Tue, May 01, 2018 - Page 8 News List

China should follow WTO rules

By Martin Feldstein

I am a great admirer of China and its ability to adjust its economic policies to maintain rapid growth, but now that it has risen to the top of the global economy, it must adopt the necessary reforms to become fully compliant with the international rules that it accepted upon joining the WTO in 2001.

When I first went to China in 1982, it was a very poor nation governed by a thoroughly communist regime. Agriculture was completely collectivized. Because peasants had lost the right to farm their own land, agricultural output was extremely low. Beyond agriculture, individual ownership of the means of production was outlawed. A Chinese family could own a sewing machine for its own use, but it could not own two sewing machines or hire a neighbor to help produce garments.

Under Chinese leader Deng Xiaoping (鄧小平), this began to change. Plots of land were returned to their previous owners, who were allowed to keep any output exceeding the government’s quota. As a result, agricultural output soared and farmers produced a range of additional crops, such as flowers and vegetables, to sell directly to the public. Restrictions on ownership of productive assets and on hiring workers were gradually relaxed, such that the private sector now accounts for the majority of economic activity in China.

The result was an explosion of economic growth and a rapid increase in living standards. Since 1982, China’s real (inflation-adjusted) GDP has grown at an average annual rate of more than 7 percent. Per capita real GDP is now 18 times higher, with about 800 million people having been lifted out of poverty since the start of Deng’s reforms. Although overall per capita output in China is still only one-quarter of the US level, the standard of living in China’s major cities is impressively high. To see the gleaming skyscrapers and array of shops serving affluent young people is to appreciate the change that has occurred in just a few decades.

Deng once said: “To get rich is glorious.”

China’s people have responded. Private entities flourish and a very active stock market allows widespread share ownership. China apparently has more self-made billionaires than the US.

The combination of private incentives and effective education is a key reason for China’s rapid growth. The nation has an ancient tradition of promoting the brightest students based on extensive examinations. The officials who worked for the emperors were selected based on written exams of Confucian thought. Now, literacy is universal and national examinations are used to decide who goes to the top universities. More than 1 million Chinese students have studied in the US and several of the top government economic officials have done graduate work there.

In many ways, the Chinese economy now works like a large US multinational corporation. Broad strategy is set by management at the top: growth targets, the structural shift from heavy industry to consumption, the Belt and Road Initiative (which will guide exports and foreign aid) and so on. Individual managers are tried out in regional cities and promoted based on their success in achieving the goals set by national leaders.

The goals set by Chinese President Xi Jinping (習近平) and the current government are to increase the sophistication of the economy and achieve a middle-class standard of living for the population. To succeed, China is investing large sums in research and technical education.

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