GLOBALISATION AND THE REGULATORY ENVIRONMENT
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Presentation of Richard Ci-Liang Yan*
What will most define our lives in the next century? The global economy. The forces underlying globalization will shape the lives of everyone on the planet. Economic globalization is already dismantling traditional frontiers, bringing people closer together and presenting a host of new challenges. The process of globalization will, if anything, accelerate in the years ahead.
How will this globalization affect the way governments regulate economic activity? I would like to talk about this issue in connection with the recent experience of my own country, China, in its efforts to transform itself from a centrally-planned to a market-led economy. In doing so, I will also draw upon the experiences of my own company to illustrate my points.
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The role of the private sector
First, let me say that I believe private sector business is currently playing �� and will continue to play �� the most important role in the process of economic development and globalization. Everyone knows that global businesses are important, but let's look at some numbers.
According to Fortune magazine, in 1997 the world's largest 500 global companies had combined revenues of over US$11 trillion. This sum is larger than the GDP of the United States, the world's largest national economy, and is equivalent to approximately one third of global GDP.
The total value of assets controlled by these 500 companies amounted in 1997 to US$34 trillion and their combined profits came to close to half a trillion dollars.
Their profits alone were equivalent to almost half of China's GDP, yet to create and control so much wealth, these companies employed less than 37 million people, a number smaller than the population of Shanghai and its environs!
How could such a small number of companies employing so few people can create so much of the world's wealth and control so much of the world's resources? Economies of scale. The revolutions in communications and transportation of the last few decades have made economies of scale increasingly important. They will get more important as globalization continues.
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Implications of these changes
The implications of the growth in power and wealth of global private sector businesses are profound. When corporations generate more revenue than the GDP of many nations, the balance of power between business and politics has to change and is changing. Governments have to find new ways of governing and, indeed, competing for investment. The regulation of business must go through some fundamental changes to adapt to the times.
Let me be clear. I believe that all people share a desire to live better and healthier lives. I believe further that, for most countries, the road to better and healthier lives is economic growth. Moreover, I believe that the engine of economic growth is the private sector.
Of course, governments will always play a part. Among other things, government must help and protect the poor, provide appropriate public services and maintain public order. And government must balance the many competing forces that shape human life, such as religion, environmentalism and tribalism. And in doing these things, governments need to regulate business, which cannot be expected to regulate itself.
To achieve the goal of human development, I believe that a top priority of government should be the creation of a regulatory environment that will encourage the healthy development of private business. This is particularly true for developing countries, where the need for economic advancement is most acute, including the majority of countries within APEC.
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The role of regulation: China's experience
As I've indicated, I'd like to use China and our own businesses there to illustrate my points about how government regulation should develop in the new global economy.
Since 1978, China has moved away from central planning toward a market-oriented economy. In the two decades since China's "Open Policy" was adopted, Chinese people have created, adapted and developed businesses that have become the key drivers of the economy. And the Chinese economy has, in this period, enjoyed very substantial economic growth.
This process has required not only hardware but also "software," especially human resources. The Chinese government needed to create and develop a completely new regulatory framework that allowed businesses to be created, flourish or perish. To do so, China had to attract international participation while unleashing the entrepreneurial energies of its own people. In addition, China and to tap the resources and expertise of the large overseas Chinese community.
Given the low base from which we started, China has been phenomenally successful in these efforts. However, given the simultaneous global revolution everywhere, China is now facing enormous competition to keep up this growth.
China was more fortunate than many developing countries during the first two decades of our Open Policy. We enjoyed the hypothetical potential of a 1.2 billion-person market and the sentimental attachment of a large and wealthy overseas Chinese community.
Yet these factors alone will not produce continuing in the years ahead. China, like other developing countries, must continue to demonstrate to international companies as well as its own enterprising people that their investments of time and money will be productive and protected.
One consequence is that China has been faced with a need to create a regulatory environment that is sufficiently favorable to attract businesses to invest. The global economy means that investors have a choice. As an investor, I cannot emphasize enough the importance of a good regulatory environment in attracting investment to a country.
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Richina's experience
At this point, it is appropriate for me to say a few words about Richina, the company I represent. This will help me illustrate some points about the role of government regulation in the global economy.
Richina has its origins in a private enquity investment fund formed to leverage international capital and expertise in developing private enterprises in China. Over the past four years, we have invested, both through our fund and in conjunction with a variety of co-investors, some US$100 million in China-related businesses.
Today, we have four operating businesses: two in Beijing and two in Shanghai. These include one of China's largest leather tanneries; the first flexo packaging company in China; the largest tropical aquarium in China and the China's first and only independent media company.
Based on our own experience, I have the following observations of what constitute good regulatory framework for private businesses to grow and thrive:
- Transparency
- Consistency
- Predictability
- Fairness
- Simplicity
- Appropriate control
- Strong enforcement
- Encouragement of competition
I will not go through each and every one of these points. I would prefer instead to review some of the ways in which China's practice of regulation has affected the activities of private investors and business people. In doing this, I will use some examples from Richina's own experience.
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The Chinese experience
In its effort to attract and promote private investment, the Chinese government has done two things of great significance:
First, it declared 20 years ago that China welcomes foreign investment. China subsequently enacted a series of laws to give effect to that policy. The laws clarified the basic framework for investment and granted preferential tax treatment and other incentives to certain forms of investment. This policy has resulted in enormous inflows of foreign direct investment.
Second, and more recently, the Chinese government has also made it clear that privately owned business will be treated equally with state enterprises and encouraged foreign businesses. The state still dominates the domestic economy in China, but this is changing fast and, given my convictions about the role of the private sector in economic development, I believe this is a fundamentally important principle.
However, just declaring that you want investment and a private sector is far from sufficient. China has had to create a regulatory environment for private business virtually from scratch.
For private investors, by far the most important factors in a country's regulatory framework in attracting investment are transparency, consistency and predictability. Government must give people confidence that the rules will not be arbitrarily changed. It must also understand that the new global economy permits investor to punish those governments that make regulatory mistakes, even a country as big and as important as China.
Let me give an example. A couple of years ago the Chinese government announced an end to certain preferential tax treatment for foreign investment projects. It made the mistake of believing that China was so attractive that foreign companies would invest irrespective of those preferences. Wrong! Global companies have a choice about where to invest and do not like "bait and "switch" regulatory regimes. The Chinese government has had to retreat on this particular issue and, I hope, has learned important lessons from the episode.
In addition to knowing that the rules will not be changed, investors must be given confidence that they will be enforced with a high degree of consistency. The consistency issue is particularly important in a big country like China, especially as the government is keen to attract investment throughout the country and particularly in poorer regions of the country.
In our own experience, we have heard enough horror stories about how corrupt local governments in some underdeveloped areas of China ignore central policies, making their own rules and applying them to favor local interests. Richina has decided so far that the risks of local favoritism is simply too great for us to invest in these areas, no matter how attractive the potential returns might be. As a result, the government's aim to promote development throughout the country has been undermined by inconsistency of enforcement.
Even within Beijing, where we do invest, problems of inconsistency can arise. For example, four years ago Richina obtained permission to build an underwater world aquarium in central Beijing. At the time, the understanding was that the municipality would not grant licenses for other aquaria. On this basis, we undertook to make a significant investment.
Following the completion of our aquarium, one other aquarium has since opened and one more is expected. In this particularly case, the Beijing municipality actually lived up to their promise. Unfortunately, other central government agencies residing in Beijing also have the right to approve license of this nature and did so.
In addition to our commercial disappointment, this inconsistency has produced a wasteful duplication in a city that desperately needs other facilities. This point has not been lost on the Chinese government and we understand Premier Zhu Rongji himself has used the Beijing aquaria as an example of inefficient allocation of capital. The case highlights another aspect of regulation in a immature market, that is, that having rules are not enough when there are too many people who can apply them to their liking or worse, break them at their will.
The point here is that just to have rules, even clear and fair ones, is not enough. It is also essential to show people that the rules will be applied and applied consistently. Without that degree of confidence on the part of investors, any country, or regions within the country will find it hard to attract long term investors.
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How much regulation?
Given my own belief in the role of the private sector, I believe the long-term goal for China should be to have a little regulation as is possible, leaving business people to make business decision. This is essentially the Hong Kong model.
For a country like China, making the transition from central planning to the market, deregulation cannot occur all at once. One of the biggest problems China faces is over-investment in certain "hot" areas where market forces simply do not yet function well enough to prevent wasteful investment. One only has to drive around downtown Shanghai for a couple of hours to realize that it will take decades to fill up all the Grade A office towers that were built in the past few years.
The over-investment in real estate in recent years has wasted scarce resources. China can ill afford such waste. During these early stages in the development of a market economy, I believe the Chinese government needs to strike a delicate balance. There is a need to have sufficient regulation, particularly of state assets, so as to avoid waste. At the same time, the private sector must be freed to exercise commercial judgement in putting private assets to work.
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How much encouragement?
For China, where the state sector has played such a big and key role in the nation's economic affairs, it is in my view of paramount importance that the regulatory environment encourages investment. This encouragement should extend not only to international companies but also to local entrepreneurs.
So far, the Chinese government has only "permitted" the existence of the private sector. While it has incentivized foreign investors, it has not done anything to encourage local investors. I believe it must do more.
Using effective regulations to encourage and guide development is of critical importance for a country like China as it moves from a planned economy to a market economy. Government can and must exercise its power in making clear rules for a desired result: in this case, the development of a clearly private sector. China has recently made a very positive move in this direction by forbidding the Chinese army and police from participating in business.
In addition, I believe the government should promulgate detailed regulations to encourage the growth of private companies. One of the most critical needs is to give private companies equal status in accessing the capital markets. Private firms should have clear claims to their property and therefore have access to debt capital. Also, they must have the ability to apply for listing on the country's two stock exchanges based on merit.
Without positive regulations along these lines to strongly encourage the growth of the private sector, China will continue to under-utilize its most valuable resource, an entrepreneurial population.
Finally, the rules of the game must apply equally to everyone. Foreign investors and private interests in China must feel that they can compete fairly with state enterprises. It is therefore important that the person who makes the rules must not also be a player. As a result, for a country like China, where the state once was everything, the government must take urgent steps to prohibit government bodies and institutions �� such as the army �� from actively engaging in business.
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Conclusion
In summary, our experience in China has convinced us that, to attract investment, government must establish and adhere to clear rules. Government actions must instill confidence in people that these rules will only improve over time and will not be erratically revised. The rules must give sufficient room for business people to exercise judgement while permitting government to retain a degree of control and guidance. The rule maker must not also be a player so as to ensure the fairness of the rules. The rules must be enforceable in a relatively simple manner and in all places they apply.
Although I am a great believer in private business, there is no doubt that in developing economies like China, proper government regulations play a very significant part in engendering economic growth. The trick is to get the balance right.
I think China has done a pretty good job so far, and that its experience deserves to be studied. We also believe that the Chinese government �� and all of the APEC governments �� need to understand the changes that are occurring globally and that they must continue to adapt and change the way they regulate business as the process of economic globalization accelerates in the years ahead.
Thank you all for listening.