Promoting Economic Reform, Even Out on a Limb

In 1985, Edwin Lim established the World' Bank's office in China and also served as the first chief of mission to China from 1985 to 1990. Mr. Lim led a World Bank team in surveying China's economy and writing an influential report on the nation's modern development.
 
Lim helped establish China's first joint-venture investment bank, China International Capital Corp., and served as its first president. He also participated in researching and drafting numerous five-year plans for the Chinese government.
 
Lim joined an elite group of scholars that included Xue Muqiao, Ma Hong and Wu Jinglian at a Three Gorges gathering in September 1985 for brainstorming sessions with international specialists including James Tobin and János Kornai.
 
Today, results from this meeting known as the Bashanlun Conference are cited by economists as a foundation for China's market economy. Indeed, their brainstorming events helped build an intellectual foundation for the nation's transition to comprehensive economic reform following the rural reform period.
 
For his many contributions at Bashanlun and since, Lim has been hailed as a window to the world for Chinese government officials. His words, although sometimes controversial, still carry weight.
 
Caixin interviewed Lim in September. His remarks follow:
 
Caixin: The Chinese government claimed that the 2008 global financial crisis would lead to a new model for economic development. Do you think it is mere propaganda as the global economy has been recovering?
 
Lim: I've studied economic development for more than 50 years. I've researched African and southern Asian economies, and lived in India for a long time. I've also lived in Indonesia and China. In my opinion, transforming the mode of development is an ongoing process. Periodically, you need to change policy because circumstances change. However, I don't believe in sudden changes.
 
Caixin: Currently, many scholars are worried that China will fall into a "middle-income trap." The term describes the stagnation of many developing economies when they reach the moderate levels of per-capita income. Your view?
 
Lim: I don't accept the concept of a middle-income trap. At a middle-income stage, you may run into difficulties in development. But the most difficult stage of development is actually at the low-income stage, which is why I have always thought that guarding against a "low-income trap" is more important.
 
Of course, at every stage of development, it is necessary to evaluate whether successful policies of the past are still suitable to changing circumstances. In China, policies based on exports and especially exports of labor-intensive products are no longer applicable, and it is necessary to change the model of development.
 
However, I think there is a strong, internal force in the Chinese economy. Take a look at China's performance since the global financial crisis. You'll find the Chinese economy is in much better condition than those in many other countries. The Chinese economy has many features that allowed it to do this.
 
One strong factor is China's good financial position. Other countries could not introduce such a strong government economic stimulus program. They either lacked the planning capabilities or their financial situations were weak. Some had huge budget deficits.
 
Caixin: About the so-called "China model," there is now fierce controversy in China over it. Premier Wen Jiabao has publicly denied its existence. What is your view?
denied its existence. What is your view?
 
Lim: I don't believe in the China model. It suggests that there exists a development path that can deviate from economic common sense. Of course, each country has its own characteristics. This is inevitable. There is no need to elevate a development philosophy and spread it vigorously.
 
Looking back at China's development over the past 30 years, the root cause of its success lies in establishing a market economy as its fundamental economic system. Currently, the market economy in China is still imperfect. The degree of price controls remains high, especially for some important commodities. To a large extent, investment is still centrally controlled. The labor market is more flexible than before, but the hukou [Household Registration] system still exists, which seriously restricts the free movement of labor. China needs to further develop the market economy.
 
Caixin: The 12th Five-Year Plan included the concept of "top-level design (dingceng sheji)." How do you think it should be carried out?
 
Lim: Systemic reform really needs a comprehensive program. This is because within the economic system you can't resolve only a single problem and ignore the others.
 
In the 1980s, I launched a number of partnerships with the Economic Restructuring Committee. The rapid advance for reforms at that time was in fact due to the committee, to a certain extent. The team did not have a specialized function, as did other government departments. Its basic task was to research reform issues, and it cultivated a lot of talented reformers. Later, many ministers working in the economic sector came from the Economic Restructuring Committee.
 
I don't think we need to rebuild the Economic Restructuring Committee today, because the situation is different. However, an agency to conduct comprehensive analyses of methods and policy research would be very useful. This body should have access to the decision-making level, but it should not be a participant in decision-making. This is what the Economic Restructuring Committee was like: It basically had no decision-making responsibilities, but had a close relationship with the premier. I think experiences from other countries show that this sort of institution is very useful.
 
Caixin: Some scholars think a top-level design for each small sector and a national reform team are enough.
 
Lim: Different levels of reform teams are not mutually exclusive. We need to look at problems from the national level, but we also need to analyze issues at provincial and ministerial levels. China's provinces are big. Many are bigger than entire countries.
 
But an independent reform think tank is needed. Now, because there is no such body, various ministries usually make their own policy recommendations. They inevitably represent the perspective of a specific sector.
 
Caixin: What's the next step for state-owned enterprise reform? 
 
Lim: There are mainly two questions related to SOEs. The first is, what should be the scope of SOEs? I think there should be competition. In many sectors, SOEs and private companies should be allowed to exist concurrently. I can't see a reason for retaining so many sectors in which only SOEs are allowed to exist. If the government wants to retain a sector specifically for SOEs, it needs to demonstrate that this is necessary.
 
The second question is, if we really want to keep SOEs, what should their corporate governance structures be like? What is the meaning of an SOE? China's wording is that they are "owned by all the people," but it looks like the government owns them.
 
I don't insist on turning over 100 percent of SOE profits to the government. But the basic assumption should be 100 percent. SOEs will argue that they need to invest 20 percent to increase production capacity. But SOE managers need to demonstrate why they need to retain the 20 percent.
 
The issue in China now is completely turned upside down, making an issue of whether SOEs should turn over 10% or more of their profits. This approach is completely wrong. We must return to the basic concept: The government owns SOEs, so profits should of course be turned over to the government. The fundamental principle of the market economy is that the company's profits go to the company owners. Otherwise, why establish SOEs?
 
Caixin: A monopoly of state-owned capital means market access is a problem for private enterprises. How can we change this situation?
 
Lim: This is about vested interest. In the 1980s, the task of reform was arduous. But there wasn't much resistance because at the time there were not many vested interests. Now, in implementing reforms, there will be winners and losers. Sometimes, reform's potential losers are very strong. To break this situation requires leadership.
 
In other countries this is called "political will." I'm not too familiar with China's system, but in other countries, attempts to break vested interests must rely on the political will of leaders.