Top economist says it’s now time to remove resources bottlenecks
Print Edition
China is at a stage in its development where it is necessary to remove the distortions and bottlenecks in the mechanism for resources allocation, former World Bank chief economist Justin Yifu Lin said yesterday.
“It’s time to remove these kinds of distortions and the Chinese leadership certainly understands this issue very well,” he told the inaugural Singapore Management University China Forum.
Lin, honorary dean and professor at the National School of Development of Peking University, said China was “ready” to pursue reforms to allow the market to play a fundamental role in the allocation of resources in its economy.
The country was already at a stage where it was no longer short of capital and had an advantage in capital-intensive industries such as automobile and equipment manufacturing, he said.
China has moved gradually from a planned economy to a market economy, but it had also adopted a dual-track approach over the years. Lin said this allowed it to sidestep the trap where economic sectors collapse when all distortions are removed at once.
As for the fundamental drivers of growth, Lin highlighted constant technological innovation and industrial upgrading.
The world’s second-largest developing economy started with labor-intensive industries where it had a comparative advantage after it opened up to foreign investment. But now it was starting to have an advantage in capital-intensive sectors.
This meant that the distortion in resources allocation that has households and small firms effectively subsidizing the operations of big firms seemed increasingly absurd.
Lin said the distortions and bottlenecks are a legacy from the era of a planned economy. The big firms, many of them state-owned, have access to cheap credit, whereas that is difficult for small firms and households.
China has already scrapped the cap on lending rates and the next step would be to remove the limit on savings rates, thereby achieving an interest rate determined by the market, he said.
There was a need for more smaller financial institutions operating in provincial or local markets, Lin said, adding he remained confident of China’s growth.
Its per capita income in 2008 was around 21 percent of the US per capita GDP. This was like Japan in 1951, Singapore in 1967 and South Korea in 1977, and these East Asian economies managed to achieve average growth rates between 7.6 percent and 9.2 percent in the 20 years since.
It is possible for China to have another 20 years of sustained growth of around 8 percent per year from 2008, Lin said.
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