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Chinese Economic Policy since the Global Financial Crisis: The New State Activism. Barry Naughton University of California, San Diego Rio de Janeiro. Since the Global Financial Crisis…. The financial crisis was a major turning point in Chinese economic policy.
University of California, San Diego
Rio de Janeiro
Reform Fatigue: High unemployment after mass lay-offs; health system collapsed; anxiety about impending WTO membership.
Sought a “people-oriented” policy (以人为本), and a “harmonious society (和谐社会).
What was the content of these new policies to be? How radical a departure from the 1990s? Examine three key policy areas to find out:
Cautious and incremental effort to rebuild social service institutions and reduce the large urban-rural gap. Moderate but unambiguously positive effects:
These initial programs were highly consistent with, and complementary to, a well-functioning market economy.
The 11th Five Year Plan, to cover 2006-2010, came out at the end of 2005.
The Plan was the product of a surprisingly wide process of consultation and brain-storming, more of a vision statement than a traditional five-year plan.
Innovative elements included an emphasis on environmental improvement and sustainability.
Most important was an emphasis on investment in human resources. This reflected both a backward-looking critique of China’s physical capital investment-driven growth model, as well as a forward-looking awareness of the need to shift to a more sophisticated development strategy as China approached middle-income status.
The plan was very general, so it was left unclear what measures government would take to implement the plan; there was an ambiguity here is between social policy (adapted to these changes) and social engineering (driving the changes).
State Asset Supervision and Administration Commission (SASAC) created to exercise authority over the large central-run firms. A reform step in that SASAC is an “ownership agency,” independent of the government administrative apparatus, with control limited to defined set of subordinate companies
But SASAC was also a step toward decelerating ownership reform. Core mandate to “maintain and increase of the value of public assets.” End of managerial buy-outs for large firms, and new commitment to maintain a significant state sector.
SASAC never succeeded in articulating clear limits to public ownership, failed effort in 2007. Too many sectors included, and list never publicly released.
Ambiguity between further reforms of state firms through improved corporate governance, versus protecting and rebuilding the size of the state sector.
By the middle of the decade, the Hu-Wen Administration had engineered a coherent shift in overall economic development policy. The 1990s emphasis on building market institutions and reforming the economy had been replaced with a new emphasis on rebuilding social institutions and investing in human resources and technology.
The shift away from economic reform was not large and it did not undo any of the major achievements of earlier reforms. Moreover, it was concentrated in areas where market failures are known to be severe: health care, insurance, education, and investment in new technology.
The new development strategy had many positive aspects. The emphasis on human capital investment was a positive alternative to over-investment in physical capital. The shift to sectors with a higher skill content was a natural step in China’s rapid development, and consistent with evolution to a more diverse and sophisticated labor force, that would also create a more diverse and sophisticated domestic consumer market.
More government steerage and intervention in the economy was compatible with a modest course correction, and a positive synthesis between a market economy and government intervention.
It shattered a 30-year-old presumption that the US model was the best & that China would move steadily in this general direction.
It elicited a very strong stimulus response in China, which was successful in insulating China from the worst of the crisis. We would consider this a strongly Keynesian response to crisis (to be wound down after the crisis is past).
The Chinese leadership concluded that this was evidence of broader strength, and for the first time argued that their current system of strong government and market economy is superior to a U.S.-style system (no need to scale it back).
China’s current successes and problems all trace back to the choices made in late 2008-early 2009. First among these is a surge of liquidity.
Increasingly common rationales included:
The emphasis on re-balancing was played down; the emphasis on direct government intervention to restructure the economy was increased.
Planned infrastructure investment of 4 trillion RMB (US $586 Billion) was announced quickly, but the overall response was much bigger, more complex.
Tens of thousands of local infrastructure projects were launched; but so were hundreds of large-scale central government projects.
Example: “16 Mega-Projects” to be rolled out gradually over 15 years 2005-2020. In early 2009, decided to begin all 16 by year-end.
Agreed to give Chongqing aid and policy breaks worth 800 B. RMB through 2020 to support “Chongqing Model”
China’s high speed rail is an example of a project under development for a long time, that was suddenly accelerated in the wake of the global financial crisis.
We learned from the crisis the need to “fully bring to bear the superiority of the socialist system in effective decision-making, a powerful organization and concentrated power to accomplish big things.”
Health: Within the last three years, China has rolled out two new health insurance plans that complement the existing urban formal sector insurance. Together these cover more than 90% of the population by the end of 2010.
The level of individual coverage is modest, but the total outlays of $60 billion projected for 2011 is substantial. Only 1% of GDP, but up from almost nothing a few years ago.
Government has taken over direct management of most clinics, as well as procurement of a list of 307 categories of drugs, and enforced an average price reduction of 40%. This was the major source of clinic revenue that government is now replacing.
Housing: Major move into provision of public housing. For sale at subsidized prices, and creation of public housing rental sector.
Plans: 2010: 5.9 m. M2
2011: 10.0 m. M2
Ambitious plans—calling for about 15-20% of all 2011 construction to be public housing—probably will not be fulfilled.
Similar trends apparent in education, social welfare and pension spending.
“Indigenous Innovation”: Policy was always vague with multiple strands. New in 2009-10 was: “the degree of intensity and simultaneous use of multiple tools” (Scott Kennedy), used with overlapping, and unpredictable impact.
7 Designated Sectors, with 35 sub-sectors or projects:
These sectors account for only 2% of China’s GDP today, but planners call for growth to 8% by 2015 now written in to 12 FYP. Is this realistic?
The government explicitly commits, in the 12th Five Year Plan “Suggestions” to finishing up the many projects initiated during the stimulus program of 2009.
The 12th FYP also commits to increasing the degree of financial and policy commitment to the “Strategic Emerging Industries.” (It even slips in an eighth emerging industry, “oceanic industries,” which gets its own section after failing to make it into the Strategic Emerging Seven.
The other major social initiatives, including about $60 billion for health care (400 B. RMB) in 2011 are built into upcoming plans.
Public housing is projected to build 10 million units in 2011.
Government commitment to a range of industrial policy measures is strong, and perhaps accelerating>
Total budget of projects under construction was 126% of GDP by the end of 2009; and 130% of GDP at the end of 2010.
Projects begun, or accelerated, as stimulus measures now seem to have become part of long-run development plans.
Taken together, these changes amount to a breath-taking gamble on the ability of the Chinese government to shift the pattern of economic development.
Ideas that had been accepted by the government but were being cautiously and partially implemented are now being accelerated across the board.
It is clearly the intention of the Chinese government to maintain the far higher level of government involvement with the economy that was triggered by the global financial crisis.
More ambitiously, the objective is to accelerate the shift to knowledge-intensive industries; avoid a growth slow-down; and catapult China into the front ranks of the world’s economies. A new gamble.
Yes, parts of it will work. China will continue its movement towards the front ranks of world economies and the world technological frontier.
However, China would have continued its catch-up under any scenario. Will these policies accelerate technological absorption? It is far from clear and will not be smooth.
Chinese planners will be disappointed in the success rate of their state-sponsored research projects. How many of the 16 mega-projects will be successful in an economic sense? Will it be two or six? The answer to this question will determine the distribution of power and resources in tomorrow’s world.
Planners are under-estimating the risks and the costs, but nevertheless, China has made enough investment in human resources, entrepreneurial innovation, and engineering skills, that they will be able to move ahead rapidly in some of the target sectors.
But what are the costs?
Inevitably, these protectionist policies will create friction with foreign partners and technology providers
On one side: Foreign businesses, particularly in high-tech sectors, find it is increasingly difficult to navigate the maze of discretionary preferential policies. They feel constrained in their ability to cooperate profitably with Chinese firms. Public complaints by, among others, GE and Siemens, indicate the depth of dissatisfaction.
On the other side: A major change is taking place in patterns of resource allocation in China, particularly those that link China to foreign technology suppliers. China is already buy less technology abroad and investing much more domestically. This change will end up imposing substantial unanticipated costs on Chinese development.
China has embarked on a major re-orientation of development strategy in the wake of the 2008-2009 global economic crisis. The full implications of this shift will not be evident for several years.
If China were to succeed in all its high technology initiatives, the result would be a profound upheaval in global relations.
More likely, China will succeed in a handful of cases, and will have to manage the after-effects of mixed results and outright failure for the majority of these bold initiatives.
Even on this account, however, five to ten years from now, China will have moved decisively up the global technology rankings, contributing a far higher share of sophisticated value-added. The main credit for this, though, will be the investment in human resources and the innovation in business models in the market-oriented parts of the Chinese economy.