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The cost of production consists of two parts, the cost incurred in the course of materializing the various factors of production and the cost involved in business transactions. The cost of materializing the various factors of production is low in China - maybe lower than in any other country. That‘s explains why international corporations are shifting their production to China. But the whole cost of production is not low because the transaction cost is extremely high. International corporations have a competitive edge in both parts of the production cost. International corporations will exploit their advantages to the full. In view of this, our national industries will find it even more difficult to compete on the world market (in the wake of China‘s WTO entry).
The high transaction cost that characterizes Chinese industries can be attributed to a variety of reasons. For intermediate service organizations (anywhere in the world), the most important function is to (help the producer) reduce the cost of transactions, the cost of information (collection, access and transmission) in particular. It so happens that our intermediate service organizations are weak in strength and poor in business operations. They are few in numbers relative to those in developed countries, and their services are, in general, poor in quality.
Our intermediate service organizations originate from the planned economy and administrative intervention has been a dominant feature of their development. The Finance and Economy magazine once published an article analyzing problems with (Chinese) accountants‘ offices. The most essential problem, said the magazine, is that many of them are affiliated to government financial departments. In other words, they are "judges" and "players" at the same time. While business entities, they have government functions to perform and exercise some administrative powers. For this reason, they fall far short of the requirements of the market economy for standardized operations and high professional ethics. It is said that Chinese accountant‘s offices and law firms are to be reformed. I think this will be an arduous task, a task that will take a long time to accomplish. Because of their relations with the government, these organizations find it impossible to independently offer intermediate services.
China is already a full member of the World Trade Organization and a market economy is by and large in place in the country. The country‘s intermediate service organizations have failed to develop in step with the soaring growth of the national economy, hence the numerous irregularities in China‘s economic life and the high transaction cost. China will undoubtedly develop into the world factory in the 21st century, but that by no means suggests that domestic enterprises will be able to fully play the role designated to them (by the state). Because of our institutional and organizational drawbacks, it is highly possible that this world factory will be dominated by foreign enterprises where Chinese citizens are just laborers. We certainly don‘t like to see that sort of affairs happen.
What‘s to be done? First of all, no effort should be spared to promote the reform of our intermediate service organizations and make them truly market-oriented. Equally important is the improvement of China‘s legal system.
There is one more question, the question of how for intermediate service organizations to seek development and improvements. This is a question of environment. Our accountants‘ offices and law firms do not have the kind of environment in which it is possible for them to develop independently. They have to count on their relations with the government in order to develop. China is late in developing the market economy. Ours used to be a planned economy, an economy dominated by the government. How to ensure a healthy growth of our intermediate service sector merits study in real earnest.
The author is a senior researcher at the Development Research Center under the State Council, China‘s central government. The article is in fact a talk he made at a symposium on the market economy and intermediate service organizations held in Beijing May 18-19, 2002.
The high transaction cost that characterizes Chinese industries can be attributed to a variety of reasons. For intermediate service organizations (anywhere in the world), the most important function is to (help the producer) reduce the cost of transactions, the cost of information (collection, access and transmission) in particular. It so happens that our intermediate service organizations are weak in strength and poor in business operations. They are few in numbers relative to those in developed countries, and their services are, in general, poor in quality.
Our intermediate service organizations originate from the planned economy and administrative intervention has been a dominant feature of their development. The Finance and Economy magazine once published an article analyzing problems with (Chinese) accountants‘ offices. The most essential problem, said the magazine, is that many of them are affiliated to government financial departments. In other words, they are "judges" and "players" at the same time. While business entities, they have government functions to perform and exercise some administrative powers. For this reason, they fall far short of the requirements of the market economy for standardized operations and high professional ethics. It is said that Chinese accountant‘s offices and law firms are to be reformed. I think this will be an arduous task, a task that will take a long time to accomplish. Because of their relations with the government, these organizations find it impossible to independently offer intermediate services.
China is already a full member of the World Trade Organization and a market economy is by and large in place in the country. The country‘s intermediate service organizations have failed to develop in step with the soaring growth of the national economy, hence the numerous irregularities in China‘s economic life and the high transaction cost. China will undoubtedly develop into the world factory in the 21st century, but that by no means suggests that domestic enterprises will be able to fully play the role designated to them (by the state). Because of our institutional and organizational drawbacks, it is highly possible that this world factory will be dominated by foreign enterprises where Chinese citizens are just laborers. We certainly don‘t like to see that sort of affairs happen.
What‘s to be done? First of all, no effort should be spared to promote the reform of our intermediate service organizations and make them truly market-oriented. Equally important is the improvement of China‘s legal system.
There is one more question, the question of how for intermediate service organizations to seek development and improvements. This is a question of environment. Our accountants‘ offices and law firms do not have the kind of environment in which it is possible for them to develop independently. They have to count on their relations with the government in order to develop. China is late in developing the market economy. Ours used to be a planned economy, an economy dominated by the government. How to ensure a healthy growth of our intermediate service sector merits study in real earnest.
The author is a senior researcher at the Development Research Center under the State Council, China‘s central government. The article is in fact a talk he made at a symposium on the market economy and intermediate service organizations held in Beijing May 18-19, 2002.