Reform must speed up, not slow down

PUBLISHED : Sunday, 03 April, 2011, 12:00am
UPDATED : Sunday, 03 April, 2011, 12:00am


The mainland has come to a point where only a determined drive for comprehensive reform can surmount problems resulting from three decades of high economic growth, says eminent economist Professor Wu Jinglian.

Delivering last week's 'Prospects for China's 12th five-year plan', part of the University of Hong Kong's Centenary Distinguished Lectures series, the 81-year old liberal economist told his audience it was no accident that the plan called for 'accelerating the transformation of the economic development pattern'.

Approved by the annual session of the National People's Congress last month, the plan provides a road map for the country's economic and social development for 2011-2015.

'President Hu Jintao made a speech at a provincial-level study class early this year about the need for change. In the speech he used the term jiakuai (accelerate or move fast) 50 times, plus expressions such as 'let's lose no time'. That certainly says a lot about the urgency seen at the highest level.'

The top leader's words of course carried weight, and action immediately followed. But 'it was done within the old framework and mechanism, such as the government-led mobilisation of capital and resources. The results are less than ideal,' adds Wu, a veteran research fellow at the State Council Research Development Centre.

Such a deep-rooted mindset could be traced back as early as the 1950s when the Soviet model was introduced in China.

'China imported the investment-driven model of the Soviet Union in the first five-year plan (1953-1957), which remained basically unchanged until the 1990s,' he says.

Although the old Soviet economic model is now a thing of the past, its ideology, Wu says, remains deeply entrenched among some people.

'That, in fact, has been a major problem in China's economic reform throughout the past decades, that is, a rapid growth based on investment of resources but not a rise in efficiency to realise the growth, leading to rampant shortage of resources and damage to the environment.'

It was not until the 1990s that China began to discuss a new model for its economic growth, and the expression 'transformation of the economic development pattern' was coined in the ninth five-year plan (1995-2000).

But due to low domestic consumption, which in China in 1990 was 40 per cent of GDP compared to the global average of 65 per cent, China adopted the export-driven model of some Asian countries such as Japan, to sustain growth.

'The export-led model brought about impressive results at first, as it did to Japan and other Asian economies initially. But it did not take long for problems to surface: resource wastage, environmental damage, an imbalance between internal and external growth, excessive issuance of yuan, the formation of a bubble economy, inflation, just to name a few.'

It was under these circumstances that the 12th five-year plan reiterated the call for the privatisation of most state-owned enterprises.

To Wu, the reiteration of a call made 15 years ago is no waste of time; it has garnered stronger resistance to reform and change from new vested-interest groups.

'The 15th party congress in 1997 resolved that all state-owned enterprises would be released [to the market], except those of a strategic nature [such as defence and power industries]. Those remaining as state-owned enterprises should become corporatised. But these plans were never carried out to the full. Over the years there has been good progress among small enterprises. But most of the large corporate groups stay the same. In recent years they have even gone backwards, leading to what some describe as guojin mintui (state-owned companies advance while the private sector retreats).'

Wu says these corporations, despite their enormous profits, failed to honour the stated policy of 'giving back to society' but instead invested in projects for profit. The same can be said of the local governments, whose income is rarely proportionate to their social responsibility.

As a result, the domestic consumption rate keeps on dropping despite the country's increasing wealth, to just 26 per cent of GDP in 2009.

So Wu finds it hard to accept the argument that economic reform has succeeded and no more is needed.

'I don't really agree with that notion because I think China has yet to pass its economic test, especially the state-owned enterprises.'

The main issue at stake, Wu says, is at the structural level.

'During the discussion of the 11th five-year plan [in 2005], the following 'structural obstacles' were identified: too much power of the government over resources; the GDP growth figure used as the standard for the government's merit; flaws in taxation, manipulation of factor pricing etc.

'During the 11th five-year plan, moreover, despite great strides in technical innovation, few became industrialised. The crux of the matter is a lack of an economic, judicial and social system and environment that is conducive to innovation and industrialisation.'

To Wu, the emphasis on a change in the economic development pattern in the 12th five-year plan is necessary and timely. Specifically, its targets should be to raise efficiency, develop service industries and boost domestic consumption.

He particularly applauded the plan's preamble statement, which reasserted reform as the 'driving force' for change and called for 'greater resolve and courage to push forward reform in all sectors'.

'I think confirming reform as the driving force hits right at the heart of the matter. Only by reform can structural obstacles be dealt with and the transformation of the economic development pattern be possible.'

The reform, Wu adds, has to be comprehensive to resolve many problems accumulated over the years, such as those in state-owned enterprises, the fiscal system, taxation, currency, justice, and reform of the government itself.

But past experience suggests these reforms 'will surely encounter all kinds of resistance and obstacles from vested interest groups and ideological concern'.

'Our country is moving from a government-controlled, centrally planned economy to a market economy. So it is inevitable for some in power to take advantage of the change for their own profit. While corruption becomes prevalent, these people in turn obstruct further reform and twist reform. On the ideological side, moreover, the resistance comes from the residue of the former Soviet model and its dogma, which is deeply rooted among some people, and that also becomes an obstacle to reform with or without allying with the vested interest groups.'

Wu says 'the key to the whole thing lies in the government, and how much determination and courage it has to press for the change into a modern market economy'.

After the talk, the professor laid out what he sees as the key areas for reform.

'Economically, we need to continue marketisation. Socially, the creation of a social safety net is necessary, such as medical care and care for the elderly, as well as minimum protection for those who live below the basic subsistence level. As for political reform, I think it is best to start with the rule of law.'

On those who use the rise of China as a reason for arguing against further reform, Wu said China's rise showed the great potential of the Chinese people, but 'only through further reform will China's potential be given full play'.

He said there were strong voices suggesting alternatives to reform, such as the Chongqing model. The southwestern municipality has taken to, among other things, broadcasting Maoist songs on its local television station.

'[Leftist] groups such as the website Utopia (wuyou zhixiang) have their own well-substantiated agenda and seize every opportunity to propagate it, such as holding conferences in Beijing and Shanghai early this year on the Chongqing model.'

Although Wu said he did not feel any pressure for speaking out in support of reform, he did encounter controversy in 2008 when accusations emerged that he was an American spy. There were even claims that he had been arrested.

The official People's Daily and Xinhua blamed 'overseas media' for '[cooking] up rumours trying to slander [Wu]'.

'I think the source of the rumour is not from without, but from within,' he said, 'I have requested our judicial authorities to follow up the case, but I don't know whether there is any action.'

Export economy

Domestic consumption worldwide represents 65 per cent of GDP

On the mainland, in 1990 that figure was 40 per cent. By 2009 it had slipped to: 26%