The transition to a market economy does not succeed without well-designed and government-led development policies. More detailed lessons are addressed in the aspects of management reform and labour issues.
7. 1. 1 Lesson for the introduction of competition
Competition is essential to market transition and should be created in all sorts of ways. The following ways are effective and have been proved to be useful, at least in the Chinese case. First, the nonstate sector should always be encouraged to grow to create external competition to the SOEs. Second, opening up to the outside world and the involvement in the global economy, such as WTO access, would generate
increasing opportunities for more international competition into domestic markets and promote competition among firms, both domestically and abroad. Within the SOE
sector, a distinction should be made between industries for promoting competition, as it is indeniable that markets are often inevitably imperfect and that, therefore the creation of competition may not be feasible. For those industries in which competition is unlikely or deemed socially undesirable, other preferable means need to be taken into account, such as regulation. The liberalisation of the markets for transition (competitive) industries, the removal of market entry and exit barriers, the weakening and prohibition of local protectionism, and the setting up of a level-playing field for both the public and private firms would surely enhance equal and fair competition.
7. 1. 2 Lessons for ownership change
Ownership restructuring is essential and necessary for market transition. In practice, it requires some preconditions and the materialization of its potential benefits is subject to constraints and may not fit all industries or all situations.
Therefore, commercialization and necessary regulatory preparation are advisable to be in place before restructuring public ownership. And ownership change may be conducted first in industries which are more likely to be competitive and in transitional industries, especially at the early transition stage. In other words, ownership of the whole state sector cannot be change all at once. To realize the benefits of ownership change, supportive institutions and a legal system are required to legalize and secure property rights and private property. Additionally, in the process of ownership change, insider privatization or the improper distribution of transition benefits and costs should be avoided by all means.
7. 1. 3 Lessons for management
Here management reform has two broad tiers. One is at the government level, which includes government functional transformation and institutional set up. The other tier is at the firm level, which mainly includes the internal organisation and management of the firm. Lessons for policy implications are defined below in turn.
7. 1. 3. 1 Management reform at government level
A shift of competence and power from the central government to local governments is necessary for the deregulation of a planned economy. Such a shift means moving the public finance system and much decision-making power toward decentralization, and streamlining local governments by giving them greater
autonomy. Otherwise the process of weakening the central government is not matched by enhancing local governments. The joint position of both levels of government must be seen as an integrated entity needed for the sake of gradual institution - building.
The institutional arrangements are an important factor for progress toward durable growth. Institution building by its nature must be a gradual process and must be conducted in a proper and timely way without leaving a legal or policy vacuum.
This is true regarding privatization and the development of competitive capital markets. The realization of the potential optimal benefits of ownership change and competition requires strong government, supporting institutions and legal protection, such as secure property rights, private property and the legalization of sound market practices. The government at state and local levels has a proper role to play in regulatory governance, institutional arrangements for a healthy market transition environment, as well as a sustainable development of economy.
7. 1. 3. 2 Management reform at firm level
Transitional reforms of public enterprises ought to be directed toward those aspects which are the most crucial and currently the most incompatible with the requirements for market economy. These aspects, at least in contexts similar to that of China, include organisation structure, incentives and control, appointment of
management personnel, market-orientation and the adaptability of enterprise behaviour. In transition, the organisational structure of the enterprise is required to change to meet new needs. For example, when a public enterprise is transformed into a shareholding company, there ought to be supporting corporate governance.
Normally the three new committees (shareholder congress, the board of directors and the committee of supervisors) should be established and functioning. The old
organisational structure, such as the old three committees in the case of Chinese public enterprises, should be combined with and absorbed into the new organisational structure. In doing so, internal conflicts of organisation and decision-making can be reduced and organisational efficiency is more likely to be increased.
The selection and appointment of firm management also need to be shifted from old criteria and authorities to the new ones that are more subject to market forces than to political influences. The firm manager should be competent, professional and a real entrepreneur, who can lead the firm to survive and grow through fierce market
competition. The incentives for, and control of the firm management have to be reinforced and integrated to avoid ‘insider control’ on the one hand and excessive intervention of a firms operation on the other. In this sense, government intervention ought to be prohibited in specific aspects of decision-making within the firm.
Long-term economic incentives are often weak in the pre-reform public enterprises, as they are often subject to political interests or distortions. In the new firm
environment, long-term incentives for the firm manager should be closely related to
the firm’s performance. The provision of options, as a kind of long - term incentive for the manager of the firm, should be allowed and encouraged. It is required to recognize entrepreneurs’/managers’ private property and individual claimant rights.
The government should have a role to play in increasing inputs for technology innovation in the firm.
7. 1. 4 Lessons for labour policy
For economic efficiency, surplus labour in the public enterprise has to be reduced, and the redundancy process has to be preceded with great caution, step by step within the tolerance of social stability. At the same time, excessive
enterprise-based social burdens ought to be taken away from the enterprise, although some of them -such as pensions, health care, employment-related disability insurance - can be allowed to remain with the enterprise by conventional standards. Meanwhile social stability has to be taken into account in tackling the surplus labour, while redundant labour must be properly handled by providing necessary compensation and maximum help with re-employment and job creation in new emerging industries and areas.
To minimize the adverse affects on the labour side of the transition of public enterprises, it is crucial to raise employees’ awareness of the costs, benefits, timing and methods of such transition through wide worker participation. Effective measures are required to increase employees’ involvement in the transformation. These include the necessary education of the employees in the adjustment of their values and views about the transition, the potential long-term benefits and the immediate costs and support expected from them. Endless efforts should be taken to reduce resistance and discontents from employees of the enterprise. Obsolete labour system and relevant institutions are required to be replaced by new ones to suit the new situation. For example, it is necessary to remove the distinction between cadre and worker status in the firm and prohibit the manipulation of wages and bonuses. The solely public enterprise-based social welfare system has to be dismantled and substituted with a new welfare system.
Social security has to be built up as early as possible in the transition process, as social security has a key role to play as a complementary factor for a smooth
transition. Minimum living allowances and wage schemes should be enforced to guarantee the basic rights of labour and to balance the distribution of transition costs and benefits. To build sound social security, the government has to play an important role while the enterprise and individuals contribute together. That is, a new system where the firm, the government and the individual all contribute a certain portion to the funds for social safety nets. Non-government organisations should also be
encouraged to get involved. Different kinds of public funds / associations / job centres are worth setting up to take care of welfare matters and job creation that are not conducted by government or firms. Overall, the labour system and social security has to be properly handled in order to reduce resistance against market transition from the employee side and fears of social instability and threats of power from the
government side.
It is expected that the government will accelerate the transformation of the ownership system despite bankruptcies and unemployment, and that the new wave of SOEs and corporate-owned enterprises (COEs) reform, featured as a shareholding cooperative system, is to sweep China in the next few years.
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