Justin Yifu Lin’s “Interpretation of China’s Economy” Note 7

Original link: https://ljf.com/2022/09/14/1150/

Lecture 12: Post-crisis world economic situation and China’s future economic development

1. Analysis of the current world economic situation

The 2008 financial crisis was even more severe than the Great Depression of the 1930s that led to the New York stock market crash of 1929. The G20 meeting in Washington at the end of 2008 agreed to take a common response to overcome the financial crisis. The response measures include three aspects: first, countries that have experienced financial crisis continue to support the banking system; second, countries adopt active fiscal policies and loose monetary policies; third, continue to adhere to free trade. This policy measure stabilized the world economic situation at that time.

China launched a proactive fiscal policy of 4 trillion yuan at the end of 2008 and early 2009. In the first quarter of 2009, my country’s economy began to resume growth. In 2009, my country’s economic growth rate was still as high as 9.2%, 10.4% in 2010, and 9.3% in 2011.

In the United States, if a labor force loses a job and does not actively look for a job for a month, such a labor force is considered to have withdrawn from the labor market and is no longer included in unemployment statistics.

Every time the International Monetary Fund or the European Central Bank provides short-term assistance to those countries in southern Europe that are in sovereign debt crisis, the recipient countries have to promise to carry out structural reforms after receiving the assistance, but when the leaders of these countries get the assistance and return to their countries, they actually implement the structure. When there is a sexual reform, there will be demonstrations, protests, and social unrest in the country immediately, and the reform measures cannot be carried out.

2. Reasons for the slowdown in China’s economic growth

China’s economic growth rate was 10.4% in 2010, 9.3% in 2011, 7.7% in 2012, and 7.7% in 2013. However, the economic growth rate of India, which is also a “BRICS country”, was 9.1% in 2010, 7% in 2011, 5.3% in 2012, and 4.9% in 2013. At the same time point, it is also declining, and the decline is faster than that of China. even bigger. Looking at Brazil, the economic growth rate in 2010 was 7.5%, in 2011 it was 2.7%, in 2012 it fell further to only 0.9%, and in 2013 it was only 2.2%. In the same situation, it cannot be said that China’s system and mechanism problems have dragged down China’s economic growth rate, and it has also dragged down India and Brazil more severely than ours. This makes no sense.

The only explanation for the decline in my country’s economic growth, and the more severe decline in these emerging market economies and high-income, high-performance economies at the same time, is only external international cyclical factors.

3. Will China’s economy still grow rapidly in the future?

(1) Investment or consumption

What is the premise of consumption growth? It is the continuous improvement of residents’ income level. The continuous improvement of income level depends on the continuous improvement of labor productivity. The continuous improvement of labor productivity depends on the continuous innovation of technology and the continuous upgrading of industries to reduce production costs and increase the value of output, as well as the continuous improvement of infrastructure to reduce transaction costs. Technological innovation, industrial upgrading and improvement of infrastructure all require investment. If there is no investment, consumption growth will be used to drive the economy. At the beginning, use your own savings. When the savings are used up, you will start borrowing. After borrowing for a period of time, you will always have to repay the debt. And the time to pay off the debt is when the crisis hits.

The U.S. Treasury Department recently published an article titled “Basic Vulnerabilities,” arguing that the withdrawal of quantitative easing did have a big impact on India, but not China. In this article, there are six basic vulnerabilities. According to these indicators, China’s economy is considered to be strong and India’s is the most vulnerable, and the conclusion is that India’s problems are self-inflicted and have nothing to do with the withdrawal of the loose monetary policy of the United States. The indicators used to show that China’s economy can withstand external shocks, such as high savings rate, large foreign trade surplus and large foreign exchange accumulation, were criticized by the Federal Reserve and American academic circles in the past, and were considered to be the reason for China’s unsustainable economic growth. Used as an indicator of the strength of the Chinese economy. Therefore, Chinese scholars must have independent judgments, and they cannot sing along with the tune of developed countries. They cannot believe it because many famous foreign institutions or scholars say that China’s economy should be changed to a consumption-driven growth model. Consumption is important, but consumption is the ultimate goal of economic growth.

(2) Effective investment is the key

(3) The status of investment funds

Regarding the debts of the central and local governments, in 2013, the National Audit Office dispatched more than 50,000 people to inspect the debts of local governments. After an inspection for half a year, it was found that the debts of the entire government accounted for 39.4% of the gross domestic product, the lowest level in the world. nation.

(4) Local government debt

The overall debt level of the Chinese government is not high, but will local government debt be the trigger for the crisis? This has become a hot issue for the past year or two. The main problem with local government debt is not its high proportion, but the borrowing of short-term debt for long-term construction. The total debt of the central and local governments is 21.7 trillion yuan, of which the central government debt is 9.8 trillion yuan and the local government debt is 10.9 trillion yuan. In addition, the government guarantees the financing platform. The central government is 2.6 trillion yuan, and the local government is 7 trillion yuan. We probably don’t need to worry too much about the central government debt, and the main concern is about local government debt. Local government debt plus government guarantees for local financing platforms totaled 17.9 trillion yuan, accounting for 31.5% of GDP. The government guarantees the financing platform. According to past experience, about 15% will eventually need to be repaid by the government. Together with the local government debt, the total is about 11.92 trillion yuan, accounting for about 20% of the GDP. This proportion is not high either domestically or internationally.

Of course, this does not mean that we do not need to pay attention to the issue of local government debt. The main issue to be concerned about is maturity mismatch.

4. The Potential of China’s Future Economic Growth and the Structural Issues to be Solved

(1) Potential for future long-term growth

Both at home and abroad are generally pessimistic about the prospects of my country’s economic growth. They believe that China’s economy has continued to grow at a high rate of 9.8% for 35 years from 1978 to 2013, which has never happened in human economic history. Countries such as Japan and the “Four Little Dragons” in Asia The economic growth miracle of 8% to 10% in China and the region has been maintained for more than two decades, and then dropped to below 7%, or even only 4% or lower. They believe that China has no way to violate this natural law of history.

The level of per capita GDP reflects an average level of labor productivity, technology, and industry. According to the latest comparable cross-country statistics, based on the purchasing power parity calculation in 2008, the per capita GDP of mainland China in that year was 21% of that of the United States. %, which is equivalent to the level of disparity between Japan in the early 1950s, Singapore in the mid-1960s, and South Korea and Taiwan in the mid-1970s. Japan, Singapore, South Korea, and Taiwan, China, have maintained an average annual growth rate of 8% to 9% for 20 years at the level of late-mover advantage represented by the same gap with the United States. Therefore, from the perspective of the potential of late-mover advantages, mainland China has an average annual growth potential of 8% for 20 years starting from 2008. This judgment is an objective analysis, not an optimistic assumption.

(2) Problems to be solved

How can we maintain social stability? Income inequality, social corruption and the environment need to be addressed.

Lecture 13: Reflection and Summary of Neoclassical Economics

1. The results of the reform and the views of the international economic community

Contrary to the predictions of many famous economists in the early 1990s, China’s economy continued to maintain rapid growth, while countries that implemented “shock therapy” experienced extremely severe inflation. The economic development did not experience a temporary decline followed by continuous rapid growth. Instead of a “J”-shaped curve, it is an “L”-shaped curve that regresses sharply and then weakens for a long time (see Figure 13.1). In 1993, the inflation rate in Russia reached 8,414%, that is, prices rose by 84.14 times in one year; in Ukraine, it reached 10,155%, or 101.55 times in one year. Not only that, but the GDP fell sharply, with Russia’s GDP in 1995 only reaching 50% of 1990’s and Ukraine’s only 40%. With the sharp decline in per capita income and the extreme deterioration in income distribution, various social indicators are also declining. In 1990 Russian men’s life expectancy was 64 years, and in 1994 it dropped to 58 years. According to a survey of 23,000 households in 23 countries conducted by the European Bank in 2006, 70% of people believe that life is worse now than it was 15 years ago when the transition started. In a word, the country’s reforms to implement “shock therapy” are full of difficulties and have not had the effect expected by mainstream Western economists. Among Eastern European countries, Poland has the best economic development, and its GDP has fallen by about 20%. However, Poland has not really implemented “shock therapy”. Although prices have been fully liberalized, most large state-owned enterprises do not have private ownership. change.

2. Viability and Reflections on Neoclassical Economics

(1) The Implicit Premise and Inference of Modern Economics

A theory should be able to explain and predict phenomena, and if it cannot, the theory is fundamentally flawed.

There is an assumption implicit in the existing neoclassical economic theories, which economists unconsciously take as the established premise of economic research and economic theory.

(2) Theoretical summary of viability

A firm’s viability is determined by its industry, product, and technological choices, and a good example of this concept is Japanese agriculture. Agriculture in Japan is dominated by small farmers, and the farmer is both the owner and the operator, so there is no problem of property rights, and there is no corporate governance problem caused by information asymmetry and incompatibility of incentives. However, Japan is a country with extremely scarce land, and it has no comparative advantage in land-intensive agricultural products (such as grain). , does not have a comparative advantage. The intensive cultivation of Japanese agriculture is famous in the world. However, the survival of Japanese farms depends on the high financial subsidies and tariff protection of the Japanese government. If the Japanese government opens up the free import of agricultural products, most of the farms in Japan will close down.

3. Realistic observation and theoretical development

(1) Policy failure under neoclassical economic theory

1. The Proposition and Main Content of “Washington Consensus”

The most concrete and concentrated expression of reform policy based on neoclassical economic theory is the so-called “Washington Consensus”, which includes the following: Public investment in neglected but high-return sectors, broadening the tax base, unifying exchange rates, liberalizing trade, removing barriers to foreign direct investment, privatization of state-owned enterprises, deregulation of market access and protection of private property rights, etc. ( Williamson, 1997).

Even in non-socialist countries, the problem of soft budget constraints will also exist if there are government-promoted enterprises that lack viability. For example, South Korea’s large conglomerates with catch-up characteristics are an example. At the same time, in a socialist country, even if the socialist government is overthrown and enterprises are privatized, the phenomenon of soft budget constraints cannot be eliminated.

2. The reform of the Soviet Union failed

According to the World Bank’s “World Development Report” in 1996 and “The First Decade of Reform” in 2001, it is proved that after the complete privatization of the Soviet Union and Eastern Europe, the government’s support for state-owned enterprises not only did not decrease, but some of them were still Increase. At the same time, before the transition, the government implemented a unified approach to revenue and expenditure. After the transition, the government’s taxation capacity has been greatly reduced. Under the circumstance that the support given to enterprises cannot be reduced, it is not surprising that hyperinflation has occurred.

3. China’s reform setbacks

China’s reforms began in 1978, and the most significant results are the two “unexpected” summed up by Deng Xiaoping: the first is the huge vitality of the household contract responsibility system and the huge driving force for agriculture; the second is the township and village enterprises. The sudden emergence of the country has made a huge contribution to the development of the rural economy.

Designing according to the existing theories of neoclassical economics or copying the western experience is not successful because the premise of these theories and the premise of the ubiquitous existence of western enterprises are different from the characteristics of our enterprises.

4. The catch-up failure of other countries

The per capita income in Taiwan, China is higher than that of South Korea, but compared with similar enterprises in Taiwan, South Korea’s large conglomerates are one level higher in technology and capital-intensiveness. During the East Asian financial crisis in 1998, Taiwan’s exchange rate only depreciated by 15%, and except for mainland China, where the RMB is not freely convertible and the capital account is not open, Taiwan is the only economy in East Asia that maintains positive growth. In 1998 In 1999, it reached 4.5%, and in 1999, it reached 5.7%. Sustaining such a growth rate in this harsh environment proves that its business is competitive and viable. The South Korean economy collapsed in the East Asian financial crisis and had to apply for assistance from the International Monetary Fund (IMF) to tide over the crisis. After the implementation of the IMF’s aid terms and the abolition of various protection subsidies for large enterprises, 17 of South Korea’s 30 large conglomerates have now gone bankrupt. This shows that these enterprises are not viable, and in a competitive market, it is difficult to survive without the protection of the government.

(2) The development of neoclassical economics

The contribution of the Nobel Laureate in Economics, Ronald Coase, is to abandon the implicit assumption that market transactions have no transaction costs in the Marshall system, and to initiate the study of contracts, property rights and non-market institutions in modern economics, and to form transaction costs. school.

(3) Importance of introducing viability into development economics and transition economics

4. Explore the gold mines of theoretical innovation, promote the all-round development of disciplines, and devote to the revival of the great cause of the nation

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