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Improving China's Economic Quality: Problems and Solutions
The world is undergoing rapid development, great adjustment and profound change. As human beings are creating a better future, they are confronted with more and more common challenges. Many economies have adopted a series of measures to boost economic recovery since the outbreak of the international financial crisis, but the world economy remains sluggish. Meanwhile, acute social conflicts have become a global phenomenon.
Under such circumstances, how to foster new power for economic growth and improve the quality of economic development has become a major issue that faces human society as a whole. In March 2014, the English version of Capital in the Twenty-First Century by French economist Thomas Piketty was published, and it become very popular, triggering a widespread and heated discussion worldwide. This indicates that our development is stuck in deep structural contradictions, and severe defects exist in the traditional mode of development and growth.
Economic quality improvements in four aspects
Soviet Union economist Kamayev gave a systematic analysis of the quality of economic growth as early as the 1970s. Since then, many other experts and research institutes have released papers in this respect. However, there is not yet a universally agreed definition on the quality of growth. Based on our studies, I think we can approach the concept from our aspects. The first aspect is whether growth is intensive, such as whether various resources are effectively allocated and utilized. The second aspect is whether growth is environmentally friendly, meaning whether growth meets the demands of environmental protection and a good eco-system. The third aspect is whether growth is stable, such as whether there are sudden ups and downs and waste of social wealth during economic growth. The fourth aspect is whether growth is fair, meaning whether it benefits people from all walks of life.
Based on this understanding, it is noticeable that China has made remarkable achievement in economic development—in terms of not only its size but also its quality, since China began its reforms and opening-up, in at least the following four ways:
First, economic efficiency has greatly improved. Reforms in the economic system have facilitated free flow of productive factors and opening-up has expanded the space for resource allocation, thus optimizing the allocation of resources among different regions and sectors. It is worth noting that reform of State-owned companies has dramatically enhanced microeconomic efficiency. Most studies, both Chinese and overseas, on China's productivity show that the country is among the leading countries in terms of improving its productivity. The University of Pennsylvania's Penn World Table estimated that China's annual total factor productivity averaged more than 3 percent from 1980 to 2011.
Second, remarkable progress has been made in intensive use of resources and energy. China has made greater progress in this aspect than many would have imagined. Its energy consumption per-unit of GDP fell 4 percent on average year-on-year from 1978 to 2013. Had there not been increase in efficiency, China would have used another 11.2 billion tons of standard coal for its GDP in 2013, almost three times the actual energy use for that year.
Third, economic growth has grown steady. There were many fluctuations of economic growth from the beginning of the reform and opening-up in the late 1970s to the mid-1990s. China's GDP grew 11.7 percent in 1978 and fell to 5.2 percent in 1981. It then rebounded and hit 15.2 percent in 1984, the highest in the past three decades. Such sudden ups and downs have resulted in waste of social wealth. However, since the mid-1990s, thanks to an improved economic system and enhanced ability in macroeconomic management, China has seen more steady economic growth. One telling example is that the difference of economic growth between any two subsequent years has been less than 1.6 percent, except for in 2008 when the global financial crisis hit.
Finally, economic growth is benefitting more and more people. China has cut the number of people living on less than $1.25 per day, the World Bank's poverty standard, by 670 million from 1981 to 2010, 93 percent of poverty reduction efforts worldwide in the same period. Meanwhile, the country is pushing forward its urbanization drive, with the rate of urbanization growing from 17.9 percent in 1978 to 53.7 percent in 2013. Statistics show that urban residents surged from 130 million to 710 million in the same period. That means hundreds of millions of rural people are sharing the achievements of modernization and industrialization thanks to urbanization.
Major problems in China's economic quality
However, there are also some problems in China's quality of economic growth.
First, greater efforts should be made to improve resources allocation. Compared with developed countries, China's per unit GDP requires more resources, labor and capital. A 2012 World Bank report showed China's productivity was less than half the average for OECD countries. There's still a lot of room for China to optimize its allocation of resources. At present, productivity in the country's secondary sector is 4.6 times that in the primary sector. Also, productivity in East China's Jiangsu province was 3.2 times that in Southwest China's Yunnan province. In addition, productive factors are extensively used in micro-economic areas.
Second, China's growth needs to be more environmentally friendly. Its energy consumption per-unit of GDP is 2.1 times the world's average, and 2.9 times the average of high-income countries, including 2.6 times that of the US. Immense energy consumption brings huge amounts of emissions so that clean air has become a rarity for people in Beijing, Tianjin and neighboring Hebei province. The blue skies that appeared during the APEC conference were referred to as "APEC Blue" by local people. This directly reflects the environmental costs of China's economic growth.
Third, China needs a more solid foundation for steady economic growth. After more than 30 years of reform, China has established a basic market economy framework, but it has still not developed the ability to understand and follow the development pattern. It also needs to improve the ability to predict economic development trends. When major economic fluctuations occurred, China tended to stabilize the economy administratively, which brought the desired results but also led to structural contradictions such as overcapacity and monetary and financial risks as well.
Fourth, efforts need to be made to increase fairness. From a macro perspective, China has not come up with a reasonable income distribution. China's labor remunerations, in 2011, accounted for 47 percent of its GDP, whereas in the US and France, the figure was above 62 percent. From a micro perspective, China has a wide income gap. The National Bureau of Statistics shows the Gini coefficient has been gradually falling since 2008, but it now stands at 0.47, still higher than the international warning line of 0.4.
Vigorous measures should be adopted to improve economic quality
Chinese leaders are well aware of these problems. In 2013, President Xi Jinping stressed at the Central Economic Work Conference that China wants greater speed on condition that it improves livelihoods and employment, increases productivity, enhances economic vitality, makes structural adjustments, and improves growth quality.
Thanks to this, China has come up with effective measures, with the guiding principle being the best use of both the invisible hand and the visible hand to let the market play a decisive role in resource allocation, to let the government do what it is supposed to do, and to build a better system for economic growth. The ultimate goal is to allow the people to share the results of economic development in a fairer way and to make economic growth better utilize resources for steadier, more environmentally friendly growth.
More specifically, the following are measures that China has adopted or will adopt soon:
First, China will slash the government's role in the direct allocation of resources. Since the 18th CPC Congress, the State Council has devolved the power to examine and approve or abolished procedures for some 600 items. It also established the Shanghai Free Trade Zone and went looking for ways to better manage foreign capital. President Xi emphasized at the Sixth Session of the Leading Group for Overall Reforms that any experience gained from the free trade zone should be promoted for broader results.
Second, China has greatly enhanced its environmental protection efforts. In September 2013, the State Council announced its Action Plan for Air Pollution Prevention and Control, with the goal being to generally improve China's air quality and cut the number of heavily polluted days within five years. The central government allocated 15 billion yuan in 2013 and 2014 to improve air pollution in Beijing, Tianjin, Hebei province and neighboring areas. In addition, China said at the recently concluded APEC meeting that its carbon emissions will reach a peak at around 2030.
Third, China is innovating in macroeconomic management. The new administration emphasizes the role of the market in handling economic fluctuations and regulating economic growth with more accurate measures. These measures have prevented loss of efficiency from undue administrative intervention and problems with unfairness caused by "one-size-fits-all" regulatory methods.
Fourth, China is speeding up the pace of income distribution and household registration reforms. The government will make income increases match the pace of economic development and raise the percentage of labor wages in relation to GDP. It has responded to public concerns about the pay of top management at State-owned companies by promulgating the Reform Plan about Salaries of Top Management at Central-owned Companies and the Opinions about Reasonably Determining and Strictly Regulating Welfare and Business Expenditure of Top Management at Central-owned Companies. The government has also come up with a plan for reforming the household registration system.
I want to emphasize that the following three things are crucial to the quality of China's economic growth. First, China should continue its policy of opening-up to the outside world by building a new system so as to improve the quality of growth in a globalized system. Second, it should make innovation the driving force and the means to optimal resource allocation. It should get the public involved in innovation and pool resources to solve technical problems that affect the quality of economic growth. Third, it should strengthen the rule of law as a fundamental guarantee that the market plays a decisive role, while the government does what it is supposed to do and the market economy moves effectively and fairly, in line with the decisions at the Fourth Plenary Session of the 18th CPC Central Committee rulings on law.
China's economy has entered into a crucial period and it urgently needs to improve its quality. Considering its challenges and constraints, it will require China's own efforts and international experience as well.
The author is Li Wei, President and research fellow at the Development Research Center at the State Council (DRC). The article appeared in the 12th issue of New Economy Weekly in 2014.
