Macroeconomic policies cannot replace structural reforms, Liu Shijin says
Former Deputy Director for the State Council's Development Research Center calls for reforms aiming at equality of status, equal rights to access basic public services, and equal property rights
Would you be interested in reading an article titled “Correctly Manage The Relationship Between Macroeconomic Policies And Structural Reform Is Essential for Unleashing Economic Potential”? I would. That’s because whenever a serious Chinese intellectual calls for “correctly” or “wisely” managing the relationship between A and B, that means they think the relationship is currently not - or risks not - being “correctly” or “wisely” managed, and that maybe A has been emphasized excessively at the expense of B, or vice versa.
Below is the article bearing the title published on March 18 in the WeChat blog of China Macroeconomy Forum (CMF), a Renmin University of China-based platform for Chinese economists, by Liu Shijin, Former Deputy Director of the State Council's Development Research Center, equivalent to a Vice Minister in a central ministry. Liu sat on the Monetary Policy Committee of the People’s Bank of China, China’s central bank, until very recently.
挖掘潜能要把宏观政策和结构性改革的关系摆正
Correctly Manage The Relationship Between Macroeconomic Policies And Structural Reform Is Essential For Unleashing Economic Potential
1. Unleash Potential for Catch-up and Transformation
China's current and future growth potential in a significant period can be caterized into two kinds: catch-up potential and new potential driven by digital technology and green transition. The catch-up potential implies that while China has not achieved certain accomplishments of developed economies, it possesses the capability and potential to do so. At present, the per capita income of China stands at approximately $13,000. The target in Long-Range Objectives Through the Year 2035 (Adopted on October 29, 2020, at the Fifth Plenary Session of the 19th Central Committee of the Communist Party of China) is to attain a per capita income level comparable to that of moderately developed countries. This represents a growth potential of around $20,000. The driving force behind this growth primarily lies in the development of the service industry, spurred by the upgrading of consumption patterns, along with the modernization of traditional sectors such as manufacturing and agriculture. Hence, the potential for catching up is more realistic, certain, and worthy of attention.
In terms of the new potential brought by digital technology and green transition, there are few disparities between China and other pioneers. In certain domains, China is either keeping pace or even leading, underscoring the imperative to delve deeper into this new potential.
The new potential propelled by the technological revolution and the catch-up potential are not distinct paths but rather integrated, presenting a clear advantage for China. Firstly, China boasts a vast market capacity and comparatively lower income levels, offering ample growth opportunities. Leveraging economies of scale, China can swiftly drive down costs, while new technologies and industries can establish comparative advantages in a relatively brief period, as evidenced by the smartphone and new energy vehicle markets. Recent advancements in areas like the internet, mobile communication, and new energy vehicles have already underscored the advantage of China in the realm.
2. Balancing Macro Policy and Structural Reform
The Government Work Report specifically underscores the necessity of strengthening macroeconomic control and balancing the expansion of domestic demand with the deepening of supply-side structural reforms. Very recently, there has been a growing call for loose macroeconomic policies due to insufficient demand and a waning growth momentum. In my opinion, when considering the impact of macroeconomic policies on the economy, it's crucial to note the significant differences between China and developed economies. Developed economies have reached a stage of maturity in economic development, often characterized by sluggish growth. In a sense, their economic expansion relies on depreciative, maintenance-oriented growth with minimal potential for new growth. Therefore, for developed economies, macroeconomic policies essentially dictate the overall economic trajectory and situation.
However, China still possesses a growth potential of at least around 5% and is not undergoing slow growth. During the phase of medium-speed growth, China's macroeconomic policies primarily serve a stabilizing and balancing function. Rough estimates suggest that China's economy still holds a potential growth rate of around 5%, with macro policies influencing GDP by approximately one percentage point, while the remaining four percentage points depend on technological conditions and the macro policy environment. This ratio of 1:4 roughly illustrates the relative importance of macroeconomic policies and structural reform. Therefore, in the current scenario of ensuring stable growth, it is necessary to manage macroeconomic policies appropriately, requiring a moderately loose and more proactive approach. However, we should not solely concentrate on macroeconomic policies and overlook the promotion of structural reform.
Some believe that structural reform is a long-term solution and cannot address immediate needs, which is a misconception that needs to be corrected. In fact, some structural reform policies yield results faster than certain macro policies, and structural reform also has a short-term expansion effect.
3. Encouraging Developmental Consumption and Increasing Public Expenditure on Education, Healthcare, and Social Security
The most fundamental way to boost domestic demand is to increase income. International precedent indicates that as China approaches the threshold of high-income status, the share of consumption or labor wages within the overall economy will notably rise. This is a regular phenomenon, and China has indeed undergone similar transformations in recent years. We hope that this trend will take effect in China, furnishing income growth as a foundation for expanding consumption.
We need to distinguish between two types of consumption: survival consumption and developmental consumption. Survival consumption, which primarily includes essential daily needs like food and clothing, has stabilized, and the survival challenges of many low-income groups have been addressed. As a result, the current increase in consumption is primarily fueled by developmental expenditures, such as social insurance, healthcare, education, culture, sports and entertainment, financial services, transportation, and communication. Therefore, developmental consumption is closely related to basic public services provided by the government. Government spending on basic public services currently constitutes a significant portion of developmental consumption, necessitating the government's involvement in providing platforms, establishing systems, and allocating funds. Consequently, developmental consumption is essentially a blend of government expenditure and household consumption. In practice, there exists a notable deficit in developmental consumption in this aspect. One of the largest gaps lies in the need to fill the gap in basic public services for nearly 300 million migrant workers who have moved from rural areas to cities.
Therefore, the current issue of expanding consumption should focus on two key points. The first key point is developmental consumption supported by basic public services, and the second is the middle- and low-income groups, with a focus on migrant workers. Failure to address these two points will make it difficult to achieve significant progress in expanding consumption.
4. Giving Due Importance to Urban-Rural Integration and the "Three Equalities"
From the perspective of the demand side, advancing structural reform is essentially about urban-rural relations. In the context of urban-rural integration, it is crucial to uphold the principle of "three equalities." As highlighted in the Government Work Report, there is still considerable potential for urbanization in our country. Therefore, it is imperative to further implement a new urbanization strategy, facilitate the bidirectional flow of various factors, and shape a new pattern of integrated urban-rural development. Giving top priority to the acceleration of urbanization for agricultural migrant workers, we must deepen reforms in the household registration system, refine the linkage policy concerning "people, land, and government funds," and ensure that migrant workers willing to settle in cities have equal access to basic urban public services on par with permanent residents.
The "three equalities" refer to equality of status, equal rights to access basic public services, and equal property rights regarding land and real estate. Regarding equality of status, it is related to the reform of the household registration system. I recommend adopting a negative list approach, which involves removing distinctions between urban and rural residency, except for specific areas with unique needs. Additionally, I propose that we should embark on a new three-year campaign, focusing on equalizing basic public services for nearly 300 million rural migrant workers. During this process, we should undertake construction projects for basic housing for rural migrants moving to urban areas, and convert unsold properties into government-subsidized apartments for migrant workers through government acquisition.
The inequality of land rights is a major factor contributing to the limited property income of farmers. While urban residents can freely trade houses built on state-owned land, farmers require approval to construct houses on rural collectively-owned land. Unauthorized constructions are termed 小产权房 "houses with limited property rights," and sanctioned homesteads can only circulate within rural collectives. In a market economy, whether assets, especially real estate, can be liquid, tradable, mortgagable, or pledged as collateral, usually result in a significant disparity in value. The low income of farmers is largely due to restricted property rights, especially stemming from the inability to transfer or trade land. The Third Plenary Session of the 18th Communist Party of China Central Committee raised the issue of rural land system reform, but the actual progress of the reform has not met expectations. Urgent attention is required to address issues related to restricted homestead transfers and "houses with limited property rights." I propose the next step should consider allowing rural collective construction land to enter the market in the intersection of urban and rural areas of large cities, with the same price and rights as state-owned land.
There should also be proactive exploration and breakthroughs in the transfer, mortgage, and collateralization of rural homesteads outside rural collectives. Some may express concerns that displaced farmers could lead to social issues. However, it’s merely a hypothetical problem lacking basis, since such instances are rare, and similar situations exist in cities as well.
To systematically address potential issues, it could be stipulated that revenue from rural land transactions should prioritize improving social security, including government-subsidized housing, for relevant individuals. This can establish a more reliable and efficient modern social security system than the land-based social security one. At the same time, urban-rural residents should be allowed to move and settle bidirectionally, driving improvements in living conditions and upgrades in consumption structure.
5. Upholding Entrepreneurship
From the supply-side perspective, I believe greater efforts should be put into understanding, protecting, and promoting entrepreneurship. Overcoming the middle-income trap, invigorating China through science and education, fostering new quality productivity, achieving technological self-reliance and self-strengthening at higher levels - all of these frequently discussed goals require the spirit of adventure and innovation, embodied in entrepreneurship.
In theory, we should make a clear distinction between entrepreneurs and capitalists. Entrepreneurial ability and spirit refer to a set of qualities in entrepreneurs, including curiosity, foresight, insight, adventurousness, perseverance, organizational coordination, and execution ability. These qualities are rarer resources compared to various other resources such as capital, labor, land, and technology. Capitalists, on the other hand, are providers of capital, and their roles differ from those of entrepreneurs. Since the beginning of China's reform and opening up, the development of private enterprises has been driven by a group of individuals known as private entrepreneurs, who possess entrepreneurial abilities.
Moreover, as the socialist market economy develops and matures, the diversification of equity ownership has become commonplace. Purely state-owned or private enterprises are increasingly rare. In the past, the classification of enterprises based on ownership deviated from the actual situation of enterprises and the market; more importantly, it underestimated the importance of entrepreneurial abilities and spirit. Ultimately, the success of an enterprise depends on these qualities. Therefore, the classification of enterprises should be adjusted accordingly. Instead of categorizing them based on ownership, characteristics such as scale, technology, and employment, and formulating appropriate policies should play fundamental roles.
This does not imply that ownership becomes irrelevant. Rather, ownership should be categorized according to investors. For instance, various types of investors could encompass central state-owned investors, local state-owned investors, non-state institutional investors, individual investors, and foreign investors. The distinction between ownership should shift from the level of individual enterprises to that of investors, ensuring fair development and unbiased competition among enterprises, and allowing investors to showcase their unique characteristics and capabilities.
Substantial progress should be made in correcting discriminatory practices regarding ownership, especially in encouraging platform companies and large-scale technology enterprises to invest and innovate. Recently, a group of large enterprises has ventured into fields such as generative artificial intelligence. It is imperative to involve them in building national key projects and implementing normalized regulatory measures on a negative-list basis.
 | A guest post by
|