Changes to devel­op­ment model

The Pak Banker - - Editorial - Zhang Xiao­jing

The 12th Five-Year Plan pe­riod (2011-2015) is cru­cial for China. So it is es­sen­tial that the de­ci­sion­mak­ers rec­og­nize the op­por­tu­ni­ties and chal­lenges at home and abroad be­fore draft­ing the new devel­op­ment plan to trans­form the coun­try's growth model and in­dus­trial struc­ture. China will still have a la­bor ad­van­tage de­spite the grow­ing pres­sure of an ag­ing so­ci­ety. The high sav­ings rate, which won't change much, is go­ing to dra­mat­i­cally drive China's eco­nomic growth, to­gether with the ac­cel­er­at­ing process of ur­ban­iza­tion and the progress and openingup of the Chi­nese mar­ket.

The global power shift to the East has been dra­mat­i­cally ac­cel­er­ated. The West has been trau­ma­tized by the fi­nan­cial cri­sis, while the emerg­ing economies are re­cov­er­ing vig­or­ously. Ac­cord­ing to the IMF, de­vel­op­ing economies' share in global out­put, in terms of pur­chas­ing power, will sur­pass that of the de­vel­oped coun­tries, for the first time in his­tory in 2013. That is to say, China will be an in­dis­pens­able part­ner ac­tively par­tic­i­pat­ing in re­gional co­op­er­a­tion and global gov­er­nance. This will pro­vide China with a golden op­por­tu­nity to in­ter­na­tion­al­ize its cur­rency and grad­u­ally re­form the global mon­e­tary sys­tem.

How­ever, al­though op­por­tu­ni­ties abound, we should adopt a prag­matic at­ti­tude and pay at­ten­tion to the chal­lenges ly­ing ahead. Since the early 1980s China has en­joyed a com­pa­ra­bly cozy in­ter­na­tional en­vi­ron­ment in which to de­velop its econ­omy, with the global fi­nan­cial cri­sis this is com­ing to an end. It will take a long time for the global econ­omy to trans­form its struc­ture and re­bal­ance. Re­form­ing the in­ter­na­tional fi­nan­cial ar­chi­tec­ture and dis­cov­er­ing the new growth points amid the rise of trade pro­tec­tion­ism will also take time. China needs to ex­pand its do­mes­tic con­sump­tion, as ex­ter­nal de­mand will con­tinue to wither.

China has main­tained 9.5 per­cent eco­nomic growth on av­er­age for more than three decades. Our re­search in­di­cates over this pe­riod an av­er­age 1.3 per­cent of growth had en­vi­ron­men­tal costs. This wor­ri­some pro­por­tion climbed to 2 per­cent over the last decade. Given the re­straints of a low car­bon econ­omy and the drain­ing of la­bor re­sources, the po­ten­tial growth rate for China may grad­u­ally fall be­low 8 per­cent in the next decade.

The so­cial and in­dus­trial struc­ture con­tains more knotty is­sues of im­bal­ance in devel­op­ment. The im­bal­ance be­tween ru­ral and ur­ban ar­eas, in­vest­ment and con­sump­tion, growth and dis­tri­bu­tion, man­u­fac­tur­ing and ser­vice in­dus­tries, fet­ters fu­ture devel­op­ment.

On the one hand, eco­nomic catch­ing-up and fac­tor prices are dis­torted, which causes struc­tural im­bal­ance, wastes re­sources and dam­ages the en­vi­ron­ment. On the other hand, a nar­row-minded fo­cus on growth with­out fair dis­tri­bu­tion leads to a mis­match be­tween eco­nomic and wel­fare progress. Over-de­pen­dence on in­vest­ment and heavy chem­i­cal in­dus­tries are es­pe­cially un­sus­tain­able with the de­ple­tion of nat­u­ral re­sources.

Be­sides, the widen­ing in­come gap has pushed the Gini co­ef­fi­cient of China to a dan­ger­ous 0.46. Sta­tis­ti­cally, the in­come ra­tio be­tween city and coun­try­side res­i­dents is about 3.3:1. But the real gap is much larger con­sid­er­ing the ad­van­ta­geous so­cial se­cu­rity and sub­si­dies for ur­ban res­i­dents. More­over, the share of la­bor wages in na­tional in­come has dropped con­stantly with the ro­bust growth of the econ­omy.

The Chi­nese econ­omy is in­evitably trapped in a self­made dilemma af­ter more than 30 years of dra­matic growth. In­sti­tu­tional re­form is cru­cial to trans­form­ing China's devel­op­ment mode. The govern­ment should play down its role in pro­mot­ing eco­nomic growth and grad­u­ally evolve into a ser­vice-ori­ented or­gan.

Govern­ment in­ter­fer­ence eats into the mar­ket's part in al­lo­cat­ing re­sources and stakes pub­lic fis­cal se­cu­rity on eco­nomic volatil­ity, which also har­bors nu­mer­ous "rent-seek­ing" chances for un­su­per­vised pow­ers. Lo­cal gov­ern­ments' pas­sion­ate in­volve­ment in eco­nomic ac­tiv­i­ties is rooted in the eval­u­a­tion sys­tem of civil ser­vants. Eco­nomic in­di­ca­tors, say GDP growth, are still the most im­por­tant tan­gi­ble nu­meral ref­er­ence to pro­mote of­fi­cials. But only when more so­cial in­di­ca­tors, such as the growth rate of res­i­dents' in­comes, em­ploy­ment, so­cial se­cu­rity and en­vi­ron­men­tal in­dices, are made a de­ci­sive part of the eval­u­a­tion sys­tem can lo­cal gov­ern­ments start se­ri­ously think­ing of chang­ing their roles. In ad­di­tion, more im­por­tance should be at­tached to ad­just­ing in­come dis­tri­bu­tion and in­dus­trial struc­ture through price and tax mech­a­nisms. Only when the prices of en­ergy re­sources are rea­son­able and taxes on re­sources and the en­vi­ron­ment are in place, can the am­bi­tious en­ergy sav­ing and emis­sion re­duc­tion goals be met. Only when di­rect taxes are in­creased by a large mar­gin, can lo­cal gov­ern­ments be prompted to build bet­ter lo­cal in­dus­trial struc­tures rather than just blindly ex­pand­ing the scale of in­dus­try. Only when re­la­tions be­tween cen­tral and lo­cal fi­nances are prop­erly man­aged can the over-de­pen­dence on land trans­fer and lop­sided mal­for­ma­tion of the real es­tate mar­ket be cor­rected. The fast devel­op­ment of Ja­pan be­fore 1980s over­shad­owed the struc­tural de­fects of its econ­omy, which were ex­posed af­ter the mid-1980s when Plaza Ac­cord was signed.

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