Economic gears need important, major overhaul
By Chi Fulin |
March 31, 2012, Saturday
|
Print Edition
Print Edition
HEAD of China (Hainan) Institute for Reform and Development
Consumption will determine China's growth prospects. In the next decade, China doesn't lack for new growth drivers to keep it on an upward track. However, the key point lies in whether China can effectively release its consumption demand. If consumption potential is fully tapped, total consumption will rise above 60 percent of GDP, while the share of investment will return to a more normal level of below 40 percent. In that event, China is likely to maintain annual economic growth of around 8 percent in the next 10 to 20 years.
But if the consumption rate is stagnant or even declines and investment growth continues to outpace consumption, China will face risks, and it will be difficult to achieve 8 percent growth, and that has the potential to trigger an economic crisis.
We should proceed in two phases: In the first, we should boost the consumption rate during the 12th Five-Year Plan period (2011-2015) to 55 percent from 48 percent. That would entail raising the household consumption rate to 45 percent from about 34 percent.
By 2020, we should further boost the consumption rate to about 60 percent, with household consumption rising to about 50 percent.
Despite great consumer spending potential, the consumption rate has been declining year by year. That results largely from a delay in reforming income distribution. Under the scenario outlined, we can't postpone that reform any longer.
Chen Zhiwu
Professor at Yale University
It has been fashionable to call for China to shift from an investment-driven and export-oriented growth model to one that is more driven by domestic consumption, especially by household consumption. But, in reality, for the past 17 years, dependence on investment and exports has increased steadily, with household consumption as a percentage of GDP declining from about 45 percent back in 1995 to 35 percent in recent years.
Why has it been difficult for China to reduce its dependence on investment and increase household consumption?
The answer lies in an unbalanced taxation system, the domination of state ownership and government control of economic decision-making and resource allocation. The whole system is set up to be investment-friendly and private consumption-averse.
Government fiscal revenue (excluding off-balance items such as land sale proceeds, various fees and profits of state-owned enterprises) increased 9.2 times between 1995 and 2010. During the same period, per capita disposable income increased by 2.3 times for urban residents and by only 1.8 times for rural peasants.
Physical infrastructure and large industry projects have been (spending) favorites because of their scale and immediacy. Until a couple of years ago, no significant expenditures were devoted to items related to citizens' lives, education and health care.
State ownership is a major depressant of private consumption growth in China.
Consumption will determine China's growth prospects. In the next decade, China doesn't lack for new growth drivers to keep it on an upward track. However, the key point lies in whether China can effectively release its consumption demand. If consumption potential is fully tapped, total consumption will rise above 60 percent of GDP, while the share of investment will return to a more normal level of below 40 percent. In that event, China is likely to maintain annual economic growth of around 8 percent in the next 10 to 20 years.
But if the consumption rate is stagnant or even declines and investment growth continues to outpace consumption, China will face risks, and it will be difficult to achieve 8 percent growth, and that has the potential to trigger an economic crisis.
We should proceed in two phases: In the first, we should boost the consumption rate during the 12th Five-Year Plan period (2011-2015) to 55 percent from 48 percent. That would entail raising the household consumption rate to 45 percent from about 34 percent.
By 2020, we should further boost the consumption rate to about 60 percent, with household consumption rising to about 50 percent.
Despite great consumer spending potential, the consumption rate has been declining year by year. That results largely from a delay in reforming income distribution. Under the scenario outlined, we can't postpone that reform any longer.
Chen Zhiwu
Professor at Yale University
It has been fashionable to call for China to shift from an investment-driven and export-oriented growth model to one that is more driven by domestic consumption, especially by household consumption. But, in reality, for the past 17 years, dependence on investment and exports has increased steadily, with household consumption as a percentage of GDP declining from about 45 percent back in 1995 to 35 percent in recent years.
Why has it been difficult for China to reduce its dependence on investment and increase household consumption?
The answer lies in an unbalanced taxation system, the domination of state ownership and government control of economic decision-making and resource allocation. The whole system is set up to be investment-friendly and private consumption-averse.
Government fiscal revenue (excluding off-balance items such as land sale proceeds, various fees and profits of state-owned enterprises) increased 9.2 times between 1995 and 2010. During the same period, per capita disposable income increased by 2.3 times for urban residents and by only 1.8 times for rural peasants.
Physical infrastructure and large industry projects have been (spending) favorites because of their scale and immediacy. Until a couple of years ago, no significant expenditures were devoted to items related to citizens' lives, education and health care.
State ownership is a major depressant of private consumption growth in China.
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