Thursday, September 19, 2013

Institutional Reform to Avoid Systemic Crisis

At a conference this week, Economist Wu Jinglian warned that China could face a systemic crisis if leaders fail to move forward with institutional reforms at this fall's key "third plenum" meeting on economic matters. He calls for leaders to remove institutional barriers by clarifying property rights for land and curbing the power of government in resource allocation.

Professor Wu voiced frustration that China has backtracked on market-oriented reforms during the last decade. At the "third plenum" of the 14th party congress in 1993, the leadership made an important push forward on market reforms and there was a lot of progress during the 1996-2000 five-year plan--presumably he's referring to the dismantling of many state-owned enterprises, privatizing urban real estate, and decontrolling prices and marketing.

Wu Jinglian thinks reforms stalled during 2001-05. He says the government has actually gained more power over resource allocation while the role of the market has weakened. As Wu describes it, "Each level of government is like a company, the party secretary is like the CEO, and the mayor is like the general manager." The local government decides what industry will be developed, what technology will be used, and what economic activity will be pursued.

Wu criticizes government leaders for their single-minded obsession with GDP growth. They spend with abandon and exploit resources to maximize GDP growth. Problems are now being manifest in a growing debt-asset ratio that threatens to explode into a systemic crisis. He warns that external and internal pressures could produce a meltdown. A crisis in one locality could quickly spread to other regions, says Wu.

Another manifestation of crisis, says Wu, is the abuse of the most basic resources that are fundamental to survival: land, water, and air. In the pursuit of GDP there has been no conservation or environmental protection.

The third plenum of the 18th party congress--expected to take place in November--will be a key meeting where leaders will set the road map for reform. Wu Jinglian hopes for institutional reforms that will put China back on track toward market-directed resource allocation.

Unfortunately for Wu--and for China--the force of inertia and years of sloganeering is strong. Another economist quoted at the meeting, Yu Yongding of the Chinese Academy of Social Sciences, recited the tired mantra of "technology" that has gotten China up this alley. Yu emphasizes scientific technology, product upgrading, "innovation," service industries, and utilizing communications technology to raise efficiency. Yu even calls for shifting "surplus rural labor" to urban employment to raise productivity. This is exactly the prescription China has been following for the last decade and it has carried the country as far as it can.

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