Monday, June 27, 2005

What is the long term dangers?

The goal of the reform is for China to move away from centrally planned economy. Large conglomerates should eventually be owned by private shareholders and operate to commercial principles, i.e. only the fit one survives. This is the only way that large state owned enterprises can improve on productivity and compete with the outside
world. Subsidies and government protections, if not removed, will scare away foreign investments due to unfair competition. This will also generate disputes with China trading partners after joining WTO.
Furthermore there are opportunities for conglomerates to expropriate the state during the transition to private ownership therefore in the long-term this could lead to corruption. Political units will arbitrage between themselves for personal benefits or for their cronies who hold managerial positions. Such corruption is a high cost to the state.

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