Yang Ruilong: “Dependence on High Growth” Should Be Removed for Promotion of Supply-side Reform

With the decline of potential growth rate and the subsequent L-type economicgrowth in the future, it is imperative to boost supply-side structural reform, namely, to improve the quality and quantity of economic growth through economic restructuring and optimal allocation of factors; specifically, to reduce ineffective supply by cutting overcapacity, destocking, deleveraging and reducing costs and to increase effective supply by strengthening weak links. However, although nearly no one cognitively doubt the importance of restructuring, there are few effects in practice.

The reason is that actions such as cutting overcapacity, deleveraging and eliminating zombie enterprises can without doubt help economic restructuring and improve economic quality, but economic structure reflects the interest structure in a given development mode while development mode is related to system mode. Without conversion between system mode and development mode, economic restructuring could only depend on “governmental hand”, which might lead to new distorted allocation of factors, resulting in not only high short-term cost on restructuring, but also obviously suppressed investment demand and real estate price in the short run. This may cause slowdown of economic growth and, in view of an increase in public and private financial liabilities, greater systematic financial risks. Therefore, in order to avoid economic “hard landing”, macro-management authorities have to adopt economic stimulus packages to maintain a certain economic growth rate.

In the previous growth mode featured by excessive dependence on high investment, with increasing economic downturn pressures, China’s economic growth has decreasing effects on job creation and revenue generation; in order to solve the problem of employment and income increase, China has to depend on high growth rate, forming the so-called “speed thirst” or “dependence on high growth”. In other words, only through high-speed growth can it be possible to prevent accumulation and concentrated explosion of various social contradictions. On the other hand, however, the mode of growth driven by high investment gives rise to aggravated structural imbalance in economy. With the original growth mode unchanged, China will fall into a dilemma. Firstly, it will get stuck in the vicious circle of high investment→ high growth→ aggravated structural imbalance→ higher growth rate required→ higher investment required. Secondly, as restrictions on investment and export growth increase, economic growth slows down and structural contradictions still exist and even continue to worsen, serious employment and social problems will occur.

The “dependence on high growth” worsens economicimbalance. Firstly, it worsens the imbalance between the government and market. In order to stabilize economic growth, the government has to choose more government interventions, resulting in increased imbalance between the government and market, mainly embodied as government-led investment squeezing the room for private investment and distortion of price mechanism in the factor market leading to increasingly prominent folk lending problems. Secondly, it worsens the imbalance between capital and labor. In order to maintaingrowth and a high level of investment and return on investment, the government chooses to protect investment, but not labor to some extent, so payment of labor cannot increase with productivity. Thirdly, it worsens the imbalance between urban and rural areas. In the given growth mode, growth of urban sectors determines economicgrowth of a region, so the government pays more attention to urban development and the gap between urban and rural areas has not been obviously narrowed with economic development. Fourthly, it worsens imbalance in income distribution. In the traditional growth mode, price distortion in the factor marketand production deviation in redistribution results in wider income distribution gap. Fifthly, it worsens internal-external imbalance. With the aggravation of international economic imbalance and the continuation of effects of the financial crisis, China is witnessing an increase in contradictions of internal and external economic imbalance. Consequences of these contradictions are simple: structure deterioration in case of high growth speed; explosion of social contradictions in case of low or no growth speed.

Thus, if China cannot get rid of the “dependence on high growth”, then economic restructuring will always be interrupted by various economic and social contradictions due to economic downturn, and finally restructuring has to slow down and priority will be given to stabilization of growth, so it is hard to solve the problem of distorted and inefficient resources allocation. The key to elimination of the “dependence on high growth” is to implement the conversion between system mode and development mode, as characteristics of distribution structure, aggregate supply structure and aggregate demand structure are rooted in the traditional growth mode. The income distribution system corresponds to a power relation and driving mechanism; similarly, the key difficulty in the transformation of investment system is to solve the conflicts between administrative and market distribution powers. The author hereby provides the following suggestions:

Firstly, the issue of reform should not be confined merely to reform itself and the reform should focus on re-demarcation between governmental power and market power instead of re-definition of income distribution structure. Full development of market economy requires the government to offer corresponding services, which must transit from growth orientation to development orientation and achieve change of its role from “contending with the people for benefits” to “creating benefits for the people”, and should focus more on building a market order of fair competition.

Secondly, efforts should be made to perfect the factor market and straighten out the price mechanism, eliminate policy-based distortions and enable supply of and demand for factors such as labor and capital to be truly reflected in the market and to be truly indicated in price signals such as salary and interest rate. This is the precondition to that the factor market truly shows investment costs and benefits of different sectors or industries. Only if the factor market can truly reflect fact costs and benefits can the market play a leading role in the evolution of investment structure.

Thirdly, efforts should be made to strengthen the transformation of economic development mode, create conditions for reform of the income distribution system and drive sustainable growth of consumer demands. The issue of distribution should not be confined merely to distribution itself since adjustment of distribution relation is not only to adjust power relation, but also to adjust mode of production. Therefore, on the one hand, the government should achieve the adjustment of income distribution relation through extensive adjustment of the current power system; on the other hand, it should pay attention to the development stage of China, establish a distribution mode suitable for the mode of production and give play to the core role of the market in adjusting distribution relation.

Fourthly, efforts should be strengthened to fight against monopoly, especially to limit monopoly of state-owned enterprises, release restrictions on investment and industry access by private capital, and create conditions for the development of private economy.

Source: http://www.cs.com.cn/xwzx/hg/201611/t20161130_5106884.html