Event Summary by Distinguished Fellow Richard C. Longworth
China’s economic growth in the future depends on free-market reforms, including a shrunken state-owned sector, deregulation, and the rule of law, Chinese economist Weiying Zhang told The Chicago Council Tuesday evening.
Zhang is an outlier among Chinese economists, an outspoken champion of the free market and of entrepreneurialism. Both controversial and courageous, he is a professor of economics at Peking University’s National School of Development, the chief economist of the China Entrepreneurs Forum, and the director of the Center for Market and Network Economy of Peking University.
Zhang has been in Chicago as the Dr. Scholl Foundation Visiting Fellow on US-China Relations, an annual Council program that brings leading Chinese scholars or policy-makers to the city. His speech Tuesday was the Sixth Annual Dr. Scholl Foundation Lecture on US-China Relations, one of many appearances and briefings he has given around the city in his three weeks here. He also is the author of a new book, The Logic of the Market: An Insider’s View of Chinese Economic Reform, published earlier in China and published in translation here by the Cato Institute.
Zhang indicated that the three-decade model of Chinese economic growth, based on state guidance and led by exports, has gone about as far as it will go. Annual growth, still above seven percent, is at its lowest level in 25 years.
There are several reasons, he said. China had “the later-comer’s advantage” in the global economy and it had a cheap labor supply—both diminishing strengths now. In addition, global markets have “a limited potential” and severe environmental problems are imposing costs on China’s economy.
China today is like a student who found it easy to go from a D grade to a C grade, but is now finding it hard to go from a B to an A, he said.
In addition, labor costs are doubling every five years, he said, partly because the nation’s one-child policy means that the labor force is actually beginning to decline.
The solution, Zhang said, can be found in the teaching of Western economists such as Adam Smith and Joseph Schumpeter—but not, he stressed, John Maynard Keynes.
The secret to a growing economy, he said, is wealth creation, which depends on innovation, which depends on entrepreneurialism. Government stimulus and, especially, a government industrial policy is not part of this equation, he said.
Zhang presented what he called the Smith-Schumpeter Growth Model, based on the market, the division of labor, innovation, and economic development, but with the entrepreneur firmly at the center, guiding the process.
China has been putting too many of its eggs in the export basket, Zhang said. As a result, its domestic market is essentially “unexplored,” even though many of its individual provinces, led by Guangdong, are bigger than Taiwan all by themselves, let alone such nations as Sweden, Poland, and South Africa.
The truth is that “everything in China is a big market,” Zhang said, from telecoms to luxury goods to foot massages.
More than half of all Chinese live in cities, and these cities are linked by new highways, communications, and high-speed rail.
“Today we have one market, the China market,” he said.
But China won’t be able to take full advantage of this market unless there are major reforms, Zhang said. One is a reduction in the state’s share of the economy, from the current 35 percent to about 10 percent. Another is the protection of property rights, to give entrepreneurs the security to risk and invest.
Too often now, he said, when a Chinese entrepreneur becomes rich, he takes his wealth and goes abroad.
This implies a reform in the rule of law based on an independent judiciary. No one—not even the government—should feel above the law, he said.
The economy today is too regulated, particularly in the finance sector. Individual entrepreneurs should have the right to set up private financial institutions, he said.
Corruption, like environmental degradation, is a drag on the economy and must be reformed, Zhang said. Land must be privatized, and the gap between urban China and rural China narrowed.
Last in the list of reforms was democracy, which Zhang admitted that, in China, “is a long-time project, not for the moment.” Full democracy will take decades, he said, “and we must be patient.”
Zhang ended by stressing the link between ideas and leadership. Good ideas will never be implemented by a weak leadership, he said, but bad ideas enforced by a strong leadership are even worse.
His example was the post-revolutionary dictatorship of Mao Zedong, “who was a strong leader but he had the wrong idea.”
Will these reforms come to pass?
Zhang himself said that China’s future is “a great hope and a big uncertainty.”
Richard C. Longworth is a distinguished fellow at The Chicago Council on Global Affairs. Read more of his program summaries and recent publications or follow his blog.