The Chinese Economic Reform: A Blueprint for Nigeria’s Economic Plans

23 March 2010

By: Salim Salihu Muhammed

Over the years, government had embarked on several economic reforms aimed at bettering the lives of its citizenry; promising fulfilment of human needs for peace and security, clean air and water, food, shelter, education, arts, culture, and useful and satisfying employment; maintenance of ecological integrity through careful stewardship, rehabilitation, reduction in wastes and protection of diverse and important natural species and systems; provision for self-determination through public involvement in the definition and development of local solutions to environmental and development problems; and, achievement of equity with the fairest possible sharing of limited resources among contemporaries and between our generation and that of our descendants. Almost all of these reforms or policies failed to live up to its projections; the remains are abandoned strategic projects that could eliminate the unemployment quagmire the nation is experiencing today. However, Nigeria’s failure to turn around the economy is not in the policies, but rather in its inability to find one right way out of the million wrong ways it has consistently followed in achieving a plausible quest for an economic reform that could stand out as a reference to other nations.

Perhaps, one good solution to Nigeria’s economic problems could be a rendezvous of an effective research and feasibility studies on countries with a functional and effective economic reform; a consideration of China whose export rate is growing at an annual rate of 40% may serve a worthy step towards making the country one of the top 20 economies by 2020. One may want to ask why China is growing so fast: The reality is that China’s experiment with market reform has propelled her into the top 10 trading nations in the world. Over the past two decades, China has achieved the fastest economic growth of any national economy. If that growth continues, China could become the world’s largest economy during the first half of the 21^st century. The World Bank estimates that by 2020 China could be the world second largest exporter and importer and its consumers may have a purchasing power larger than all of Europe’s. She is becoming the biggest economy in the planet with a population whose main objective in life is to become prosperous.

China is passing through massive transformation; from a command to a market economy, from an economy based on agriculture to one based on manufacturing and services, from one with high fertility and low longevity to one faced with Organization for Economic Co-operation and Development (OECD) style low fertility and high longevity, and from an economy that was almost totally closed to one that, today, even before her accession to the World Trade Organization (WTO), is much more open than most countries at the same level of income. This vast movement of transformation started on a very simple principle frequently stated by Deng Xiaoping: “Poverty is not socialism”.  Prosperity was the new face of the socialism according to Deng Xiaoping’s famous dictum: to get rich is glorious. In the past socialism used to mean government planning, for the new China, it means common prosperity.

China offers Nigeria a unique opportunity to explore the causal relationships among economic, institutional, political, and social forces in an important transforming economy. In China’s economic transition, important structural changes are occurring at the state and firm levels, and these changes have radical implications for the structure of economic and social life in China. Gradualism and stability were the foundations of the Chinese reform and continue to be so for the present leadership of the country. For the Chinese leaders, economic reform has priority over political reform. They acknowledge that it would be impossible to accomplish anything in an environment of political unrest. The premature introduction of markets where there was neither a culture nor the institutions for dealing with them can have catastrophic effects. And from the results obtained, we can consider the Chinese as one of the most outstanding social transformations in human history, all this within a long period of stable and peaceful social environment, except for the Tiananmen Square demonstrations in June, 1989.

Some analyst, including the Libyan leader, Gadaffi, had attributed the failure of a good economic transformation of Nigeria to enormity and diversity. However, if we must admit to these insinuations on a developing nation with well over 150 million people, we must consider the enormity of the task facing China. Some figures can give a glimpse of the burden of the scale. The country has a total population of circa 1,300 million people distributed among 23 provinces (24 with Taiwan), 4 autonomous regions, 4 municipalities plus Hong Kong and Macau; 18 of those provinces have a population between 90 and 35 millions and they could be considered big countries in their own. China has more cities of 1 million-plus population than the rest of the world combined. Among China’s state-owned enterprises there are 500 that employ more than 100,000 people, and her economy must create 10 million to 15 million new jobs every year. Nigeria had failed to make provision for its ever growing population over the last three decades in terms job creation, health services, and other social security that contribute to a nation’s growth.

China’s economic reform started in 1979 with a combination of regulation by plans and regulation by the market, to be followed latter by the implementation of the socialist market economy: reform of agriculture, finance, taxation, pricing, industrialization and foreign trade. As a result of these reforms, there have been important changes in the state-firm relationship at the three levels: economic responsibility has been pushed down the hierarchy, administrative offices have become more economically oriented, and firms have independent budgets and self-responsibility policies. Managers are more responsible now for the economic health of the organizations over which they preside. However, the relatively easier reforms have now been completed. As did China, it would be expected that Nigeria may consider a socialist approach to economic reform while engaging a free market economy; an economic system in which individuals, rather than government, make the majority of decisions regarding economic activities and transactions. Individuals are free to make economic decisions concerning their employment, how to use or accumulate capital, what expenditures to make, and whether to use their resources now or to save them for later consumption.

This complex administrative system of government organizations was set in place to mobilize firms and the individuals within them around directives issued from the central government. This system was an administrative decentralized governance structure that allowed the central government to promulgate policies down the hierarchy of government jurisdiction, relaying on local government offices to mobilize organizations and thereby people. The result of these policies was a “nested hierarchy” of government organizations spread throughout the country, each with jurisdiction over a smaller sector of the population. It is a dispersed bureaucratic system in which individuals hold immense capacity to circumvent formal regulations. The political center does not control the system throughout and there is significant deviation from central policy across bureaucracies and at the local level. In some sense, real politics in China is local politics. It is at the local level that problems have to be solved concerning economic policy and social equity.

Although the results of strategic economic policies are not void of uncertainties, success are not heavily guaranteed by countries who attained an economic triumph during their reform processes, as it was in USSR’s rapid industrialization in the Soviet Union. Nigeria’s quest of improving her power supply to 6000 MW was over guaranteed till its eventual failure. Impressive as China’s strengths are, they do not guarantee success. Much will depend on the ability and resolve of the authorities to maintain momentum of reforms.

A key component for the success of the Chinese economic reform is the restructuring of the banking and financial sector. Like the current reform in Nigeria, China experienced similar setbacks in the 80s. China’s financial reform was not really thought of as a part of economic reform. However, in the mid-90s reformers recognized the need for the overhaul of the sector and the necessity of cleaning up the banks’ bad debts. This was given extra urgency, first by the Asian Financial Crisis and then by the impending WTO entry. With the main role of state banks to feed the State Owned Enterprises (SOEs) sector, they built up a huge portfolio of non-performing loans. China set in motion a series of reforms designed to free the state banks from local politics, to allow the Central Bank to play more of a regulatory role, and to get the non-performing loans off the books of the banking system.

In 1994, China’s banking system was divided into three types of banks: commercial banks, policy banks and cooperative banks, with a limited but increasing role for private banks. The four major banks remained under the authority of the state but were given greater capacity to make loans on a commercial basis. These four banks (the Industrial and Commercial Bank, the Bank of China, the China Construction Bank, and the Agricultural Bank of China) account for up to 70 per cent of the domestic banking business and they employ together with the Bank of China a total of 1,760,000 people. The Agricultural Bank of China alone has 510,000 employees which makes it the biggest company in the world in number of employees.

Capital markets still remain small, the banks being the main source of financing in China. In 1998, with the onset of the Asian Financial Crisis, the reformers were able to push ahead with financial sector reform. First, the reorganization of the branches of the People’s Bank of China along regional lines to reduce political interference by powerful provincial party chiefs in lending decisions. Another measure was to move the non-performing loans off the books of the four major commercial banks and to recapitalize them. Asset Management Companies were created and the capital is provided by the Ministry of Finance. The AMCs are to acquire at face value loans from SOEs. The AMCs were expected to recover those loans through debt-for-equity swaps. This may appear as a perfect coincidence; however, the attainment of Nigeria’s economic reform has less to do with politics and aggression of the opposition and more of a solid and lucid financial sector.

More market does not mean less government. It means different government. Government energies need to shift away from direct involvement in productive activities and toward two areas in particular: first, more spending on such priority areas as education, health care, agricultural research, infrastructure development, environmental protection, and support for the disadvantaged groups in society; second, the development of transparent and participatory institutions that promote the rule of law, and a stable economic environment. As Nigeria’s reform moves to the next stage and integrates further into the world economy, there will be significant losers, including workers and institutions, but still many questions remain open for the Nigerian leaders, one of which is: what are the underlying indices and macroeconomic framework that could ensure a true and transparent economic reform that would list the country among 20 top economies by the year 2020? 

Salim Salihu Muhammed

salimmed16@yahoo.com

 Jemaá Street, Romi North, Kaduna South, Kaduna State.

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