Zhu Rongji’s Promise

Nicholas R. Lardy
Nicholas R. Lardy Anthony M. Solomon Senior Fellow

October 28, 2002

Zhu Rongji began his tenure as China?s prime minister with a promise. During his now-famous March 1998 press conference at the National People?s Congress, the bold and freewheeling Zhu pledged that within three years he would turn around China?s ailing state-owned enterprises, long the nemesis of China?s economic opening. Now, as the prime minister prepares to step down, his critics are charging he has failed to deliver.

The behemoths of Chinese industry continue to be an enormous drag on the economy. And now that China has entered the World Trade Organization, many fear that China?s state-owned companies, especially those most sheltered from needed reforms, will collapse under the pressure of foreign competition.

But Zhu?s critics must give the man his due. While he cannot claim total victory, there?s little doubt that the pace of economic reform accelerated during his tenure. Perhaps the most important benchmark of his success is the smaller number of workers employed by the state sector. Under Zhu?s predecessors, public-sector employment marched relentlessly upward, even as the relative output of state enterprises declined. But in Zhu?s first four years, state-sector employment in cities fell by 34 million jobs, or 30 percent. Many of these cuts were accomplished by selling off tens of thousands of small- and medium-size state companies. Others came from state-owned companies simply thinning their ranks. The state railroad system alone has slashed almost 4 million jobs. Even the four largest state-owned banks, long oblivious to their inefficient management, have laid off 250,000 employees since 1997.

Zhu?s fingerprints are all over the streamlining of the Chinese economy, much of it in anticipation of entering the WTO. The prime minister has been a persistent voice for reform, arguing that the marketplace, in proper doses, could do much of Beijing?s work for it. Indeed, market competition has thinned the herd of state enterprises in most sectors of the economy. Reduced trade barriers have allowed foreign goods to enter the country at lower tariffs. These cheaper, foreign-made goods are a surefire means of applying pressure on China?s domestic industries. Simultaneously, direct investment from abroad has expanded so rapidly that foreign companies are the sole or partial producers of almost a fourth of all manufactured goods in China. And state-owned banks are shutting the teller?s window to the longstanding practice of propping up bankrupt state enterprises through unsound extensions of credit. Business as usual may never be the same in post-Zhu China.

So with the near end of China?s system of lifetime employment, known sometimes as the iron rice bowl, where is the much-feared and expected backlash? Chinese authorities have heard the cries of disgruntled workers in widespread demonstrations, especially in the industrial northeast, but have seen nothing akin to the social chaos predicted by many. Beijing?s—and Zhu?s—success is rooted in a couple of policies. First and most important, macroeconomic policy has been geared to maintain rapid growth. When it comes to making the transition from central planning to market competition, there is no better antidote than job creation. Private firms, both domestic and foreign, have become the major source of new jobs. Second, since 1998 the central government has allocated public funds to provide subsistence payments to workers laid off from state-owned firms. Although many urban workers still do not have this protection, for millions of state employees these payments have been a welcome relief. But Beijing?s new social contract with its work force is not cheap. China?s makeshift social-safety nets, when combined with matching funds from local governments, have had a price tag of close to $36 billion. While stepping into the breach may come at a high cost, it is a bargain when exchanged for social stability.

There is still, of course, more work to be done. But for all the naysayers and dire forecasts, China is squarely confronting an admirable number of its economic hurdles. If these policies are pursued and domestic reforms continue to run apace, China?s next prime minister may just succeed in fulfilling Zhu?s promise.