After Japan and South Korea, China is arguably Asia's next giant. Starting from a relatively egalitarian base, in terms of asset and income distribution, created during the years of central planning, it has over the last two-and-a-half decades grown at a remarkable pace within the framework of an increasingly market-friendly regime. Per capita income has increased more than four-fold from $168 in 1980 at 1995 prices to $727 in 1998. Growth over time was indeed uneven with the annualised rate of growth of three-year-average GDP figures rising from a little less than 7 per cent in 1982 to a peak of close to 14 per cent in 1985, then falling continuously to less than 6 per cent by 1991, rising again to the above 13 per cent level in 1994 and then falling to less than 8 per cent in 2000. However, the average rate of growth has indeed been high.
 
This increase in per person incomes has occurred in a period when China has witnessed major reform of its economic policies, starting with reform in the agricultural sector in 1978. Later, beginning in the mid-1980s, China opened its economy to inflows of goods and investment. Though a range of non-tariff barriers still remain in place, the average tariff rate on imports has fallen from 40 per cent in the early 1990s to 15 per cent in 2001. Foreign investment flows, which increased from around $1 billion a year to $3.5 billion during the 1980s, mainly as a result of investment in special economic zones, jumped to $37.5 billion in 1995 and $40.3 billion in 1999. As a result, during the second half of the 1990s, FDI inflows amounted to over 5 per cent of GDP and accounted for well over 10 per cent of gross capital formation. There does seem to be evidence of a virtuous link between such FDI flows and China's export performance. In the event, China's exposure to trade has grown substantially, with the ratio of imports plus exports to GDP rising from 12 per cent in 1980 to 42 per cent in 2000.
 
This and other evidence has been collated in a recently released 800 plus-page study titled "China in the World Economy: The Domestic Policy Challenges". As is to be expected the study uses the link between reform, growing trade dependence and high growth as the basis for two generalisations. First, that if appropriately carried out, a shift from an interventionist to a market-friendly regime, which facilitates international integration, is the best route to high growth. Second, that to overcome the deceleration in growth that China has been recently experiencing, the best strategy would be intensify the reform effort. Thus, China's commitments as part of its accession to the WTO, which go far beyond what many other middle income countries have adopted, is seen as a positive step forward.
 
However, while declaring that China's progress during the economic reform era is one the great success stories of the post-war era, the study points to a number of emerging areas of concern in recent performance. These include the evidence of a loss of dynamism in industry and agriculture, of growing unemployment and of substantial and rising regional disparity. Grain production has stagnated in the early- and late 1990s fell in 2000 to its mid-1990s level. Industrial growth has fallen quite sharply after 1993. The town and village enterprises, which were a much-noted source of dynamism in the Chinese economy, are faced with difficulties. This is of significance, since the TVEs were the largest contributor to growth in aggregate GDP and employment from the mid-1980s through the  early 1990s, and by 1996 employed 131 million workers, or 28 per cent of the rural workforce. The development of rural enterprises in turn has transformed rural income generation, with more than 40 per cent of rural incomes now coming from non-agricultural activities. Unemployment has been on the rise, which in its starkest form is reflected in the phenomenon of "floating" migrant workers in search of underpaid informal sector employment, estimated at around 100 million. Finally, China's growth during the 1990s has been accompanied by growing inequality among its regions. Growth has been most rapid in the coastal provinces, followed by provinces in the central region, and least rapid in the western regions.
 
These trends have generated some degree of skepticism regarding the evidence of rapid growth over long period in China as well as a degree of disillusionment with the reform itself. Surprisingly, it is precisely at this time that China has decided to accept extremely tough conditions in terms of trade, foreign investment and financial sector reform as commitments made in return for WTO access. This, many argue, would not merely ensure a qualitative shift in the nature of the economic regime in China, but would accentuate the tendency towards sluggish growth and weakening welfare.
 
It is that argument that the OECD study seeks to challenge. While admitting that the evidence is growing that "the important engines that have driven China's growth in the past have lost their dynamism", the study advances two theses. First, it holds that even though China is even now as open as many WTO members and though the depth and breadth of its WTO accession commitments to increase access to its domestic economy are far greater than those agreed to by previous adherents to the WTO, China's accession is merely an important and much-needed milestone in its reform path rather than a change in direction. Second, to reverse the tendency towards loss of dynamism and maximize the benefits of the imminent increase in the openness of its economy, China would have to go further than its WTO commitments and undertake a set of complementary and far-reaching reforms. The intent of the study is clearly to remake China in the image of the developed capitalist world, if that is possible at all, ostensibly because "to reap the full benefits of further integration in the world economy, the Chinese economy must undergo fundamental adjustments."
 
There have been four elements to the reform in China adopted so far. The process began with reform in the agricultural sector, which displaced the pre-reform commune economy. This was replaced with a household based system in which individual households that leased land from the collectives were provided autonomy in production decisions. Further, market forces were given a greater role and government intervention in the production, pricing and marketing of most crops, excepting grains, was substantially reduced. Second, the government permitted and sought to encourage investments outside the state owned industrial sector, initially in the town and village and other collectively owned enterprises, then in foreign funded enterprises and more recently in domestic private enterprises. Third, the government began to liberalise the import and export trade, by reducing tariffs and easing non-tariff barriers on a range of exports. Finally, the government has sought to encourage foreign investment in special economic zones and elsewhere.
 
Each of these the report argues contributed significantly to increasing productivity and stimulating income growth. The problem is that more recently their role as stimuli has substantially waned. The waning of the effects of these stimuli is attributed in large part to the fact that the specific form which reform took in each area had positive effects in particular segments of the concerned sector. But once the slack in those segments had been taken up, the persistence of dynamism required not just the intensification of reform in the affected segments, but the extension of reform to other segments and to economy-wide policies. While China's WTO access commitments partly do involve such an extension, they would be inadequate if the benefits from opening up are to be maximized.
 
In agriculture, the loss of dynamism is attributed to the fact that there are now binding barriers to increases in agricultural productivity. Fertiliser use is already exceptionally high, pesticide application cannot be increased because of environmental problems, and there is a growing shortage of water in many areas. This, according to the study, implies that agricultural production must diversify away from land-intensive to labour-intensive products like horticulture. But such diversification is constrained by the grain procurement system maintained for food security reasons, which has ostensibly contributed to growing surpluses, falling prices, reduced rural incomes and constrained rural consumption.