China’s transition out of its current investment-led growth model will require a mix of state leadership and state retreat – but probably in opposite doses to what’s actually happening.
Lu Xiongwen, a professor at Shanghai’s Fudan University, said the government must set the pace in spurring a more innovative culture. Although Chinese entrepreneurs are adept at business innovation (often by networking and leverage state resources), technological innovation has lagged. He spoke at a seminar organised by the Foreign Correspondents Club in Hong Kong last week.
Mass innovation is crucial if China is to maintain productive growth. Over the past three decades, the country’s economic ‘miracle’ has been driven by migration of workers from rural villages to industrial cities, to participate in an export-led trend. These phenomena are now waning.
Neither the private nor the public sectors have a culture of technological innovation or spending much on research and development. Private entrepreneurs chase market share and short-term profits; executives at state-owned enterprises are rewarded for output, not for investing in research.
Therefore the state, at the topmost level, needs to set a new tone, Lu argued. The military, for example, is starting to become a technological innovator, the benefits of which can be transferred to civilian sectors. But so far the rest of the state-owned sector has not followed suit, and the private sector is therefore waiting for a cue.
Lu also called for the government to take the lead in shaking up the educational system. He noted that the focus on passing tests rather than on true learning undermines the skills required for innovation. It is an indictment of China’s educational system that the elite and the smartest students end up choosing universities in the US and other countries. “That is the loss of China’s future development,” Lu warned.
Huang Yasheng, a Chinese and Indian economics professor at MIT Sloan School of Management in Cambridge, Massachusetts, told the FCC audience that the government needs to back off in other ways to ensure a better rebalancing.
First it should recognise that its infrastructure-led growth model, which is widely admired outside of China, has its drawbacks. For every parcel of land taken from a household at a low price and transferred to industrial use (reaping great profits in the process for the company, ministry and/or local government involved), there is a loss of income to the families giving away assets cheaply.
Huang said it is a myth that household savings are high in China. Government and corporate savings are very high, but household savings are at par with India and other big emerging markets. People don’t consume because household income growth has not kept pace with GDP growth over the past 20 years.
Therefore Huang said the government should stop deploying eminent domain and let market prices dictate such transactions.
Secondly he said the government can aid the economic transition by scrapping the hukou system, in which people are tied to their home province or township’s welfare systems even if they migrate to another part of the country. The hukou system has meant migrants leave their families behind, which impedes the market-driven process of equalising income gains (or losses).
Huang noted the Chinese economic model retains its legitimacy, thanks to its track record of consistent output and per capital income gains. But he contrasted the current economic blueprint of Xi Jinping’ government, which is full of detail, with that of Deng Xiaoping’s, which emphasised general principles and encouraged experimentation.
