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    Is China Bringing Back the Planned Economy?

    A new government document on creating a “national unified market” has sparked fears of centralized planning. The reality is more complex.
    Apr 29, 2022#economy

    On April 10, the Central Committee of the Communist Party of China and the State Council — China’s Cabinet — jointly released a document titled, “Opinions on Accelerating the Construction of the National Unified Market.” Any document bearing the seal of two of China’s most powerful bodies tends to attract public attention, but it was the term “national unified market” that really got analysts debating the question: Was China plotting a return to the planned economy?

    On the surface, that might seem like a leap of logic. In context, it’s more understandable. In recent weeks, as some of China’s largest cities battle COVID-19 outbreaks, just about everyone has felt the grip of government interference in their daily lives. Against this backdrop, the announcement’s timing seemed especially significant. Perhaps the central government intended to take a firmer hand, not just in disease control itself, but also in the market.

    Further confusing matters, the Chinese word for “unified,” tongyi, has different connotations depending on one’s perspective. Used in the phrase “national unified market,” the term refers to “integration.” But placed next to words like “national” and “market,” it’s easy to see why it might conjure up images of the government forcibly implementing a top-down, one-size-fits-all approach to regulation and control nationwide.

    That’s not necessarily the case, however. Indeed, in my view, the “Opinions” could have the opposite effect. What is a planned economy? It’s an economic system in which production, the allocation of resources, and the consumption of goods are all planned in advance. English-language coverage of the “Opinions” has focused on the central government’s efforts to break down local protectionism and regional market segmentation, both side-effects of government meddling. But there’s another, less obvious example of the new policy’s market leanings: labor.

    China’s central government has spent the past several years attempting to improve what it terms “domestic circulation”; that is, the unimpeded circulation of goods on a truly national commodity market. A key sticking point to achieving domestic circulation is the continuation of limits on market allocation of production factors, many of which date back to the country’s planned economy days. Some, such as the above-mentioned market segmentation, are the result of local protectionism, as governments favor local enterprises at the expense of more efficient firms outside their jurisdictions. Even more pressing, however, is the difficulty labor faces in flowing between regions, and especially to large cites.

    Contemporary Chinese society is characterized by an aging population alongside a falling birth rate. As this demographic trend progresses, the total supply of labor will continue to decline. This makes the efficient deployment of labor resources increasingly critical to the country’s economic development, yet workers remain constrained by policies first formulated during the planned economy period, most notably the hukou household registration system, which ties their access to social services to their officially registered residence.

    Traditional restrictions on worker movement, while perhaps beneficial to protectionist local governments and firms, hinder labor flows into high-demand regions and industries. Although the hukou system has been relaxed in recent years, large cities continue to implement restrictions, and the social security system remains a regional patchwork.

    Moving forward, China should allow workers to move freely, and the recent “Opinions” document, with its explicit call to “stimulate the flow of labor and talent across regional lines,” suggests the government is increasingly cognizant of this fact.

    If labor is allowed to move freely, it will naturally concentrate in more economically developed areas — such as coastal regions and bigger cities — where it will foster economies of scale and generate increased productivity. As for the regions workers leave behind, industry there will likely move toward agriculture, tourism, and natural resources. A division of labor will gradually form across the whole country, with each area developing local industries according to its comparative advantages.

    Of course, as the economy and population concentrate in a few areas, some regions will experience population outflows. This process is already underway: According to the results of the seventh national population census released last year, around 40% of China’s prefecture-level cities and municipalities experienced population decline over the prior decade.

    This is not necessarily a bad thing. Population outflows mean that per capita resources are increasing, which helps raise the level of per capita income. Indeed, as China improves the circulation of production factors between regions, the trends point toward greater per capita balance, not less. China is already experiencing growing population concentration, especially in large cities, yet the per capita GDP gap between regions is narrowing.

    Of course, even if the movement of labor is completely unrestricted, the per capita GDP gap will not fall to zero, nor will absolute equality be achieved. Because of the higher costs of living in more developed regions, however, China will eventually settle into a state of relative income equality between regions, as other countries have. In the meantime, the central and provincial governments should increase transfers to those areas with population outflows to balance the levels of public services and quality of life throughout the country.

    It’s ironic that a policy aimed at increasing the role of markets in the allocation of production factors like labor has sparked fears of a return to the planned economy, but the misunderstanding is revealing. The planned economy period continues to cast a long shadow. It is incumbent on the government to reassure the people that their country is developing in a market-oriented direction.

    Translator: David Ball; editors: Wu Haiyun and Kilian O’Donnell.

    (Header image: Employees work at a steel company in Dalian, Liaoning province, 2018. Liu Debin/VCG)