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China’s reform and opening-up
  1. The end of China’s labour reform? | East Asia Forum
  2. The Labor of Reform in China
  3. Key findings
  4. The Labor of Reform in China

Such explosive growth in productivity is remarkable--the U. Analysis of the pre- and post periods indicates that the market-oriented reforms undertaken by China were critical in creating this productivity boom. The reforms raised economic efficiency by introducing profit incentives to rural collective enterprises which are owned by local government but are guided by market principles , family farms, small private businesses, and foreign investors and traders.

They also freed many enterprises from constant intervention by state authorities. The profit incentives appear to have had a further positive effect in the private capital market, as factory owners and small producers eager to increase profits they could keep more of them devoted more and more of their firms' own revenues to improving business performance.

China's recent productivity performance is remarkable. China's rate of almost 4 percent simply puts it in a class by itself. Exactly how did China's economic reforms work to boost productivity, especially in an economy still burdened by extensive government controls? In the important rural sector the story is particularly interesting.

Prior to the reforms, nearly four in five Chinese worked in agriculture; by , only one in two did. Reforms expanded property rights in the countryside and touched off a race to form small nonagricultural businesses in rural areas.

China capital market: Reform in steady progress

Decollectivization and higher prices for agricultural products also led to more productive family farms and more efficient use of labor. Together these forces induced many workers to move out of agriculture. The resulting rapid growth of village enterprises has drawn tens of millions of people from traditional agriculture into higher-value-added manufacturing.

Further, the post reforms granted greater autonomy to enterprise managers.

The end of China’s labour reform? | East Asia Forum

They became more free to set their own production goals, sell some products in the private market at competitive prices, grant bonuses to good workers and fire bad ones, and retain some portion of the firm's earnings for future investment. The reforms also gave greater room for private ownership of production, and these privately held businesses created jobs, developed much-wanted consumer products, earned important hard currency through foreign trade, paid state taxes, and gave the national economy a flexibility and resiliency that it did not have before.

By welcoming foreign investment, China's open-door policy has added power to the economic transformation. This foreign money has built factories, created jobs, linked China to international markets, and led to important transfers of technology. These trends are especially apparent in the more than one dozen open coastal areas where foreign investors enjoy tax advantages. In addition, economic liberalization has boosted exports--which rose 19 percent a year during Strong export growth, in turn, appears to have fueled productivity growth in domestic industries.

In one final area, price reform, the Chinese have proceeded cautiously, granting a fair amount of autonomy to producers of consumer goods and agricultural products but much less to other sectors. Several bouts of inflation have buffeted the Chinese economy in the past two decades, deterring the government from implementing full-scale price liberalization. High rates of growth also raise inflationary worries. Inflation may pose the single greatest threat to Chinese growth, though thus far it has been largely contained. As with any national economy, China has unique characteristics that the researcher must properly account for.

First, many researchers cite the periodic political crises that seized China before as a factor obscuring pre economic strength. Because the political climate in China was so much in flux, these commentators argue, the economic pictures before and after cannot be compared with any accuracy. This proposition was evaluated by dropping from the analysis the subperiod, which encompasses the Great Leap Forward and the Cultural Revolution.

The Labor of Reform in China

The result is that pre productivity increased only modestly as a result, from 1. Second, in the period Chinese central planners invested heavily in the urban industrial sector and restricted migration from the country into the cities. Could the abandonment of this policy after itself explain the strong performance of the economy? Did these sectoral shifts drive growth, or did productivity?

In the event, although these sectoral shifts are important, they do not eliminate the independent rise in productivity associated with the reforms. Third, some commentators maintain that if the productivity growth was a one-time shot of adrenaline to the body economic, it is certainly not sustainable. In fact, productivity gains have been steady throughout and even increased during If the post-reform period is broken into three distinct phases, each associated with a different set of reforms, sizable productivity gains are evident in each subperiod. This indicates that the Chinese were able to carry over initial productivity gains to other parts of the economy.

Finally, one can scrutinize the analysis for measurement problems.

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In particular, are the capital-stock data calculated properly and were there any measurement errors relating to the input data? Regarding the capital-stock measurement, since the Chinese national income statistics exclude the value of residential housing and since outlays for new housing rose during , the investment figures should be adjusted accordingly. When this is done, there is no change to the pre productivity growth estimate and a modest increase in the post-reform productivity growth rate, which corroborates the general story.

Could an overvaluation of the initial capital stock have biased the findings? More conservative estimates of the capital stock were used to re-analyze the data, but there is no strong evidence to refute the findings. Although the pre productivity gains become negative, the post-reform productivity rate is unaffected. Another more significant problem with capital-stock data is that Chinese asset surveys do not produce capital stock estimates consistent with the investment data in the national accounts.

The difficulties of bridging this statistical gap are considerable. The analytical findings of this study were compared with those obtained by economists who had computed the data somewhat differently. On the productivity side, the studies differed in emphasis but not in essence: as a body, the available evidence corroborates productivity improvements as a significant source of post growth, even when divergent capital-stock calculations are employed.

The outside estimates of productivity growth vary from about 2 percent to nearly 4 percent for the period.

Regarding other input data, a study was made of the potential for a differential bias that might overstate the post-reform growth relative to the pre-reform period. This problem might arise because centrally planned economies are prone to the overreporting of output and the underestimating of prices. As it happens, although enterprise managers have traditionally tended to overreport output in an effort to meet production targets set by the government, the incentives to do so have probably declined in the reform era as managers have faced less strict state control.

It is unlikely, therefore, that performance in the post era has been overstated relative to earlier eras. The underdeflating of nominal output could be a more serious source of bias. The piecemeal character of price reform--with some sectors liberalized and others not--means that selecting an appropriate deflator for the post period is difficult. Yet, the central planning period may also have seen an underdeflation of output, since repressed inflation was probably widespread as manifested in shortages, black market trading, and long waits for certain goods.

Indeed, despite steady improvements, public health and education levels remain low nd worldwide. And India lags behind China in the efficiency of its product and labour markets ranking 85th and 99th, respectively. Only by addressing these shortcomings can India attract sufficient investment and boost economic growth.

Key findings

At the same time, India should expand labour-intensive manufacturing, thereby creating employment opportunities for its growing pool of workers. In a sense, India has the advantage of being able to learn from China. China transformed its agrarian economy by building a strong, labour-intensive industrial base, shifting workers from agriculture to manufacturing and construction, and improving productivity across all sectors. Equally important, Indian workers — especially young people — need opportunities to upgrade their skills continuously. Meanwhile, the country will face a shortage of 13 million medium-skilled workers.

For example, he has already announced measures to promote foreign direct investment in insurance, defense, and telecommunications, including higher infrastructure spending and new tax incentives for savings and investment. That, together with the planned reforms, would enable India to seize the opportunities that arise with favourable demographics and achieve Chinese-style growth.

The Labor of Reform in China

Published in collaboration with Project Syndicate. Lee Jong-Wha , Director. The views expressed in this article are those of the author alone and not the World Economic Forum. I accept. Lee Jong-Wha Director. How do we build a sustainableworld? Submit a video.