Tue, Apr 08, 2014 - Page 9 News List

To grow, China must walk state-market tightrope

To maintain its growth trajectory, China must rein in credit expansion, increase tax and invest in public services

By Joseph Stiglitz

No country in recorded history has grown as fast and moved as many people out of poverty as China over the past 30 years. A hallmark of the country’s success has been its leaders’ willingness to revise the country’s economic model when and as needed, despite opposition from powerful vested interests. Now, as China implements another series of fundamental reforms, such interests are already lining up to resist — can the reformers triumph again?

In answering that question, the crucial point to bear in mind is that, as in the past, the current round of reforms will restructure not only the economy, but also the vested interests that will shape future reforms — and even determine whether they are possible. Today, while high-profile initiatives such as the Chinese government’s widening anti-corruption campaign receive much attention, the deeper issue that the country faces concerns the appropriate roles of the state and the market.

When China began its reforms more than three decades ago, the direction was clear: The market needed to play a far greater role in resource allocation — and it has, with the private sector far more important now than it was before. Moreover, there is a broad consensus that the market needs to play what officials call a “decisive role” in many sectors where state-owned enterprises (SOEs) dominate. Yet what should its role be in other sectors and in the economy more generally?

Many of China’s problems today stem from too much market and too little government. Or, to put it another way, while the government is clearly doing some things that it should not, it is also not doing some things that it should.

For example, worsening environmental pollution threatens living standards, while inequality of income and wealth now rivals that of the US, and corruption pervades public institutions and the private sector alike. All of this undermines trust within society and in the government — a trend that is particularly obvious with respect to, say, food safety.

Such problems could worsen as Beijing restructures the economy away from export-led growth toward services and household consumption. Clearly, there is room for growth in private consumption, but embracing the US’ profligate materialist lifestyle would be a disaster for China, as well as the planet. The country’s air quality is already putting peoples’ lives at risk and global warming from even higher Chinese carbon emissions would threaten the entire world.

There is a better strategy: For starters, Chinese living standards could and would increase if more resources were allocated to redress large deficiencies in healthcare and education. Here, the government should play a leading role and does so in most market economies, for good reason.

The US’ privately-based healthcare system is expensive, inefficient and achieves far worse outcomes than those of European countries, which spend far less. A more market-based healthcare system is not the direction in which China should be going. In recent years, Beijing has made important strides in providing basic healthcare, especially in rural areas, and some have likened China’s approach to that of the UK, where private provision is layered atop a public base.

Whether that model is better than, say, the French-style government-dominated provision may be debated, but if one adopts the British model, the level of the base makes all the difference. Given the relatively small role of private healthcare provision in the UK, the country has what is essentially a public system.

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