As 18th Congress Ends, a Peek Into the Process

During the past 20 years, economist Zhang Zhouyuan has been a witness to and active participant in the formulation of the country's economic policy.

He participated in drafting the reports at the party's three previous national congresses that set broad policy and reform agendas to be discussed at the subsequent meetings of each new party central committee.

In this interview with Caixin, he reflects on how these important political events have shaped China's development and discusses his hopes and policy suggestions for the 18th National Congress and beyond.

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

Zhang Zhouyuan: In essence, the party congress has, since opening up and reform in the late 70s, 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 even further during their third plenary session in defining a socialist economy as a "planned commercial economy built upon the foundations of public ownership."

The 13th party congress then proposed an improvement on this economic model by following the principle that the "state regulates the market, the market leads businesses."

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During this period from late 1989 to 1991, China saw a general trend of market-orientated reform and an unceasing expansion in 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. Prior state-led talks with economists reached the 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 accordance 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.

Based on your experience, can you describe the drafting progress for us?

My involvement began with the drafting group for the third plenary session of the 14th Central Committee which was composed of 20 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 over 50 people helping to 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.

Prior to the drafting of the reports for the previous three national congress, a speech was made by the general secretary providing a guiding direction after which the drafting group was generally given free rein to draw up the specifics of the report outline. The report is delivered to the central committee for review numerous times as the draft evolves. It is then circulated across the country seeking the input of more than 100 provincial level officials and institutions. It normally requires 20 to 30 revisions before the report is ultimately presented to the national congress, which will make further revisions. Open debate among drafting group members and involvement at many levels of government result in the collective wisdom of the party being embodied in the reports.

What are your hopes for the 18th National Congress?

I think that after the 18th party congress, there is still the need to push for the continued improvement and implementation of the two resolutions on market economy in order to deepen reform. Both of the resolutions remain very good top-level plans but the key is to move forward with practical implementation.

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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 only emerge 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 the 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 begun 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 wealth has soared and 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: breaking up monopolies and reforming state-owned enterprises (SOEs) requires separating government from enterprise management. Reforming the state-owned assets management system requires the separation of 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 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 turned into law in order to guarantee continued reform and legitimize China's socialist market economy.

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

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

The old development model has led to resource shortages, damaged the environment and created an imbalance between investment and consumption. Workers' 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.

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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.

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

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

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

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

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

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 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 reforms of SOEs involve separating government from enterprise management and breaking up industry monopolies which are the most problematic consequence of SOEs today. However, reform of 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.

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

Co-operation is beneficial to promoting reform, but the key remains 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 between 1990 and 1991. Just as the planned price and market price of building materials were within a 20 percent margin of each other and the majority of observers believed the ideal conditions for the merger of the dual-pricing were met, relevant departments disapproved the merger on the grounds of avoiding market turmoil. Only when the State Council stepped in and backed the reform was the merger finally carried out.

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

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 with 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 the adjustment of the social interest structure and 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 of the reform process being derailed by the influence of interest groups in certain departments and regions.

How do you view the Bo Xilai scandal?

Of most pressing importance is for China to move closer towards the rule of law. Moreover the laws must be good laws that promote progress rather than bad laws that encroach on 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 uncovered in the many cases of corrupt official have been shocking. Public disclosure through compulsory financial asset declarations remains the most effective solution to fight such corruption, but has yet to be implemented successfully. This is largely down to an inadequate supervision network. A stronger inspection system must be developed along with a transparent reporting system for official's finances.