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Why China Is Still So Far From A Free-Market Economy

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com / ECONOMIC OBSERVER

-Analysis-

BEIJING – Most agree that state-owned enterprises, which have long been at the core of China’s economy, must be reformed. That begins with fundamental changes in the way that such entities are managed, both by increasing the separation between state oversight and individual management, and the separation between management and ownership.

The establishment in 2003 of the SASAC, the main body that oversees China’s state-owned enterprises, has helped create a more independent system and established a wide variety of rules and regulations. The effect has been that these enterprises, especially those owned by the central government, are getting stronger and bigger. More and more of them are making it into the rankings of the world’s Top 500 companies.

However, this doesn’t mean that China has found the right path to truly make these enterprises compatible with the market economy.

We are convinced that only private companies can truly be separate from the public administration. The reason is simple. In markets, property rights belong to the private firms, which means they are truly independent. The government has no authority over the way they are handled, except to create a legal framework in which they operate.

Meanwhile, state-owned enterprises’ property rights belong, in theory, to the people, but the custodian is the government: thus these firms are tantamount to being government-owned. This is why talk about “the separation between administration and enterprises” is not convincing. On one hand if the state does not interfere with the state-owned firms’ operation it will behave contrary to its role as the trustee of the people. On the other hand, if it does interfere this contradicts the economics of property rights.

For instance, a core power in an enterprise is the right to make high-level personnel appointments. But in Chinese state-owned firms, the power is still in the hands of relevant government departments. Any major decision must be approved by the SASAC. This demonstrates that there is no real separation between the government and the enterprises.

A recent SASAC report lauded the supposed reform in the management of state-owned firms, including “the full respect of the property rights of the legal person and autonomy in management as an independent market entity.” But again, the meaning of the so-called “property right of the legal person” is not any true kind of property right. Without governmental approval, no state-owned entity is entitled to dispose of any of their assets. So what sort of reform is this?

As for the operational autonomy such as strengthening supervision, improving assessment and accountability, performance-based salary, and financial control…etc., they are just the norm for any private company.

First step: property rights

The essential step in any real reform is the reform of property rights. As long as this remains unchanged, in other words, where a real owner is absent, the fundamental shortcoming of the state-owned firms will not improve.

Here, the owner refers to the true owner who would take full responsibility for the firm’s gains or losses. In brief, as long as the situation remains the same, China’s state-owned enterprises can only stay as what they were meant to be, and can only assume the mission handed to them of providing public goods to society. They can never be the economic entities they would be in a market economy.

And with state-owned entities currently so inflated that they have become the country’s main economic bodies, it implies that this country doesn’t operate a market economy, or at least not a full one.

Take China’s five state-owned banks, for instance. As long as we insist that these large banks belong to the state, the state will be obliged to assume the obligation and responsibility of securing their deposits.

Whether it’s about the implementation of the deposit insurance system or interest rate marketization, the first reform would be to privatize the banks. At the very least, they need to get rid of their “fully state-controlled” nature, so as to become mixed-ownership banks that conform to the essence of a modern enterprise system.

It’s ludicrous to imagine that you can just immerse state-owned firms or state-owned banks completely in the market, and let the law of “survival of the fittest” play out. Like other industries, were China’s banks to undergo real reform, the reform of their property rights has to be the initial step.

Macroeconomic data shows that China is at great risk for an economic downturn. On the one hand, stimulus policies are needed to curb this decline, but on the other hand, there is excess production capacity in many sectors. The profit margins of the small and medium size companies, in particular the private ones, have been squeezed.

As all experts point out today, new reforms are necessary. We sincerely hope that China’s reform of its system of state-owned enterprises will withstand the pressure and take risks on the path toward success.

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India’s tablet revolution

India’s ruling Congress Party was stunned by the magnitude of recent public protests.

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For the first time in recent history, India’s normally docile middle class and its youth are speaking up over everything from the country’s recent rape tragedy to the Congress Party’s corruption. Social media and technology have empowered these segments of society in new ways. The digital world has enabled similar rebellions in China and the Middle East.

This is just the beginning, though. As the cost of devices drops and Internet access becomes universal, we are witnessing a new kind of revolution.

Information used to be more localised. People were barely aware of the affairs of their own villages let alone in nearby towns or the rest of the country. Governments had the power to feed their citizens whatever propaganda they wanted them to know.

Now, however, people are more connected. Those in the poorest parts of the world are gaining access to an equivalent breadth of knowledge as those in the wealthiest parts. They are beginning to participate in the global economy, to learn from others, and to solve their own problems.

The first global communications revolution began with cell phones. Over a 10-year period the number of cellular subscriptions jumped from a few million to nearly 6 billion (or 87 percent of the world’s population, according to The International Telecommunication Union). These made it possible for families to stay in touch when breadwinners travelled to cities and for workers to connect with employers. They allowed populations to discuss what was happening in different parts of the country and to exchange political views. And they allowed the disenchanted to organize demonstrations via text messages.

The next step in this revolution is cheap tablets. India recently launched the Aakash tablet, which provides all the features of more expensive tablets. It has a processer as powerful as the first iPad, twice as much RAM, and an LCD touch screen. One hundred thousand of these devices have been purchased by the Indian government from a company called Datawind for $40 and are being provided to teachers and school children for a subsidized price of $20. Meanwhile, Datawind has sold 1 million of these commercially at a price of $60. CyberMedia Research says that within two quarters of its introduction, the Aakash tablet has leaped ahead of Apple in terms of market share in India.

To add to the increasing accessibility of technology and its benefit, India has launched an initiative to connect 250,000 villages via optical fiber cable. The fiber-optic lines will provide cheap, affordable Internet. Regardless of whether the government delivers on these plans, India’s cell phone carriers already provide affordable data plans. Newer versions of Datawind tablets, or “phablets” as they are colloquially referred to, have cell phone capabilities and come with unlimited web access for Rs.100 (US$1.75) per month.

India’s population currently has around 900 million mobile phones, which typically cost $30 or more. When the cost of the “phablets” reaches this price point, they will undoubtedly become the replacement device for cell phones. I expect that India, because of tablets, will have more than 100 million new Internet users in the next three years. This number will grow to more than 500 million within five years, and 1 billion by the end of the decade.

The Indian government has inadvertently started a revolution that will transform India and shake up the world. It has lowered the expected base price of tablet technologies to a range of $35 to $50. Chinese vendors are competing with Datawind to bring production costs below $35.

Cheap tablets will make it possible for farmers to watch weather reports, for village children to access MIT courseware, and for artisans to sell their goods online. These will also enable the development of Silicon Valley-style apps to transact commerce, play games, and manage bus and train schedules. Don’t be surprised to see villagers developing apps that solve their own unique problems.

Add some sensors that read a person’s vital signs to these devices and connect isolated villagers to physicians over Skype, and you can provide desperately needed medical advice. This isn’t wishful thinking. I asked Alivecor, which has developed an FDA-approved iPhone case that monitors heart rhythms, to test a credit card-sized version of their device with low-end Aakash tablets. Their founder Dr. Dave Albert told me it worked flawlessly. Albert’s goal is to sell a version of this device in India for a cost comparable to the price of the tablet. This will provide the same functions as expensive EKG monitors. There are hundreds of such sensor-based medical devices in development all over the world.

It is only a matter of time before $49 tablets are also commonly available in the West. This will wreak havoc on the global PC, laptop, and smart phone industries. It will decimate profit margins as the number of cheap tablets in use increases exponentially and prices continue to drop. There will be thousands of new uses for these inexpensive tablets. Expect to see them in your cars, houses, restaurants, schools, and even at church. There will be billions of interconnected devices.

There will be 3 billion more people coming online in this decade. Never before has humanity been connected this way. With ubiquitous access to Internet-capable devices, the poor and the rich will have the same access to information. The lower classes will be able to educate themselves, learn about the latest advances in agriculture and farming, find out the real value of the goods they produce, and take advantage of e-commerce. They will be able to tell the world about the bribes they paid and the abuses they suffered at the hands of corrupt government officials. They will be empowered just as the Indian middle class has been.

Most importantly, the rising billions will be able to participate in global discussions and exchanges of ideas. Imagine village-developed apps showing up in our app stores. Imagine young Einsteins emerging from the villages of Kenya, Columbia, and India — offering solutions to medical and scientific problems posed by Harvard researchers. These geniuses do exist.

This is all going to be a reality sooner than you think.

Wadhwa is director of research at the Center for Entrepreneurship and Research Commercialization at Duke University and fellow at the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford University.

© Foreign Policy, 2013

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Australia’s gun ownership levels return

Australia’s leading gun control expert is in Baltimore, Maryland, to contribute recommendations on how the US can control gun violence in the wake of the Newtown school massacre.

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Speaking from the Summit on Reducing Gun Violence in America, Professor Philip Alpers, from Sydney University’s School of Public Health, says the US is interested in Australia’s success story on gun control, but he remains realistic about what will follow.

“Nobody is mad enough to say that what we did in Australia can be done in the United States,” Professor Alpers told SBS.

“Their [mistaken] belief [is] that the more guns you have, the safer you are. If that was the case then America would be the safest nation on earth.”

The conference will feed in to US vice president Joe Biden’s panel for gun control, which will deliver its recommendations tomorrow.

New research suggests that Australians have steadily restocked the firearms destroyed in the wake of the Port Arthur massacre, with the number of firearms in the community now estimated at 3.2 million.

After Port Arthur, Prime Minister John Howard pushed through tough national controls, banning semi-automatic rifles and pump-action shotguns and introducing more stringent licensing.

At that time, more than a million guns were sent to the smelter.

“People talk about the 650,000 guns that were destroyed in the Port Arthur federal long gun buyback, that’s only half the story,” Professor Alpers said.

“In fact, our research shows that a huge number of Australia gun owners gave up their guns for no compensation at all – remember there were 38 [state-based] gun amnesties since these mass shooting began.

“Over the last 10 years, the importation of fire arms has built up again, and now I know from customs figures that we have already replaced a million guns in Australia.”

Professor Alpers said that nearly 90 per cent of Australia’s gun deaths had nothing to do with mass shootings, but rather involved domestic homicides and suicides.

An Australian Institute of Criminology homicide study shows gun murders have steadily declined from the late 1980s and are now far outnumbered by murders with knives.

Watch the interview with Professor Philip Alpers

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Women stood their ground in Tahrir

CAIRO — Only one woman sat among the 14 people who flanked General Abdel Fattah al-Sisi on Egyptian state television as he announced Egypt’s new constitutional order.

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In President Mohamed Morsy’s cabinet, there were two — out of 24 people. Over the last few days, in other words, Egyptian women have been asked to take sides between two organizations in which women are almost entirely marginalized: the Muslim Brotherhood and the Egyptian army.

And yet, whenever there are protests, there are women in Tahrir Square — lots of them. They know the drill. They have seen the videos on YouTube. They know the risks they take when they go down there. During the day, there are usually families in the square — little girls on their mothers’ shoulders, grandmothers.

But at night, when the families leave, the harassment begins.

Harassment is actually a gentle, almost euphemistic way to describe it. At least 80 women were assaulted last night in the square as the crowd celebrated Morsy’s ouster and the army’s takeover. And yet, this morning they were still there.

A week ago, before the June 30 protests, everyone hoped, as they do before any large demonstration in Tahrir since the revolution, that this time would be different-that the men who surround women, cut off their clothes, and attack them in groups and from every angle, many while pretending to recue them, would stay home. But if they ventured the hope, they also prepared for the worst.

In the week leading up to June 30, Operation Anti-Sexual Harassment (OpAntiSH), Tahrir Bodyguard, and other organizations held trainings in their central Cairo offices on how to intervene in instances of mob sexual assaults. These groups document cases ranging from sexual harassment to assault to rape. Men and women would show up, volunteers still in their work clothes, and stay long into the night to undergo training for the day itself.

By the Friday before the planned uprisings, there had already been 12 assaults in Tahrir. Last night saw the largest number of reported assaults since these organizations began documenting them.

Although there are many volunteers, and more at every demonstration than at the last, the scope of the problem is overwhelming and diffused across a wide and densely crowded area. “The problem is that the cases are all over the place,” said Mariam Kirollos, a core team member of OpAntiSH. Because of the large number of volunteers of both genders, they are often able to intervene at a very early stage. But there are so many attacks, and the square so large, and the crush of people so dense, that they are far more often unable to reach people who need them.

Both OpAntiSH and Tahrir Bodyguard maintain an active presence on Twitter and Facebook, advising women and men which parts of the square and which metro exits to avoid. Meanwhile a group called Harassmap maintains a map of where the assaults take place. When Tahrir is full, it is impossible to move without coming into contact with other bodies and impossible to see what is happening only feet away. As a result, it is often difficult to access women who are being assaulted to bring them to safety. It becomes a crowd-sourced effort. Activists pass out flyers in Tahrir explaining to bystanders what to do if they witness assaults and, more broadly, the need to change the culture that allows them to happen. Last night, they even called on those who had access to apartments overlooking the square to try to identify instances of assault from above. Because the attacks can involve many assailants, it is actually possible to spot them aerially. One volunteer reported an assault in which as many as 400 people were involved, some participating while others looked on. “Maybe they’re organized,” said Kirollos, “but definitely there are people who join in.”

Activist groups sometimes have to step in even when it seems that the survivor should be in safe hands: OpAntiSH tweeted that its activists had intervened in a case where a survivor was about to undergo a “virginity test” by a female doctor in a police booth inside the Tahrir metro station. Military officers used these so-called tests against female protesters under the SCAF’s previous tenure as rulers of Egypt.

As far as activists are aware, no one has been arrested or even charged in connection with these gang assaults.

In recent days, Muslim Brotherhood members have contrasted the lack of sexual harassment at their pro-Morsy protests with the assaults in Tahrir. They have a point. But at the Brotherhood protests, there were far fewer women present overall. And activists respond that there were many mob assaults documented during the jubilation in Tahrir Square when Morsy took office a year ago.

Moreover, on the question of women’s rights, the relative absence of sexual assault at Brotherhood protests is about the only thing one can say for the Brotherhood just now. Former President Morsy’s government fumbled at every turn. As recently as June 30, the Ministry of Health shared a survivor’s name, hospital, and details of the assault with the newspaper of the Freedom and Justice Party (the Muslim Brotherhood’s political party) while also citing instances of sexual assault in the square in an attempt to delegitimize the protesters there. In March, they opposed a document on violence against women issued by the United Nations, and they consistently refer to female genital mutilation, a widespread practice in Egypt, as a sanctioned cultural practice.

General Adel Afifi, a member of a Salafi party allied with the Brotherhood who serves on the Shura Council’s human rights committee, in a statement that has now become legend among the activist community, declared: “Girls who join [the protests] do so knowing they are in the middle of thugs and street types. She must protect herself before asking the Ministry of Interior to do so. Sometimes a girl contributes 100 percent to her rape because she puts herself in those circumstances.”

Given comments like this and, more broadly, the risks each woman takes consciously when she enters the square, it says something about the strength of women’s conviction of their right to participate fully in public discourse and political life that they keep showing up.

The women at the protests are of all religious and political persuasions. On June 30, I met Amani Sayed, 43, who wore a full face veil. Her gripe with the Brotherhood? That they had divided Egyptians from one another — Muslim from Christian, liberal from conservative.

Huwaida Ibrahim, a 34-year-old international football referee who does not wear a hijab, emphasized the role of women in the economy, saying, “If women don’t go to work, half of the country will stop.” That was why she was there — to protest the horrendous economic conditions under the Brotherhood.

Fatima Mustapha, a 35-year-old Cairene housewife said she had supported Morsy until he made such a mess and “spilled the blood of our youth.” She said that when it came to women’s participation in politics, “lack of knowledge” was the problem, “I want women in the People’s Assembly, on the Shura Council, in the cabinet, in the judiciary” she said. “But it won’t be people like me. It will be particular people [of a particular social class or educational background], … but we all want to be able to try.”

This morning, there was a military air show over Tahrir, a last hurrah of the protests and a message to the masses: Show’s over, go home. At Tahrir around midday there was a small stage set up on one side of the square with music and a crowd of a few hundred people. There was a women’s section in the middle cordoned off from the men with a large space around them, patrolled by women in yellow vests. A cruel joke given the violence of the night before.

© Foreign Policy, 2013