Nobel-winning economist sees challenge
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.”