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Economists search for new growth paths
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SOBER analyses by reputable economists is critically needed amid China’s ongoing economic restructuring efforts.
Noted Chinese scholars and officials from the Asian Development Bank (ADB) gathered and shared their thoughts on how to get the Chinese economy back on track at a recent symposium at Shanghai’s Asia-Pacific Finance and Development Institute. The symposium was held to commemorate the 30th anniversary of China’s cooperation with ADB.
Professor Zhang Weiying, who teaches at the National School of Development, a think tank affiliated with Peking University, pointed out that China’s spectacular growth in the past 30 years can be attributed to, among other things, improved efficiency of resource allocation.
Chinese entrepreneurs have benefited enormously from what he calls the “arbitrage model” since the start of the country’s economic reforms, meaning that they have taken advantage of the gap between Chinese and foreign prices for resources like labor, land and raw materials.
But as this gap shrinks, arbitrage opportunities are steadily running dry, suggesting the necessity of a new path to growth. This is where, in Zhang’s opinion, innovation and entrepreneurship come in. Unlike the quick, short-term gains made through arbitrage, promoting innovation is a long-term endeavor. It will take years, if not decades, to realize the benefits of such efforts, he said.
Although Chinese authorities have instituted changes and put in place mechanisms intended to foster innovation, these are not necessarily enough to incentivize a popular drive to innovate, he said.
According to him, the biggest thing lacking in China’s ongoing efforts to build a true market economy is an equally strenuous commitment to a sound legal system that genuinely enshrines property rights.
Rule of law
As the cornerstone of innovation, stronger property rights protection, especially of intellectual property rights, is needed to ease the sense of insecurity felt within the local business community, he observed.
A longtime champion of property rights, the Peking University professor remarked that a key challenge China has to meet in the next 20 years or so is how to update its legal system to ensure the arrival of a society governed by the rule of law, rather than the rule by law.
In response to the well-trodden criticisms of China’s state owned enterprises as inefficient and monopolistic behemoths, Takehiko Nakao, President of ADB, said there is much work China can do to enhance economic efficiency.
For example, it can consider deregulating and opening up some industries for free competition. Such policy suggestions are hardly new, yet still haven’t materialized on a large scale.
Reflecting on ADB’s 30-year partnership with China, Nakao recalled a comment economist Paul Krugman made in the 1990s about what he saw as the ultimate unsustainability of Asian growth owing to a lack of innovation. As Krugman saw it, growth in Asia was fueled mainly by pooling and utilizing resources like labor, land and capital, with little innovation to speak of.
Nakao took issue with the Nobel laureate in Economics, saying that proper mobilization of resources in support of growth is, in itself, a big step forward as it requires an innovative spirit that still eludes many underdeveloped nations in Asia and beyond.
Nakao concluded that the pooling-utilization model deserves more credit than is given by Krugman.
In assessing the biggest risks threatening China’s economic well-being, Professor Lawrence Lau with the Chinese University of Hong Kong dissented from the consensus view that the country’s debt-to-GDP ratio is a harbinger of a debt crisis. According to Lau, public debts, which actually account for roughly a fifth of China’s GDP, are still low by global standards and fairly manageable.
The real danger he sees lies in the dearth of effective demand.
At a time when just about every major industry is battling overcapacity, it should not be forgotten that the private sector is usually unable to generate demand on its own.
“What can they invest in? Steel, cement, glass? Everything is in excess supply,” said Lau.
He believes now is the time to look at increasing the provision of public goods, in areas like the environment, education and health care. A good place to start would be cleaning up the air, an undertaking that would benefit everyone.
He suggested that all this requires government leadership at both the local and central levels, since the private sector is unlikely to play a leadership role in these areas.
However, he warned about the pitfalls of this typical Keynesian approach. The best example of this is the lingering fallout from the 4 trillion yuan (US$583 billion) stimulus package adopted in 2008 to generate demand and stimulate the economy. “While it did sustain growth, the government has sort of overdone it,” Lau claimed.
He remains upbeat nonetheless about the prospects of China becoming a “moderately prosperous” society by 2020, with per capita GDP exceeding US$10,000 — a goal outlined in an economic blueprint issued several years ago.
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