Download New State Activism

Chinese Economic Policy since
the Global Financial Crisis:
The New State Activism
Barry Naughton
University of California, San Diego
Rio de Janeiro
Since the Global Financial Crisis…
• The financial crisis was a major turning point
in Chinese economic policy.
• Government has become much more actively
engaged in shaping the trajectory of economic
development.
• Two simple points:
– This change is new and significant.
– It represents an enormous gamble, with costs and
benefits that are not yet known.
1. Background: The Big Picture
• By the turn of the 21st century, China had
accomplished two remarkable things.
• No. 1, it had established the fundamental
framework of a market economy, including
– A substantial role for private business
– A solid foundation for public finances
– Agreement on a framework for international
exchanges, through W.T.O. accession.
– Rudiments of a domestic legal and regulatory
framework.
Diverse Ownership Structure
Table 1: 2009 Industrial Output and Employment
All Large-Scale Industry (Output above 5 million RMB)
Output Value Share
Employment Share
Total
54,831
88.3
State Owned & Controlled
14,663
26.7%
18.0
20.4%
Domestic Private
16,203
29.6%
29.7
33.6%
Foreign-Invested
15,269
27.8%
24.5
27.7%
Table 2: Exports by Ownership Category (Percentage Share)
1997
2005
2010
State Owned Enterprises
56.5%
22.2%
14.9%
Foreign-Invested Enterprises
40.8%
58.3%
54.6%
Private and Collective Firms
2.8%
19.5%
30.5%
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
25%
1996
Budgetary Revenues
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
30%
1981
5%
1980
1979
1978
Percent of GDP
Fiscal Revenues and Industrial SOE Profits
40%
35%
Launch new tax
system and SOE
reform
20%
15%
10%
Industrial SOE Profits
0%
No. 2: High Input, High Growth
• An institutional framework that was highly tailored
to support investment and growth.
• Highest physical capital investment rate in the world;
• Very rapid labor force growth.
• Highest sustained growth rate ever achieved by any
economy.
• High cost: Consumption/GDP low; energy and
materials usage high; pollution serious; income
distribution bad & deteriorating.
• Not sustainable: Labor force growth and structural
transformation must slow down; as incomes and
wages rise, will China face “middle income trap”?
2.Hu-Wen Administration (2003-13)
Sought to Modify Economic Strategy
Reform Fatigue: High unemployment after mass
lay-offs; health system collapsed; anxiety
about impending WTO membership.
Sought a “people-oriented” policy (以人为本),
and a “harmonious society (和谐社会).
What was the content of these new policies to
be? How radical a departure from the 1990s?
Examine three key policy areas to find out:
A. Rebuild Welfare Institutions
Cautious and incremental effort to rebuild social service
institutions and reduce the large urban-rural gap. Moderate
but unambiguously positive effects:
• Agricultural taxes reduced, then abolished.
• To accommodate the reduction in local revenues the national
fiscal system became much more redistributive.
• Pilot program to promote universal free elementary education
created and gradually expanded.
• Pilot rudimentary rural cooperative health insurance scheme
created and gradually expanded.
These initial programs were highly consistent with, and
complementary to, a well-functioning market economy.
A more fundamental re-thinking?
The 11th Five Year Plan, to cover 2006-2010, came out at the end of 2005.
The Plan was the product of a surprisingly wide process of consultation and
brain-storming, more of a vision statement than a traditional five-year
plan.
Innovative elements included an emphasis on environmental improvement
and sustainability.
Most important was an emphasis on investment in human resources. This
reflected both a backward-looking critique of China’s physical capital
investment-driven growth model, as well as a forward-looking awareness
of the need to shift to a more sophisticated development strategy as China
approached middle-income status.
The plan was very general, so it was left unclear what measures government
would take to implement the plan; there was an ambiguity here is
between social policy (adapted to these changes) and social engineering
(driving the changes).
B. Stabilize State Ownership
State Asset Supervision and Administration Commission (SASAC)
created to exercise authority over the large central-run firms.
A reform step in that SASAC is an “ownership agency,”
independent of the government administrative apparatus,
with control limited to defined set of subordinate companies
But SASAC was also a step toward decelerating ownership reform.
Core mandate to “maintain and increase of the value of public
assets.” End of managerial buy-outs for large firms, and new
commitment to maintain a significant state sector.
SASAC never succeeded in articulating clear limits to public
ownership, failed effort in 2007. Too many sectors included,
and list never publicly released.
Ambiguity between further reforms of state firms through
improved corporate governance, versus protecting and
rebuilding the size of the state sector.
C. Technology / Industrial Policy: Medium - Long
Term S&T Development Program (2006-2020)
• Introduces “indigenous innovation.” Argues: “Experience shows us
that we cannot buy true core technologies in the key fields that
affect the lifeblood of the national economy and national security.”
• Lays out 16 Engineering “Megaprojects.” These are “to be
completed within certain time frames through core technology
breakthroughs and resource integration in order to achieve national
goals; they are the priority of priorities in China's S&T
development.” Including:
–
–
–
–
very-large-scale integrated circuit manufacturing technologies
nuclear power stations with large-scale advanced pressurized water reactors;
prevention and treatment of AIDS, viral hepatitis, and infectious diseases;
large civilian aircraft; etc.
• Instruments such as taxation relief; procurement preference; and
subsidized credit.
• Ambiguity: Nationalist, centralized and top-down, but incremental.
An Ambiguous Shift in Direction
By the middle of the decade, the Hu-Wen Administration had engineered a
coherent shift in overall economic development policy. The 1990s
emphasis on building market institutions and reforming the economy had
been replaced with a new emphasis on rebuilding social institutions and
investing in human resources and technology.
The shift away from economic reform was not large and it did not undo any of
the major achievements of earlier reforms. Moreover, it was concentrated
in areas where market failures are known to be severe: health care,
insurance, education, and investment in new technology.
The new development strategy had many positive aspects. The emphasis on
human capital investment was a positive alternative to over-investment in
physical capital. The shift to sectors with a higher skill content was a
natural step in China’s rapid development, and consistent with evolution
to a more diverse and sophisticated labor force, that would also create a
more diverse and sophisticated domestic consumer market.
More government steerage and intervention in the economy was compatible
with a modest course correction, and a positive synthesis between a
market economy and government intervention.
3. The U.S. financial crisis changed
everything.
It shattered a 30-year-old presumption that the US model was the
best & that China would move steadily in this general direction.
It elicited a very strong stimulus response in China, which was
successful in insulating China from the worst of the crisis. We
would consider this a strongly Keynesian response to crisis (to
be wound down after the crisis is past).
The Chinese leadership concluded that this was evidence of
broader strength, and for the first time argued that their
current system of strong government and market economy is
superior to a U.S.-style system (no need to scale it back).
China’s current successes and problems all trace back to the
choices made in late 2008-early 2009. First among these is a
surge of liquidity.
Crisis caused the acceleration and
reformulation of the development
strategy shift already underway.
Increasingly common rationales included:
• We have to pump money into the economy to avoid
crisis anyway, so we can do the things we’ve always
wanted to do.
• The advanced countries will pump money into their
economies to support their strategic industries of the
future, so we have to do the same, or we will be left
behind.
• The ability to shape the macroeconomic trajectory is a
strength of our system, so we should use it pro-actively.
The emphasis on re-balancing was played down; the
emphasis on direct government intervention to
restructure the economy was increased.
40%
Growth of Credit and CPI
35%
30%
Growth of Domestic
Currency Bank Lending
20%
15%
10%
Growth of Consumer
Price Index
5%
Feb 11
July 10
Jan 10
July 09
Jan 09
July 08
Jan. 08
July 07
Jan. 07
July 06
Jan. 06
-5%
July 05
0%
Jan. 05
Growth over Year Previous
25%
Rapid expansion and acceleration of
local projects and national programs
Planned infrastructure investment of 4 trillion RMB
(US $586 Billion) was announced quickly, but the
overall response was much bigger, more complex.
Tens of thousands of local infrastructure projects
were launched; but so were hundreds of largescale central government projects.
Example: “16 Mega-Projects” to be rolled out
gradually over 15 years 2005-2020. In early 2009,
decided to begin all 16 by year-end.
Agreed to give Chongqing aid and policy breaks
worth 800 B. RMB through 2020 to support
“Chongqing Model”
Shanghai-Hangzhou line, October 13, 2010. (Just Opened for passengers.)
China’s high speed rail is an example of a project under
development for a long time, that was suddenly
accelerated in the wake of the global financial crisis.
Stimulus Policy was Successful, and
success was interpreted broadly.
We learned from the crisis the need to
“fully bring to bear the superiority of the
socialist system in effective decisionmaking, a powerful organization and
concentrated power to accomplish big
things.”
“充分发挥我国社会主义制度决策高 效、
组织有力、集中力量办大事的优势。”
– Wen Jiabao, Government Work Report, March 2010,
reporting on the official lessons learned from the
crisis.
4A. Expansion of Social Policies
Health: Within the last three years, China has rolled
out two new health insurance plans that
complement the existing urban formal sector
insurance. Together these cover more than 90% of
the population by the end of 2010.
The level of individual coverage is modest, but the
total outlays of $60 billion projected for 2011 is
substantial. Only 1% of GDP, but up from almost
nothing a few years ago.
Government has taken over direct management of
most clinics, as well as procurement of a list of 307
categories of drugs, and enforced an average price
reduction of 40%. This was the major source of
clinic revenue that government is now replacing.
Expansion of Social Policies (cont.)
Housing: Major move into provision of public
housing. For sale at subsidized prices, and
creation of public housing rental sector.
Plans: 2010: 5.9 m. M2
2011: 10.0 m. M2
Ambitious plans—calling for about 15-20% of all
2011 construction to be public housing—
probably will not be fulfilled.
Similar trends apparent in education, social
welfare and pension spending.
4B. State Ownership
• A lively discussion has emerged in China about “the
state advancing at the expense of the private sector”
(国进民退). State firms bulked up on credit and
expanded their business lines.
• Central SASAC has substantially more employees
now (about 12 million) than it did when it was
created in 2002 (8.6 million).
• As important as the quantitative dimension is the
newly vindicated ideological position of state firms,
who can lead technologically. For 2011, SASAC’s
primary task is grow central state firms into “globally
competitive national champions.”
4C. Technology / Industrial Policy
“Indigenous Innovation”: Policy was always
vague with multiple strands. New in 2009-10
was: “the degree of intensity and
simultaneous use of multiple tools” (Scott
Kennedy), used with overlapping, and
unpredictable impact.
• Technical Standards
– Used strategically to privilege local technology and
increase bargaining power over royalty payments.
– Full roll-out of TD-SCDMA (indigenous 3G telecom
standard) is green lighted at beginning of 2009.
Overlapping Policies of Indigenous
Innovation (Cont.)
• Patent rules that require disclosure of
technologies used in vital national standards.
• Required disclosure of sensitive technology for
information security.
• Procurement preference for products with
“indigenous technology” content; combined with
an indigenous innovation product list.
• Collusion among government agencies with the
objective of protecting local producers.
• Rapid increase in subsidies to individual firms and
to R&D process in general.
“Emerging Strategic Industries”
7 Designated Sectors, with
35 sub-sectors or
projects:
– Clean energy (solar and
wind)
– Electric vehicles
– New materials, esp.
nanotech, composites and
rare earth.
– Precision Machinery,
including Aeronautics and
high-speed rail.
– Biotech industries, esp.
transgenic plant breeding
– Advanced
telecommunications
networking
– Environmental protection
equipment
These sectors account for only
2% of China’s GDP today, but
planners call for growth to 8% by
2015 now written in to 12 FYP. Is
this realistic?
Commitments to Large Programs
The government explicitly commits, in the 12th Five Year Plan
“Suggestions” to finishing up the many projects initiated during the
stimulus program of 2009.
The 12th FYP also commits to increasing the degree of financial and
policy commitment to the “Strategic Emerging Industries.” (It even
slips in an eighth emerging industry, “oceanic industries,” which gets
its own section after failing to make it into the Strategic Emerging
Seven.
The other major social initiatives, including about $60 billion for health
care (400 B. RMB) in 2011 are built into upcoming plans.
Public housing is projected to build 10 million units in 2011.
Government commitment to a range of industrial policy measures is
strong, and perhaps accelerating>
--16 Megaprojects
Total budget of projects under construction was 126% of GDP by the
end of 2009; and 130% of GDP at the end of 2010.
Projects begun, or accelerated, as stimulus measures now seem to have
become part of long-run development plans.
A New Direction
Taken together, these changes amount to a breath-taking
gamble on the ability of the Chinese government to
shift the pattern of economic development.
Ideas that had been accepted by the government but
were being cautiously and partially implemented are
now being accelerated across the board.
It is clearly the intention of the Chinese government to
maintain the far higher level of government
involvement with the economy that was triggered by
the global financial crisis.
More ambitiously, the objective is to accelerate the shift
to knowledge-intensive industries; avoid a growth slowdown; and catapult China into the front ranks of the
world’s economies. A new gamble.
Can it Work?
Yes, parts of it will work. China will continue its movement towards the
front ranks of world economies and the world technological frontier.
However, China would have continued its catch-up under any scenario.
Will these policies accelerate technological absorption? It is far from
clear and will not be smooth.
Chinese planners will be disappointed in the success rate of their statesponsored research projects. How many of the 16 mega-projects
will be successful in an economic sense? Will it be two or six? The
answer to this question will determine the distribution of power and
resources in tomorrow’s world.
Planners are under-estimating the risks and the costs, but nevertheless,
China has made enough investment in human resources,
entrepreneurial innovation, and engineering skills, that they will be
able to move ahead rapidly in some of the target sectors.
But what are the costs?
5. Costs and Risks
• This gamble has a potentially large upside.
Graduates from colleges and Universities in China
have soared from only a million to over 5million in 7
years. Graduates are reasonably well trained and
having a hard time find work. Can this help them?
• More hard-headed evaluations are not to positive.
These commitments conflict with the desire to make
China’s economy more “balanced,” if balanced
means with a greater role for consumer demand
(quantitatively) and consumer choice (qualitatively).
Prediction: We won’t see much “rebalancing” in the
next two years.
Costs
 The commitment of resources put pressure on
macroeconomic balances, and reduces the
government’s flexibility in dealing with inflationary
pressures. Total budget of projects under
construction was 130% of GDP at the end of 2010.
 The Central Bank is stepping on the brake, while the
government initiatives are stepping on the gas.
 With multiple, inconsistent policy-levels extending
over different sectors, it is hard to tell which sectgors
are privileged and which are handicapped.
Costs (Cont.)
• These types of mildly protectionist policies have
benefits at the beginning and only show costs at the
end. (Politically, they are the opposite of reforms,
which their short-run costs and long-run benefits).
• The early benefits make it easier to assemble
supporters and clients. Decision-making becomes
more politicized while poductivity (may) slow down.
• There are substantial lag effects, in whih harmful
behaviors slowly return: the soft budget constraint
makes a comeback.
Costs (cont, again)
• Crucially, the technology interventions come near
technological frontier. We don’t even know which of these
technologies will be technically feasible or economically
profitable, much less the cost-benefit rate.
• Many other countries have relied on government
mobilization to coordinate efforts to borrow and assimilate
foreign technologies. Industrial policy, effectively
executed, can accelerate the movement to the frontier.
Only rarely has government coordination effectively
nurtured firms with frontier technologies. Costs will are
likely to be much higher, and benefits uncertain.
• Ultimately, the concern must be with the exit mechanism.
Will China be able to pull the plug on underperforming
projects and companies? If so, costs can be limited. If not,
the Chinese economy risks being burdened for a long time
by a large array of under-performing sectors.
Finally, the Impact of Indigenous
Innovation on foreign parties
Inevitably, these protectionist policies will create friction
with foreign partners and technology providers
On one side: Foreign businesses, particularly in high-tech
sectors, find it is increasingly difficult to navigate the
maze of discretionary preferential policies. They feel
constrained in their ability to cooperate profitably with
Chinese firms. Public complaints by, among others, GE
and Siemens, indicate the depth of dissatisfaction.
On the other side: A major change is taking place in
patterns of resource allocation in China, particularly
those that link China to foreign technology suppliers.
China is already buy less technology abroad and
investing much more domestically. This change will
end up imposing substantial unanticipated costs on
Chinese development.
5. Conclusion
China has embarked on a major re-orientation of development
strategy in the wake of the 2008-2009 global economic crisis.
The full implications of this shift will not be evident for several
years.
If China were to succeed in all its high technology initiatives, the
result would be a profound upheaval in global relations.
More likely, China will succeed in a handful of cases, and will have
to manage the after-effects of mixed results and outright
failure for the majority of these bold initiatives.
Even on this account, however, five to ten years from now, China
will have moved decisively up the global technology rankings,
contributing a far higher share of sophisticated value-added.
The main credit for this, though, will be the investment in
human resources and the innovation in business models in the
market-oriented parts of the Chinese economy.