Reform 2.0

Updated: 2012-03-02 08:47

By Andrew Moody (China Daily)

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Reform 2.0

Robert Zoellick (second right), president of the Word Bank, and Klaus Rohland (right), country director for China, at the release of the China 2030 report. Wu Zhiyi / China Daily

George Magnus, senior economic adviser for UBS in London and author of Uprising: Will Emerging Markets Shape or Shake the World Economy, says whatever road map is advocated for China over the next 20 years there is no certainty it will produce the result required.

"There isn't a riskless strategy. If the Chinese government goes for more radical reform it could induce the sort of economic slowdown it is very keen to avoid," he says.

"There are perhaps more risks the other way. If you do nothing, there is more chance of more dramatic slowdown later down the line."

One of the key recommendations of the China 2030 report is the need for greater innovation.

Bernhard Hartmann, managing director of management consultants A.T. Kearney in Greater China, believes this is true particularly in heavy industries such as chemicals in which he specializes.

"There are around 36,000 companies in the chemicals industry in China and only a handful of these would be classed as being at the high end. Many are at the high volume commodity segment of the market."

He says there has been innovation in China's major heavy industries in recent years but it would be a mistake to believe, as the report suggests, that exposing SOEs to market forces would necessarily make them more innovative.

"What China needs to do is design world-class companies out of its SOEs. These would be companies which could take on the likes of BASF," he says.

"There is a danger of assuming that this can only be achieved by some market-led approach. This is very much a Western mindset. It could be achieved through the existing structures."

The report places emphasis on how China can get to the next stage of development without falling into the "middle-income trap."

It has proved a barrier to many countries in the past, particularly ones in Latin America and also the former Soviet Union in the 1980s.

Others have succeeded, most notably Japan and South Korea, in making the transition to high-income advanced economies.

The difference with China is that if it does become an economy with a high per capita income, it would have a dramatic impact on the rest of the world being the world's most populous country.

Nobel laureate Spence is confident the Chinese government is aware of the challenge of passing through this barrier.

"You just can't run an early stage growth labor-intensive export model when your incomes are between $5,000 and $10,000 because you don't have comparative advantage and then you end up producing not very good economic results. The Chinese understand this," he says.

One area where China has the opportunity to make a great leap is in green technology.

According to the report, the country has "manifold environmental challenges", not least pollution in many of its major cities, but also has the opportunity to become a market leader in green technology.

Rohland at the World Bank says this represents a major opportunity.

"China has the chance to leapfrog and that is one of the advantages of being a developing economy. You can go from no telephones to mobile phones and ignore the fixed line stage.

"China has been very focused on photovoltaic technology over the past 10 years. Instead of following the West, it has the opportunity to take a lead in this area which could be for the benefit of the whole world," he says.

The China 2030 report also highlights the need for an adequate social security system.

One of the problems China has of moving from an export-orientated economy to one led by domestic consumption is the high savings rate of its population.

People put away money to pay for unexpected healthcare bills, to cover periods of unemployment and for their old age because of a lack of welfare provision. The report makes a number of recommendations, including benefits being portable from one city or province to another. At present a worker can lose all entitlement to benefits simply by moving.

Hans Hendrischke, professor of Chinese political economy and director of the Confucius Institute at the University of Sydney, says this needs to be dealt with on a national basis.

"Any solution cannot be only local, because migrant labor requires portability of social security claims. This affects labor issues, mobility and social stability," he says.

One area the report says China needs to address is its fiscal system, particularly in the area of local government.

A report last year by the National Audit Office, China's leading auditor, revealed local government debt to be 10.7 trillion yuan ($1.7 billion, 1.26 billion euros) in 2010, around a quarter of China's GDP.

Innes-Ker says the report was right to place emphasis on this.

"The Chinese government needs to look at reforming local government finances which are a bit of a disaster zone," he says.

"Local government has a spending requirement well above its income level and as a result of this they are reliant on land sales which simply cannot be sustained in the medium term because they will run out of land to sell. There needs to be a move very swiftly to an alternative funding system."

The China 2030 report also calls for China to play a larger role in multilateral institutions and to help shape "the global government agenda".

Zhu Ning, deputy director, Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, says China has made steps in this direction by hosting the Olympics in 2008 and the Shanghai World Expo in 2010 but needs to do more.

"The Olympics and World Expo drew the world to China. More meaningful openness has to continue to happen, with two-way exchanges at different levels such as government, commercial and educational entities," he says.

Concerns in China remain over such issues as growing income inequality between the rich and poor.

"The biggest challenges the Chinese government faces in the social sphere is the widening disparity in wealth as some elements of society reap huge profits from the explosive economic growth while most of the people lag far behind and increasingly see the system exploiting them," says Joseph Bosco, senior associate of the Southeast Asia program of the CSIS (Center for Strategic and International Studies) in Washington.

Spence of New York University, however, is confident China's leaders are aware of the risks in the next stage of development and will find a path of their own.

"I think the people who have been in charge of the reform process for several years understand the issues very well and are not inclined to go in the wrong direction."

Li Aoxue and Chen Jia contributed to this story.


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