By 1996, the state-owned enterprises accounted for merely 30 percent of total industrial outputs whereas the non-state enterprises accounted for 70 percent. 6 To reduce trade barriers, WTO requires that, among its members, tariff levels were restricted, roughly, to an average of 5 percent for developed countries and 15 percent for developing countries. China achieved major progress in trade liberalization. In compliance with WTO rules and to give greater access to its market for foreign competition, China progressively lowered its tariffs.
The absence of a freely convertible currency served as the final complicating factor in the quest for WTO membership. To obtain WTO membership, China committed itself to move faster toward total convertibility of its currency. To further meet WTO requirements, China's central bank, since 1997, allowed the currency to become convertible in current accounts, one step closer to a fully convertible currency. This change reduced government control over the financial market and international trade, giving more room for the “invisible hand” to function.
China has gradually relaxed the restrictions of market entry for enterprises with foreign capital investment. More and more foreign enterprises have been permitted to sell their goods and services in the domestic market. 9 Far from making governance easier, the shift to less administrative interference and curtailing the direct provision and administration of services makes it more complex. The Chinese state has added to its old monopoly functions new regulatory roles that are broader and more complex than before and that became even more complex as China is member of WTO.
The Chinese government dismantled old ministries and organisations, adapted the roles of others while creating new ones to serve the needs of a WTO world. Most current administrators are less familiar in a role where they would act as an indirect provider or a regulator. These new roles require them to acquire additional skills and capacities to manage within a markedly different administrative framework. Pension reform is a good example of the new challenges.
The central government decided to shift responsibility for the pensions of the privileged sector of the working class from state-owned enterprises to the local government. This entails local administrations dealing with complex matters of collection, pooling and disbursement. However, many localities lack the skills to manage these funds effectively and with insufficient transparency and regulation many have simply used pension funds as state assets to be invested as they see fit in their pet development schemes.
Even at the national level there are problems. The required regulatory development is mind-boggling and extremely expensive. For example, it costs a typical developing country $150 million to implement requirements under just three of the WTO agreements (customs valuation, sanitary and phytosanitary measures, and intellectual property rights). Another important aspect of China's bid to join WTO that has resulted in positive policy change is intellectual property rights (IPR) protection.
International pressure to protect foreign intellectual property rights has helped China establish its IPR legal systems and set up rules for a market economy. 10 In addition to tariff reductions to promote free trade, WTO requires its members to dismantle non-tariff barriers and make rules, regulations, judicial decisions, and administrative rulings in their domestic trade systems transparent (i. e. , open and accessible to the public). 11 Many observers expected that with the expansion of the market economy, the role of the state would decline in transitional economies, including China.
However, this has not been the case and reform has brought with it state expansion into new areas while old functions have not necessarily been terminated. Indeed, a withering away of the state may not be the most appropriate approach. One of the primary problems in post-communist Russia has been the lack of an effective state apparatus to guide the process of market transition. A market economy without an effective enabling environment of rules and regulations implemented by a relatively impartial judiciary results in an anarchic free for all.
First and foremost an effective, as distinct from strong, state structure is a precondition for any hope of successful reform. Certainly, the role of the state in the economy will change with a narrower set of interventions and less direct administrative interference. However, an increase in state capacity is a prerequisite for an effective market to function. The state must adjudicate the increasingly contentious nature of economic market transactions.
This means that it is the obligation of the state to establish a sound legal system. In addition, the state must manage the key macroeconomic variables and ensure that economic and investment policy is not distorted by price fixing or subsidy supports that have outlived their rational lifetime. It must deal with revenue collection and distribution, and this will help the state to provide minimum social services and welfare guarantees to protect those who are vulnerable in the shift to a market economy.