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Use of "Tilting to Supply-Side" Policies to Control Deflation
1999-02-16
Wu Jinglian
Deflation in fact refers to a phenomenon that the overall price level continues to decline. The decline in the price index in the past 18 months indicates that deflation is a reality. Of course, the change in the overall price level is a monetary phenomenon in the final analysis. But the question is that money circulation involves two factors: the amount of money supply and the velocity of money circulation. In China today, although the amount of money supply is increasing, the velocity of money circulation, no doubt, is drastically declining in view of the fact that the commercial banks are having large amounts of idle positions. As a result, it seems unconvincing to say that China has no problem of deflation because its money supply is increasing.
In light of this situation, we should not only pull the economic growth by taking the "Keynesianist" measures to increase demand, but should also tap the potential of the supply side (enterprises) by adopting the "supply-side policies". In this way, we can build a virtuous circle characterized by supply expansion and demand increase so that the economy can get out of the predicament of deflation.
We all know that the so-called "supply-side economists" constituted a school of economists that emerged in the 1970s in Western countries, especially in the United States. At that time, the "Keynesian" demand policy that had been adopted by these countries since the end of World War II was not working, resulting in a phenomenon of "stagflation" that comprised both stagnation and inflation. The supply-side economists held that the economic conditions of a country did not depend on whether demand was sufficient as argued by "Keynesianism". Instead, it depended on whether the "supply-side" (enterprises) was dynamic. As a result, the main government measure to promote economic development should not be the adoption of the financial and monetary means to increase demand; rather, it should be "tilting toward the supply-side" so that the enterprises can raise their competitiveness and their investment enthusiasm. Since he became the American president in 1981, Ronald Reagan adopted a series of supply-side policies to increase the dynamism of American enterprises according to the ideas of the economists of this school. The policies he adopted included lifting controls, opening competition, reducing taxes and supporting small businesses. In retrospect, the "supply-side policies" failed to yield good results in cutting deficits and controlling inflation as the Republicans had promised in campaigning. However, they did bring about remarkable results in raising the competitiveness of the American economy. Many people believe that this is precisely the micro-economic basis for the sustained prosperity of the American economy in the 1990s.
As to China, the efforts made by the Chinese government in mid-1998 to use expansionary financial policies to pull economic growth began yielding certain results after September that year, and brought about an improvement in the macroeconomic situation in China. Nevertheless, the method to stimulate growth through government investment has limitations. Relying on this policy alone can not ensure a long and sustained growth of the national economy. The situation now is that on the one hand, the dependence on the government to bear debts is already very heavy and the government investment is unlikely to be intensified further. At the same time, the growth of the national economy can not be based for too long on the infrastructure construction supported with government investment. Therefore, it is unrealistic to continue to take massive government investment as the main tool to prop up an economic growth in the future. On the other hand, it is also a reality that it is hard to increase the efficiency of government investment. Besides, government investment is likely to produce a certain "squeeze-out effect", which reduces effective non- governmental investment. Increasing taxation for the sake of offsetting increased financial expenditure will contain the enthusiasm of the non-governmental sector to expand, investment. Therefore, to reverse the current deflation, we need to continue to adopt expansionary financial policies and stick more firmly to the monetary policy of proper expansion. But more importantly, we should pay greater attention to the implementation of the "tilting to supply-side policies" and do everything possible to mobilize the enthusiasm of enterprises and entrepreneurs so that the dynamic and growing enterprises can become the "engine" for a healthy economic growth.
China is currently in a transition from the planned economy to the market economy. We have vast room for freeing the enterprises and entrepreneurs from the yoke of the old systems and the "leftist" ideology. The principles formulated m the 15th Party Congress actually contain the elements to activate the vitality of the "supply-side" and have yielded initial results in the past two years. In the regions where the principles of the 15th Party Congress have been better implemented, the economy is growing, employment is full and exports are on the rise. This is a proof to the correctness and dynamism of these principles, The question now is how to further implement the principles of the 15"' Party Congress and build up new growth points on the supply side by more firmly relying on the strength of the market, the enterprises and the non-governmental sector. This will help bring about a comprehensive revitalization of the economic activities and a steady improvement in the economic situation. To this end, 1 believe work in the following areas is of utmost urgency:
I. It is imperative, in keeping with the principles set by the 15th Party Congress, to adjust the layout of the national economy, improve the ownership structure of the national economy, explicitly declare and earnestly support all the enterprises that meet the "three conducive" requirements, and strive for a common development of the economies of different forms of ownership. In particular, small state-owned enterprises should be transformed into true enterprises in keeping with the principle of "freeing the small". Efforts should also be made to do away with the ideological prejudice and discriminatory policies against the non-state-owned enterprises, to improve their operating environment and to let the small and medium-sized enterprises develop freely in conjunction with the construction of small towns and cities.
2. Earnest transformation should be carried out to some "plaque-change companies" among the large and medium-sized state-owned enterprises so that they
can become modern enterprises that meet the requirements specified in the Company Law of the People's Republic of China. The key step is to establish an effective corporate governance structure. Only by so doing can their property rights, powers and responsibilities be clearly defined, their corporate management be separated from government functions, and efficient management be introduced.
3. The assets of the banks and non-banking financial institutions should be reorganized so as to promote the reform of their enterprise system and turn them into true banks. At present, the capital market is flooded with "junk stocks", speculation is out of control, illegal activities are rampant, prices drastically fluctuate and the interests of small and medium-sized investors are seriously jeopardized. These phenomena must be changed if the capital market is to develop on a basis of rule of law and become an favorable investment ground with information transparency and clearly-defined rules of the game.
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