3rd Plenum sets clear economic course
- By John Ross
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E-mail China.org.cn, November 15, 2013
It is therefore misleading when people talk as though there were a single thing called "the" market requiring a single relation of the government to it. Indeed, the same actions carried out in different forms of market lead to directly contradictory consequences. Lack of control of a monopoly necessarily leads to disastrous consequences in overpricing and inefficiency - inherently monopolistic markets require extremely strong state intervention. However government interference in strongly competitive markets results in higher than necessary prices and inefficiencies.
A precise study of different forms of market in different industries is therefore one of the key conclusions flowing from the Third Plenum. Without concrete analysis of these different types of market, maximum efficiency cannot be achieved.
This directly relates to a second key issue: what will be the sources of China's economic growth as it develops towards its goals of first a "moderately prosperous" and then a "high income" economy? Confusion exists in some media discussion on this, indicating that thirty years of international econometric work have not been absorbed. It is therefore necessary to clarify it factually.
It is sometimes argued in sections of the media that as China becomes a more developed economy "qualitative" growth has to replace "quantitative" growth - improvements in productivity and efficiency have to replace quantitative increases in investment and labor inputs. Unfortunately this confuses the outcome of economic development in a higher quality of growth (higher living standards, better quality environment etc.) with the inputs that cause that growth. In reality, as an economy becomes more developed, increases in efficiency play a smaller role in its growth and increases in quantitative inputs of capital and labor play a bigger one. In particular, as development occurs economic growth becomes increasingly "capital intensive."
On average, capital investment accounts for 52 percent of growth in a developing economy but 57 percent in an advanced one. The percentage of growth accounted for by labor (including not only hours worked but education level) rises from 29 percent in a developing economy to 32 percent in an advanced economy. However the percentage of growth accounted for by increased productivity (technically "total factor productivity") falls from 19 percent in a developing economy to 11 percent in a developed one.
One reason for this is the advantage of "catch up." A developing economy can adopt technology from a more advanced economy without incurring development costs - therefore the speed of technological advance can be more rapid in more "backward" economies. But this is only one feature of the overall process that as economic development increases the more investment driven an economy becomes. Those who want to see the most up to date and detailed data are recommended to read the important book to be published later this month by Khuong Vu, "The Dynamics of Economic Growth."
This has major implications for the state's role in the economy as outlined at the Third Plenum. "Efficiency" is in statistical terms only a relatively small part of economic growth - in an advanced economy only 11 percent of economic growth is due to productivity gains. Provided reasonable productivity efficiency is maintained, by far largest part of maintaining economic development is how to increase inputs of investment and labor.
For China the arithmetic of the "labor" part of this equation is clear. China's working age population is already not expanding and in the future will decline. Essentially all increases in labor inputs into the economy will have to come from improvements in the education and skills of its workforce. Fortunately China has been pouring resources into education for over sixty years and continues to do so. Increases in productivity and efficiency, through marketization and other measures, above all maintaining the openness of the economy to international competition, will be useful. But as already seen, these are the smallest part of economic development and will decrease in weight as China become a more advanced economy. The really difficult task on the input side will be maintaining the enormous increases in investment required as China develops towards becoming an advanced economy.
The Third Plenum's economic algebra is "marketization" without "privatization." Its key measurable outcomes are increases in living standards and environmental quality. "Marketization," particularly keeping the economy open to international competition, will be crucial in maintaining efficiency. But in the end economic arithmetic dictates that success depends on maintaining the rapid rise in investment. For 35 years, since its economic reforms began, China has successfully solved this problem and the Third Plenum indicates that it will continue to do so.
The author is a columnist with China.org.cn. For more information please visit:http://www.formacion-profesional-a-distancia.com/opinion/johnross.htm
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