Back to All Related Articles
From WSJDN
Fast-Track China Is on the Wrong Path
Wu Jinglian, the doyen of Chinese economists, has been credited with repeatedly invigorating debates over the government’s complicated role in China’s fast-track economy since leader Deng Xiaoping inaugurated the reform era in 1978. He’s been called one of the principal architects of China’s modern economic-development process, a distinction he earned by speaking out.
Now 81, the author and economic adviser to the powerful State Council, Mr. Wu remains an advocate of private-sector development in what’s still a government-supervised economy, and he’s worried that a lack of fresh progress in the reforms he has championed could cause big problems.
Mr. Wu spoke with Hu Shuli, editor-in-chief of Caixin Media, a business and financial media group in China. Excerpts:
Caixin: In China in the wake of the financial crisis, a sense of complacency set in. How do you perceive China’s style of macroeconomic management?
Wu Jinglian: The market economy that China established at the end of the 20th century is far from perfect. This incompleteness is mainly reflected in the fact that the state sector still plays the lead role in allocating resources.
Specifically, it’s reflected in the following areas: First, although the state-owned economy does not account for the majority of [gross domestic product], it still controls the “commanding heights” of the economy. And state-owned enterprises continue to hold a monopoly position in industries such as oil, telecommunications, railways and finance.
Second, governments at all levels have tremendous power to allocate important economic resources, including land and capital.
Third, a basis for rule of law, indispensable for any modern market economy, has not yet been established, and government officials at all levels have too much discretionary power. They can interfere in the microeconomic activities of enterprises by such means as directly approving investment projects, requiring administrative licensing for market access and controlling prices.
Caixin: In recent years, there has been an obvious advance of the state at the cost of the private sector. Should the government take the lead in the economy again? People often cite neighboring Japan and South Korea as examples of successful state intervention.
Wu: During the early stage of China’s reforms, political leaders who were enamored of the government-led market economies and authoritarian development models of Japan, South Korea and Singapore believed—and those economists who considered a European- or American-style free-market economy to be the objective of the reforms agreed—that during low levels of market growth, the government has no choice but to assume greater responsibility for coordination.
In the government-led market economies of countries such as Japan, government intervention occurs through the central bank’s giving “window guidance” to credit activities and through the Ministry of International Trade and Industry’s [now called the Ministry of Economy, Trade and Industry] guiding policies on industrial development. But the government does not directly conduct business activities.
This is unlike the situation in China, where the system has evolved from “State Syndicate” or “Party-State Inc.” There is a huge state apparatus that directly manages the national economy and a powerful, state-owned economy that controls the commanding heights of the economy.
Therefore, China’s state sector has more power in terms of economic control and intervention compared with what’s found in other East Asian countries, thus creating a hybrid economy with heavy government control as well as a liberalized market—a “semimarket and semicommand economy.”
Caixin: There was a consensus in moving toward a market economy over the past three decades. Now the debate over state versus market has re-emerged. How do you view it?
Wu: In recent years, political and academic circles in China have entertained opposite views about the existence of a “semimarket and semicommand economy,” and about the strengthening of state control.
Caixin: Can you briefly introduce these opposite views?
Wu: One view is that the Chinese model, dominated by a state-owned economy and a strong government that controls the entire society, can scientifically formulate and successfully implement strategies and policies in accord with national interests. It also says that giving play to the advantages has allowed a concentration of resources to accomplish large undertakings, not only creating a miraculous 30 years of rapid growth, but also allowing the economy to remain unscathed during the high tide of a global financial crisis, and making China the envy of developed nations. They say this makes it fully qualified to serve as a global model.
Another view, diametrically opposed, is that the miracle of China’s high-speed growth over the past 30 years was derived from the fact that market-based reforms liberated the entrepreneurial spirit of the people. It also says growth achieved by relying on the strengthening of administrative controls and large-scale investment of resources cannot be sustained in the long term, and sooner or later they will produce serious economic and social consequences.
Caixin: The momentum of economic reform has dimmed. What are the risks of no action and no reform?
Wu: Under this type of growth model, high-speed growth relies on large-scale investments of resources. Although in the short term the government can rely on forced mobilization and investment of resources, there is no basis to sustain this type of growth. Resource depletion, environmental damage and declining living standards due to this type of growth have become increasingly serious in recent years.
Since the reform and opening period began, China has followed the experiences of Japan and other East Asian countries in adopting export-oriented policies, using demand for exports to make up for a lack of domestic demand and supporting high-speed economic growth. Rapid growth in export trade stimulated rapid development among processing industries in coastal areas that employ hundreds of millions of migrant workers.
However, like Japan, South Korea, Taiwan, and other countries and regions with export-oriented policies, after 10 years of export-driven prosperity, symptoms of macroeconomic problems, such as the excessive printing of currency, asset bubbles and inflationary pressures, have appeared.
Caixin: Will China make the same errors again?
Wu: This is a warning. If China cannot eliminate the institutional obstacles as quickly as possible to transform its type of economic growth, it will inevitably face economic and social disaster.
Second, the strengthening of resource-allocation powers and the increasing interference in economic activities by governments at all levels are causing corruption to rapidly spread and widen the gap between rich and poor. It’s also led to intensifying conflicts between officials and the people, and even to social unrest.
Caixin: How deeply rooted is corruption in China’s current system?
Wu: Between 1988 and 1998, Chinese economists carried out in-depth discussions on rising corruption during the transition period, and proposed a response that would eliminate the institutional basis for corruption and prevent China from becoming part of what Gunnar Myrdal has called the “Asian drama.”
The liberalization of commodity prices at the start of the 1990s cut off profiteers whose means of acquiring wealth stemmed from selling allocation directives for raw materials. However, administrative powers were not withdrawn from the market, which meant that in many areas the basis for rent-seeking remained.
Caixin: How can corruption be stemmed in the near future?
Wu: The system’s evolution is path-dependent, and once it enters a government-led path, vested interests that benefit from rent-seeking activities will inevitably seek to push the government-led market economy into state capitalism, and even crony capitalism. If large strides in reform are not taken to block this path and put China back on the right path, China will be locked into following this path. Once locked, as Douglass North has said, it will be hard to reverse course except through extreme social turmoil.
