This focus on the physical barriers to productivitiy increase and the policy-induced constraints to diversification because of the emphasis on grain production is not just overstated. It also tends to underplay some of the consequences of agricultural reform for welfare and growth. Thus, according to some observers the phenomenon of "floating" migrant workers is in large measure the result of a loss of the institutional ability to mobilize and utilize labour resources, which was characteristics of the commune system of production. An example of such utilization was the pooling of off-season labour resources in building rural infrastructure. The collapse of the latter not only affected employment adversely, it also resulted in the neglect of the maintenance and strengthening of communal infrastructural facilities, with adverse consequences for productivity. But a perspective which has as its prior the view that Chinese reform was positive but inadequate inevitably ignores such questions.
 
Consider also the puzzle as to why rural unemployment has increased despite the success of the TVEs. The growth of such enterprises in the rural as opposed to the urban areas was partly because of the opportunity for sustaining ancillary activity and contract work at extremely low labour costs that excess labour resources in rural areas provided. Temporarily, at least, the government's decision to encourage TVEs as a part of the process of "growing out of the plan" worked because it facilitated the rural outsourcing of such activities, to sustain low cost production, including for export markets. As a result, the new system appeared to be a better way of absorbing rural surplus labour. However, evidence to the contrary is growing. The demand for such outsourcing was inadequate to absorb the growing rural labour surplus in full. Further, such employment tended to be unevenly distributed. Such industries have developed mostly in coastal provinces and are reportedly much less visible in the interior provinces, especially in the west of the country. More recently, there are signs of stagnation and decline in the TVE sector, with employment in rural enterprises falling by close to 2.5 million since 1996.
 
Glossing over all this the OECD study asserts that worseninf TVE performance is due to fundamental structureal problems. These include financial problems, operating inefficiencies, loss f competitiveness due to distance from infrastructure. Hence, "even under optimistic assumptions about how much their performance can be improved, REs (rural enterprises) are unlikely to be able to take up more than a fraction of the rural workers who will need to find jobs outside the agricultural sector."
 
What then is the answer? Urban industry does not offer much of an alternative. The OECD's study points out that: "As in agriculture, the dynamism to industry imparted by structural shifts seems to be weakening. Industry financial performance has deteriorated sharply since the early 1990s. Profits fell to nearly zero in 1998, with more than one-third of enterprises making losses, and despite noticeable improvement during 1999-2001, financial performance remains weak in many sectors. Growth in industry employment and capital spending has declined markedly. The deterioration has been pervasive and not simply confined to SOEs. The performance of collective enterprises has worsened nearly as much as that of SOEs; and the SME sector generally is in particularly dire straits."
 
With foreign investment flows into China already far in excess of other developing countries, and with a predominant share coming from Hong Kong, Taiwan and other Asian countries with ethnic Chinese populations, it is unlikely that this sector can even sustain its growth, let along help employ the unemployed. In the event, we are likely to see a worsening of unemployment, because even the high growth associated with the unusual combination of more than two decades of rapid expansion accompanied by persisting and even growing unemployment in the Chinese economy is no more a reality.
 
Given all this it should be obvious that this is hardly the point in time when Chinese producers should be subjected to increasing competition from imports and State-owned enterprises should be restructured through downsizing or outright closure. But these are inevitable consequences of China's WTO accession commitments, rendering the argument that this wide-ranging commitment is an appropriate deepening of reform questionable. But the study advances that argument by attributing poor industry performance to inefficiency resulting from wrong investment decisions and protection and cost ineffectiveness because of social burdens imposed on them. Even if this were true, reform in a period when international competition is expected to increase would only result in closure. And given the dependence of many local industries on the SOEs, the process is likely to be cumulative.
 
Yet, in the OECD's view, more reform is the answer. "Trade and investment liberalisation should help to improve some of the mechanisms needed to accomplish the necessary restructuring, by increasing competition, expanding opportunities for alliances between foreign and domestic firms, and spurring government officials to take measures to improve the business environment. However, key obstacles that now exist to improvement in industry performance, such as continued government interference in enterprise management, poor financial discipline, and restrictions on exit and other modalities for re-deploying resources, need to be addressed if the potential benefits of trade and investment liberalisation are to be realised."
 
The difficulty is that the OECD's economists are not even satisfied with the extent of reform implied by WTO commitments. The study argues: "In China's present situation, the outcomes of particular reforms depend increasingly on the interaction among measures taken by the economy's key actors – government, enterprises, workers, and the financial system – acting in markets whose functioning is shaped by key framework conditions such as competition, property rights, and corporate governance. Rather than emphasising particular sectors, reforms now need to focus more on economy-wide policies to promote more efficient allocation of resources and to bolster the effectiveness of markets."
 
Two areas into which the extension of reform is emphasized is the financial sector and macroeconomic policy. Lamenting that the financial sector is still dominantly state-owned, the report argues that credit is inefficiently allocated, with state owned enterprises obtaining the bulk of funding, to ensure that they operate with soft budget constraints. This is indeed true since the role of credit in the Chinese system, hitherto, was a means to realize targeted production as per plan. If in the name of bank restructuring SOEs are to be now starved of funds, leading to the collapse of such enterprises, the banks themselves would not be able to survive unless they are recapitalised by the State. As the study itself notes: "In a proximate sense, the ongoing problems of financial institutions reflect the poor condition of their enterprise customers. A severe vicious circle has developed. Poor enterprise performance contributes to bank non-performing loans and lowers bank profits by eliminating much of their core market."
 
Banks after all cannot restore the health of real economy enterprises. That has to be the result of appropriate corporate restructuring and counter cyclical macroeconomic policies. But with the customs duty reductions and the tax rationalisation associated with reform having reduced the revenues of the State substantially, the manoeuvrability of the State is already substantially circumscribed. Though "official figures suggest that China's fiscal position is healthy and that there is ample scope for fiscal expansion," this picture is misleading because it is widely acknowledged that the government will need to take on debt obligations not yet explicitly recognised. The main obligation, the funds needed to restore solvency to financial system, could more than double the government debt ratio initially."
 
Given these factors the challenge in China is to restore the room for manoeuver of the state so that it can restore some dynamism to the system. This would require reducing rather than increasing China's integration into the world system. But though its own analysis points in that direction, the OECD given the predilections of its member governments to obtaining a foothold in the large, even if stagnating, Chinese market, is forced to argue to the contrary.