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Spurring Global Growth

Justin Lin 

Mr Lin was Chief Economist and Senior Vice President of the World Bank from 2008 to 2012. The founder and first Director of the China Center for Economic Research says that the Chinese mainland must become a well-functioning market economy in order to achieve its potential. 

What kinds of reforms does mainland China need to implement to realise its potential?
Certainly, if it wants to realise its potential, China needs to do many things. One, it needs to complete the transition from a planned economy to a well-functioning market economy. At the same time, the government needs to play a facilitating role in the process of upgrading and technological innovation; just as in any other developed country.

We have seen the mainland’s export growth slow quite significantly this year. Apart from the weak market conditions overseas, are there any particular reasons for the slowdown in exports?
I would see the slowdown or weakness relating to importing countries. We know the Eurozone is going to have negative growth this year, and its countries’ economies are so sluggish. The Eurozone is the number-one export market for China; since the Eurozone’s demand was reduced, certain exports would be reduced. I see this kind of situation as cyclical. As long as these countries return to normal, then I’m sure exports will continue to be very robust.  

 

Watch the entire interview with former World Bank Chief Economist Justin Lin

How long will it take the renminbi to become truly internationalised?
That depends not only on conditions in China but also on conditions outside China. Currently, because of the slowdown in growth rates and high unemployment in developed countries, they have generally adopted some kind of quantitative easing, very loose monetary policies. These kinds of government macroeconomic policies in various countries have stimulated all kinds of speculative funds. They need to find a way to prevent the inflow of hot money. 

Even the International Monetary Fund used to be the champion of capital account liberalisation; now it’s also recommending to developing countries, when they encounter large inflows of short-term capital, that they should impose certain kinds of capital controls. As a developing country, China also needs to prevent a large inflow of that short-term, speculative capital. So, how fast will there be liberalisation of China’s capital account, or total convertibility of the renminbi, very much depends on policies in China, but also outside China.  

How do you see the mainland’s role in the world economy as its economy evolves?
If China can maintain that dynamic economic growth I mentioned earlier, tapped into an eight per cent growth potential, the Chinese economy will become larger. But it will also have a very important contribution to the global economy. Currently, the main challenge in the world is growth. The only way out of trouble for a high-income country, whether the Eurozone, the US or Japan, is to have strong demand outside their countries. To have strong demand, you need to have very robust growth. If China can maintain this kind of dynamic economic growth, the Chinese people will realise their economic aspirations. China will also make a contribution to the development and peace of the world.  

What changes can you envisage in the mainland’s economic structure over the coming decade; what will be the major drivers of growth?
China needs to upgrade from very labour-intensive, low-value manufacturing sectors to higher-value, capital- and technology-intensive sectors. China also needs to shift from agriculture to manufacturing then gradually to service sectors. This is a pattern all countries must adopt if they want to move from low-income to middle-income and then to high-income status; that is the path they need to take, and China needs to take that path also. 

Would you say that the mainland has excessive investment but inadequate consumption?
We have to realise that consumption in China has also increased very rapidly. If you go to any department store, you see so many consumers that would be the envy of other department stores in the world. You go on the highways and see how many cars there are. But the issue is not the speed but the proportion. As a percentage of GDP, consumption dropped from about 60 per cent in the 1990s to about 35 per cent now, while investment increased substantially, to about 50 per cent of GDP. The reason for this disparity is because income distribution is concentrated in the hands of the rich or revenue is concentrated in the hands of large corporations. That is why consumption as a percentage of GDP has declined and if China wants to address that issue, it needs to improve income distribution to lower-income people. If they can do that, consumption will increase.

 

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