the outside world. There is a widespread belief that unlike the Chinese, the Japanese willingly acquiesced to Western demands. This is untrue. The signing of the Treaty outraged public opinion, and the Minister who signed it was assassinated and the foreigners were frequently attacked. However, after two naval bombardments in 1863 and 1864, the Japanese bowed to the inevitable.

Japan was fortunate in having a small group of young samurai of remarkable ability, vision and daring. The oldest was Tomomi Iwakura, 43 years old, and the youngest, Hirobumi Ito, 27 years old. This group laid the foundation of modern Japan. Having disposed of the last Shogun and restored the Meiji emperor, 55 of them set out on an extraordinary voyage of discovery of Western countries. In all, they spent two years abroad, studying all important aspects of Western societies — their constitutions, their legal systems, their schools and universities, their industries and their armies and navies. Thus, over the next 30 or 40 years, the core of Japan’s political leadership was equipped with an accurate understanding of Western government and economic systems. This knowledge enabled them to correctly assess the policy recommendations of their experts on how to restructure their country in gradual stages, and eventually to join the ranks of modern industrial states. Japan’s historic experience has taught her people the necessity of acquiring comprehensive and accurate knowledge as the basis of decisions on policy and action. Western scholars studying Japan’s recent spectacular economic successes have linked these to her unrivalled skills in collecting, analysing and disseminating information. The Japanese thus successfully applied the counsel of China’s ancient strategist Sun-zi. He said, “Know yourself, know the other side and you can fight a hundred battles without danger.” By contrast, the Qing government leaders had little understanding of the Western world and blundered from one disaster to another to its final collapse in 1911.

The forcible opening of doors to foreign trade in China took place as a consequence of two wars waged by foreign powers. These were the First Opium War, 1839–42, and the Second Opium War, 1856–60. These events ushered in a long era of great misfortune and calamity for the Chinese people. The disasters that befell the country were less the immediate consequences of the wars than the result of the decline of the central authority leading to disorder. Nor did the opening of China’s market to foreign trade bring lasting economic benefits to foreign countries. For trade to prosper and bring mutual benefit to trading partners, a key requirement is economic progress under a stable and orderly government. That did not occur in China.

When the dynasty collapsed in 1911, events in China took their accustomed historical course. Warring factions battled for supremacy. But history introduced a new element in the struggle — the invasion of foreign powers. All these increased the misfortunes and suffering of the Chinese people. After 38 years of strife, China was once again reunited under the victorious Communist Party in 1949. The period of disorder was not exceptionally long by Chinese historical standards but the scale of conflict reached unprecedented heights. The two groups contending for mastery over China — the Communists and the Kuomintang — between them commanded more than eight million regular forces in the final battles. In Japan, by contrast, the Tokugawa shogunate was overthrown by 6,000 rebel soldiers and the issue was decided in a battle which lasted one afternoon. I make this comparison to emphasise the point that China is a large country with a complex social and political structure. What is accomplished in an afternoon in one country may take a longer time in China.

When the Communist Party leaders addressed their minds to the tasks facing them in 1949, the challenges appeared formidable. The devastation caused by decades of war had to be repaired. The country was short of infrastructure of every description — roads, railways, ports, telecommunication facilities and power — and lacked a modern industrial base. Even more important than inadequate physical structures was the neglected state of the schools, technical colleges and universities. Because of the international situation, the only source of technical and financial assistance was the Soviet Union. In the 1950s, China began a massive construction effort and adopted the Russian system of planning and controls.

The restoration of peace, unity and order provided a favourable setting for very rapid economic progress in the first decade. Despite the ultra-leftist errors committed in subsequent years, economic growth and, in particular, industrial expansion continued at a robust pace. But eventually, both the political leaders and the economic experts detected certain weaknesses and flaws in the system. By 1978, a consensus was reached within the Central Committee of the Communist Party that a thorough reform of economic policies must be undertaken. Confining my observations to the shortcomings as perceived by China’s leaders, I shall describe some of the policies adopted to overcome these shortcomings and discuss some of their implications for foreign investment.

As China is a socialist country, all the major enterprises are stateowned. In practice, ownership and control may be vested in a variety of government agencies. The most common are the production ministries such as Ministry of Textile Industry, Ministry of Electronics Industry, Ministry of Light Industry, Ministry of Chemical Industry and Ministry of Metallurgical Industry. These may be central ministries of the central government or they may be their equivalents in provincial governments or even municipal government. Sometimes, enterprises owned by a central ministry may be transferred to a provincial or even city authority for better supervision and control. Sometimes, an enterprise may be owned by one of the large national trading companies or their provincial or even city equivalents.

Whatever the ownership arrangements, before the recent reforms got underway, all large enterprises had to arrange their production activities according to a plan determined by the State Planning Commission. The plan set physical targets for the output mix, specified quality standards, regulated the prices and provided for the necessary inputs in respect of quantity, quality and prices. The task of the enterprises was to make the best use of materials, labour, energy and other planned inputs to meet the production targets. The system had both advantages and disadvantages.

In the early years of reconstruction, the advantages were evident. It was an effective method of mobilising production skills in the form of engineering and scientific staffs to concentrate on what the Planning Commission rated as national priorities, such as building railways, exploiting mineral resources and manufacturing machinery. Despite the extensive criticism the system was subject to in recent years, it produced an extensive network of industries. There was hardly any product which China used that was not manufactured in China: intercontinental ballistic missiles (ICBMs), trucks, locomotives, machine tools, textiles, consumer electronics and other consumer goods. But the products generally suffered from inadequacies of two kinds. First, the quantity produced was insufficient and second, the design of these products was often outdated.

Insufficient output may be ascribed to China’s large population and the chaos prevailing for a hundred years prior to 1949. Given time and the accumulation of physical capital, shortages could eventually be overcome by expanding production facilities. But out-of-date design, especially in the production of machinery and transport equipment, was a more serious matter. The reason was that the system of production, according to state plans, laid more stress on physical output than quality and up-to-date design. Enterprises had no incentive to introduce better design unless instructed to do so. Once a model of a commodity had been sanctioned for production, neither the enterprise nor the production ministry in charge felt any compelling motivation to improve on the design. Such innovations might require a new set of tools that might slow down current production. Or new components might be needed which were difficult to acquire, such as micro-electronic devices.

Since whatever was produced by the enterprise was taken away by a state agency, it could be irrational business practice to introduce improved products especially if this raised problems of sourcing of components and difficult negotiations with the Price Bureau for higher prices. Troubles of this kind are not peculiar to China; they affect the economies of Eastern Europe. So far as the production of consumer goods is concerned, weakness of this kind seems inherent in centrally planned economies.

China’s leaders and economic experts recognized the limitations of central planning when applied in a rigid manner. They correctly identified the root weakness of the system, which comprised the important links between prominent components of the economy being either missing or existing in an inadequate form. In particular, they noted that production was not properly related to consumer demand, prices to costs, wages and salaries to performance and profits to enterprise efficiency. Thus they traced the waste and inefficiency of the system to one or more of these deficiencies.

The analysis and diagnosis were clearly correct, but it represented a courageous departure from the conventional wisdom of that time. This breakthrough was made possible as a result of both the pragmatic nature of the Chinese culture as well as Deng Xiaoping’s constant reminder “to learn truth from facts”. The media in China, both popular and academic, published frank accounts of faults in economic management. Hence, the feeling was widespread that something needed to be done. The remedies proposed had to consider economic logic on the one hand and, on the other, the institutional arrangements pertaining to production. Let us first consider logic. If the faults arose from improper links cited — between production and consumer demand, prices and costs, etc. — logic requires that market conditions should be given prominence in economic decisions. It is a simple matter to prescribe abstract principles about how to allow markets to determine outputs, prices, costs, wages and salaries, profits, etc. However, when it comes to determining policies applicable to the real situation in China, we must take into account the institutional arrangements concerning production. This means going back to the ownership and control of enterprises. These are organised along different lines from those in free enterprises. The large enterprises are more than production units. In the course of their evolution, they have come to provide for the employees not only permanent employment but an extensive range of welfare benefits — such as health and hospital services, subsidized housing (virtually free), pensions, schools and even universities for children of employees. Under the old system, the entire profits of the enterprise went to the owners, that is, the state; likewise when losses were made, because the enterprise produced goods whose prices had to be kept low, they were made good out of the state budget. The enterprise thus functioned like a government department, producing whatever it was ordered to produce with the materials supplied by the state.

Institutional arrangements of this kind place a constraint on the pace at which market forces can be allowed to determine economic decisions. For instance, it is not feasible to charge economic rents for accommodation provided at low rents to employees unless the employees are given corresponding pay increases. Nor is it possible to withdraw the status of permanent employment from those granted such status.

Another marked difference between Chinese enterprises and ours relates to the sharing of authority within the enterprise. Again for historical reasons, professional managers have to share authority with the Party apparatus and the trade union representatives. This arrangement goes back to the revolutionary years when the Party administered large areas of China while fighting the Kuomintang and/or Japanese armies. In the sometimes fluid battle situation, enterprise managers needed a stiffening of resolve. This was what the Party and trade union leaders provided. Once their participation in enterprise management has been institutionalized, it is not feasible to dismantle the system completely. Under a political system in which the supremacy of the Party is elevated to a cardinal principle, the disengagement of the Party from enterprise affairs will not be an easy matter to bring about.

Clearly, these complicated institutional issues affect the rate of reforms. There are also major economic policy constraints, the foremost of which concerns the impact of economic liberalisation on prices. One of the outcomes of centrally planned and directed system of production of previous years was price stability. As a result of prolonged control over prices and wages, these remained virtually unchanged for 30 years after the war. It is true that price controls were accompanied by extensive rationing of basic necessities, foodstuffs, clothing, etc. But prices were very low by world standards. The same applied to a wide range of raw materials and semi-finished goods, many of which were sold at a fraction of world prices.

Allowing market forces to determine prices runs the risk of an unacceptable rate of inflation if liberalisation proceeds at too fast a pace. A population accustomed to 30 years of price stability would take poorly to widespread price increases. But not to move fast enough would limit the benefits of reform in several ways. Incomplete reform of prices means that a part of the output of a product is sold through planned distribution channels at planned prices. Another part of the output may be sold by the producer to authorized buyers at negotiated prices. The balance of the output may be sold freely at whatever the market can bear. This leads to a multitiered price system. One undesirable effect of this on enterprise efficiency is that the profits of the enterprise may depend more critically on access to controlled supplies than on superior management. Enterprises with substantial access to planned supplies may be tempted to use excessive amounts of raw materials per unit of output. Multiple pricing has other bad effects. Management resources will be lavished on cultivating right connections, on preparing favourable negotiating positions to the neglect of efficient control and supervision of production matters. Suppliers of controlled price goods may resent the profits their client enterprises make which they consider to be at their expense.

It was against this kind of socio-economic background that the Chinese government introduced a series of reform measures, focused on the enterprise. The object was to transform a rather rigid bureaucratic organisation responding only to directives and instructions from higher authorities to an efficient and responsive production unit with powers of dynamic self-development. As China’s experts saw it, to achieve this objective a number of steps ...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• About the Editors
• Contents
• Introduction
• 1. China's Economic Policies in a Historical Perspective
• 2. America Looks at China Part I — After Deng, What?
• 3. America Looks at China Part II — Future of Reforms
• 4. America Looks at China Part III — Absorbing Modern Technology
• 5. America Looks at China Part IV — Correcting Systemic Weaknesses
• 6. Li Peng on China's State Enterprises
• 7. Into the 21st Century
• 8. What's Gone Wrong in China?
• 9. China's Coal Industry: Symptom of a Deeper Malaise of the Economy
• 10. Doing Business in China
• 11. The Awakening of Asia's Giant — China
• Index