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Op-Ed Contributors

Economy needs to break from its past

By Wu Jinglian (China Daily)
Updated: 2010-03-26 07:51

The financial crisis is teaching us that the nation's long-held growth patterns could make its financial system very vulnerable. Economic growth that mainly depends on investments and exports could cause insufficient domestic demand, exorbitant savings and investments rates. This in turn will trigger a surplus liquidity, asset bubbles and even inflation.

So what tactics should the government adopt to overcome an economic crisis? Generally, fiscal and monetary policies in place now are adequate remedies. To expand demand through relief and take government credit as a substitute for vanished market credit is indeed a short-term solution, but it's not sustainable. It actually might lead to an outbreak of a second crisis because the market has been braced by large amounts of currency issued by the authorities and more virtual wealth has accumulated in the financial system.

Capital and natural resources (land) have been the main production elements fueling our economic growth in the past. Well, now it should turn to employment and human capital. Under the current system, the total social income are mainly allocated to owners of capital and land, namely governments at various levels - which are the de facto holders of land and the major holders of capital - as well as the rich, who invest heavily to make a profit. But domestic consumption could be boosted mainly by laborers and professionals, which means the government should increase the demand for professionals.

Most of the previous Five-Year plans have emphasized the importance of transforming how this economy grows. But there are too many institutional barriers posing a fundamental problem, and improvements are urgently needed in innovation and for future entrepreneurs.

Institutional barriers exist for four reasons: First, the government still enjoys a dominant status in allocating resources rather than allowing the market to do this; second, local GDP growth is still the main standard in assessing officials' performance; third, the current fiscal system is somewhat opaque, including sources of revenue and expenditures.

Finally, there needs to be more market-oriented reform because the prices of upstream products and raw materials are not decided by the market and are subjected to administrative interference, which leads to a huge waste of resources and a surge in frivolous projects.

To transform the economy, the government should first reform processing and manufacturing, which accounts for a high proportion of our economy. Compared with our neighboring countries, China's advantage in cheap labor forces is declining, forcing the nation to intensify efforts to promote research and development, brand marketing, supply chain management, financial services and after-sale services.

Second, we should cultivate newly emerging industries and try to gain a foothold in establishing international technical standards, such as the fusion of PSTN (public switched telephone network), computer networks and cable TV networks, mobile standards, electric vehicles, efficient use of coal, and new energy development.

To remove institutional barriers, we need to continue reform in the economic, social and political systems to create an environment in which different businesses can be treated equally, and create a legally sound environment for innovation and entrepreneurship.

Monopolies could lead to the spread of corruption, and market reform should not be blamed for the results, as some critics have argued. The call for using more administrative intervention to prevent monopolies doesn't make any sense; it will only bring more opportunities for more monopoly privileges. So, there is absolutely no way out for countermarching market-oriented reform.

In addition, we used to rely on government-led planning and government's allocation of human capital, material and financial resources, but this is not conducive to technological innovation and industrial transformation. The government needs to formulate preferential policies on technology innovation and new products and form a combined force with the law of market economy.

The government should set boundaries for itself and administrative license. Market access permission against the law should not be approved.

The author is a researcher at the Development Research Center of the State Council. The story first appeared in the National Business Daily.

(China Daily 03/26/2010 page8)