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Premier proposes ‘double engines’ to help China escape&nbsp

(2015-01-25 07:58:16)
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By Shujie Yao(Chinadaily.com.cn),Updated: 2015-01-23 11:01

http://usa.chinadaily.com.cn/opinion/2015-01/23/content_19386638.htm

Premier Li Keqiang delivered his keynote speech to the World Economic Forum in Davos, Switzerland, on Wednesday, suggesting that a more liberalized market and reformed government would become two important engines of China’s future economic growth. Making them work efficiently would help China avoid the curse of the middle income trap experienced by some Latin American economies towards to the end of the 20th century.

His key message was how China would do when faced with an economic slowdown and low quality economic structure. More importantly, as China has become a middle income country and its next ambition is to become a high income one, people are concerned whether the continuing economic slowdown may lead China to be trapped by the middle income curse.

Li did not answer this question straight away neither did he boost China’s great achievements in the past. He used his charm and humor at the beginning of his speech: “Davos is a beautiful town. In the past, it was famous for producing penicillin to cure lung diseases. Now, it is famous for providing an intellectual platform to cure brain diseases. Today’s world, in a difficult and complicated situation, implies that we now need a different kind of penicillin.”

In what followed he prescribed a new penicillin for China’s own problems. He used the term “double middle-high” as China’s medium term development goal. “Double middle-high” means that economic growth will change from high- to middle-high speed and economic structure will change from low- to middle-high quality.

He suggested that China had two choices, either to use “strong stimulation” as it did in the past to achieve high growth, or maintain middle-high level growth without “irrigating the soil with too much water”, a Chinese metaphor for uncontrolled quantitative easing. He immediately made his own choice, saying “we certainly opt for the latter”.

But how to achieve a middle-high growth and create an economic structure of middle-high quality is no easy task. What China will do is what Li wishes to share his view with the delegates at the World Economic Forum.

He suggested that China’s growth rate of 7.4 percent in 2014 was still the highest among the world’s major economies and this growth was achieved without strong stimulation. In addition, China created more than 13 million new jobs, the highest in history.

Li firmly indicated that China would not get into any regional and systematic economic or financial crisis. The inflation rate in 2014 was only 2 percent, meaning that there was room for some stimulating measures. In addition, 70 percent of local debts were used for infrastructure which provided an important base for further growth.

Li further suggested that China’s economic potential depended on its vast domestic market, hardworking spirits of 900 million workers, as well as proactive and good governance.

Finally, he used the concept of “double engines” for propelling China’s future growth in the next 10 to 20 years to help the country escape the curse of the middle income trap.

The first engine of growth is a more liberalized market where people are encouraged to do business creatively. In addition, China has a high savings rate of 50 percent, providing ample financial resources for internally derived growth.

Li used two interesting examples to suggest that market reforms could create economic miracles. The first was rural and agricultural reform in the late 1970s. The reform stimulated agricultural productivity so that China could produce enough food to feed its huge population and per capita rural income rose 15 percent per year in real terms during 1978-85. The second was a small village in eastern China he visited recently. The village had 700 families who opened 2,800 e-business shops delivering more than 30 million items everyday to different parts of the world.

If the free market is considered as a new engine of growth, in Li’s mind, government is an old one but needs polishing. What he said in Davos was what the State Council has actually done in China under his leadership.

The major reform in government is to reduce the number of checking and approval rights granted to different government organizations so that private as well as state firms will have fewer restrictions in doing business. It will also reduce the scope for corruption as well.

Li suggested that the function of government will also change to meet the demands of society and people in the new situation. More public services should be created, such as urban infrastructure, waste treatment facilities, public health and education. Central and local governments should find better and more efficient ways to provide these services. Public facilities and services may not be entirely financed by the government itself. Private capital can play an important role in breaking the bottlenecks of financing and efficiency improvement. For example, in 2014, a waste water treatment facility in western China cost 300 million yuan to build and a German water services company contributed 70 percent of the capital. By allowing private and foreign capital to participate in the construction of public facilities, China can easily accelerate her urbanization process.

Li’s speech was clear and powerful with many new creative concepts and ideas that we have not heard before. By encouraging tens of millions of private firms to engage in business and creation and redefining the role of government, he is confident that China will be able to sustain a relatively high level of economic growth for the next one or two decades. China needs a peaceful external environment and it will not just focus on its own affairs without paying serious attention to the rest of the world.

A vast domestic market, large population, high savings, hardworking and creative ability of 900 million workers and a proactive government means China has an ability to maintain a middle-high level of growth and create a new economic structure of middle-high quality. By doing so, China has a good chance to escape the so-called middle income trap. This is the most powerful message I have read from Li. It will greatly help the rest of the world understand China better as one of the world’s leading economic powers.

Yao Shujie (姚树洁)is professor of economics at the University of Nottingham and University of Chongqing.

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