[National Business Daily] Nie Huihua: Fully Release Institutional Dividend and China’s Economy Still Has Much Room for Growth

Since 1949, especially since the reform and opening up, the rapid economic development has caused China’s per capita GDP to rise continuously. China has gradually become one of the upper middle-income countries instead of being a low-income country.

According to the National Bureau of Statistics, in 2017, China’s per capita GDP was 59,660 yuan. With the price factor deducted, it increased by 22.8 times compared with 1978, and the actual average annual growth rate was 8.5%. China’s per capita Gross National Income (GNI) increased from 200 US dollars in 1978 to 8,250 US dollars in 2016, exceeding the average level of upper middle-income countries and rising to the 95th place among the 217 countries (regions) announced by the World Bank.

For a country with a low starting point for economic development and a large population base, such progress is quite commendable.

However, since China’s economic growth rate shifted in 2012, the voice that the Chinese economy may fall into the “middle-income trap” has been heard from time to time. In this context, how should China overcome the “middle-income trap” and achieve high-quality development?

Nie Huihua, Executive Deputy Dean of the National Academy of Development and Strategy of Renmin University of China (RUC), said in an exclusive interview with the reporter of National Business Daily (hereinafter referred to as NBD) that to successfully become a high-income country, it is necessary to maintain a certain GDP growth rate, which is mainly to deepen reforms, expand openness, and release institutional dividend. We can not always boost economic growth through strong incentives as in the past. We need to shift from factor-driven and investment-driven to innovation-driven development.

Promote institutional reform

NBD: The “middle-income trap” in other countries is mainly characterized by economic growth decline or stagnation, polarization of wealth, excess urbanization, employment difficulties, fragile financial system, and environmental degradation. Compared with other middle-income countries, is China also faced with such risks? How do you think we should avoid the “middle-income trap”?

Nie Huihua: Compared with other countries, China is also facing some of these risks, such as slow economic growth, fragile financial system, insufficient resources and rising labor cost.

The first is a slowdown in economic growth. It is impossible for such a large economy to always maintain a rapid growth, but currently, it still maintains a medium-to-high-speed growth.

Second, our existing financial system is relatively closed, and there are issues such as shadow banking and debt problems of local governments and state-owned enterprises. In addition, our growth in the past was mainly based on high investment and extensive growth, which consumed a lot of resources, and with China’s per capita resource occupancy lower than the world average, such growth is unsustainable.

The last is the reduction of young and middle-aged labor force. Many young people are reluctant to engage in hard labor, which has led to an increase in labor cost.

How to avoid this? Porter proposed four stages of national economic development: the factor-driven stage, the investment-driven stage, the innovation-driven stage, and the wealth-driven stage.

In general, of course we need to shift from relying on factor and investment to mainly on innovation. This requires deeper reforms and opening up. The most important thing is to promote institutional reforms, or structural reforms.

China should shift from mainly relying on demographic dividend in the past to mainly on institutional dividend. Our institutional dividend is yet to be fully released, and some of our systems still have unreasonable elements. If we improve these systems, we still have a lot of room for growth.

For example, many rural land resources, including fields, homesteads, and woodlands, are left idle and wasted;

The flow of labor is also inadequate. Although the population can flow, the hukou and related benefits are limited. If human capital, the most important capital, is limited, optimal resource allocation will not be possible and growth will slow down;

In terms of capital market reform, enterprises rely too much on indirect finance. Financing in the capital market is hard, and there is no good system to encourage the masses to engage in equity investment;

In addition, in general, in middle-income countries, the cultural industry should have much room for development, but there are still many restrictions on production and consumption in our cultural field.

Overall, some systems lag behind economic growth and constrain economic growth. With the release of institutional vitality, the Chinese economy can maintain a medium-to-high-speed growth for 30 years.

Expected to become a high-income country in 2050

NBD: Countries that enter middle-income stage are vulnerable to the impact of foreign economies, causing economic stagnation. However, we have never stopped expanding our openness. How do you think we should balance the two?

Nie Huihua: Expanding openness and integrating into the world economy is a trend. In general, the degree of integration into the global division of labor system is positively related to the economic risks faced, however, we shall not throw away the apple because of its core.

There is no contradiction between expanding openness and maintaining economic stability, and to some extent, they are complementary. First, by expanding openness, we can import advanced technologies and innovative systems, and absorb more high-quality human capital and money capital. In addition, we can attract more high-quality enterprises to China, forcing domestic enterprises to reduce costs and improve efficiency and competitiveness through technological innovation, thereby further increasing exports while better meeting domestic middle-to-high-end demand. If the domestic market gets increasingly bigger and high-end, this is also an important way to jump out of the middle-income trap.

NBD: Some believe that whether China can overcome the middle-income trap depends on whether its pillar industries can beat competitors in the global middle-to-high-end market, and that the traditional low-end capacity is destined to be eliminated. What do you think are the new growth points and opportunities for the future economy?

Nie Huihua: This view is correct to a certain extent for big countries. It is generally applicable to China, but may not so for small countries.

The overall competitiveness of a country is certainly related to the competitiveness of several important industries. I believe that the high-end market must be occupied, but low-end industries can not be eliminated without distinction. High end and low end are relative, we can not only look at technology, and the market should have the say. For example, tourism, cultural industries, and traditional industries (such as handiwork) can also have a large market (such as Japan’s traditional tofu shop with a history of 100 years or so). They may not contain high technology, but as long as there is a market, they should be encouraged. In addition, there are also many small “invisible champions”, which are not necessarily pillar industries.

In terms of economic growth points for the future, generally speaking, artificial intelligence (AI), bio-pharmaceuticals, and high-end equipment manufacturing, among others, are important growth opportunities. In fact, the real opportunity should be judged and chosen by the market instead of human decision.

NBD: China is already an upper middle-income country. In 2018, China’s GDP exceeded 90 trillion for the first time, and per capita GDP reached about 10,000 US dollars. According to the current development trend, seen from economic growth, how is the prospect like for China to become a high-income country?

Nie Huihua: We have done our calculations. In 2014, the World Bank defined high-income countries as those with a per capita GNI of more than 12,745 US dollars. If this standard stays unchanged, China’s average per capita GNI growth rate from 2017 to 2050 needs to reach 1.32%.

However, the standard for high-income countries is under dynamic adjustment, rising from 9,385 US dollars in 2004 to 12,745 US dollars in 2014. Assuming that the per capita GNI growth rate threshold of high-income countries in 2015-2050 is equal to the average per capita GNI growth rate threshold in high-income countries in 2004-2014, which is 3.11%, the per capita GNI threshold of high-income countries in 2050 is about 37,228 US dollars.

For China, with a per capita GNI of 8,260 US dollars in 2016, its per capita GNI growth rate in 2017-2050 needs to reach 4.67% to qualify it as a high-income country in 2050. Assuming that the per capita GNI growth rate and GDP growth rate are equal, this means that the GDP growth rate will need to reach 4.67% per year from 2017 to 2050.