The Reform Experiments in China

The whole world is aware that when Deng Xiaoping embarked on the Four Modernizations, China was a basket case in terms of economic development.  Reform, reform, reform!  But the devil is in the details.  What reforms?  There is no lack of experts about what is to be done.  What is missing are experts who observe the reforms which are often based upon conventional wisdom or pure thought, and then monitor their actual consequences.  To no surprise, theory runs up against unanticipated social realities, and the best of intentions may end in social disasters.  Hindsight usually makes it clear that the consequences should have been obvious.

The following is a partial translation from the speech made by economic Long Xianping (郎咸平) at Tsinghua University in Beijing on December 21, 2005.  This extract is focused on the actual results of three areas of reform in China.

[in translation from Xici Hutong]

First, there is the reform of the state enterprises. Let us recall what I said earlier today -- the trust in the American professional managers is an essence of capitalism.  But how did we cope with this point in the reform of our state enterprises?  We took the superficial manifestations of western capitalism and we mix them into our ideas for a messy reform.

For example, I would like to ask: What is the reform of state enterprises?  I have finally understood now: my home is a mess, I hire a nanny to clean up and what happens afterwards?  The home now belongs to the nanny!  This is state enterprise reform.  We discover that the contemporary Chinese state enterprise professional managers are not trustworthy.  Worse yet, we even offer some absurd excuses in order to let them take over state properties.  For example, there is the icicle theory -- the state enterprises are poorly run and will slowly melt away like icicles.  Rather than let it melt away totally, why not hand it over to those untrustworthy professional managers before it melts away.

Dear fellow students, I cannot imagine that our society does not even have this minimal standard of judgment to the point where the state enterprise managers have no responsibility.  Can you imagine that the state enterprise managers fail to perform; worse yet, they even take over the state enterprises for themselves?  Shouldn't those state enterprise managers be doing some good instead?  Since when have we lost this minimal level of judgment?  I have received thousands of complaints and I have the sentiments summarized by these words "I am terrified by what I see and my heart breaks at the sight" (触目惊心、痛心疾首). 

Let me offer an example: a certain local state enterprise is inefficient, so it went through a simplified privatization.  After the private boss buys out the state enterprise, he fired all the workers and shoved the responsibility for them towards society.  The government lost that state enterprise and the society assumed the responsibility, but the boss now owns the state enterprise and keeps all the profit.  Worse yet, they demolish all the state enterprise facilities and make way for skyscraper buildings.  They get to keep all the money that they make.  This is what I mean when I said that the benefits of the reform go to certain individuals whereas the burdens are borne by the reforming society.

One of my students went to a certain county in Sichuan to discuss a joint venture.  The local state enterprise boss told him: "Let me tell you.  We can undervalue our assets through some accounting tricks.  For you, you can pay 20% of the value and we will sell our enterprise to you.  Furthermore, we have 5,000 mu of land in the back belonging to the Communist Party, but I can give it to you as well.  Can you give me a bit of money?"  This is the untrustworthy "party cadre of ours."

We bring in western philosophy, but we dare not bring in the western notion of trust.  We find it risible that you can take over the state asset that does not belong to you and have the nerve to get on the podium to discuss the experience of property reform.  This society of ours does even have the most fundamental standard of evaluation.

Let us look at our workers.  They toiled hard at the factory for 30 years, but when you became the factory boss, they lost their jobs.  How can the factory workers accept that?  (applause)  I do not believe that the people have to accept the social burden of the reform while a small group of people profited from the reform of state enterprises.  You cannot accept it either, because it seriously violates Deng Xiaoping's idea of reform.  (applause).

Let us talk about our reform of education.  (applause, laughter).  When I speak about educational reform, I always use Tsinghua University as the example.  (laughter).  I speak to the government officials and the enterprises bosses as follows: "Dear guests, do you remember the situation when you were accepted by Tsinghua University and Peking University more than 20 years ago?  Of course, you remember.  Your parents accompanied you to the train station with tears in their eyes.  They could not afford to buy a seat for you on the train, so they bought you a standee ticket.  You had to stand all the way to get to Tsinghua or Peking University.  You graduated.  You became rich and famous.  You brought your parents to live in the city.  You started to work on education reform.  But you have terminated any chance for poor rural students like yourselves to leave poverty, because the high tuition fees made it impossible for them to afford to go to university.  How can you be so cruel?"

What is educational reform?  This is the most absurd kind of reform.  (laughter)  What do I mean by being absurd?  Do you know how you qualified for Tsinghua?  That was because you had good examination results and you were the elite.  This was the result of an elite system in which supply and demand are not necessarily in balance.  That is to say, the educational system is one in which supply and demand do not have to be in balance.

So how can you introduce market ideas into education?  Education itself is about an imbalanced system of supply and demand, and it doesn't matter if you have no money.  But under the reform, all the stories that we read on the Internet become true.  That is, those people from poor families can no longer afford to attend school!  It does not matter how talented you are, you just cannot afford to attend Tsinghua!

Where has the reform in our country gone?  We wave the label of free market reform, and we can get away with anything!  (applause)  Why does American university education cost so much, but China cannot do so?  It is possible in America but not in China!  Because you do not have the supporting system.  In the United States, university tuition fees are high for rich people.  But if your income is lower than a certain level, the American government will provide a low-interest loan (or even interest-free loan) to you, and there are also school and government scholarships!  Do you know that?

These students can go through four years of education, and then earn money to repay the American government.  I ask you whether such a system exists for us?  We do not have the concept of the government offering loans to help out poor people.  If you insist on market-based reform, the result will be that many rural youth cannot attend university not because of poor grades but because they cannot afford to pay.  The support system is a prerequisite for educational reform.  We do not have the support system, so how dare we inject the market concept into educational reform?  This is yet another absurd reform in which the costs are borne by the poorest segment of society.

Now let us look at medical reform!  (applause)  When a patient is sent to a hospital in an emergency, the first question from certain hospitals is not "What is your problem?" but "Can you pay the deposit?"  (laughter)  If you don't, then you can wait to die in the corridor!

We may be indifferent to that now.  But let me tell you, at any hospital in Hong Kong, it costs nothing for a patient in an emergency.  Do you know why the people of Hong Kong are willing to pay for that?  This is because of their minimal concern for humanitarianism and the socially vulnerable groups.  Do we have it here?

I want to tell you about how people get treated in the United States when they are sick.  American law requires that they treat you first.  Afterwards, they will ask you for the money.  If you don't have the money, you can pay it by installment.  This is also based upon the care and concern for the vulnerable people!  Do we have it here?

But I admit that the government is trying hard here.  For example, we have attempted to reduce the price of pharmaceutical drugs for the 18th time.  But the problem is not that.  In a country without the rule of law and in a system without the rule of law, you cannot control the fee structure overall and in particular, you cannot control the fee structure at private hospitals.

For example, if you really have one illness, they will say that you have ten illnesses.  You really need to take only one medicine, but they will prescribe twenty for you.  While the price of drugs has dropped by 5%, you now have to buy 20 drugs instead of the one before.  (laughter)  Are you better off?  Of the 1,500 hospitals in our country and the more than 10,000 health clinics, about 80% are controlled by a small number of groups.  Do you know that?

Right now, the media are reporting widely that some hospitals arbitrarily name you a disease, arbitrarily quote a medical fee for you and arbitrarily prescribe medicine for you.  In the end, you will find that people don't even have the opportunity to get treated.  I ask you, before we begin the reform of the medical system and before we begin market reform, have we thought about why not a single attempt at medical reform around the world has been successful?

Let us look back at America.  President Clinton was supposed to be a smart president.  On the first day in his job, he appointed his wife Hillary to become the chairperson of the American medical and healthcare reform commission.  Two years later, it was a total failure.  (laughter)  Europe also attempted medical and healthcare reform, Asian countries also tried that and the results were all failures.  The reason was that the insurance fees were too high for the governments to bear.  The other reason was the information asymmetry.  For example, when Taiwan tried labor insurance, the government paid while the workers can take their policy to seek treatment at the hospitals.  In the end, the patients had no illness but they took their policies to the hospitals and conspired with the hospitalsl so that they can split the payment.  (laughter)  In the end, the system was cancelled due to too many cheaters.  (laughter).

In the United States, not everyone has an insurance policy.  Quite a lot of poor people in the United States do not have medical coverage.  Medical insurance may costs several thousand American dollars each year.  Looking across the United States, Europe and Asia, there does not seem to be many countries which have successfully reformed their medical care systems.  Since there are so many difficulties and problems with medical care, how can we lightly inject market ideas on medical care reform?  Such reforms are worse than doing nothing, because you don't understand the international trend.  You treat market reform as sacrosanct, but we find out in the end that many private enterprises used medical care market reform to make immense profits, but the costs were borne by the patients instead.

This is yet another reform that benefited a few people, but the costs of this flawed reform were borne by the majority of society.  This is our medical reform.

Is this because the Chinese government is not very good at formulating, planning and/or executing these types of reforms?  Here are two other examples that happened to be in today's news.  Those are failed reforms of gargantuan proportions, one by the International Monetary Fund in Argentina and the other by the United States in Iraq.  Let me be quite clear about my position: I am not against China's reforms, IMF impositions, the liberation of Iraq or other noble projects.  But I am very much opposed to incompetence and indifference before, during and/or after the process.

(The Guardian)  Argentina's unorthodox rehab.  By Uki Goñi.  January 10, 2006.

... Argentina last week cancelled its $9.8bn (£5.5bn) debt facility with the IMF, symbolically and effectively liberating itself from IMF-imposed constraints, which many here see as responsible for a long economic malaise that ended in massive unemployment and rocketing poverty.

"With this payment, we are burying a significant part of an ignominious past," said Argentina's Peronist president, Néstor Kirchner, when he announced the final repayment last week. The centre-left Kirchner is commanding a stunning 80% approval rating in opinion polls, thanks in part to his hard-nosed attitude towards the IMF and his friendly ties with anti-Bush Latin American leaders such as Fidel Castro and Venezuelan president Hugo Chávez. In a recent address to the nation, Chávez described the new close ties between Kirchner's Argentina and oil-rich Venezuela as the "Axis of Good", a description that may not sit well with Washington officials, especially given Argentina may be considering the transfer of some of its advanced nuclear power technology to Venezuela.

Argentinians may be excused for holding a dim view of IMF-approved "globalisation" recipes. IMF reforms under the previous Peronist administration of Carlos Menem started off well enough in the early 1990s, when Argentina was touted as a shining success story for the application of free-market economics. That experiment ended in disaster four years ago, when a country that once stood head and shoulders above its poorer South American neighbours descended into frightening chaos. Much of the Argentinian middle-class plummeted below the poverty line as their life savings were swallowed by an unprecedented banking collapse. The banks shuttered their branches and customers camped outside demanding their savings back, hammering on the doors with pots and pans.

The television news started transmitting scenes of starving Argentinian children. When cash became scarce, barter clubs sprouted overnight in school yards and community centres. Hairdressers traded their services for home-baked cakes, fruit was swapped for nappies. The political cost was soon felt: five presidents succeeded each other in office in two weeks and Argentina was forced to default on foreign debts that ran to more than $100bn.

Having fallen so low, Argentinians wondered if they had hit rock bottom and whether they could resurface. Salvation came sooner than most dared to hope. Today, even if poverty and unemployment rates remain worrying and inflation doubled to 12% last year, on the streets of Buenos Aires glum faces and empty pockets have been replaced by broad smiles and runaway spending boosted by healthy investment and a surge in tax receipts.

(  Bremer claims he was used as Iraq ‘fall guy’.  By Edward Alden and Guy Dinmore.  January 9, 2006.

Paul Bremer, former head of the Coalition Provisional Authority in Iraq, says that senior US military officials tried to make him a scapegoat for postwar setbacks, including the decision to disband the Iraqi army following the US invasion in 2003. ...

A Pentagon spokesman on Monday confirmed that Mr Bremer had sent Mr Rumsfeld a memo based on a report by the Rand Corporation consultancy that recommended 500,000 US troops would be needed to pacify Iraq – far more than were sent. But Mr Bremer’s advice was rejected by military leaders and Mr Rumsfeld.

Mr Bremer’s account of his 13 months as Iraq’s governor is at times vituperative – scathing of the Iraqi exiles who formed the initial Iraqi Governing Council, resentful of Democrats in Congress who sniped at his efforts, the press for focusing on the negative and feeding on leaks, and bureaucrats in Washington who obfuscated when he was trying to rebuild an entire country.

“They couldn’t organise a parade, let alone run a country,” Mr Bremer writes of the Iraqi politicians.  Even allies come in for some criticism, including Britain for being “weak-kneed” in avoiding a showdown with a militant Shia cleric.

What emerges clearly from the diary is that there was no detailed postwar reconstruction plan, that the US lacked decent intelligence to deal with an insurgency it failed to predict, and the naivety of Americans who were shocked at the dismal state of Iraq’s economy and infrastructure after years of sanctions.  Mr Bremer accuses Pentagon officials of setting him up to take the fall for the postwar failures in Iraq, even though the decision to disband the army was personally approved by Paul Wolfowitz, the deputy defence secretary, and cleared by Mr Rumsfeld and President George W. Bush.