CHINA
12 May 2014
2013 OECD China Economic Survey
Our friend Ken Davies, President of Growing Capacity, Inc., has kindly shared with us his excellent review of the OECD's 2013 China Economic Survey.
Our friend Ken Davies, President of Growing Capacity, Inc., has kindly shared with us his excellent review of the OECD's 2013 China Economic Survey. This is the third survey, the first was published in 2005 and the second in 2010.
This year's survey focuses on five policy areas: financial sector reform, competition and innovation, inclusive urbanization, relations between levels of government, and greening growth.
In this post, Ken gives us a candid assessment of this report based on his years of experience at the OECD working directly with the Chinese government. At the bottom, there is a link so you can read the whole report free of charge.
The OECD makes policy recommendations which are generally in line with current government policy. Reading between the lines, what the OECD is saying is that the central government's policies should be more strongly enforced at local level. The five areas listed above necessarily get more focused attention than the obligatory opening section on macroeconomic policy.
The OECD's approves of the Chinese government's loose monetary policy in the short term, but tells China to "guard against inflation risks further out". This advice is superfluous: inflation is one of the main fears of China's leaders because of the possible threat to "social stability" (i.e. the domination of society by the Chinese Communist Party) that it may pose.
The hyperinflation of the 1940s played a major role in the downfall of the Nationalist government and the Communist victory of 1949. When inflation reared its head during the reform period, especially in 1988-1989 and in the early 1990s, the government was quick to stamp on it. A repeat of the massive credit expansion of 2009 is in any case no longer affordable.
A major threat to economic management is the property boom, which the Chinese authorities have been wrestling with in recent years. The OECD makes one additional proposal to deal with this, that the government substantially raise the annual quotas for new building land in areas where the cost of apartments is high "in order to guard against renewed pressure on property prices".
This begs the question: where is the new land to come from? Appropriation of rural land for the expanding cities is a major problem (to put it politely) for the rural population from whom it is seized, often with minimal compensation. Bulldozing more temples and courtyard houses in Beijing or French mansions in Shanghai is not the answer in city centers, either. Perhaps new housing estates could be built on the ruins of smoky power stations relocated to outlying areas to reduce inner-city pollution? The solution to the property bubble lies probably elsewhere.
The recommendations on financial-sector reform are valuable in providing strong support from a respected external body for an acceleration of the liberalisation that the government has been committed to for some time. The aim is to allow the development of an effective financial sector to support the rest of the economy while simultaneously minimizing the risk of a financial crisis like that in Asia in 1998-1999 or more recently in the USA and Europe.
Such a crisis has in fact been forecast for China since the late 1990s, but has not happened, initially largely because of the slow pace of financial liberalization. The OECD therefore goes along with the policy of gradual, step-by-step financial liberalization, not a "big bang" reform. It asks China to strengthen the rules on maturity mismatch and risk diversification for wealth management products, to continue to move towards market-determined interest rates, align the regulation of bond markets for maturities of over five years with the practices of the market for shorter maturities, increase the quota for inward investment in equities and long-dated bonds, allow greater use of offshore renminbi (CNY) deposits in mainland China and allow for greater exchange-rate flexibility.
The language here is, of course, much milder than that employed by recent US administrations. The OECD does not brand China a "currency manipulator" or make other charges suggesting that its economic policies are conspiratorial or damaging to other countries. This is in line with the OECD tradition of politeness and also reflects the need to agree a text with all OECD Member countries and with the Chinese government, principally the National Development and Reform Commission (NDRC), the OECD Economic Department's main partner in China. The NDRC (originally the State Planning Commission, SPC) is a super-ministry that oversees economic policy, now that its functions as a central planning body have been reduced since the mid-1990s.
The section on competition and innovation policy reflects the findings of earlier OECD reviews of other policy areas. The recommendation to "clarify rules concerning the opening up of new sectors to private investment, including of foreign provenance" and "strengthen enforcement of intellectual property rights by raising awareness of laws and increasing penalties for infringements to ensure adequate protection to domestic and foreign innovators" are in line with more detailed policy options that I outlined in the 2003 OECD China Investment Policy Review and reiterated in the two subsequent Investment Policy Review which I wrote and published while I was still at the OECD in 2006 and 2008. (I wrote an update to these which was submitted to the OECD's Investment Division in final form over a year ago, after I had retired from the OECD in 2010, but it has yet to be published.) Similar recommendations are in the OECD's recent massive survey of China's innovation policies.
A major strong point of the OECD's economic surveys is that they are not limited to a narrow definition of economic policies but frequently examine social policies that have a major long-term economic impact. For example, a recent OECD United States Economic Survey included chapters on US high school education (among the worst in the OECD) and university education (by far the best in the world).
The 2013 OECD China Economic Survey's focus on inclusive urbanization is interesting not just because urbanization is a (perhaps the) major factor driving GDP growth in the next few decades, but also because the movement of hundreds of millions of people from the country to the cities to manufacture exports and erect buildings is the source of major injustice and therefore potentially dangerous social unrest. The "migrant workers" do not have urban residence permits (hukou) and so do not enjoy the fundamental rights that born city-dwellers take for granted. The last administration, particularly Premier Wen Jiabao, talked often of rectifying this, but progress has been slow.
The OECD's recommendations in this area may appear excessively gentle, but perhaps that is the best way to approach the current leaders of China: offer objectively-phrased policy options which they can pick up off the table and work on. If you read through the recommendations, they tell a dreadful story about the present situation. The OECD suggests that migrants from the countryside be allowed to enrol in high schools and take university entrance examinations in their place of residence, which of course means that they can't do that now.
How is this possible in a civilized country? It has become commonplace for critics of the existing restrictions to point out that the next Einstein may come from the children of migrant workers and China will lose out if it denies them schooling. The OECD also recommends that the government "disconnect the provision of local public services from local registration". This recommendation also tells a miserable story about the exclusion of the people on whom China's export earnings are largely derived from the cities that they have built with their own hands. When you watched the 2008 Olympics, did you notice that the workers who built the stadium were expelled from Beijing before the games started?
The 2013 Survey also glances at the (often illegal) seizure of farmland by urban developers for their enrichment. The recommendations here do not go far enough, mainly because the Review is focused more on tackling urban property price inflation. They do include a proposal to change the land-use rights of agricultural land to the same length as in urban areas, but they also propose an easing of the limits on the use of agricultural land for development and housing, allow farmers to sell land to developers directly (at what price?) and to consolidate agricultural land parcels in order to raise productivity. This will be music to the ears of the developers, not necessarily to farmers.
A recent, and under-reported, OECD review of China's fiscal arrangements concluded that the large sums earmarked by the central government for basic education and healthcare often did not reach the villages because they had to pass through powerful (and, although the OECD can't say that, greedy) provincial governments, who manage to appropriate a portion of it. The 2013 Economic Survey recommends that the Chinese government "raise the share of general intergovernmental transfers and improve the design of earmarked ones". The use of the term "intergovernmental" here refers to transactions between different levels of government within China, not to relations with foreign governments. No doubt this term is used because "intergovernmental" does not sufficiently convey the separateness and even contradiction between the spheres of administration of these different levels.
"Greening growth" is an inevitable component of any major review of China's economic policies. The whole country, and the rest of the world, is aware of the wanton destruction of the environment that is continuing to accompany industrialization. It is symbolized by this year's disastrous air pollution in Beijing, which the delegates to the National People's Congress and the Chinese People's Political Consultative Conference must have noted during their brief annual get-together there.
Each year, these meetings have heard a Government Work Report that boasted of the previous year's economic achievements. Some of those, given by Premier Wen Jiabao, spoke boldly of protecting the environment, conserving energy and building a "circular economy", even of making environmental policy the "pivot" of economic policies. Yet millions of people still do not have clean drinking water and can not breathe clean air.
The OECD inevitably proposes largely market-based solutions: encouraging energy conservation by raising excise duties on gasoline and fully deregulation prices, moving to full market-based pricing for natural gas and coal, deregulating electricity prices, avoiding preferential pricing for selected industrial users, raising piped water prices to encourage conservation, increasing pollution levies and taxes, implementing CO2 pilot emissions trading schemes, and moving towards national carbon pricing, preferably via a carbon tax.
It also proposed better data collection and enforcement of environmental regulations, "including by holding local governments accountable". For years the government has been promising to make environmental performance as important as the successful promotion of economic growth in the promotion of local party leaders. In practice, GDP growth has remained the main criterion on which provincial officials are judged, which is why they fiddle the figures to show higher growth. (If you are not familiar with this topic, take the provincial GDP growth figures for the past few decades, calculate the average, then compare this with the national average. Why is the national figure almost always lower?)
Conclusion: the 2013 Review pushes most of the right buttons (except on the seizure of rural land), but, as always with the OECD, it pushes them too gently. As with the OECD's review of China's environmental performance, it makes criticisms and recommendations which are less robust than you will hear from many people living in China, including officials. The OECD is not just a "think tank", as it is lazily described by many journalists. It is an international organization built on consensus. That consensus extends to non-Members under review.
True, to the extent that each report is published under the authority of the Secretary-General, it is independent enough to be able to say things that not everybody agrees with. And the reports are written by qualified experts, working in an academic surrounding and consulting a wide range of expertise and opinion, especially in the reviewed country. On the other hand, the reports are part of a process of co-operation on policy development that implicitly requires that the officials in non-Member governments who work with the OECD are not made to lose face by, for example, the inclusion of material that the reviewed government finds highly offensive, even if (or often precisely because) it is true.
This year's survey focuses on five policy areas: financial sector reform, competition and innovation, inclusive urbanization, relations between levels of government, and greening growth.
In this post, Ken gives us a candid assessment of this report based on his years of experience at the OECD working directly with the Chinese government. At the bottom, there is a link so you can read the whole report free of charge.
The OECD makes policy recommendations which are generally in line with current government policy. Reading between the lines, what the OECD is saying is that the central government's policies should be more strongly enforced at local level. The five areas listed above necessarily get more focused attention than the obligatory opening section on macroeconomic policy.
The OECD's approves of the Chinese government's loose monetary policy in the short term, but tells China to "guard against inflation risks further out". This advice is superfluous: inflation is one of the main fears of China's leaders because of the possible threat to "social stability" (i.e. the domination of society by the Chinese Communist Party) that it may pose.
The hyperinflation of the 1940s played a major role in the downfall of the Nationalist government and the Communist victory of 1949. When inflation reared its head during the reform period, especially in 1988-1989 and in the early 1990s, the government was quick to stamp on it. A repeat of the massive credit expansion of 2009 is in any case no longer affordable.
A major threat to economic management is the property boom, which the Chinese authorities have been wrestling with in recent years. The OECD makes one additional proposal to deal with this, that the government substantially raise the annual quotas for new building land in areas where the cost of apartments is high "in order to guard against renewed pressure on property prices".
This begs the question: where is the new land to come from? Appropriation of rural land for the expanding cities is a major problem (to put it politely) for the rural population from whom it is seized, often with minimal compensation. Bulldozing more temples and courtyard houses in Beijing or French mansions in Shanghai is not the answer in city centers, either. Perhaps new housing estates could be built on the ruins of smoky power stations relocated to outlying areas to reduce inner-city pollution? The solution to the property bubble lies probably elsewhere.
The recommendations on financial-sector reform are valuable in providing strong support from a respected external body for an acceleration of the liberalisation that the government has been committed to for some time. The aim is to allow the development of an effective financial sector to support the rest of the economy while simultaneously minimizing the risk of a financial crisis like that in Asia in 1998-1999 or more recently in the USA and Europe.
Such a crisis has in fact been forecast for China since the late 1990s, but has not happened, initially largely because of the slow pace of financial liberalization. The OECD therefore goes along with the policy of gradual, step-by-step financial liberalization, not a "big bang" reform. It asks China to strengthen the rules on maturity mismatch and risk diversification for wealth management products, to continue to move towards market-determined interest rates, align the regulation of bond markets for maturities of over five years with the practices of the market for shorter maturities, increase the quota for inward investment in equities and long-dated bonds, allow greater use of offshore renminbi (CNY) deposits in mainland China and allow for greater exchange-rate flexibility.
The language here is, of course, much milder than that employed by recent US administrations. The OECD does not brand China a "currency manipulator" or make other charges suggesting that its economic policies are conspiratorial or damaging to other countries. This is in line with the OECD tradition of politeness and also reflects the need to agree a text with all OECD Member countries and with the Chinese government, principally the National Development and Reform Commission (NDRC), the OECD Economic Department's main partner in China. The NDRC (originally the State Planning Commission, SPC) is a super-ministry that oversees economic policy, now that its functions as a central planning body have been reduced since the mid-1990s.
The section on competition and innovation policy reflects the findings of earlier OECD reviews of other policy areas. The recommendation to "clarify rules concerning the opening up of new sectors to private investment, including of foreign provenance" and "strengthen enforcement of intellectual property rights by raising awareness of laws and increasing penalties for infringements to ensure adequate protection to domestic and foreign innovators" are in line with more detailed policy options that I outlined in the 2003 OECD China Investment Policy Review and reiterated in the two subsequent Investment Policy Review which I wrote and published while I was still at the OECD in 2006 and 2008. (I wrote an update to these which was submitted to the OECD's Investment Division in final form over a year ago, after I had retired from the OECD in 2010, but it has yet to be published.) Similar recommendations are in the OECD's recent massive survey of China's innovation policies.
A major strong point of the OECD's economic surveys is that they are not limited to a narrow definition of economic policies but frequently examine social policies that have a major long-term economic impact. For example, a recent OECD United States Economic Survey included chapters on US high school education (among the worst in the OECD) and university education (by far the best in the world).
The 2013 OECD China Economic Survey's focus on inclusive urbanization is interesting not just because urbanization is a (perhaps the) major factor driving GDP growth in the next few decades, but also because the movement of hundreds of millions of people from the country to the cities to manufacture exports and erect buildings is the source of major injustice and therefore potentially dangerous social unrest. The "migrant workers" do not have urban residence permits (hukou) and so do not enjoy the fundamental rights that born city-dwellers take for granted. The last administration, particularly Premier Wen Jiabao, talked often of rectifying this, but progress has been slow.
The OECD's recommendations in this area may appear excessively gentle, but perhaps that is the best way to approach the current leaders of China: offer objectively-phrased policy options which they can pick up off the table and work on. If you read through the recommendations, they tell a dreadful story about the present situation. The OECD suggests that migrants from the countryside be allowed to enrol in high schools and take university entrance examinations in their place of residence, which of course means that they can't do that now.
How is this possible in a civilized country? It has become commonplace for critics of the existing restrictions to point out that the next Einstein may come from the children of migrant workers and China will lose out if it denies them schooling. The OECD also recommends that the government "disconnect the provision of local public services from local registration". This recommendation also tells a miserable story about the exclusion of the people on whom China's export earnings are largely derived from the cities that they have built with their own hands. When you watched the 2008 Olympics, did you notice that the workers who built the stadium were expelled from Beijing before the games started?
The 2013 Survey also glances at the (often illegal) seizure of farmland by urban developers for their enrichment. The recommendations here do not go far enough, mainly because the Review is focused more on tackling urban property price inflation. They do include a proposal to change the land-use rights of agricultural land to the same length as in urban areas, but they also propose an easing of the limits on the use of agricultural land for development and housing, allow farmers to sell land to developers directly (at what price?) and to consolidate agricultural land parcels in order to raise productivity. This will be music to the ears of the developers, not necessarily to farmers.
A recent, and under-reported, OECD review of China's fiscal arrangements concluded that the large sums earmarked by the central government for basic education and healthcare often did not reach the villages because they had to pass through powerful (and, although the OECD can't say that, greedy) provincial governments, who manage to appropriate a portion of it. The 2013 Economic Survey recommends that the Chinese government "raise the share of general intergovernmental transfers and improve the design of earmarked ones". The use of the term "intergovernmental" here refers to transactions between different levels of government within China, not to relations with foreign governments. No doubt this term is used because "intergovernmental" does not sufficiently convey the separateness and even contradiction between the spheres of administration of these different levels.
"Greening growth" is an inevitable component of any major review of China's economic policies. The whole country, and the rest of the world, is aware of the wanton destruction of the environment that is continuing to accompany industrialization. It is symbolized by this year's disastrous air pollution in Beijing, which the delegates to the National People's Congress and the Chinese People's Political Consultative Conference must have noted during their brief annual get-together there.
Each year, these meetings have heard a Government Work Report that boasted of the previous year's economic achievements. Some of those, given by Premier Wen Jiabao, spoke boldly of protecting the environment, conserving energy and building a "circular economy", even of making environmental policy the "pivot" of economic policies. Yet millions of people still do not have clean drinking water and can not breathe clean air.
The OECD inevitably proposes largely market-based solutions: encouraging energy conservation by raising excise duties on gasoline and fully deregulation prices, moving to full market-based pricing for natural gas and coal, deregulating electricity prices, avoiding preferential pricing for selected industrial users, raising piped water prices to encourage conservation, increasing pollution levies and taxes, implementing CO2 pilot emissions trading schemes, and moving towards national carbon pricing, preferably via a carbon tax.
It also proposed better data collection and enforcement of environmental regulations, "including by holding local governments accountable". For years the government has been promising to make environmental performance as important as the successful promotion of economic growth in the promotion of local party leaders. In practice, GDP growth has remained the main criterion on which provincial officials are judged, which is why they fiddle the figures to show higher growth. (If you are not familiar with this topic, take the provincial GDP growth figures for the past few decades, calculate the average, then compare this with the national average. Why is the national figure almost always lower?)
Conclusion: the 2013 Review pushes most of the right buttons (except on the seizure of rural land), but, as always with the OECD, it pushes them too gently. As with the OECD's review of China's environmental performance, it makes criticisms and recommendations which are less robust than you will hear from many people living in China, including officials. The OECD is not just a "think tank", as it is lazily described by many journalists. It is an international organization built on consensus. That consensus extends to non-Members under review.
True, to the extent that each report is published under the authority of the Secretary-General, it is independent enough to be able to say things that not everybody agrees with. And the reports are written by qualified experts, working in an academic surrounding and consulting a wide range of expertise and opinion, especially in the reviewed country. On the other hand, the reports are part of a process of co-operation on policy development that implicitly requires that the officials in non-Member governments who work with the OECD are not made to lose face by, for example, the inclusion of material that the reviewed government finds highly offensive, even if (or often precisely because) it is true.