China’s Next Steps: Six Smart Moves
In the annual N.T. Wang Distinguished Speakers lecture, cosponsored by Columbia University's Weatherhead East Asian Institute and the Chazen Institute of International Business, Liu Shijin, vice minister of the Development Research Center of the State Council of China, said that the country is at a tipping point. Like so many emerging markets, it could become mired in a middle-income trap, where salaries rise to the point at which it can no longer compete on the basis of cheap labor. Or it can move to join the handful of countries classified as high income.
The World Bank report “China 2030: Building a Modern, Harmonious and Creative High Income Society,” which Liu helped write, outlines six strategies China needs to embrace to move into the high-income cadre of countries:
1. Implement structural reforms meant to strengthen the foundations of a market-based economy.
The government must shed ownership in state-owned enterprises, at the same time making them more responsive to market forces and adding technology to make them more efficient. This will pave the way for a stronger private sector and allow increased competition. Legislative reforms meant to protect individual rights can also grease the way for a dynamic service sector.
2. Accelerate the pace of innovation.
As it loses its cheap-labor advantage, China must embrace innovation as its primary means of growth. Liu warned that this move will require transforming a culture that values stability over change. “That's very hard to do on our own,” he said. “Our enterprises will have to be open to input from outside.” Beyond strengthening laws to protect intellectual property rights, China will need to revise its university system to foster original thinking rather than rote memorization. Pointing to the emphasis that Western societies place on innovation, he suggested that partnering with American universities could help China learn how to teach its students to be entrepreneurs and innovators.
3. Seize the opportunity to “go green.”
Rather than view environmental regulations as burdens, Liu said, “companies should view clean energy and environmental protection as growth opportunities to develop a new industry.”
4. Expand opportunities and promote social security for all.
Liu acknowledged that China’s meteoric rise has not benefited every group equally. Economies of inland provinces and rural areas have lagged those of the coastal regions, and rural residents can not access the same social safety net that urban Chinese rely upon. The good news is that, while growth rates of China’s more developed areas are slowing, catch-up rates in inland provinces can buoy national growth in the next few years — if the national and provincial governments implement land and tax reforms to encourage farm ownership, build infrastructure in the outlying regions, and extend social reforms to all citizens.
5. Strengthen the financial system.
In particular, small businesses must be allowed access to loans, and banks must base lending on market motives rather than political mandates.
6. Seek mutually beneficial relations with the world.
As illustrated by the global recession that began in 2008, China’s economy is profoundly affected by what goes on outside its borders. The country must increase its international leadership role in the global marketplace, finding partners throughout the world.
Liu says that if China makes the transition successfully and growth continues at a 6 percent to 7 percent rate, the nation’s economy will not only become the world's largest by 2020 but will also continue expanding. While acknowledging that China’s challenges are daunting, he is optimistic. “China’s new leaders are very open to new ideas and globalization,” he said, noting that the newest generation has international experience and has worked in various provinces and industries. The push has already begun, he said. “Adjustments are already underway in local governments.”