Thursday, October 2, 2014
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China's WTO Revolution

China's accession to the World Trade Organization (WTO) is the most important event in the country's history since the inception of its "open door" economic policy a quarter-century ago. Trade liberalization will benefit consumers, small entrepreneurs, and foreign investors. But for China's peasants, WTO membership appears to pose a direct and immediate threat to the tremendous gains made since Deng Xiaoping's agricultural reforms in the late 1970s.

The fear felt by China's peasants is understandable because it is deeply rooted in China's history and politics. Since the founding of the People's Republic in 1949, the peasantry has been the country's most under-represented and manipulated social group, bearing the brunt of the Communists' promotion of heavy industry. But WTO membership does not come at the expense of agriculture, for it promises to erode rather than reinforce the peasantry's legacy of discrimination and powerlessness.

It is a legacy built on deception. During China's civil war in the late 1940s, the promise of land reform attracted tens of millions of landless peasants to support the Communists. After the founding of the People's Republic, they did receive land, only to see it taken back when the new regime embarked on its massive agricultural collectivization drive. The harshness of the subsequent industrialization campaign culminated in the Great Leap Forward of 1958-60, producing a famine that killed 30 million people, mostly in rural areas.

By the time Mao Zedong died, in 1976, the rural economy was a shambles. In desperation, village leaders in Anhui province initiated an experiment that returned land to peasants-a de facto privatization that violated official policy. The government, believing that the situation in the countryside could not get worse, did not stop them. These village experiments with private ownership were highly successful, boosting agricultural output significantly. Indeed, it was the peasantry that fired the first shot in the reform campaign that has transformed China in the decades since.

Mindful of the bitter memory of famine (and trade embargoes), China's government remains obsessed with ensuring self-sufficiency in food. But despite owning the means of production such as land and tools, Chinese peasants have not achieved the social and political status accorded industrial workers in state-owned sectors - people who, according to the constitution, remain the official "vanguard" class. The government erected trade barriers and adopted other measures to protect China's agriculture, but this reflects its concern for factory workers, not-as in the US and Europe-farmers' political clout.

Inefficient and loss-making state-owned enterprises (SOEs) remain the primary beneficiaries of official economic policy, kept alive on a drip-feed of government subsidies and cheap loans from state-owned banks. Township and village enterprises (TVEs)-which are owned by and employ mostly former peasants-had to rely on themselves to become the most dynamic and productive sources of China's economic growth.

WTO membership will expose China's agricultural sector to foreign competition. Rural labor will be displaced and the agricultural sector as a whole may experience net job losses. But the WTO-induced expansion of non-agricultural labor-intensive sectors, particularly the textile and clothing industries, could absorb these workers. Today, peasants move to seek new and better employment opportunities created by economic liberalization. Free internal migration has become a fait accompli, effectively shunting aside China's apartheid-like system of residency permits.

WTO membership will also force the government to cease discriminating in favor of SOEs and against economic sectors with a high degree of private ownership, including agriculture. China's industrialization strategy in the pre-reform era rejected the notion of "comparative advantage"- the principle that an economy produces some goods more efficiently than others owing to factors such as natural resources, geography, and climate.

Jamaica, say, does not produce frozen salmon or hockey players because investing in industries such as citrus fruit and tourism provides far more certain profits. The same WTO-induced sectoral adjustment underlies the decline of steel and textiles in advanced countries such as the US.

In China, most SOEs survived because central planners emphasized economic autarky, regardless of cost. With trade liberalization, the cost of ignoring comparative advantage soars. China's increasing openness to global competition will eventually jeopardize the SOEs' continued survival and undermine the sustainability of politically biased development schemes. With the entry of foreign competitors, China's state-owned banks will be forced to base lending policy on the ability of borrowers to service their debts. The bottom line will replace the Party line in determining how investment is allocated.

With social stability the government's overwhelming priority, fundamental institutional changes are unlikely to come from within. So accession to the WTO may be just the external catalyst China needs, promising the emergence of a level economic playing field, with respect for and protection of property rights, transparent rules and regulations, free and fair competition, and equal participation. Although there will be pain, this should benefit many, if not most, social groups. It will, at long last, liberate the peasantry from the greatest historical burden it bears-the dead hand of a state that dotes on its inefficient industrial proletariat.

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