China has a new government! This will be the start of PRC 3.0.

Postat den 8th May, 2013, 07:59 av Mats Harborn, Beijing

PRC 1.0 was China under Mao and during this period China adopted the planned market economic model and got a dictatorial leadership model, with catastrophic consequences. The fingers of the state reached everywhere and involved the most intimate details of private lives. With the bad experience of the cultural revolution and after the death of chairman Mao, the party decided that it would never like to go back to a one man dictatorship and instead established a collective leadership model.

PRC 2.0 lasted the next 30+ years and had the task of rebuilding China. During this period, the most important goal was to get all the basics in place: infrastructure, industry, private enterprise, a legal system, a middle class, education. etc. During this period China made huge domestic investments and received large foreign investments. The cheap labour and the establishment of production in China by foreign enterprises lead to a booming export industry. All this is well known.

Perhaps less well known is that the state has taken its hands off the micro management of its population. No longer wants the state to approve marriages, pregnancies, nor does it any longer allocate work and housing to people. There are, however, still some restrictions left in the society such as the Hukou registration restrictions or incomplete access to social security. But on the whole the Chinese people have much more freedom over their lives than at the end of PRC 1.0.

When entering PRC 3.0, the state again has to take steps towards micro management – not of individuals, but of industry. In the period of PRC 2.0 when China was in a build-up phase it was still to a large extent the skills of the planners that build China. The mentality was often that the government knew best – also in matters that normally are better left to the market or to the citizens to solve. As the Chinese economy became increasingly complex, the ability of politicians to make correct resource allocation and decisions or to engage themselves in micro management of industry became more difficult by the day.

By mid PRC 2.0, former president Hu and former prime minister Wen seem to have realized the need for deepened reform and to let the markets handle more of the resource allocation. Possible attempts to lead the development in the right direction were distorted by the Lehman Brothers crash and the ensuing global financial and economic crises. A gigantic stimulus package ensured that China could reduce the negative impact from falling export revenues and lower foreign investments. The world also took comfort in China as the locomotive of the global economy. The problem, however, is that the still ongoing problems of the free market economies and the considered success of the state capitalistic system of China cemented the belief among many Chinese politicians and officials that their system – with politically decided allocations and detailed control – was in fact an optimal governance model.

At the onset of PRC 3.0, the new government should realize that there is no other way forward than deepened market reform and less government involvement in resource allocation. The big challenge now is to also let ministries, bureaus, administration and individual officials to understand that the private industry and the society as a whole need to function in an efficient and creative. Instead of setting detailed standards, regulations and laws, the government needs to start setting goals and targets. It should design systems to follow whether these goals and targets were really met or not – but the government must not determine all the solutions to reach these goals.

In my view, this would be a big step, may be comparable to the start of PRC 2.0 – and it needs to be done. If it will be done, China will experience major efficiency improvements and new creative forces will emerge. I do hope the government is ready to take this crucial step…