Home » Opinion » China Knowledge
SOEs need market competition far more than ownership reform
November 29, 2012, Thursday
|
Print Edition
Print Edition
CHINA has been able to grow continuously at 9.9 percent for the past three decades by tapping into its "advantage of backwardness," a strategy it should be able to continue for another two decades, said Justin Yifu Lin, who served as chief economist and senior vice president for the World Bank from 2008 to 2012.
He spoke at the University of Pennsylvania recently as part of a series of events sponsored by the school's Center for the Study of Contemporary China.
"There's no reason to think that China doesn't have the potential to grow at 8 percent for another 20 years" if the right measures are taken, Lin noted.
The primary obstacles to China's growth are not its rapidly aging population, or ownership of state enterprises, according to Lin, who spent 15 years as founding director of the China Center for Economic Research at Peking University before his tenure at the World Bank.
The biggest challenges the government faces are "distortions" created by three decades of rapid economic growth using a "dual track approach," he said.
The Chinese mainland is one of 13 economies since the end of World War II to achieve a growth rate of 7 percent for 25 years or more by tapping into the "advantage of backwardness," Lin noted. Japan maintained an average growth rate of 9.2 percent for 20 years; Singapore averaged 8.6 percent for 20 years; Taiwan (region) 8.3 percent for 20 years, and South Korea 7.6 percent for 20 years.
Like China after 1979, these countries tapped into this advantage by importing existing technologies and harnessing their labor to manufacture products that the rest of the world wanted.
Before 1979, China was not able to achieve dynamic growth because it was not tapping into this benefit. The government set ambitious Five-Year Plans to modernize heavy industries and catch up with the United Kingdom in 10 years and the United States in 15 years. But as a poor agrarian economy, it could neither obtain nor invent the technology needed and could not afford to compete in such capital-intensive sectors.
Dual-track approach
After 1979, however, China shifted its focus and adopted a gradual, dual-track approach that developed its labor-intensive industries while protecting firms in non-viable sectors. The gradual transition allowed China to grow rapidly without disrupting social stability by reforming markets too abruptly, Lin said.
"If China did not use the dual-track approach, China might have immediately encountered 30 percent or 40 percent unemployment, and we know that is not good for the growth."
But China paid a price for its dual-track reform: income disparity, over-saving, over-investment, insufficient consumption and a huge trade surplus. For 30 years, China's economic policies favored some sectors at the expense of others, resulting in a number of distortions in the economy, Lin explained.
For example, in order to fuel non-viable, capital-intensive sectors, the government created a financial system that provided financing to large state-owned firms at the expense of agrarian households and small and medium-sized enterprises.
Although such groups account for 80 percent of China's employment, they have had little access to financial services, and have struggled to develop.
"If you suppress their development, you suppress the labor force," Lin noted. "If you ask the poor people to subsidize the rich people's growth, the income disparity is going to grow larger and larger."
China now needs to work to remove such remaining distortions, which are no longer beneficial to its growth, Lin said. "After 32 years, state-owned sectors have been reduced from about 60 percent of GDP to about 25 percent of GDP," he added.
A lot of once-weak state-owned industries such as automobiles are now strong. "You don't need to give them protection anymore," Lin suggested. Policymakers "should introduce market competition to force them to further improve.
Competition, not ownership, is vital to China's continued economic growth, Lin noted. "Competition is more important than ownership reform," said Lin of China's state-owned industries.
If China increases market competition, state-owned corporations will need to rise to the challenge and compete with the private sector. Whether the corporations are owned by the government or by shareholders, it is market competition that generates the information management needs, he added.
Lin said that China's aging population "puts pressure" on the economy but wouldn't likely create "a big hurdle" to future growth because China can address it in different ways. China's retirement age right now is very low, so the government could extend it to overcome a shortfall in the nation's labor supply, Lin suggested.
Adapted from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the original version, please visit: http://www.knowledgeatwharton.com.cn/index.cfm?fa=article&articleid=2701
He spoke at the University of Pennsylvania recently as part of a series of events sponsored by the school's Center for the Study of Contemporary China.
"There's no reason to think that China doesn't have the potential to grow at 8 percent for another 20 years" if the right measures are taken, Lin noted.
The primary obstacles to China's growth are not its rapidly aging population, or ownership of state enterprises, according to Lin, who spent 15 years as founding director of the China Center for Economic Research at Peking University before his tenure at the World Bank.
The biggest challenges the government faces are "distortions" created by three decades of rapid economic growth using a "dual track approach," he said.
The Chinese mainland is one of 13 economies since the end of World War II to achieve a growth rate of 7 percent for 25 years or more by tapping into the "advantage of backwardness," Lin noted. Japan maintained an average growth rate of 9.2 percent for 20 years; Singapore averaged 8.6 percent for 20 years; Taiwan (region) 8.3 percent for 20 years, and South Korea 7.6 percent for 20 years.
Like China after 1979, these countries tapped into this advantage by importing existing technologies and harnessing their labor to manufacture products that the rest of the world wanted.
Before 1979, China was not able to achieve dynamic growth because it was not tapping into this benefit. The government set ambitious Five-Year Plans to modernize heavy industries and catch up with the United Kingdom in 10 years and the United States in 15 years. But as a poor agrarian economy, it could neither obtain nor invent the technology needed and could not afford to compete in such capital-intensive sectors.
Dual-track approach
After 1979, however, China shifted its focus and adopted a gradual, dual-track approach that developed its labor-intensive industries while protecting firms in non-viable sectors. The gradual transition allowed China to grow rapidly without disrupting social stability by reforming markets too abruptly, Lin said.
"If China did not use the dual-track approach, China might have immediately encountered 30 percent or 40 percent unemployment, and we know that is not good for the growth."
But China paid a price for its dual-track reform: income disparity, over-saving, over-investment, insufficient consumption and a huge trade surplus. For 30 years, China's economic policies favored some sectors at the expense of others, resulting in a number of distortions in the economy, Lin explained.
For example, in order to fuel non-viable, capital-intensive sectors, the government created a financial system that provided financing to large state-owned firms at the expense of agrarian households and small and medium-sized enterprises.
Although such groups account for 80 percent of China's employment, they have had little access to financial services, and have struggled to develop.
"If you suppress their development, you suppress the labor force," Lin noted. "If you ask the poor people to subsidize the rich people's growth, the income disparity is going to grow larger and larger."
China now needs to work to remove such remaining distortions, which are no longer beneficial to its growth, Lin said. "After 32 years, state-owned sectors have been reduced from about 60 percent of GDP to about 25 percent of GDP," he added.
A lot of once-weak state-owned industries such as automobiles are now strong. "You don't need to give them protection anymore," Lin suggested. Policymakers "should introduce market competition to force them to further improve.
Competition, not ownership, is vital to China's continued economic growth, Lin noted. "Competition is more important than ownership reform," said Lin of China's state-owned industries.
If China increases market competition, state-owned corporations will need to rise to the challenge and compete with the private sector. Whether the corporations are owned by the government or by shareholders, it is market competition that generates the information management needs, he added.
Lin said that China's aging population "puts pressure" on the economy but wouldn't likely create "a big hurdle" to future growth because China can address it in different ways. China's retirement age right now is very low, so the government could extend it to overcome a shortfall in the nation's labor supply, Lin suggested.
Adapted from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the original version, please visit: http://www.knowledgeatwharton.com.cn/index.cfm?fa=article&articleid=2701
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
