China’s Premier Wen Jiabao’s report in this year’s 12th Five-Year Plan included the main areas for future reform but it was his comment on reform and how it was accepted by society that was significant.
Wen recommended, in part: “Improving price decision-making mechanisms for oil, gas and all kinds of power supplies and, additionally, for water supply. Consummating regulations for paid waste management and launching pioneer trading projects. The changing of price must fully consider the level of acceptance of the general public, in particular, the low-income population.”
For me, Wen’s emphasis on “the level of acceptance” is very relevant and also an indicator of strategic reform.
For instance in regulating the oil price, the government should not increase it without considering the level of public acceptance and the overall benefits to society. There are several reasons.
Firstly, in light of much opposition to previous oil price rises, we have to consider consumers’ purchasing power and their ability to manage after a price increase. Secondly, we have experienced many oil price rises and if it happens again inflation will be pushed to a new level with side effects that would become more severe. Agricultural products are mostly affected by the change in oil price and, in recent years, the price of food has increased dramatically as a result. Furthermore, China is a large provider to the world market and with a new oil price rise the cost pressures presumably will be passed on to other areas through the international market system and result in higher inflation. Thirdly, China’s two oil companies are state-owned and while they need to be able to sustain themselves, they cannot only focus on making profits. When conflicts of interest occur between state-owned companies and society, the former has to back off. Fourthly, no market regulation is violated if the price is not increased. The new oil pricing mechanism states that when the international oil price reaches US$80 per barrel, each country has the right to adjust accordingly, even though the mechanism requires a standard 4% price adjustment.
The issue of oil price reform is a separate case. In recent years, the price of gas, water, and power, etc., all have been increasing on a national scale. Some went through justification hearing procedures; some did not. One has to understand that without a hearing procedure, a price rise violates the basic rule of justice, and abuses the Law of Price.
Objectively speaking, the prices of natural and energy resources need to rise significantly from current levels in the long-term. But in saying that, the government must consider that changing prices might cause serious inflation and harm both the low-income population and the microeconomic system. Hence, it is also necessary to take into account the competitiveness of resource supply markets because any irresponsible price reform could result in a series of crises.
In China, state-owned companies control most resource supply industries and some large state-owned businesses monopolize key suppliers of natural and energy resources. The state-owned companies have “double personalities” in that they are both “market-oriented enterprises” and “non-profit suppliers of basic commodities.” They could switch to either role to maximize their profits if government relaxed its supervision of them during enterprise reform. For example, they could act as “enterprises” to promote the market-orientated economy when resource prices are rising; and they could also act as “non-profit suppliers of basic commodities” to please all. They can butter their bread on both sides. To enjoy the “real market” price, we should not only abolish the administrative bureaucracy, but also should enhance market competitiveness. If price reform simply follows the first strategy, but does nothing about the second, state-owned companies are more likely to build up their “unique” authority status and win more, possibly pocketing the entire benefits of reform. The public has to pay the bill if reform goes wrong so, before embarking on change, we must introduce a market competition mechanism. The two should go forward together.
Resource price reform must also consider the microeconomic sector’s level of acceptance. A nation’s economic activity and competitiveness are not reflected through monopolies or high level resource supply enterprises, but through manufacturing, machinery and high-tech industries. These are commonly found at the low end of any production chain: they are vulnerable to any pressure from the top resource suppliers and cannot transfer price rises to consumers because of intense competition. Therefore, price reform of natural and energy resources might easily harm this group. Moreover, these enterprises are important in creating jobs, especially low-skilled jobs. If reforms force them to close down or reduce employees, huge social problems could result.
While China is currently facing high inflation pressures, it is theoretically more important to reform the economic development strategy and structure. However, as written in the government report, this year’s main goal is to prevent high inflation.
All reforms in China, including the current price reform, must include collective action and concepts. In order to accomplish that, we must work on eliminating the public’s reaction against reform and change so that all levels of society can benefit with improved living standards. This will be achieved firstly by stopping interest groups monopolizing any kind of resource supplies. Secondly, the government must be more responsible about its role, which includes creating a social welfare system and compensating groups disadvantaged by reform. Thirdly, government should allow the public to participate in shaping policy reform, the selection process, and allocation of benefits. After all, reform affects every member of society. No matter which sector is reformed, the public should be involved and make decisions on how to do it, at what pace and in which area. In this way, the reform will have the support of the people and its efficacy will be safeguarded.
In terms of natural and energy resources price reform, one should neither focus solely on benefits to resource suppliers, nor merely aim to achieve a certain government goal, for example, energy conservation and emissions reduction. Having a helicopter view is essential here. The importance of economic stability, public acceptance, impact on enterprises and market control mechanism improvement will be a long-term process that cannot be shortened. Nevertheless, if price reform must launched, it should at least wait until it is certain that inflation rates have fallen and resource suppliers have had a significant market make over.
Deng Yuwen is deputy chief editor of Study Times, published by Central Party School based in Beijing