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Stiglitz: Towards A More Sustainable Growth Strategy For China

Apr 18-2013   



 

 By GUO Nan

 

“Over the 30 years of reform and opening up, China has made successes that have attracted the whole world’s attention. First, China recorded an unprecedented annual GDP growth rate of 9.8% in these years; second, it relieved 300 million Chinese of poverty; third, it has become the 4thlargest economy and the 3rd largest trading nation of the world,” with these words did Joseph E. Stiglitz, “Cheung Kong Scholar” Professor with PKU, Economics Professor of Columbia University and Former Chief Economist of World Bank, a Nobel laureate in economics, comment on Chinese achievements in his speech entitled “Towards A More Sustainable Growth Strategy For China”on March 20th, 2008, in CCER.

 

Huge Successes in the 30 Years of Reform and Opening Up

 

Professor Stiglitz noted that China, through shifting from planned economy to market economy, reforming township enterprises, establishing joint ventures, entering the WTO, building a harmonious society, and so on, has been changing its economic policies to adapt to the development over the past 30 years. One important mark of China’s previous success has been its ability to adjust its economic growth pattern in accordance with its own successful experiences from economic practice as well as the changes of global situations.

 

However, Professor Stiglitz stated, China also faces new challenges today, including the problems of fairness and environment protection and the problem of how to sustain its strong economic growth.

 

The Challenge of Worsening Unfairness

 

Professor Stiglitz first pointed out that the unfairness in income distribution has worsened in China and the Geni coefficient, which measures the rich-poor disparity, has climbed from 0.29 to 0.47 in the country.  Among major economies, the Geni coefficients of the United States and China have risen drastically. Nevertheless, the current Geni coefficient of China, far greater than 0.31 of India and 0.25 of Japan and Sweden, has surpassed that of the United States, which is 0.41, and is approaching the figure of 0.53 of Brazil, a South American country recognized to have the world’s most serious poor-rich gap. Meanwhile, between the city and the countryside, between migrant population and local residents, and between different regions, the gap has been expanding, especially in terms of access to education and medical services.

 

He said that China has lagged behind other countries in terms of social security. For example, in the past decades, China’s ratio of expenditures for education and medical services has been much lower than that of Brazil.

 

Inadequacy in social security goes against the goal of building a harmonious society. Some people estimate that about 1 million children in China are not able to go to school because their parents cannot afford the tuition. Most Chinese do not have medical insurance, which may cause the bankruptcy of a family. 

 

 “The strategy of developing first and then coming back to solve the unfairness problems does not work,” warned Professor Stiglitz. “Inadequate investment in medical services and education will have an impact on China for decades to come.” In fact, China now has sufficient resources to solve the problem, including rising salary levels and more GDP flowing to the governmental departments.

 

Rise of Global Protectionism

 

The second challenge facing China is its excessive dependence on export and high rate of savings, which is as high as 42%, causing repeated surging of global protectionism.

 

 “As global economy slows down and U.S. economy enters recession, the probability of global protectionism has become higher.”  Professor Stiglitz believed that China is now in a good position to execute some policies discussed before and reduce its dependence on foreign trade.

 

Severe Environmental Challenges

 

Professor Stiglitz said that the whole world is now confronted with a series of environmental problems such as global warming.

 

In his opinion, despite Chinese leaders’ continuous attention to the environmental problems through the past 3 to 5 years, only limited success has been made in their solution. China has achieved only a little progress in controlling energy consumption and reducing emission of greenhouse gases.

 

The per capita emission of greenhouse gases of China, due to its much smaller per capita GDP, is lower than that of the United States, but the emission corresponding with each dollar of GDP in China is much higher than its U.S. counterpart. “China is set to replace the United States as the largest polluter of the world,” said Professor Stiglitz, anxiously. At present, China has become the second largest energy consumer and carbon dioxide emitter of the world. It is estimated that China will become the world’s largest carbon emitter by the end of this year.

 

In recent years, the energy utilization efficiency has advanced remarkably, reaching 4.4% in 2004. But this advance is far from enough to offset the influence of the fast economic growth of China. Besides, China has become more and more dependent on energy import.

 

Professor Stiglitz believed that environmental tax would be the most efficient and effective means to deal with environmental problems in large market economies. In the mean time, he said, taxing alone is not enough. A series of rules and standards should be stipulated, and governmental investment and urban planning, such as construction of public facilities and designing of cities, are also important. Sure, there is an alternative to solve the environmental problems, that is, the auction of emission permits. 

 

The Most Critical Challenge of Sustaining Strong Economic Growth

 

Professor Stiglitz said that the critical challenge to China is how to maintain its strong economic growth and realize sustainability of economy, environment and society.

 

On this issue, he said, it is essential to choose an appropriate index to measure economy. We like to talk about GDP growth rates, but GDP is not a good economic indicator, for it gives no consideration to economic, environmental and social sustainability.

 

He cited the economy of Argentina as an example. In early 1990’s, this economy kept growing at high rates. Measured by GDP, it seemed to be doing well. But then, what lied behind the GDP? Underpriced sale of the state-owned assets, though not reflected in the GDP, led to a very bad balance sheet of the country. Consequently, the economy could not sustain its growth, and finally collapsed in 2001.

 

Similarly, even though the economy is growing, the growth cannot be sustainable if resources are being exhausted and the environment is being destroyed. HDI is better than GDP. At least, “Green GDP” that takes into account resource consumption and environmental destruction should be adopted in place of GDP. In fact, there is now a global dynamic of rethinking how to rate economic development and social progress, which is presumably more important to developing countries.

 

Transform the Economic Mode to Meet Challenges

 

Professor Stiglitz gladly found that the “11th Five-Year Plan” of China has set up a framework for solving the above-mentioned problems and aims to establish a new pattern of economic development, which is reflected in elements like the “new socialist countryside” strategy, the new innovation strategy, reduced dependence on export, and more attention to environmental problems and unfairness in income distribution.

 

He said, “To remain dynamic, the economy and the society must make continuous adjustments.” In a long term, the way of living in the West that involves willful extravagance is not feasible. Only by changing its pattern of economic development can China develop a more harmonious society, gain competitive edges, and lay a foundation for the long-term sustainable growth of its economy.

 

Lessons from the Sub-Prime Mortgage Crisis in the United States

 

In the one-hour speech, Professor Stiglitz elaborated on the economic depression caused by the evolving sub-prime mortgage crisis in the United States. He believed that in the coming 25 years, the economy of the United States will experience the most severe recession since the Great Depression. This disaster of U.S. economy has taught a lesson to not only the United States but also all other countries, including China.

 

He said that the theory that advocates de-linking economies of other countries from U.S. economy is not correct. Chinese economy heavily depends on the United States, so the slowdown of U.S. economy will have impact on Chinese economy, and also cause serious depression of world economy.

He pointed out that improper regulatory system will have profound influence on economic and social development. And the market fundamentalism, which holds that the market itself is efficient, everything should be decided by the market, and the role of the government is only to avoid “standing in the way”, is wrong.

 

To a certain degree, the “invisible hand” theory introduced by Adam Smiths is right. That is to say, the market mechanism is an important component of the economy. However, “The hand is invisible because it does not exist at all”. The market cannot adjust itself, and the regulators cannot depend on the appraisal organizations or the risk control system of the banks themselves.

 

He sharply pointed out that the products originally designed to avoid risks exacerbated the risks instead in the sub-prime mortgage crisis. This fully demonstrates that this debt crisis has evolved into a systematic risk, and its consequence has gone beyond the credit sector and the financial system and has had an effect on the real economy. Two million people may lose their houses, which is an economic disaster as well as a social one.

The sub-prime mortgage crisis reveals the negative effect of securitization, which, though being itself a great invention to scatter risks, has brought a new type of information asymmetry.

 

Those stimulating innovative products or financial instruments will change the operational mechanism of the market, he said, but the securitization products that have caused the sub-prime mortgage crisis are not essentially innovative products and have not changed the operational mechanism of the market.

 

Professor Stiglitz stated that the U.S. government is now confronted with the challenge of designing a more appropriate regulatory framework. “The question here is not simply to avoid excessive or insufficient regulating, but how to design an efficient, fair and effective regulatory system.”

Stiglitz: Towards A More Sustainable Growth Strategy For China

Apr 18-2013   



 

 By GUO Nan

 

“Over the 30 years of reform and opening up, China has made successes that have attracted the whole world’s attention. First, China recorded an unprecedented annual GDP growth rate of 9.8% in these years; second, it relieved 300 million Chinese of poverty; third, it has become the 4thlargest economy and the 3rd largest trading nation of the world,” with these words did Joseph E. Stiglitz, “Cheung Kong Scholar” Professor with PKU, Economics Professor of Columbia University and Former Chief Economist of World Bank, a Nobel laureate in economics, comment on Chinese achievements in his speech entitled “Towards A More Sustainable Growth Strategy For China”on March 20th, 2008, in CCER.

 

Huge Successes in the 30 Years of Reform and Opening Up

 

Professor Stiglitz noted that China, through shifting from planned economy to market economy, reforming township enterprises, establishing joint ventures, entering the WTO, building a harmonious society, and so on, has been changing its economic policies to adapt to the development over the past 30 years. One important mark of China’s previous success has been its ability to adjust its economic growth pattern in accordance with its own successful experiences from economic practice as well as the changes of global situations.

 

However, Professor Stiglitz stated, China also faces new challenges today, including the problems of fairness and environment protection and the problem of how to sustain its strong economic growth.

 

The Challenge of Worsening Unfairness

 

Professor Stiglitz first pointed out that the unfairness in income distribution has worsened in China and the Geni coefficient, which measures the rich-poor disparity, has climbed from 0.29 to 0.47 in the country.  Among major economies, the Geni coefficients of the United States and China have risen drastically. Nevertheless, the current Geni coefficient of China, far greater than 0.31 of India and 0.25 of Japan and Sweden, has surpassed that of the United States, which is 0.41, and is approaching the figure of 0.53 of Brazil, a South American country recognized to have the world’s most serious poor-rich gap. Meanwhile, between the city and the countryside, between migrant population and local residents, and between different regions, the gap has been expanding, especially in terms of access to education and medical services.

 

He said that China has lagged behind other countries in terms of social security. For example, in the past decades, China’s ratio of expenditures for education and medical services has been much lower than that of Brazil.

 

Inadequacy in social security goes against the goal of building a harmonious society. Some people estimate that about 1 million children in China are not able to go to school because their parents cannot afford the tuition. Most Chinese do not have medical insurance, which may cause the bankruptcy of a family. 

 

 “The strategy of developing first and then coming back to solve the unfairness problems does not work,” warned Professor Stiglitz. “Inadequate investment in medical services and education will have an impact on China for decades to come.” In fact, China now has sufficient resources to solve the problem, including rising salary levels and more GDP flowing to the governmental departments.

 

Rise of Global Protectionism

 

The second challenge facing China is its excessive dependence on export and high rate of savings, which is as high as 42%, causing repeated surging of global protectionism.

 

 “As global economy slows down and U.S. economy enters recession, the probability of global protectionism has become higher.”  Professor Stiglitz believed that China is now in a good position to execute some policies discussed before and reduce its dependence on foreign trade.

 

Severe Environmental Challenges

 

Professor Stiglitz said that the whole world is now confronted with a series of environmental problems such as global warming.

 

In his opinion, despite Chinese leaders’ continuous attention to the environmental problems through the past 3 to 5 years, only limited success has been made in their solution. China has achieved only a little progress in controlling energy consumption and reducing emission of greenhouse gases.

 

The per capita emission of greenhouse gases of China, due to its much smaller per capita GDP, is lower than that of the United States, but the emission corresponding with each dollar of GDP in China is much higher than its U.S. counterpart. “China is set to replace the United States as the largest polluter of the world,” said Professor Stiglitz, anxiously. At present, China has become the second largest energy consumer and carbon dioxide emitter of the world. It is estimated that China will become the world’s largest carbon emitter by the end of this year.

 

In recent years, the energy utilization efficiency has advanced remarkably, reaching 4.4% in 2004. But this advance is far from enough to offset the influence of the fast economic growth of China. Besides, China has become more and more dependent on energy import.

 

Professor Stiglitz believed that environmental tax would be the most efficient and effective means to deal with environmental problems in large market economies. In the mean time, he said, taxing alone is not enough. A series of rules and standards should be stipulated, and governmental investment and urban planning, such as construction of public facilities and designing of cities, are also important. Sure, there is an alternative to solve the environmental problems, that is, the auction of emission permits. 

 

The Most Critical Challenge of Sustaining Strong Economic Growth

 

Professor Stiglitz said that the critical challenge to China is how to maintain its strong economic growth and realize sustainability of economy, environment and society.

 

On this issue, he said, it is essential to choose an appropriate index to measure economy. We like to talk about GDP growth rates, but GDP is not a good economic indicator, for it gives no consideration to economic, environmental and social sustainability.

 

He cited the economy of Argentina as an example. In early 1990’s, this economy kept growing at high rates. Measured by GDP, it seemed to be doing well. But then, what lied behind the GDP? Underpriced sale of the state-owned assets, though not reflected in the GDP, led to a very bad balance sheet of the country. Consequently, the economy could not sustain its growth, and finally collapsed in 2001.

 

Similarly, even though the economy is growing, the growth cannot be sustainable if resources are being exhausted and the environment is being destroyed. HDI is better than GDP. At least, “Green GDP” that takes into account resource consumption and environmental destruction should be adopted in place of GDP. In fact, there is now a global dynamic of rethinking how to rate economic development and social progress, which is presumably more important to developing countries.

 

Transform the Economic Mode to Meet Challenges

 

Professor Stiglitz gladly found that the “11th Five-Year Plan” of China has set up a framework for solving the above-mentioned problems and aims to establish a new pattern of economic development, which is reflected in elements like the “new socialist countryside” strategy, the new innovation strategy, reduced dependence on export, and more attention to environmental problems and unfairness in income distribution.

 

He said, “To remain dynamic, the economy and the society must make continuous adjustments.” In a long term, the way of living in the West that involves willful extravagance is not feasible. Only by changing its pattern of economic development can China develop a more harmonious society, gain competitive edges, and lay a foundation for the long-term sustainable growth of its economy.

 

Lessons from the Sub-Prime Mortgage Crisis in the United States

 

In the one-hour speech, Professor Stiglitz elaborated on the economic depression caused by the evolving sub-prime mortgage crisis in the United States. He believed that in the coming 25 years, the economy of the United States will experience the most severe recession since the Great Depression. This disaster of U.S. economy has taught a lesson to not only the United States but also all other countries, including China.

 

He said that the theory that advocates de-linking economies of other countries from U.S. economy is not correct. Chinese economy heavily depends on the United States, so the slowdown of U.S. economy will have impact on Chinese economy, and also cause serious depression of world economy.

He pointed out that improper regulatory system will have profound influence on economic and social development. And the market fundamentalism, which holds that the market itself is efficient, everything should be decided by the market, and the role of the government is only to avoid “standing in the way”, is wrong.

 

To a certain degree, the “invisible hand” theory introduced by Adam Smiths is right. That is to say, the market mechanism is an important component of the economy. However, “The hand is invisible because it does not exist at all”. The market cannot adjust itself, and the regulators cannot depend on the appraisal organizations or the risk control system of the banks themselves.

 

He sharply pointed out that the products originally designed to avoid risks exacerbated the risks instead in the sub-prime mortgage crisis. This fully demonstrates that this debt crisis has evolved into a systematic risk, and its consequence has gone beyond the credit sector and the financial system and has had an effect on the real economy. Two million people may lose their houses, which is an economic disaster as well as a social one.

The sub-prime mortgage crisis reveals the negative effect of securitization, which, though being itself a great invention to scatter risks, has brought a new type of information asymmetry.

 

Those stimulating innovative products or financial instruments will change the operational mechanism of the market, he said, but the securitization products that have caused the sub-prime mortgage crisis are not essentially innovative products and have not changed the operational mechanism of the market.

 

Professor Stiglitz stated that the U.S. government is now confronted with the challenge of designing a more appropriate regulatory framework. “The question here is not simply to avoid excessive or insufficient regulating, but how to design an efficient, fair and effective regulatory system.”