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A Decisive Move for the Reform’s Success

Mar 07 , 2011
  • Wu Jinglian

    Researcher, Development Research Center of State Council

The recent general consensus in the government, business and academic circles is that the 12th Five-Year Guideline marks a new historic start for China’s economic development. Opinions differ, however, about the new economic pattern China faces and the ways to cope with it. Some researchers have contended that one feature of the new pattern is that China has rapidly rising up from a low- and middle-income country to a moderate or even high-income one, while some others have spotlighted that China’s imminent play of a major or even decisive role in the world. There are also people who believe that what characterizes this new economic pattern is China’s fast adjustment of its economic structure toward the “people-oriented” direction, or its shift of focus from unbalanced development to balanced progress.

I tend to agree with the last opinion. However, there are also different understandings as to how to define balance, imbalance and rebalance. In my opinion, one characteristic of the new pattern is that the previous fragile balance between the two types of unbalanced economies in the world may no longer continue. The new pattern in this new era will be characterized by steps toward rebalance, moves decisive for the steady development of the global economy in the future.

Rebalance – the Only Way out of the Crisis

The first task is to define balance, imbalance and rebalance. This author believes the most important characteristic of the global economic system at the previous stage was the complementation of the two types of unbalanced economies. The first type is represented by the Chinese economy, whose domestic imbalance is mainly manifested by its high savings rate,which stands at 50% or even higher right now,and low consumption ratio. The second type, typically manifest in the US economy that has been suffering from internal imbalance, features low savings but high consumption. None of these two types of unbalanced economies can last by themselves. They can achieve certain balance, however, if brought to complement each other, something I would like to term as “mirror complementation”. Thanks to this type of complementation, balance does have been achieved in the global economy through trade and capital flow between the two,mainly via foreign exchange payments, current account deficits or surpluses, as well as the inflow and outflow of capital. But this has been a balance of great fragility that has given rise to lots of economic and social problems in China and the whole world. In China, for instance, domestic demand has become insufficient, wage growth for the working populace has remained unduly slow, and the income gap has widened. It has also caused mounting trade frictions among countries and put China in an extremely passive position in terms of macro-economic policy. To maintain such a balance, monetary policies have been defiled to allow big increase of money supply, which has led to excess liquidity, capital bubbles and inflation risks.

To rise out of the crisis and achieve true economic recovery, it is necessary to solve the problem of rebalance. Each country must first of all rebalance its own economy so as to achieve the rebalance of the global economy.

Diagnosis for China’s Domestic Imbalance

China registered an economic growth rate of 9.1% in 2009, an achievement made mainly through its implementation of extremely loose macro-economic policies. In respect of its demand structure, net exports (trade surpluses) continued to drop while consumption saw no noticeable expansion. Massive investment served as the chief driver behind the growth.

To address the domestic imbalance, it is necessary to identify its causes and take pertinent measures. Based on their in-depth studies of the causes of the domestic imbalance since 2005, Chinese economists have agreed that the underlying cause lies in the economic growth pattern, pinpointing the four elements of production – natural resources, capital, labor and human capital as the core issue and centering their studies on the structures of these elements and their respective contributions to economic growth.

Incomes from capital and the ownership of natural resources mainly flow to the government and the wealthy, who have a high propensity to save but a low propensity to consume. On the other hand, professional workers and ordinary workers have a high propensity to consume but a low propensity to save, although their share of the national income has kept dropping. The result is the development of imbalance of the whole economy, and the growing imbalance between savings and consumption.

One solution for the unduly high savings rate is investment. China’s investment rate stands at a very high level, around 46-47%. Investment, however, does not provide a full solution because the domestic demand is still insufficient. Another solution is to offset the insufficient domestic demand with net exports (or trade surpluses). Once again, however, this has caused a series of economic and social problems that have haunted our nation for years. To maintain a certain economic growth rate without changing this growth pattern, investment, especially government investment, has had to be increased, creating a vicious cycle. The fundamental solution is, therefore, to transfer the economic growth pattern by improving the role of labor, especially that of human capital, and increasing professionals’ contribution to the growth. This is the only way to increase the proportion of the incomes of workers and professionals in GDP, to improve the proportion of consumption in GDP, and to substantially remedy the inherent imbalance in China’s economy.

Reform – An inevitable step to promote transformation of growth modes

However, 30 years have passed since this remedy was first prescribed. In the early 1980s, the CPC Central Committee and the State Council made the decision to shift the focus of economic work to the improvement of economic efficiency. By 2000, although China had exceeded the goal of quadrupling its GDP, it failed to realize the premise. The Ninth Five-Year Plan also called for “two fundamental shifts”: the shift from a planning economy to a market economy and from extensive growth to intensive growth. Ten years later, the 11th Five-Year Guideline once again set “the transformation of the mode of economic growth as the guideline”. But why had the China failed to achieve the objective set in the early 1980s? Its policy makers tried to find the answer when mapping out the 11th Five-Year Guideline, and came to conclude that the fundamental reason came from structural obstacles. They listed several structural obstacles, and pinpointed the underlying one: excessive government power to allocate resources as enjoyed in the old planned economy.

Experiences over the past years have shown that the fundamental solution for transforming the economic growth pattern is to solve structural problems. Apparently, the only way to solve these problems is to carry out an all-around structural reform of our economic, cultural, social and political systems.

The CPC made the right decision at the 5th Plenary Session of its 17th Central Committee. The communiqué of the session sharply revealed the core of these problems and prescribed their solutions. There is a paragraph in the communiqué that demands deep thinking: “Reform is the powerful driving force for expediting the transformation of the economic growth pattern. We must promote all-around reform in every field with greater resolution and courage, vigorously facilitate the structural reform of the economic system, actively and steadily promote the structural reform of the political system, and accelerate the structural reform of the cultural and social systems so that we can better adapt our superstructure to the development of economic foundations and provide a reliable insurance to our scientific development.”

This is a decisive step. It is not a single action. Instead, it involves an all-around reform designed to transform the economic growth pattern, a step that calls for our assiduous endeavors.

Wu Jinglian is a researcher with the Development Research Center of the State Council. Source: China’s Reform, Issues 1&2 (2011).

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