Annual Report Marketization Index for China s Provinces

Transcription

1 Annual Report 2000 Marketization Index for China s Provinces FAN Gang, WANG Xiaolu, ZHANG Liwen National Economic Research Institute China Reform Foundation Beijing, China April. 2001

2 Annual Report 2000 Marketization Index for China s Provinces FAN Gang, WANG Xiaolu, ZHANG Liwen National Economic Research Institute China Reform Foundation Beijing, China The purpose While having achieved great progress in its market-oriented institutional transformation and economic development, China has been suffering significant and even growing problem of regional disparity. By economic theory, we know that one of the major factors behind the economic disparities could be the difference in the institutions and economic policies that might significantly determine the economic performance. In reality, we do observe the institutional reform process differs among the regions concerned and that difference plays the important roles in the variation of economic growth. Therefore, to measure the institutional differences among the provinces may not only provide explanations to the regional disparity, but also give strong policy implication: Speeding up the reforms is a way to achieve better economic performance and narrowing down the regional differences. That is the purpose for us to conduct such a research project to develop a Marketization Index for China s Provinces. The nature of the Index: A comparative indicator The areas and indicators that compose the Index are chosen according the theoretical framework and the characteristics of current stages of the reform process in China. They are first of all identified as the main components of the market system. Then the quantitative measurement of these components are supposed to indicate the progress of the transition towards the market economy in the areas concerned. The Index and the all components are measured into a 0-10 scales. Each province gets an index value between 0-10 based on their values of all components of the index respectively. However, it should be noticed that the 0-10 scale does not indicate the distance between the current state of a region to the fully developed or the ideal state of the market economy. Conceptually speaking, there is no such thing as fully developed market economy or any meaningful reference concept as ideal state of market economy. The market economy is constantly in evolving and any economy has its own 1

3 specifications according to its special conditions, although we may agree upon certain principles that apply to various forms of the market economy. Therefore the Index value 8.33 Guangdong province gets for 1999, for instance, does not indicate it has been 83.3% of market economy or only 12.7% away from the objective. What the Index means is the relative position in the progress towards market economy compared to other provinces. It means, for instance, compared to the index value 5.99 Hunan province gets, Guangdong, which gets 8.33, is about 40% more in advance than Hunan in the process of marketization. The index compares the relative distance between marchers on the road, not the absolute distance between marchers to the destination. The best in the index system, i. e. Guangdong, may be still far away from completion of the reform process, but others are even farther. The structure of the Index We do not have things like idea state of the market as a reference point to measure, but we may agree upon certain principles which should apply to any form of market economy, as mentioned above, and therefore we may know the direction of the transformation and what can be viewed as progresses towards the marketization. This understanding underlies the bases for the construction of the index. The Index comprises 19 components (indicators) of institutional arrangements and policies in 5 major areas with the market-oriented reforms. The 5 major areas that work as main components in the Index are: Size of the government in the regional economy (I); Economic structure, mainly concerning the growth of the non-state sector and the reform of the state enterprises (II); Inter-regional trade barriers, including the price control (III); Factor-market development, including factor mobility (IV); and Legal frameworks (V). I. Government and Market It may be highly controversial about the optimal size of the government in a market economy in terms its roles in the resource allocation. At the different stages of the economic development, the roles of the government differ too. However, at this stage of the transition, we may be quite sure that China still needs to reduce its size of the government, either at central or local level and the government at all levels should take off its hands from more areas of control and interference. Therefore, we assume at this stage, the smaller the government s size in the provinces, the higher the indicator value they get. While the fiscal revenues as percentage of GDP (1a.) is a must to measure the size of a provincial government, the situation is complicated by the existence of significant off-budget revenues at all levels of the government, which may account for the same size of the formal fiscal revenues (See FAN Gang, 1998). There is no public data of such revenues, by the nature of matter. And the survey for satisfactory data is 2

4 highly costly and actually impossible according to previous experiences by the researchers in our team. Therefore we have to turn to some alternatives such as the available data of public financial burden on farmers (1b.) that only partially reflects the problem but is a good indication of overall taxation. As we do not have satisfactory information about the government control and efficiency in terms of detailed items such as project permission, licensing, etc., we did a survey of business executives on how much time you have to allocate to deal with the government in order to keep you business going (1c). Interesting results of the survey show that this may be a good indicator of the government control. II. The ownership structure This component is designed to measure the ownership structure of the economy. Transition from the initial state of public ownership domination, it is safe to measure progress in marketization by the increase of share of non-state sectors, in terms of contributions to the Industrial Value-added (2a ), Investment (2b.), and Urban Employment (2c.). III. Goods market development Freer price setting and less trade barriers are two key aspects of market development. Available data enable us to use 3 indicators to measure the government control on price setting: Price controls on retail goods (3al), production materials (3a2), and agricultural goods (3a3). It was difficult to measure the government control on the trade although we can observe various inter-regional and intra-regional trade barriers. We confine ourselves to focus on the inter-regional trade barriers and measure the barriers by survey data from business executives about in which provinces you encountered restrictions against the sales of your products (3b.). The provinces are ranked according to the numbers of blames by the business executives and we suppose that the lower the number, the higher the degree of marketization. IV. Factors market development This area is related directly to the development of mechanisms of allocation of resources, including capital and labor. The indicator 4a Competition in banking sector uses the data of the assets of non-state banks as percentage of total bank assets to show the development of non-state banks and decreasing of the monopoly by 4 major state banks. (4b) reflects the structures of bank credits in terms of how much the credits are allocated to the non-state sector. It is a meaningful indicator as we believe that it shows how much the banks have changed from a governmental department of funds allocation to a real commercial banks making business decisions based on economic efficiency. Another change in recent years in 3

5 Chinese economy is that the security market plays more and more important roles in capital allocation and corporate financing. However, we have not found satisfactory data to establish a useful indicator-component for the Index. Indicator 4c Foreign direct investment (FDI) as percentage in total investment of the regions is designed to capture some elements in the improvement of institutions and policies for the investment. Of course we should keep in mind that how much FDI a province receives is determined not only by the institutions and policies, but also by the public infrastructures and geographic conditions. 4d the Labor mobility is designed to measure reduction of actual barriers against migrating or immigrating laborers. 4b1 Immigrated laborers as % of total employment in the region indicates the inward mobility. However, people move to seek higher income jobs. High barriers sometime may fail to prevent more immigration because the GDP is higher. Therefore we use the ratio of immigrated laborers over provincial GDP (4b2) to eliminate the effects of income differences. V. The legal framework One of the important aspects of market-oriented reform is the development of rule of law, including the setting-up of legal framework for property-rights protection and contract enforcement. Given the availability of data, we take the number of inter-mediate institutions such as law firms, accounting offices, and independent auditing offices (5a) as the indicator for development of legal institutions; take the numbers of cases of trademark violation (5b) and numbers of patent application (5c1) and patent registration (5c2) as the indicators for actual property rights protection, all adjusted by the sizes of provincial GDP respectively. The methodology Two steps are taken to construct the actual data for above variables (components) into the summary Index. Rating the components. The first step is to transform all 19 variables into a 0-to-10 scale values. Depending upon whether higher values are indicative of more or less economic freedom, alternative formulas are used to transform the variables into 0-10 scale values. For those indicators of which the higher values are indicative of higher degrees of marketization reforms, the formula used to derive the 0-to-10 rating for indicator i is V i -V min x 10 V max -V min 4

6 where Vi is the province s actual value for the component variable, V max the maximum value for a province in the 1997 base year, and V min the minimum base-year value for the component. This formula is used to derive the ratings for all years. A province s rating will be close to 10 when its value for the component is near the base-year maximum In contrast, the rating will be near zero when the observation for a province is near the baseyear minimum. For some indicators, higher actual values are indicative of less progress in marketization. The inter-regional trade barriers provides the example. For such a case, the formula used to derive the 0-10 ratings is V max -V i x 10 V max -V min This formula will assign higher ratings to provinces with actual values closer to the baseyear minimum. By these two formula, all component indicators and the summary Index are positively correlated with marketization: the higher the ratings (not the actual values), the faster the marketization process of the provinces. It should be noticed that the procedures used to convert the continuous component values to the 0-10 ratings have two important characteristics. First, if all (or almost all) provinces improve (or regress) with the passage of time, the ratings will reflect the change. Second, the distribution of the province ratings along the 0-10 scale reflects the distribution of the actual values among the provinces. The weights. One of the most crucial problems in such an index construction is how to determine the weights for each component. To avoid involvement of subjective judgment, the principal-component analysis was used to determine the weight in our study. It is an objective method of combining a set of variables into a single variable that best, as we can have so far, reflects the original data. This procedure partitions the variance of a set of variables and uses it to determine the linear combination the weights of these variables that maximizes the variation of the newly constructed principal component. In effect, the newly constructed principal component an area rating, for example is the variable that most fully captures the variation of the underlying components. The procedure is particularly appropriate when several subcomponents measure different elements of a principal component. This is precisely the case with our index. Economic theory is a road map indicating components that are likely to capture various elements of a broader area (a principal component). In turn, principalcomponent analysis indicates the permissibility of grouping components together and the weights most appropriate to combine a set of sub-components into a principal component. In Exhibit 1, the component weights derived by this procedure are shown in 5

7 parentheses; e.g. (34%). The same procedure was also used to derive the weights for the area components in the construction of what we will refer to as the summary index. In Exhibit 1, the weights for each of the 5 areas are shown in bold-face type and enclosed within brackets: e. g. [12.4%]. The uses of the Index The institutions and institutional changes are important factors to explain the economic performance and social development. The Marketization Index in many ways can serve as an institutional variables in analyses of regional development and regional disparities. Chart 1. shows the Correlation between the provincial Index and the provincial per capita GDP. The most importantly, it can help to identify in which areas the institutions and policies are different among the regions and therefore how the reform efforts should be put in those areas. The Index s strong and clear policy implications make it as an useful instruments for both the central and local government in their decision making. Table 1 is an example for the Comparison of marketization progress in various areas for XXX province with the best performances in which a region can easily find out in which areas they need to do more in order to catch up the best performance in the country. As the competition among the provinces and regions is one of the most important driving force for China s transformation, the Index seems able to play very positive roles in pushing the reform process forward. Acknowledgment There were several quantitative studies of marketization process in China that we referred when we prepared for the project, including Chen (1999), and Zhuo (2000). We also referred intensively to the work of Economic Freedom of the World. We thank Michael Walker for his comments and suggestions. The whole work is based on the efforts of our associate researchers in all provinces in concern, who provides us with not only the data and survey results, but also their ideas and first-hand knowledge of the development of market economy in the reality of various conditions. Their name may not be mentioned due to various reasons, but their works are the most appreciated. We also thank China Reform Foundation and the Center for International Private Enterprises for their generous support. 6

8 References CHEN, Zongsheng & others, 1999, A Study of Marketization Process of China s Economic System, Shanghai People s Press. GWARTNEY, James, Robert LAWSON, and Dexter SAMIDA, 2000, Economic Freedom of the World, 2000 Annual Report, The Fraser Institute, FAN, Gang, 1998, Market-oriented Economic Reform and the Growth of Off-Budget Local Public Finance, in Taxation in Modern China, edited by Donald Brean, pp ; Routledge, New York and London. International Institute for Management Development, 2000, The World Competitiveness Yearbook, 2000, IMD. PORTER, Michael E., Jeffery D. SACHS, Andrew M. WARNER, Peter CORNELIUS, Macha LEVINSON, Klaus SCHWAB, 2000, The Global Competitiveness Report 2000, Oxford University Press, New York, Oxford. WANG, Xiaolu, and FAN Gang, 2000, The Sustainability of China s Economic Growth, Economic Sciences Press. World Economic Forum, 1997: The Global Competitiveness Report 1997 ZHUO, Yongliang, 2000, The Evaluation of Process of Economic Marketization, in FANG Minsheng, edit. Institutional Changes and Development in Zhejiang Province, Zhejiang People s Press. Statistics The Index values of this set of indicators are mainly from the following statistical resources: State Statistical Bureau: China Statistical Yearbook over the years China Banking Association: China Banking Yearbook over the years State Statistical Bureau: China Labor Statistical Yearbook over the years State Statistical Bureau: China Market Statistical Yearbook over the years State Statistical Bureau: China Statistical Yearbook on Fixed Investment over the years State Statistical Bureau: China Statistical Yearbook on Industry over the years State Administration of Industry and Commerce: China Industry and Commerce Yearbook over the years The Editorial Office of China Price Yearbook: China Price Yearbook over the years The statistical yearbooks of various provinces, state-administered cities and autonomous regions, as well as related statistical data on economy, banking, labor, trade and finance, etc. 7

9 Other data are from following surveys: 1 Sampling survey by State Statistical Bureau on farmers financial burdens 2 Sampling questionnaire by the research team on business executives in selected enterprises in each province 3 Questionnaire by the research team on finance, banking, trade and investment, etc. on each province 8

10 Exhibit 1: Components and their weights in Marketization Index 1 The role of government [0.231] 1a The proportion of resource allocation by market (0.344) 1b Extra-financial burden on farmers (0.271) 1c Business costs of dealing with government control (0.385) 2 Economic Structure [0.282] 2a Non-state sectors in GDP (0.328) 2b Non-state sectors in total fixed investment (0.343) 2c Non-state sectors in urban employment (0.329) 3 Free inter-regional trade [0.148] 3a Government price control (0.500) (3a1) Price control on retail goods (3a2) Price control on production goods (3a3) Price control on agricultural goods b Non-price trade berries (0.500) 4 Development of factor market [0.242] 4a Banking sector structure (0.187) 4b Allocation of financial resource in state vs. non-state sectors (0.376) 4c Environment for foreign direct investment (0.173) 4d Labor mobility (0.264) (4d1). Immigrating workers as percentage of total employment (4d2). Ratio of Immigrating workers over provincial GDP Legal framework [0.097] 5a Development of intermediate institutions (0.429) 5b Legal protection of trade marks (0.157) 5c Legal protection of intellectual property rights (0.414) (5c1) Ratio of patent application over GDP (5c2) Ratio of patent registration over GDP Note: The numbers in brackets are the weights of area-components in the Index; the numbers in parentheses are weights of the components in the areas; the numbers without either bracket or parentheses are weights of a sub-component in the components at above level. The sum of the weights of the Index, the sum of the weights of an area-component, and the sum of the weights of a component are all equal to unit. These weights are derived by principal component analysis. 9

11 China's Marketization Index 1999 Guangdong 1 Zhejiang Fujian 3 Jiangsu 4 Hebei 5 Shanghai 6 Tianjin 7 Beijing 8 Shandong 9 Hunan 10 Henan 11 Hainan 12 Liaoning 13 Chongqing 14 Hubei 15 Anhui 16 Sichuan 17 Guangxi 18 Jiangxi 19 Shanxi 20 Jilin 21 Shaanxi 22 Gansu 23 Heilongjiang 24 Guizhou 25 Inner Mongolia 26 Yunnan 27 Xinjiang 28 Ningxia 29 Qinghai

12 Comparison of index values with the highest Jilin Government-Market Relations Highest Jilin 1a. Proportion of Market Allocation of Economic Resources 1b. Reducing Tax and Fees of Rural Residents 1c. Reducing Government Intervention in Business 2. Development of Non-State Economy 2a. Proportion of Non-state Economy in Total Industrial Output 2b. % of Non-state Economy in Total Investment in Fixed Assets 2c. % of Employment of Non-state sectors in Total Urban Emp. 3. Development of Product Market 3a. Market Determination of Prices 3b. Reducting Provincial Trade Barrier in Commodity Markets 4. Development of Factors Market 4a. Competition in Banking Industry 4b. Marketization of Credit Fund Allocation 4c. Introduction of Foreign Investment 4d. Mobility of Labor 5. Development of Intermediary and Legal Environment 5a. Development of Intermediary in Markets 5b. Protection of Legal Rights of Producers 5c. Protection of Intellectual Rights (2)

13 Fg. 1.Correlation between per capita GDP and Marketization Marketization Iindex Per capita GDP 12