Transcript Slide 1

TOWARDS A MORE SUSTAINABLE
GROWTH STRATEGY FOR CHINA
Joseph E. Stiglitz
CCER, Peking University
March 2008
30 Years of Reform
• Enormous successes
– In growth—average growth rate of 9.8% (8.4% GDP
per capita), historically unprecedented
– Moving more than 300 million people out of poverty
– Becoming the world’s fourth largest economy, the
third largest trading economy
• Constantly adapting economic strategies to
changing situations
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Movement towards the market economy
TVE’s, Joint Ventures
Joining the WTO
Building a harmonious society
New Challenges
• Growing Inequality (Ginii coefficient grown
from .29 to .47
– Including urban rural, migrant/permanent residents,
geographical disparities
– Including access to education and health
– Point of reference: U.S. .41; India, .31; Japan, .25;
Sweden .25; Brazil, .53
• Excessive dependence on exports
– High savings rate (42%)
– Growing global protectionism
New Challenges
• Environmental challenges
– Growth has put huge strains on the economy
– New global challenges of global warming
• Limited success in curbing energy usage and emissions
– China second largest energy consumer and source of carbon
emissions (may be no. ! Source of emissions by end of year)
– In spite of marked increases in energy efficiency (4.4% rate in 2004)
– China increasingly dependent on imported energy
• Adapting China’s economic model to changing situation
– As a result of China’s own success
– And the changing global landscape
– Has been hallmark of China’s success in the past
KEY CHALLENGE: MAINTAINING
ROBUST GROWTH
• Sustainable growth
– Economically sustainable
– Environmentally sustainable
– Socially sustainable
• Important to use appropriate measures of success
– What you measure affects what you strive for
• Accounting frameworks are important for firms but also
governments
– GDP is a bad measure, HDI is a better measure
– But there is a need to include resource depletion and
environmental degradation (green GDP)
– Metrics of inequality
– New global effort (OECD, Commission on the Measurement of
Economic Performance and Social Progress)
• Even more important for developing countries
11th Five-Year Plan
• 11th five-year plan laid out framework for dealing
with many of these challenges
– Including establishing a new economic model
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For example, new socialist countryside strategy
New innovation strategies
Less dependence on exports
More concern for the environment, growing inequalities
Need to create the institutional infrastructure for the market
economy
– But changes, e.g. in the global economy, new
understandings of the importance of global warming,
highlight need to strengthen key elements of that
strategy
Lessons from the looming
downturn in the U.S.
• Inadequate regulatory structures can have
profound economic and social
consequences
– Market fundamentalism is wrong
• Markets are not self-regulating
– Notion that regulators could rely on banks’ own risk
management systems and rating agencies was
questionable
– Products that were supposed to mitigate risk increased it
Long known lessons of economic theory, empirical
evidence, and historical experience had been ignored
• Downside of securitization
– new problems of information asymmetries
– Broadened scope for conflicts of interest (e.g. in
appraisals)
• Models were badly flawed
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Problems have been repeatedly noted
Fat-tailed distributions
Correlated risks
Systemic risk
New instruments were changing structure, implying
inferences based on past were of limited relevance
• As were incentive structures
Loss of Balance
– Balance between the market and government
• Market did not even produce products that would
help ordinary individuals manage their risks well
– Balance between “Wall Street” and “Main
Street”
• Systemic effects on the credit, financial system,
spill-over into the real sector
• 2 million Americans are likely to lose their homes
Challenge of designing
appropriate regulatory framework
• Not just in financial markets, but product safety,
workplace and worker protection, environment
– Can lead to a more productive economy and a more
harmonious society
• Not so much a question of too much or too little
regulation, but the design of an efficient, fair and
effective regulatory system
– Disclosure requirements, reducing scope for conflicts
of interests, mitigating externalities
– Complement tax and expenditure policies
– Distributional concerns cannot be ignored
Inequality
• Magnitude of inequality means that distributive impacts
have to be an important part of every policy decision
– Design of property rights legal framework
– Design of regulatory system
– Design of tax system
• Warning about excessive reliance on value-added tax
– Example—exchange rate policy
• In past, adjustment would have had adverse effects on farmers
• But with increasing food prices, these effects are no longer the
center of concern
– Rice price has increased 75% in past year
– To 25 year high
• But the impacts on inflation, cost of living in urban sector becomes
more important
• Exchange rate policy will help change structure of the economy
– Reduce dependence on exports
Weakening social protections go
counter to harmonious society
• And may even interfere with future productivity
• Most Chinese have no health insurance
– Families may be bankrupted by lack of health care
• Some estimate that 1 million children are not in
school because parents cannot afford fees
• China falling behind others
– Over past decade, China has spent less on education
and health than Brazil as % of GDP (Education, 20022005: 1.9% versus 4.4%; Health: around 5% vs.
8.8%; from 1978 to 2003, government share in health
expenditures halved)
– Contrast between India and China
• Trickle down economics doesn’t work
• Strategy of “Grow first, then deal with problems
of inequality” won’t work
– Lack of investment in health, education of children
has decade-long effects
• Political economy: wealth inequalities generate pressures to
preserve status quo, distort political process
– Most obvious in case of lobbyists, special interests, campaign
contributions
• China now has the resources to deal with the
problem
– Increased income
– Increased share of GDP going to government
Environment
• New IPCC report reflects growing awareness of the
problem
– Will affect all countries
– Matter of global social justice
• Global problem
– Requiring global solution
– China slated to become largest emitter in world
• Over past 30 years, emissions have grown 2.5 fold
• 1990-2004 have been growing at rate of 7.8%--slight increase in
emissions efficiency
• Though not in per capita terms
• Still, much higher emissions per dollar of GDP than OECD countries
• Many other “local” environmental problems (water, air,
toxic wastes)
• Environmental taxes may be most efficient and
effective way of dealing with problems in large
market economy
– Makes more sense to tax bad things than good things
– Additional revenues can be used to address other
social needs
– Including carbon taxes, recycling taxes
– Further benefit—help move China away from
dependence on resource intensive manufactured
exports
• Warding off initiative for “border adjustments”
– Hopefully, China’s leadership would be followed by
other countries
An Alternative
• China could auction off emission permits
• With revenues being used to achieve
broad social, environmental, and
economic objectives
– Problems of inequality
– Investments in innovation
– reforestation
But taxes alone are not enough
• Regulations and standards
– transportation, power plants, buildings cover large
fraction of emission
– May be particularly important given long life of assets
• Government investments and urban planning
– Public transportation
– Design of cities
• Green cities can also be more livable
• There is a place for planning even in a market economy
• Part of the balanced role discussed earlier
A dynamic economy and a dynamic
society requires constant change
A new economic model
• Resource profligate life-styles of West are not
viable in the long run—the planet cannot survive
• Innovation
– Focusing on saving resources, not saving labor
• Changing economic model can lead to a more
harmonious society
• Leading in these changes will provide China with
a competitive edge
• And lay the foundations for long term, robust
growth