No­bel-win­ning econ­o­mist sees chal­lenge

China Daily European Weekly - - Cover Story - By AN­DREW MOODY an­drew­moody@chi­

Michael Spence be­lieves that build­ing on the suc­cess of re­form and open­ing-up will prove to be a ma­jor chal­lenge for China. The No­bel eco­nom­ics prizewin­ner says the key to suc­cess in China’s new era will be how it en­gages with the rest of the world.

“If you look at the past 40 years (since Deng Xiaop­ing launched re­form and open­ing-up in 1978), all the ac­com­plish­ments have largely been achieved by in­ter­nal re­forms and by deal­ing in­ter­nally also with all the bumps along the road,” he says.

“In­creas­ingly, China’s suc­cess is go­ing to be con­nected with deal­ing with both in­ter­nal things and also with the ex­ter­nal en­vi­ron­ment. If you take away the fac­tor of the global econ­omy, no­body can grow, not even China.”

Spence, who is a pro­fes­sor of eco­nom­ics at the Leonard N. Stern School of Busi­ness at New York Uni­ver­sity, was speak­ing af­ter tak­ing part in a panel dis­cus­sion, “China’s Re­form and Open­ing-Up: 40 Years On” at the China Devel­op­ment Fo­rum.

“China has ben­e­fited from the se­cond-mover ad­van­tage, which is some­times also called the catch-up ef­fect, where you have very rapid growth when there is a huge gap be­tween a de­vel­op­ing econ­omy and that of the de­vel­oped economies. As this gap gets smaller, the catchup ef­fect be­comes less pow­er­ful,” he says.

Spence says China ben­e­fited from a unique “sweet spot” in eco­nomic his­tory when its econ­omy re­ally took off from the 1990s onward.

“I didn’t think it would have been able to do it in the early post-war years. World trade was only just open­ing up then. By the time China got around to de­vel­op­ing, Ja­pan had be­come a pow­er­ful econ­omy, South Korea was en­ter­ing a mid­dle-in­come tran­si­tion and the econ­omy of Tai­wan had also taken off,” he says.

“From the 1990s onward, China opened up in­ter­nally and re­moved a bunch of re­stric­tions, in­clud­ing ma­jor State-owned en­ter­prise re­form, and then you had the WTO ef­fect (when China joined the World Trade Or­ga­ni­za­tion in 2001), which cre­ated this tur­bocharged first decade of the 21st cen­tury.”

Spence, a reg­u­lar speaker at the an­nual fo­rum held at the Diaoyu­tai State Guest­house in Bei­jing, be­lieves China has made sig­nif­i­cant progress over the past five to 10 years in re­struc­tur­ing its econ­omy away from be­ing in­vest­men­tand ex­port-driven to­ward be­ing led more by con­sump­tion and ser­vices.

“It has been very suc­cess­ful, both mea­sured in out­comes such as the ris­ing in­come lev­els and the struc­tural changes in the econ­omy. You have had a lot of ser­vices busi­ness be­ing de­vel­oped, cre­at­ing em­ploy­ment. You have had this big devel­op­ment of e-com­merce, mo­bile pay­ments and this grow­ing mid­dle class gen­er­at­ing huge do­mes­tic de­mand,” he says.

“Peo­ple would have laughed 25 or 30 years ago if you told them it was go­ing to end up like this, but China is ac­tu­ally do­ing it.”

Spence, 74, who was awarded the No­bel Prize in Eco­nomic Sciences in 2001 along with Joseph Stiglitz, who also was a speaker at this year’s fo­rum, and Ge­orge Ak­erlof, for work re­lat­ing to mar­kets and in­for­ma­tion flow, says China mov­ing out of low-cost man­u­fac­tur­ing is the next stage in the so-called fly­ing geese model, whereby man­u­fac­tur­ing con­tin­u­ally mi­grates to lower-cost pro­duc­ing coun­tries

“Peo­ple un­der 40 won’t be­lieve this, but I re­mem­ber when the um­brella they put in your drink when you went to the bar was made in Ja­pan,” he says.

China, with its Made in China 2025 strat­egy, aims to build ma­jor strengths in such ar­eas as ad­vanced man­u­fac­tur­ing, ar­ti­fi­cial in­tel­li­gence, robotics and green tech­nol­ogy and to be­come a global tech­nol­ogy leader by 2035, the goal set in Gen­eral Sec­re­tary Xi Jin­ping’s re­port to the 19th Na­tional Congress of the Com­mu­nist Party of China in Oc­to­ber last year.

Spence con­cedes that it will be a dif­fi­cult po­si­tion for the US if it falls be­hind China in some key tech­nolo­gies.

“China is on the way there, and I don’t re­ally know how to pre­dict what the Amer­i­can re­sponse would be. If the dig­i­tal tech­nolo­gies are as pow­er­ful as they look right now, you don’t want to be be­hind in ev­ery­thing from e-com­merce to se­cu­rity,” he says.

Spence says China is still partly re­liant on its old model of in­vest­ment-fu­eled growth, which has led to in­creased debt lev­els, which some ar­gue makes the econ­omy vul­ner­a­ble.

“If you have a sit­u­a­tion where those trends con­tinue, it would be plain dan­ger­ous, but I don’t think it is in the dan­ger zone yet, and China’s job is to pre­vent it go­ing into it,” he says.

“There is noth­ing wrong with in­vest­ment, so long as it is not bad in­vest­ment and the re­turns jus­tify cre­at­ing the in­vest­ment in the first place. This is why fi­nan­cial re­form is so im­por­tant, be­cause it is the role of the fi­nan­cial sec­tor not to al­lo­cate cap­i­tal if the re­turns on in­vest­ment are too low.”

Spence says China could still be on course to have a fully open cap­i­tal mar­ket within 10 years.

“There are a lot of steps to still work through. The fur­thest out would be the Chi­nese yuan be­com­ing a global re­serve cur­rency. To have a re­serve cur­rency, you not only need sta­bil­ity but the con­vert­ibil­ity. Peo­ple have to have the con­fi­dence that that is the case.”

Spence be­lieves there is a pos­si­bil­ity of another re­ces­sion, par­tic­u­larly in the United States, within the next two years.

“We are 10 years out from the global fi­nan­cial cri­sis, and in the US we are at full em­ploy­ment and we are at the point where the cen­tral bank will try and slow in­fla­tion,” he says.

“For me, the big­gest risk is a shock to as­set prices, if they con­tinue to scale up, par­tic­u­larly when some­one sud­denly re­al­izes they are in un­re­al­is­tic ter­ri­tory.”

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