Hello, welcome to visit Shanghai Forum
【The clear challenge now is not to lower the investment [in technology] – that part is fine. The challenge is rather to relax government control and let the investments flow to solutions that are more innovative, instead of just supporting new clients who churn out routine scientific research.】
Reporter: Professor Naughton, you wrote a memento in 2004 to then Premier Wen Jiabao in Foreign Policy about how to handle overheating in the economy. If you were to write a letter now to President Xi Jinping or Premier Li Keqiang about your main concern regarding the Chinese economy, what would it be about, and what would you suggestions be?
Barry Naughton: Let me start by going back to 2004. It is very interesting that in retrospect it turns out, that really was a turning point in the quality of Chinese macro-economic policy-making. The quality started to deteriorate at that time. And of course I would like to say that is because premier Wen Jiabao, unfortunately, did not follow my advice. But I think it is true, at least, that that marked the beginning of a period of financial repression and unbalanced macroeconomic policy that still affects China today. So if I had to make a similar comment to the policy makers today, I think I would say: there are huge advantages that China can still reap by pushing forward the economic reform agenda. And it is there in the Third Plenum document, but it is still a little bit underdeveloped. In particular, if the reform of state owned enterprises can fulfill the potential to improve stock markets, then it can improve over all capital markets. We need those new reform derived impulses for growth if China is going to smoothly transition into the new era. So I would say take risks, and reform more.
Reporter: In your lecture at Shanghai Forum you argued against using expansionary measures to get back to the high growth that we have seen in the past decades. But how low should the growth rate be allowed to fall?
Barry Naughton: I think in the short term, 4 or 5 % is completely acceptable. I do not think it is a problem for the Chinese growth rate to drop for a couple of years, if that is accompanied by systemic changes that give people some excitement and enthusiasm about the future. I mean of course it is hard to get there. It is easy to say, but it is hard to get there.
Reporter: In the past decades, there have been recurring cycles of overheating of the economy. As we are going into a period of more moderate growth, what is the new challenge in dealing with the problem of overheating? Is it going to become more difficult for the government to handle?
Barry Naughton: I am not too worried about overheating right now. At the moment the problem is how to carry out a financial restructuring without causing too dramatic negative impact on growth. Once people realize they have to write off their bad assets, there is a tendency to dump things and panic. So I am more worried about that downside risk.
Reporter: In your book, The Chinese Economy: Transitions and Growth, you describe the technology policies in the past decades and attempts to create a more knowledge based economy. Where is China right now in terms of such policies, and what do they need to do, going forward? You have previously talked about the existence of a high tech bubble and argued that government investment was not the way forward. What is the government doing, and what do you think they should be doing?
Barry Naughton: In terms of technology policy, the situation is very different from when I wrote the book. The magnitude of the commitment to technology investment has just exploded since that time, so I would write that chapter very differently now. On the one hand, we can say China has done a very good job because they have really stepped up the input of resources both into human capital, as everyone knows – the university system has expanded very rapidly – and also into research and development. So the input side looks very impressive and in that sense I agree with John Wong and some of the others at the sub-forum who said that China has a unique opportunity to avoid the middle-income trap. On the other hand, because that increase of resources was so rapid, so big, and so top-down and government directed, a lot of the money has been wasted. So the clear challenge now is not to lower the investment – that part is fine. The challenge is rather to relax government control and let the investments flow to solutions that are more innovative, instead of just supporting new clients who churn out routine scientific research.
Reporter: Some scholars are talking a lot about the need to improve the social welfare system, or the social security system, saying that is the only way for China to shift to a more demand driven economic model. Do you agree? And what are some of China’s challenges in this process?
Barry Naughton: Yes I agree. Ironically, one of the challenges is that Chinese economists are so worried about sustainability, that even very market oriented economists support really high social security contribution rates. They are very cautious about government commitments to health care and retirement and other things – a little overcautious in terms of fiscal policy. They are too focused on making sure the government balance sheet is sustainable over a twenty to thirty year horizon. I think now is not the right time to worry about those sorts of issues. It is reasonable to not want to write too many checks given the rapid changes in the age composition. But, on the other hand, the income is growing rapidly, and China is not as poor as it used to be. It is a middle-income country, but it spends much less on health care than other middle-income countries. However, as I also briefly said in my talk this morning, it might make sense to hold some of those things in reserve, a little bit, in case they needed to be rolled out quickly.
Reporter: China is investing a lot in education and during your talk you also mentioned the issue of “managing expectations.” Now, as we see a lot of young people coming out with better education, this also leads to certain expectations about jobs. Considering that there is probably going to be a relative slowdown in the economy, how can the government meet those expectations by making sure there are interesting jobs available?
Barry Naughton: That is a great question but I think there is no simple answer. One interesting challenge is that for Chinese college graduates, there really is an expectations gap. They really think, ok, I made it to college, I am the first in my family, and now I should have a good job ready for me. For better or for worse, students in the US and Europe do not feel that way. They understand that it still might be difficult to match themselves with a good job, but students in the US and Europe are sustained a little bit by the feeling that they are going to have many different careers in the course of their life, and if they do not get on the fast track right away, it is not too bad. It would be good if the government can help communicate to graduates that things are tough, but there are a lot of opportunities that individuals have to make for themselves. Chinese college education is not really good at teaching people this. However, the Chinese cultural tradition of innovation and entrepreneurship is superb, so that is a great thing to fall back on.
Reporter: Some people have argued that unless there is more space for entrepreneurship and more innovative, smaller firms in the market, people are going to want to stick to the very secure track of working in SOEs or in the government, and some people are really worried about that. Do you agree that this is a cause for worry?
Barry Naughton: Yes, in fact we see that. At Tsinghua, which I have visited fairly regularly, the proportion of graduates who go to the government and state owned enterprise sectors is appalling. It is like two thirds. And I think that is a real misuse of human capital. Because these people are really smart and they are really creative. Of course it is good to have smart people in high managerial positions, even in government, but I think they could contribute more if a larger proportion of them were in more innovative posts.
Reporter: The Shanghai free trade zone opened last fall. Some people have compared it to the opening of the Special Economic Zones, while others have been somewhat disappointed when the actual plan was laid out. What is your view of its significance for China and Shanghai?
Barry Naughton: Well it is so much more complex and I guess I do not know enough to really have a firm answer to that question. So much depends on implementation, and so far I would say the implementation has been a little bit slow, but I do not quite want to say disappointing. It makes sense to be careful when you are dealing with financial liberalization. So I guess I am still taking a wait-and-see attitude.
Reporter: This morning, you compared China’s slowdown with the experiences of other East Asian economies. More generally speaking, how do you see China’s overall social and political development compared to these economies? Can we expect a similar development in China?
Barry Naughton: All these other economies, when they reached this point of transition to middle-income, we see a real dramatic shift in the relationship between government and the economy and society. We see governments step back, be more open to social influences, including through democratization, and we see government policy being sort of lighter touch. So if we were to look at the experience of earlier countries, we would say that is a rule. It is a strong pattern. So far, we really do not see it in China. It is funny, because of you read the document from the Third Plenum carefully, that is sort of what it says. It says we should redefine the role of government and the interrelation between government and the economy. So I think that is right. But if we look for specific outcomes, and specific policy areas, for instance technology that we were just talking about, we do not see it yet.
Barry Naughton:
Barry Naughton，professor of Chinese economics and Sokwanlok Chair of Chinese International Affairs at the Graduate School of International Relations and Pacific Studies at the University of California, San Diego. His research mainly focuses on issues relating to industry, trade, finance, and China's transition to a market economy. Professor Naughton is the author of several widely acclaimed books about the Chinese economy including Growing Out of the Plan: Chinese Economic Reform, 1978-1993 (1995), and The Chinese Economy: Transitions and Growth (2007).
