China’s top leaders continue to struggle to get local and provincial governments to implement economic reforms. China’s government appears to be struggling to get local governments to implement its economic reform policies.

Following a meeting of the State Council, China’s cabinet, on Friday, Xinhua News Agency reported over the weekend that the State Council will dispatch eight inspection teams to visit local governments nationwide to investigate whether economic reforms are being properly implemented.

“Responsibility for poor implementation of policy measures will be investigated, accountability will be serious, and there will be verbal admonishments, criticism or even administrative sanctions according to laws and regulations,” the State Council said, according to Reuters.

The inspection teams will travel to various localities from June 25 to July 5. They have been asked to review implementation of 19 different policies the State Council has announced since July of last year. The State Council has ordered local governments to conduct their own internal reviews of implementation before the inspection teams begin arriving later this month.

According to Reuters, at the top of the State Council’s list is streamlining the administrative approval process to reduce the amount of red tape, an issue that Premier Li Keqiang has been particularly forceful in promoting.  The report said the list also includes ecological and environmental improvements, “construction of major water projects, investment policies for non-state companies, employment of college graduates, construction of affordable housing, and efforts to ensure that the financial services industry supports the real economy.”

The State Council’s announcement came after its own meeting on Friday as well as the third meeting of the new Leading Group for Overall Reform. At the latter meeting, the Leading Group announced “a framework for pilot programs of judicial reform, a work program on judicial reform in Shanghai, and a plan to set up special courts on intellectual property rights (IPR).” Judicial reforms in part are aimed at weakening the grip of power of local leaders.

The Leading Group also debated plans for reforming the fiscal and household registration systems, both of which will be particularly important for local governments in China. At the meeting, President Xi Jinping — who presides over the Leading Group for Overall Reform — said, according to China Daily, that the main objectives of the fiscal reforms are “ensuring a clear division of power [between levels of government], reform of the tax system and stabilizing the tax burden, transparent budgeting, and improved efficiency.” Xi was also summarized as saying that he expects “a fiscal system to serve the initiatives of both central and local governments while clarifying the responsibilities of the two.”

On China’s household reforms, Xi was quoted as saying, “Accelerating reform of the household registration system is an important part of urbanization and involves hundreds of millions of rural migrants.”

He also stressed that implementation would be the key to success in all areas of reform. “The success of our blue print [for reform] will be its implementation,” Xi said. He also said that leading departments should be assigned for every area of reform. “Every single issue should have specific personnel to manage, supervise, urge and implement.”

Primer Li, who is a deputy of the Leading Group on Overall Reform and heads the State Council, also emphasized the importance of reform during an economic conference last week. “To achieve the development goals for 2014, we should better mobilize efforts from both the central and local authorities” to implement reform, Li said, according to local media. At the State Council meeting, Li also reportedly said, “My only concern is that our existing policies are really implemented.”

China’s top leaders are seeking to rebalance the economy from the current model which relies heavily on state-led investment to one more dependent on domestic consumption. This has slowed growth considerably, especially in certain provinces in western and central China that are heavily dependent on government investment and certain kinds of manufacturing.

As The Diplomat expected, local officials — who benefit disproportionally from the current model — appear to be the largest barrier to implementing the necessary reforms. The South China Morning Post reports that at a State Council meeting on May 30, Li “pounded the table as he blasted local officials for inertia in carrying out central government directives.” The new inspection teams for implementation are the latest way the central government has tried to force local governments to get in line.

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A failure to implement fundamental reforms associated with encouraging competitiveness is putting job creation and Europe’s long-term economic strategy at risk, finds The Europe 2020 Competitiveness Report: Building a More Competitive Europe, released today by the World Economic Forum.

Published every two years, the report aims to assess the progress of European economies in achieving the goals set by the EU’s Europe 2020 strategy to become a smart, inclusive and sustainable society. This second edition finds a Europe that has largely successfully dealt with the macroeconomic turbulence of the past half-decade, yet is enjoying mixed success in implementing reforms necessary to return the region to the top of global competitiveness.

“Europe as a whole has made significant strides towards macroeconomic stability. Now it is time for its leaders to address the long-term competitiveness agenda by implementing the right reforms and smart investments to drive productivity growth. There is no room for complacency, even for those countries that are currently performing well,” said Margareta Drzeniek-Hanouz, Lead Economist and Director, World Economic Forum.

In terms of Smart, The report corroborates Europe’s lack of progress in building a more innovation-based, knowledge-driven economy in comparison to other advanced economies. This category, which measures countries in terms of their record in building business-friendly enterprise environments, implementing a digital agenda, encouraging investment in innovation and optimizing skills and training, also represents the widest gap between Europe’s most and least competitive economies.

While the EU fares well in providing the foundations for sustainable growth, the picture is more mixed for inclusive growth, says the report. Overall, EU countries continue to depict relatively cohesive societies, although many of them are failing to provide gainful employment opportunities for large shares of their populations.

Underlying the gap in competitiveness between Europe and other advanced economies is a deep-rooted competitiveness divide within the region that has proven stubbornly hard to narrow. This is in spite of impressive achievements by many of the more “innovation-poor countries” in adopting reforms necessary to achieve stable macroeconomic environments.

According to the report, there is no one-size-fits-all strategy for lifting competitiveness across all member states as national and regional characteristics all play a part in shaping Europe’s economic landscape. However, one common thread is the need for all nations to build institutional capacity and adopt governance mechanisms that will enable more effective implementation of competitiveness-raising reforms.

An important conclusion of the report is that in the long term, there are no trade-offs between building a competitive economy on the one hand and an inclusive and sustainable society on the other. Competitive economies tend to provide more and better opportunities for their citizens, creating more inclusive societies, and fostering further opportunities for innovation and building environmentally sustainable societies.

“Europe can create more and better jobs, support rising living standards and build economically sustainable societies,” said Nicholas Davis, Director and Head of the Europe Team at the World Forum and co-author of the report. “We hope this report will encourage business, civil society and political leaders at the European and national levels to collaborate to achieve these goals.”

By Eurasia Review

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(China Economic Review)

State-owned enterprises, or SOEs, have made a remarkable contribution to the growth and development of the Chinese economy over the past 30 years. They have provided a stable long-term environment for investment and encouraged the development of the state enterprise sector in line with public as well as private interests.

But SOEs are in retreat. Between 1998 and 2010, the share of SOEs declined from 37% to less than 5% by number of firms, and from 68% to 44% by assets. Calls from inside China are getting louder for further downsizing and corporate governance reforms of the still very substantial SOE sector. Under the new administration of Xi Jinping, policymakers have proposed reforms of government-backed enterprises. The question that remains to be answered is what should take the place of state ownership in the future.

A decade or more ago the answer would have been easy. The investment banks in New York or London would have advised the Chinese government to sell its stakes via secondary offerings to a mixture of banks, financial institutions and private investors, preferably foreign as well as domestic. The objective would have been to use this opportunity of state sales to create an Anglo-American type of capital market characterised by dispersed ownership and high levels of liquidity.

It is far from clear today that this strategy is right for China. A former Minister of the UK government, Paul Myners, has characterized the UK stock market as comprising ‘ownerless corporations.’ The origins of this description can be traced to the highly dispersed nature of ownership in UK stock markets, where institutions such as domestic and foreign mutual funds, pension funds and insurance companies dominate the market. Most of these investors hold too small stakes in companies to be active investors and lack the skills to understand the companies they invest in. The result is that control is vested in the company’s board members who have little ownership and often manage the business at high cost and with poor performance.

Operating as a publicly listed company is also becoming less attractive. Harvard professor Michael Jensen predicted ‘the eclipse of the public corporation’ in 1987, well before the wave of ‘going private’ started around 15 year ago. The Economist in 2012 reported that the number of listed American companies had fallen by about 37% from 1997 to 2012, while in the UK the decline was even more dramatic, at 43%. Many of the companies that have been delisted have been taken private by management and private equity funds tired of the perceived short-termism of the stock market.

It is therefore not obvious that the Chinese government should try to emulate the Anglo-American model of ownership and control. It simply may not be the best one. There is however, another reason not to follow this route and that is, in order to function effectively, the Anglo-American model is dependent on a complex set of institutions, including markets for corporate control and well-developed systems of corporate law and enforcement. China does not have many of these institutions, or rather has different institutions, and grafting Anglo-American stock markets onto the Chinese institutional structure will simply not work.

Japan’s experience of attempting to emulate US capital markets when its institutions were simply not ready for such a task is instructive. When Japan was defeated in the Second World War, the American Occupying Authority sought to dissolve and sell-off Japanese family dominated companies, the ‘zaibatsu,’ which had been implicated in Japanese militarization. Shares in the zaibatsu were sold to employees and investors in local communities. The result was that Japanese share ownership in the mid-1950s was more dispersed than the stock markets of the UK and the US. Laws were passed, including a Glass Steagall Act separating commercial and investment banking, and bankruptcy legislation and security regulation were introduced modelled on the US system.

The experiment failed and had substantial unintended consequences. Shares held by individuals were sold, and gradually accumulated by banks and other financial institutions resulting in a system of “insider” corporate cross-holdings that has only recently begun to be unwound.

Why did Japan fail to develop its capital markets along Anglo-American lines when seemingly all the ingredients were in place? The answer is that Japanese institutions were simply not developed to support the outsider system of ownership. An example is the emergence of investment funds, which have been important in both UK and US capital markets, and at one point comprised about 10% of the Japanese market. Institutions created these funds in Japan to dispose of unwanted stock and sell them to private investors but insider dealing and breaches of trust in combination with other scandals led to the rapid disintegration of this market and instead the emergence of a market dominated by corporate insiders.

What are the alternatives to Anglo-American systems that China could pursue? There are several. Oversight of SOEs could be extended through state asset management companies managing China’s sovereign wealth and state pension funds. Employee share ownership and employee-owned enterprises could be increased and the rights of workers enhanced through their representation on the boards of companies, as is widely observed in many central European corporations in Austria and Germany. Private and public pension funds similar to those found in Canada, the Netherlands and Sweden could provide the engaged, long-term, sustainable ownership that China seeks.

The main message from the experience of Japan and other countries is that whatever path China chooses, it should be tailored to its particular social and cultural context and the role that is sought of enterprises in Chinese society. While there are important lessons to be learnt from other countries, it should not be presumed that their models can be transferred from elsewhere without significant adaption to the Chinese context.

In April, the government has said that companies engaged in defence manufacturing will not be allowed to further increase foreign portfolio investment beyond August last year level.

Industry body Assocham today asked the government to review foreign investment policy, particularly related with FIIs, in the defence sector.

In April, the government has said that companies engaged in defence manufacturing will not be allowed to further increase foreign portfolio investment beyond August last year level.

This condition "goes against the principle of a stable policy framework which is needed to attract large investments in this sector", it said.

It also said that the April decision has brought the entire process of issuance of industrial licenses to domestic private sector companies to a standstill and, "therefore, be amended,", it said in a statement.

Several domestic companies have applied to the DIPP for industrial licenses to manufacture a wide range of defence products and shares of most of these companies are listed.

FIIs inflows should be encouraged in order to boost country's foreign exchange reserves, it said.

"FIIs are in no position to exercise any control over management of the affairs of Indian companies. Further there are adequate checks and balances within the existing policy framework to protect our strategic interests," it added.

The chamber said that "there is urgent need to review the existing foreign investment policy applicable to the defence sector" on the issue of FIIs investment so that the matter of industrial licenses to several Indian companies which has come to a grinding halt can be restarted and clearances can be expedited.

Speedy implementation of projects in this critical sector of the national economy will contribute in reducing country's dependence on imports, it added.

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