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Wu Jinglian, prominent pro-market economist, on China's economic reforms
What's the lesson for today from 40 years of reform? A contingent response to slowing growth is necessary but far from enough - only further reforms offer fundamental solutions.
Wu Jinglian is one of China’s most prominent and influential pro-market economists. Recently, he wrote a preface to the second edition of《中国经济改革进程》China's Economic Reform Process published by the Encyclopedia of China Publishing House, where he reviewed not only the 40-plus years of reform but also its lessons for what China faces today.
The preface has been published in a number of outlets, including Caixin, where it is dated December 15, 2022. Below is a translation.
(Wu Jinglian, one of China’s most prominent pro-market economists, in 2009. Gilles Sabrié for the New York Times)
This book is a work first published in 2018 to commemorate the 40th anniversary of China's reform and opening up. Four years have passed, and many new phenomena have emerged in China's economy, especially in the past two years, when China's external environment has become more complex and uncertain. Domestic economic development is also facing many risks and challenges.
At present, China's economy has not yet come out of the 三期叠加 "three-phase superposition." That is, the 经济速度换档期 “transition period in respect of the growth rate,” the 经济调整阵痛期 “throes period for structural adjustment,” and the 前期刺激政策消化期 “digestion period for early-stage stimulus policies.” China is also facing the “triple pressures” of shrinking demand, disrupted supply, and weakening expectations. At a time when the government is taking a series of policy measures to "stabilize the base of the economy" and deal with the challenges, what is the significance of reprinting this book on the history of 40 years of reform and opening up?
In my opinion, in that situation, a contingent response is necessary. However, it is far from enough, as the current situation results from history. Take the current difficulties we encounter, while it is true that there are certain accidental factors, such as Covid-19 exacerbating the problems, a large number of other issues were not born recently. If we are constrained by our tradition of ignoring theoretical thinking while eagerly chasing after ever-changing superficial phenomena and giving superficial answers to so-called "hot issues", or treating merely symptoms rather than the illnesses that caused the symptoms, we won’t be able to fundamentally solve the problems.
For quite a long time, China's economy has faced two fundamental problems: the first is how to change from the high-target, high-input, and low-efficiency growth mode of the past to an efficiency-driven growth mode to achieve sustained high-quality development. The second is how to change the closed and rigid backward system of the past and build a vibrant and dynamic system. The basic content of this book, China's Economic Reform Process, reviews the theoretical debates and policy evolution related to these two fundamental issues from the mid-1970s to the mid-2010s.
After the end of the "Gang of Four" and the "Cultural Revolution," the first major problem of China's economic development was that the old way of growth became a heavy burden for the Chinese economy, making it difficult for it to really "take off." To this end, the 1981 Report on the Work of the Government, approved by the National People's Congress in 1981, called for the adoption of "ten principles for economic development, " “centering on improving economic efficiency," and "coming up with a way to achieve a better development pace, better economic efficiency, and better benefits for the people.” Unfortunately, only one year later, the new policy was criticized by politicians and theorists who claimed to 坚持马克思主义再生产理论 "adhere to the Marxist theory of social reproduction," and the old way of economic growth reverted to a certain extent.
Due to the inevitable consequences of the extensive growth method, economic overheating and inflation were repeatedly seen in 1984-1985 and 1992-1993. So in 1995, when studying the formulation of the Ninth Five-Year Plan (1996-2000), then State Planning Commission proposed to change the mode of economic growth from investment-driven extensive growth to efficiency-driven intensive growth.
After extensive and in-depth discussions, the "Proposal of the Central Committee of the CPC on the Ninth Five-Year Plan for National Economic and Social Development and a long-range objective for 2010" and the "Outline of the Ninth Five-Year Plan and Visionary Goals for 2010 for National Economic and Social Development of the People's Republic of China. The "Outline" decided to "implement two fundamental changes of overall significance," one to "change the economic system from the traditional planned economic system to the socialist market economic system" and one to "change the mode of economic growth from an extensive to an intensive one." In the years after 1995, thanks to the progress of these two fundamental transformations, China's economic development ushered in a new phase of faster and more efficient growth. In 2010, it surpassed Japan to become the world's second-largest economy in terms of GDP.
However, the outstanding GDP growth during the Ninth Five-Year Plan has led to the misconception that China has completed the transformation of its economic efficiency and growth pattern. Since the Tenth Five-Year Plan (2001-2005), supported by expansionary fiscal and monetary policies, massive investments poured into launching new projects, which were in full swing nationwide. Using "performance projects" and "vanity projects" to promote rapid economic growth became the choice for some cadres and officials to “beautify” their political achievements and enhance their status. As a result, the negative consequences of the extensive growth approach were rapidly accumulating, and the momentum of economic overheating and inflation reared its head again between 2005 and 2007.
Under this circumstance, the Third Plenary Session of the 16th Communist Party of China (CPC) Central Committee in 2006 criticized the "incorrect view of political achievements," and the 17th CPC National Congress in 2007 proposed "the strategic task of accelerating the transformation of the mode of economic development." In 2010, the Fourth Plenary Session of the 17th CPC Central Committee adopted the "Proposal of the Central Committee of the CPC on the Formulation of the 12th Five-Year Plan for National Economic and Social Development," which highlighted that "a comprehensive assessment of the international and domestic economic situation shows it is urgent to transform the mode of economic development," and thus reiterated the requirement of "accelerating the transformation of economic development.”
However, people are more used to analyzing the long-term economic growth problem with short-term Keynesian analysis focusing on the demand side. With the outbreak of the global financial crisis in 2007, which started with the subprime mortgage crisis in the U.S, to cope with the impact on China's economy, the government once again turned to expansionary fiscal and monetary policies to expand domestic demand and maintain a stable and rapid economic growth. Thus, as the transformation of the economic development approach did not make substantial progress, and expansionary macroeconomic policies continued to be adopted to support economic growth, China's national balance sheet showed symptoms of high leverage. The government and many enterprises were heavily indebted, brewing a growing financial risk. This made the central leadership propose at the end of 2013 that China's economic development had entered a "three-phase superposition." That is, the “transition period in respect of the growth rate,” the “throes period for structural adjustment,” and the “digestion period for early-stage stimulus policies.”
To deal with the difficulties in economic development during the “new normal” period, there was a major debate in the mid-2010s about what development criteria China should follow and what development approach it should adopt. As a result, the 13th Five-Year Plan (2016-2020) clarified the basic ideas for economic development, calling for a shift from high growth to high-quality development driven by further reforms and focusing on improving supply-side efficiency.
The problem, however, remains that making the right decisions does not mean they are followed through, just as what we have experienced in the first 30 years or so of the People’s Republic of China. China's Economic Reform Process outlines how this basic idea was decided and implemented in the mid-2010s. It also explained that if we fail to follow such thinking to overcome the difficulties, the macroeconomic policy will be caught in a dilemma, and economic development will be in a seesaw situation (when one end goes up, the other end goes down).
If the intensity of fiscal and monetary policy stimulus is reduced to prevent financial risks, the GDP growth rate will decline further. Maintaining a higher growth rate requires increasing the intensity of the stimulus, but then leverage will accelerate, and the possibility of systemic financial risk will rise. If the stimulus policies are repeatedly used, with strong investment to promote economic growth, the leverage will further increase and elevate the financial risks, triggering the so-called "balance sheet recession.”
These historical lessons in dealing with economic development are clearly still worth exploring today. In addition, in the past, China relied on expansionary fiscal and monetary policies to drive growth, which resulted in excessive leverage and balance sheet crises. That’s the lesson for short-term measures, such as easing credit and increasing investment. The emphasis should be on promoting efficiency and achieving high-quality development.
Another, and perhaps more fundamental, issue facing China's economic development is institutional reform. The core and essence of the economic system reform lie in the different ways of resource allocation - whether to be governed by the market price mechanism or by administrative orders and state plans. In summary, it means whether the market or the government plays a decisive role in resource allocation.
As early as the late 1970s, which was the beginning of reform and opening up, insightful people in and outside the government had already reached a consensus to carry out market-oriented reforms, introduce market mechanisms and make use of the law of economics. Afterward, the establishment of a socialist market economy and the rule of law were both solemnly written into the resolutions of the Congresses of the CPC and the plenary sessions of the CPC Central Committee.
However, market-oriented and rule-of-law reforms do not straightforwardly achieve their predetermined goals. Market-oriented reforms made great progress in the late twentieth century, which led to a sustained acceleration of China's economic development at the end of the century and soon made it the second-largest economy in the world. However, advocates of government-led resource allocation have repeatedly criticized market-oriented reforms, arguing for greater direct or indirect government control over resource allocation, which has impeded the reform process and even caused the economic system and economic policies to take the opposite direction/to go backward. It was not until backtracking was abandoned that economic development and economic reform returned to the right path.
Since the reform and opening up of China, there have been many discussions about whether the market or the government should lead the allocation of resources. China's Economic Reform Process provides a concise historical account of five of these discussions, as well as the intellectual debates behind them, and offers its own commentary on them.
One of the most significant counterattacks by the faction that insists on government domination happened at the beginning of this century. After the 14th CPC National Congress in 1992 decided that the goal of China's economic reform was to establish a socialist market economy, the Chinese economy embarked on the path of building a financial market system that was uniform and open and with orderly competition. However, due to the insufficient progress of reform in some areas and the dominant role of government departments in some important areas, the entire economic system took on the transitional characteristics of "semi-government, semi-market."
Under such a dual-track system where planning and market co-exist and administrative intervention and free price co-exist, the administrative power interfered extensively in microeconomic activities so that rent-seeking and corruption gained a broad institutional basis. The construction of a state with the rule of law was seriously lagging behind, and problems such as the spread of corruption and the widening gap between the rich and the poor intensified. This has led to public discontent.
The opponents of the market economy took the opportunity to blame the reform for the problems, which were actually caused by the inadequate promotion of market-oriented, rule-of-law, and democratic reforms. They demanded the reinforcement of government control over society, the allocation of resources, and government intervention in the micro activities of enterprises. They strongly encouraged - and even openly demanded - the reversal of China’s historic abandoning of the ultra-leftist "taking class struggle as the key link" route. They called for the "vindication" of the leader of the "Gang of Four," the leaders of the ultra-leftist route, and "another Cultural Revolution."
Under the influence of this trend in thoughts, populism and narrow nationalism have risen sharply, and some reform measures related to constructing a market system have been attacked. In some areas, there has even been a trend of "the advance of state-owned enterprises and retreat of private enterprises"”
Fortunately, the 18th CPC National Congress in 2012 lived up to the public's expectations by resisting this counter-current of history and by deciding to "deepen reforms in important areas with greater political courage and wisdom, without losing the momentum.” In 2013, The Decision on Major Issues Concerning Comprehensively Deepening Reforms (The Decision) was adopted at the close of the Third Plenary Session of the 18th CPC Central Committee.
The Decision not only clarified that "Economic system reform is the focus of deepening the reform comprehensively. The underlying issue is how to strike a balance between the role of the government and that of the market, and let the market play the decisive role in allocating resources and let the government play its functions better," but also extended the reform to other aspects of the social system.
The Decision pointed out that "The overall goal of deepening the reform comprehensively is to improve and develop socialism with Chinese characteristics and to promote the modernization of the national governance system and capacity.”
This made clear the direction of economic and political reform and put forward a set of specific reform requirements for the transformation from a transitional system to a modern market economy based on rules, in other words, a "market economy based on the rule of law".
Under the condition that the top-level design, roadmap and timetable of comprehensive reform have been clearly defined, the key lies in the implementation and execution.
China's Economic Reform Process, published in 2018, only in the final paragraphs outline the resistance and obstacles that must be overcome to comprehensively deepen reform and the methods to promote comprehensive reform into concrete actions. The book hasn’t got time to provide a specific analysis of the progress and shortcomings of reform since the Third Plenary Session of the 18th CPC Central Committee in 2013. However, as we seek solutions to the current problems, we can still draw lessons from our observations and reflections on the reform and opening-up process.
Take "weakening expectations" - the key to the "triple pressures" - as an example, while this problem began to emerge prominently due to recent factors such as the pandemic, the change in people’s minds behind it, such as the lack of confidence of entrepreneurs in obtaining a good business environment and policy environment, grew over a longer period of time.
We may recall that when the resolutions of the 18th CPC National Congress and the Third Plenary Session of the 18th CPC Central Committee started to be implemented in 2013, how viable and ambitious the market players were. They enthusiastically invested in opening new businesses and expanding their enterprises. From 2013 to 2019, the number of private enterprises, including individual business households and private enterprises, increased by 107% to 118 million; among them, the number of private enterprises with more than eight employees increased by 183% to 35.16 million. They have made great contributions to strong economic development.
But soon, voices that ran counter to the decisions of the 18th CPC National Congress and the Third Plenary Session of the 18th CPC Central Committee gradually emerged. At the beginning of 2018, a prominent professor from a prestigious university raised the opinion that "the common development of enterprises under all forms of ownership is a special phenomenon at the primary stage of socialism, which cannot be solidified and eternalized" and "every measure we take according to the actual situation should be a step toward communism" and that we should "gradually eliminate private ownership."
[Pekingnology: that’s 周新城 Xincheng Zhou, a professor of Marxism at Renmin University in Beijing.]
Later, a senior figure in the financial sector also argued that "China's private economy has completed its task of assisting the development of the public economy and should gradually phase out". Although the "private economy leaving the market" theory was rejected by the mainstream press, this trend of opposing market-oriented reforms did not recede and continued its attacks. In the atmosphere of crusades against capital and depressing private enterprises, many entrepreneurs are anxious and confused and lack the motivation to invest and start their own businesses.
[Pekingnology: the author's name is 吴小平 Xiaoping Wu, who claims to be a senior financier. But he isn’t exactly someone with a high profile.]
Based on experience, to restore and strengthen the confidence of market players, giving entrepreneurs "something capable of setting somebody's mind at ease" and comforting them will have a certain effect, but not necessarily a great one. In my opinion, the most important thing is to open the market, the rule of law, and democratization; untie regulations and decentralize power for the market and all kinds of market players; provide enterprises with the ability to operate independently in the business environment and the freedom to enter the market as long as there is no legal prohibition, and maintain policies for an environment for fair competition.
To sum up, China's Economic Reform Process records observations on the process of reform and opening up and reflections on related issues, expecting to provide some references for readers to study the problems of China's economic development and explore the paths to overcome the current difficulties. This is also the intention of reprinting this book. As the author, I would feel sincerely happy if this book could serve the purpose.
(The Second Edition of China's Economic Reform Process was published by the Encyclopedia of China Publishing House in January 2023.)
About the contributors:
Zhang Xinyi is a Master’s student in journalism at the University of Hong Kong. She got a bachelor’s degree in English language and literature from Peking University in July 2022. She has interned in ByteDance, CITIC publishing group, and Ogilvy. She also volunteered in the 2022 Beijing Winter Olympics in its news operation.
Han Yuxi is a Master’s student in Diplomatic English Interpretation at Sun Yat-sen University in Guangzhou. She holds a double bachelor's degree in translation and applied psychology and has interned at International Finance Forum, Intellisia Institute, and World Peace Forum. Her research interests focus on Chinese diplomacy, international organizations, and regional studies in the Middle East.
Check out the latest piece in The East is Read, which focuses on more concrete policy matters.