How severely has China been affected by the international financial crisis? 

Justin Yifu Lin: The crisis has left a mark on China’s economy given that China has become so closely intertwined with the global economy. This is evident by its high export dependency. Exports account for about 35% of the GDP. It’s clear that the worldwide downturn caused a significant decline in China’s exports. This has meant a rise in unemployment, though not nearly to levels we are seeing in the US. It has been widely reported that an estimated 20 million Chinese migrants lost their jobs in the wake of the crisis. More recently, in March, Chinese officials announced that they plan to maintain the urban registered unemployment rate lower than 4.6% this year. Also, the government expects to create more than 9 million jobs in urban areas in 2010. However, while the efforts to measure unemployment are complicated in China, there is no doubt that the rise in unemployment was a shock. To mitigate it, the government has been supporting affected businesses with massive amounts of financial aid for quite some time.

There seems to be an emerging consensus that China needs to replace its export-led economic model with one that is more built on domestic consumption. Do you agree with this argument?

The recipe for success in East Asia had more ingredients than export-led growth alone. Much of the success of China and the East Asia region had to do with global integration and successful economic diversification, which made the region resilient throughout the crisis. That is not to say that their exports were not hit – they were severely affected. Yet overall, countries in Asia are performing better than most other developing regions because they learned lessons from the earlier Asia crisis and had prudent fiscal policies, and at the same time did not retreat from globalization.

Could the introduction of comprehensive health and pension schemes help China strengthen domestic consumption?

While it is important for the government to increase its support for health, education and social safety net programs (including pensions), this is just part of what is needed. It is true that China’s savings rates, at up to half of its GDP, are much higher than in other countries, but this is not all because of household savings money. Indeed, household savings in China are about 20% of GDP, similar to the rate in India. An unusually high amount of savings comes from large companies in China’s corporate sector. Small and medium-size enterprises, which employ 80% of workers, have minimal access to financial services because that sector is dominated by four large banks that primarily serve large companies and rich people. The smaller businesses’ lack of access to financial services retards their growth, curbs employment and exerts downward pressure on wages, resulting in high income disparity and savings-consumption imbalance. So how can China increase consumption? The strengthening of social safety nets is desirable. Nevertheless, fundamentally, China needs to improve income distribution by promoting the local banking sector to better serve small and medium-size enterprises, including through microfinance lenders. They must open up oligopolies, such as in telecommunications, to competition and increase resource taxes.

What are the most important lessons to be drawn from the financial crisis for you?

Lesson number one: we should focus on innovation and competition in the market to generate dynamic growth, and nothing else. Lesson number two: to prevent such a scenario from recurring, it must be possible for governments to step in to provide effective regulation if needed in the future.

China’s economic growth has slowed down slightly. Does that mean the Chinese economic miracle is over for the time being, or is it just taking a break? 

China has continued an impressive record of growth despite the crisis, though the country has felt the hit from the downturn, both in terms of its export sector and in the job market. The country’s GDP growth was 8.7% in 2009 (IMF, March 2010), which was more than the 8% target the government set. Looking ahead, the World Bank’s Global Economic Prospects report released earlier in January projected 9% GDP growth for China this year. The robust outlook is expected to continue through 2011. However, Ithink that in the medium term China’s growth can only be sustained by successful rebalancing of the economy. Rebalancing and getting more growth from domestic demand will require more emphasis on private consumption and services and less emphasis on growing industry and exports. Structural adjustments and reforms are required to achieve that goal.

What developments do you see in the world economy and in China over the next 12 months?

Global GDP, which declined by 2.2% in 2009, is expected to grow 2.7% this year and 3.2% in 2011. Growth in developing countries is projected to reach 5.2% in 2010 and 5.8% in 2011 (after 1.2% in 2009). Despite the recovery, even after two years, the pace of growth will not be sufficient to offset the loss in output associated with the crisis. As a result, high unemployment, substantial spare capacity and continued pressure on firms is expected to continue to characterize the global economy even in 2011. Given prevailing fragility, the Chinese government is continuing to implement a proactive fiscal policy. In addition, there is still much room for increasing investment in China, particularly with respect to further potential for improving domestic demand.

Can you talk about China’s massive stimulus effort? How long can such spending continue?

China’s stimulus has totaled around $685 billion. In all, an estimated 7 percentage points of the GDP growth in 2009 came from government-influenced spending (investment and consumption). Such a stimulus as took place in 2009 cannot be pursued for too long, though. Indeed, on the monetary side the expansion was larger than policy-makers had initially planned. The government is now rightly working on containing the monetary expansion and is likely planning no further increase in the fiscal deficit in 2010.

Can you describe some of the details of the investment program?

Eighty percent of the planned investments will serve to improve the infrastructure, such as railroads and highways, as well as power and water supply systems in rural areas and so on. However, 40% of the investment plans are simultaneously environmental projects intended to help make China’s economic growth more environmentally friendly in the future.

Will China continue to loosen up its economy until it ultimately achieves a free market economy?

The trend is clear: 30 years ago, private businesses accounted for 0% of economic growth. That percentage is now up to 70-75%. As in every country, though, there will be sectors that remain publicly owned, such as infrastructure, commerce, transportation and some financial services. These are critical to the proper functioning of the economy.

How long is the transition phase expected to last?

I am an ardent defender of the principle of continual improvement. That’s why I say the economic transition phase will never end because there will always be something that can be improved upon. By the way, that also applies to mature market economy systems since no economic system is perfect. In other words, every country is in a transitional phase to a better economy and a better society.  

According to the Western world’s traditional understanding of economics, there is only one way for a society to achieve prosperity and that is liberalization and allowing market forces to unfold freely. Your claim is that China can show us that there is another way. 

Practice has shown that even in European countries, economic systems develop very differently. Germany, France, Great Britain, Sweden – each has forged its own path. The only thing they actually agree on is the objective: the path must lead to greater prosperity. For this reason, I am saying that there is not just one true path to a society’s prosperity, there are many.

Published by PROJECT M in April 2010

(Photo: Ullstein/aslu)