Chinese option: anticipating the third plenum.

Author:Scissors, Derek M.

In November, China's Communist Party will hold its plenary meetings. It is all but guaranteed the autumn plenum will see announcement of what are termed fundamental economic changes, as has occurred in several previous autumn plenums. What is in doubt is the nature of the changes and whether they will be implemented. Most attention is focused on likely opposition from Party cadres who benefit from the existing state-led development model. But there is a prior issue: What does the Party mean by "reform"?

Foreign governments, businesses, and experienced observers typically consider reform to be some variant of narrowed state ownership, increased competition, or both. That is, reform is market-driven. But a state-led model was adopted at the autumn 2003 plenum. It has generated a slew of economic and quasi-economic problems, with solutions that may not be market-driven, for example state action to encourage urbanization. What the Party chooses could well be important, even somewhat valuable, but involve little liberalization.

This would spur another debate about China's direction--optimists citing actions to address major problems and pessimists a liberalization failure as ensuring stagnation. This debate, however, would not extend to foreign decision makers. These are not interested in how wise the Chinese state might prove this time; they want it rolled back in their nations' commercial interests. If Beijing chooses the wrong kind of reform, no matter how it is packaged, the People's Republic of China could be seen as more trouble than it's worth. Exclusion from what could be transformative U.S.-led economic partnerships would be likely.

Market reform need not fail. The Party has a range of options to choose from. The obvious one is to take a cue from the first step in 1978 and offer farmers more property rights. This would increase both land and labor productivity, the latter growing in importance as China's population ages. Labor could be addressed directly through reform of the household registration system, which determines place of residence and associated benefits. The unrealized benefits from (far) greater labor mobility are considerable, including to multinationals operating locally.

The Party has been preoccupied with boosting innovation. Broad, sustained innovation relies on competitive pressure. Regulatory and financial protection of some state-owned enterprises could be rolled back, increasing the number of sectors where...

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