[China]China Needs Great Power Economics for Transformational Development
Lu Ming, Distinguished Professor, Antai School of Economics and Management, Shanghai Jiao Tong University, Executive Director, China Development Institute, Research Fellow, China Institute of Urban Governance, and Research Fellow, Shanghai Institute of International Finance and Economics.
After a semi-closed state during the planned economy, modern economics has taken root on Chinese soil since the reform and opening up, especially since the 1990s, and has grown into a huge tree. However, learning, spreading, imitating and catching up are not enough to face the complex and changing development landscape of China and the world today. China needs to take full account of the characteristics of transition, development and great power in its economic research.
Economics needs to be long-term, holistic and multidimensional oriented
In China today, economics can be used to translate "people-centred development" into long-term, holistic and multidimensional development goals. In this way, the tradition of economics can be carried forward and a reference point and a relatively consistent logic can be found in the discussion of many issues, avoiding unnecessary arguments over some vague concepts.
In the temporal dimension of development, it is important to optimise between short-term and long-term objectives, to achieve a reasonable ratio between investment and consumption, and to achieve a rational structure within investment for all types of investment, including physical, human and ecological capital.
In the spatial dimension of development, global development means establishing a large national unified market. In addition to eliminating inter-regional market segmentation in the commodity market, it is also necessary to optimise the allocation of resources across regions in the markets for factors of production such as labour, land and capital. It is necessary to adapt to the needs of economic modernisation and globalisation, and to achieve a relative balance in per capita income and quality of life between urban and rural areas and between regions in the process of rational movement and efficient concentration of production factors.
At the same time, development is a multi-dimensional goal. As the level of economic development rises, people will inevitably have needs for public services, income parity, a livable environment, cultural enrichment and many more. Different groups of people have different needs and need to find reasonable mechanisms to achieve common development.
Every country in the world has its own history, culture and institutional characteristics, and no country can claim to be perfect. Each country can use its long-term, global and multidimensional development goals as a reference, and build on each other's strengths and weaknesses, without being either presumptuous or arrogant. China has a long history and is a large country in transition and development. It is necessary for all social sciences, including economics, to work together to find the theoretical basis and practical solutions to achieve long-term, holistic and multidimensional development not only for China but also for all humanity.
2. The universality and specificity of economic development
The social sciences, including economics, study the behaviour of people and the societies made up of them, and draw out the laws from them. Although cultures, religions and customs vary from country to country, as long as human nature has something in common, then the laws revealed by economics are universal to all mankind. For example, as the level of economic development increases, the level of consumption rises, and the service sector gradually increases and diversifies as a proportion of GDP and employment - these are universal laws. By the same token, the economies of scale in the development of modern economies (especially in the service sector), and the resulting concentration of population from rural to urban and large cities, are also universal laws. Note that these developments, within large countries, necessarily manifest themselves in spatial changes of population and economy.
The economic phenomenon in China has both universal and specific aspects. For example, in terms of universality, as the level of economic development has increased, China has also seen rising levels of consumption, a gradual increase in the share of services, and the urbanisation of the population and its concentration around large cities. But we must also look at the specificities of the Chinese economic phenomenon and the institutional features of the transition period behind it.
China is gradually evolving towards a modern, market and open economy, but only 40 years ago it was an agrarian society, a planned economy and a semi-closed economy. If the market economy was based on price mechanisms, the free movement of factors of production and the protection of private property rights based on the rule of law, what China left behind during the planned economy was price controls, the planned allocation of factors of production and full public ownership. To this day, some of the characteristics of the transition period continue to influence whether China can achieve long-term, holistic and multi-dimensional development.
An accurate grasp of the universals and particularities in China's economic phenomena is a central issue in the development of Chinese economics. If we recognise the universality of economic laws for all human beings, then when we compare some of the phenomena of China's development on a global scale, we can see that China's urbanisation rate is on the low side, as is the consumption rate and the share of services; the spatial layout of the population is such that small cities account for a large share of the population, while the population within the metropolitan area, with the major cities as the core, is on the low side.
In terms of understanding, it is important to see the universality of economic laws and to actively confront the institutional and structural problems that constrain the speed and quality of development during China's transition. In academic research, three tendencies should be avoided in favour of a better construction of a large country economics of transition and development. To illustrate the point, the author also gives a few examples accordingly.
First, one cannot directly apply theories from the conditions of a free market economy to explain China. For example, in development economics, there are no barriers to labour mobility between urban and rural areas in Lewis' dual economy theory. The theory of convergence between regional economies is also based on the free allocation of factors of production, such as labour, across regions. While these theories can provide a reference for discussing long-term, global and multi-dimensional development, studying China requires the grafting of China's specific institutions and policies onto the above theories. The rise in labour wages and labour shortages in the more developed regions after 2003 was largely due to a policy inflection point rather than a 'Lewis inflection point'. On the one hand, there were still barriers to labour mobility across regions, which did not facilitate the convergence of income disparities between urban and rural areas and between regions. On the other hand, since 2003, the central government has increased transfer payments to less developed regions, tilted the allocation of land for construction, and so on, resulting in investment-driven economic growth in less developed regions, accompanied by faster minimum wage increases. In contrast, developed regions were subject to strict controls on land allocation for construction, which led to faster increases in house prices and higher costs of living that discouraged labour inflows and drove up wages. In general terms, there was a narrowing of the income gap between regions after the policy inflection point in 2003, but it was not the equalisation of factor returns between regions that is based on convergence theory.
Secondly, Chinese data is used directly to provide evidence for established economic theories, ignoring the particularities of China. There are two further cases in which this is the case, the first of which is where the generality of the Chinese economic phenomenon is seen, but the relevant research is not of sufficient academic value. For example, if the data show that the level of consumption in China depends on the level of income, this is something that could provide evidence for a theory of consumption. But it is not enough to conclude from this that raising consumption in China should raise income levels. For the really important problem in China is that higher consumer incomes (mainly labour incomes) are constrained by policies that encourage investment. At the same time, above a given level of income, consumption potential has not been unlocked because the social security system is inadequate and because a large number of mobile people have failed to citizenise in their place of work and need to save for their future return to their hometown. In another case, the institutional and policy context of China is ignored when explaining and seeking solutions to China's problems. For example, China's high house price to income ratio is often considered to be a bubble as perceived by textbooks. In reality, China's high house price-to-income ratio includes the value of public services tied to home ownership. Moreover, the really high house price-to-income ratios are mainly in some of the major coastal cities, which are areas where there is a large influx of population but where the supply of land and housing is strictly regulated. While it makes sense to control speculation on the demand side of high house prices, it is more important to see that high house prices are not primarily a problem on the demand side, but a "spatial mismatch" in which the supply side has failed to adapt to demand. In academic studies, however, the relative inefficiency of firms squeezed out of developed regions by high house prices after 2003 has been used as evidence of the 'selection effect' of firms in regional economic agglomeration. In a similar vein, a number of studies have used Chinese data directly to verify the inverted U-shaped curve between urban population size and labour productivity, while at the same time arguing that overpopulation in individual large cities has led to productivity losses. However, the reality is that population size projections made prior to large cities lagged well behind actual population growth, and the urban diseases that followed were due to inadequate provision in infrastructure, public services, etc., rather than to overpopulation. In these academic studies, if the institutional and policy context of China's transition period is not taken into account, then it is suggested that tighter controls are needed to solve the problems caused by them. In fact the opposite is true: China needs to orient itself towards a better market economy, build a large unified market, and improve the spatial allocation of production factors to serve high-quality development through supply-side reforms.
Third, the misconception that transformational features are the code to explain China's economic miracle. Transformation characteristics and the Chinese miracle go hand in hand, but there is no causal relationship. If there is a causal relationship, the transformational features are causing the problem rather than the miracle. It is important to see that China's economy has indeed gained rapid growth over the course of more than 40 years of reform and opening up, which is based on the universal laws of development of urbanisation, industrialisation and globalisation. At the same time, China's mega-markets and the government's role in providing infrastructure, among other things, have fuelled its rapid development, and even these Chinese particularities still imply the universality of modern economic growth theory and public goods theory. Beyond this, it is important to take a scientific approach to the relationship between other particularities of China's transition period and economic growth. 2000-08 saw a period of severe financial repression, with accelerated economic growth and a downward trend in the level of real interest rates, which resulted in rapid investment-led economic growth. There was also a period of undervaluation of the RMB exchange rate after China's accession to the WTO, which favoured the export pull to absorb domestic production capacity in that year. Over the last 20 years, China's urban land area expansion has far outpaced the rate of urbanisation of its population. During this period, local governments financed themselves through land development, incurring large amounts of debt but also indeed driving local economic growth. Local officials' assessment objectives based on maximising GDP and tax revenues have in turn fuelled these forms of economic growth. But it has to be theoretically clear that the above-mentioned short-term, local and unidimensional economic growth during the transition period is accompanied by precisely institutional and structural problems that are not conducive to long-term, global and multidimensional quality development. Without theoretical clarification of these issues, the imperfect markets of the transition period and the "competition for growth" behaviour of local governments will be seen as the cause of the Chinese miracle, to the detriment of a consensus for a higher level of reform and opening up.
3. The Political Economy of a Transitioning Power
As a large country in both the demographic and territorial sense, China faces the challenge of a historically inherited great power governance structure for quality economic development at home, and at the international level, a harmonious coexistence between an increasingly large economy and the global economy. For this reason, Chinese economics needs to strengthen its research on large countries in transition.
Firstly, in a large country like China, the unique central-local and inter-local relations have far-reaching implications for economic development. Not long ago, the Central Committee of the Communist Party of China and the State Council have issued the Opinions on Accelerating the Construction of a Unified National Market. With regard to how to bring the advantages of the central coordination mechanism into play and, at the same time, overcome the obstacles of traditional institutions and concepts to a unified large market, both to prevent localities from going their own way and to avoid a national one-size-fits-all policy, it is important to strengthen the study of the spatial political economy of large countries.
Secondly, modern economics has always lacked a major breakthrough on the issue of transformation, and Chinese economics research is yet to contribute to this. Long-term, holistic and multidimensional development goals and a sound market economy are an ideal state. But in the practice of transition, there is a need to go into the optimal pace, mode and path of transition. While thinking about and estimating the benefits to be gained from the transition, it is also necessary to confront the conflicts and contradictions arising from the transition in the context of established social attitudes and resource allocation. Long-term, holistic and multidimensional development goals cannot be achieved overnight, but rather on a smooth and gradual path.
Thirdly, as China's economy grows in size, its impact on the global economy is bound to increase, and research on the economics of large countries should be deepened. The future of the global economy will be shaped by the cooperation or games between the world's major powers (or economies). At the same time, all mankind is facing some common problems in terms of carbon emission reduction, common prosperity and data security, and China, as a big country, is duty-bound to come up with solutions based on Chinese culture and Chinese practice. In the current new stage of development, China insists on following the path of a socialist market economy with Chinese characteristics, while proposing, at the same time, to build a community of human destiny. China has to establish the basis for international interaction and cooperation under the goal of long-term, holistic and multi-dimensional development, under the universal principles of market economy and under the leadership of core socialist values. At the same time, it is important to build on the strengths and avoid the weaknesses of China's institutions in transition, and to take advantage of the development experiences from other countries, so as to promote the community of human destiny towards a mutual appreciation of civilisations and to avoid a clash of civilisations.