Dec 13, 2016 04:21 PM

Editorial: Look to Modern Economic Theories for Ways to Deepen Reform

By Hu Shuli

Efforts to push forward reforms at this critical moment in China's development trajectory must be guided by sound theories. And this is why awarding the first-ever China Economic Award to two eminent economists — Qian Yingyi, president of the School of Economics and Management at Tsinghua University, and Xu Chenggang, a professor of economics at the Cheung Kong Graduate School of Business in Beijing — has been welcomed by many. Both Qian and Xu have been recognized by the National Economics Foundation, a non-governmental think tank, for their work in understanding how governments and enterprises can be motivated to reform.

The timing and symbolism of this award are both important. The decision to open up China's economy led to its rapid development as well as the emergence of a group of homegrown economists with a deep understanding of how the country's economy has evolved. Qian and Xu are among this group of economists who were strong proponents of the process of reform and opening-up. Now authorities should again learn from modern economic theories as they attempt to transition the country away from its investment-driven growth model.

After China started opening up in the late 1970s, its economy has gradually evolved from a centrally planned one to a market-oriented one. The growth spurt that followed turned China into the world's second-largest economic powerhouse in terms of gross domestic product (GDP). Economists like Qian and Xu have been studying the country's development model very closely, and were among the first generation of Chinese economists to be recognized by top international academic circles for their studies on the different phases of economic transition in China. By rewarding these two researchers who are at the forefront of studying how the country's economic reform program has evolved, the new award will encourage other scholars to examine the forces shaping China's growth and draw more public attention to findings in this field.

Economics theories are an important guide to reforms. When China adopted central planning in the 1950s, systems designed to manage the economy failed to change the way resources were allocated and address core economic problems. Meanwhile, the central government's plan to motivate local authorities by granting them more powers led to chaos and a disastrous famine and pushed the national economy to the verge of collapse.

It has taken China a long time to put its reform efforts on track after opting for trade liberalization and adopting features of a market-driven economy. The Communist Party's 12th National Congress in 1982, where it was decided that China should "ensure the leading role of the planned economy, while allowing the market economy to play a supplement role," set the tone for the country's hybrid model. Two years later, at another top party meeting, it was decided that "the socialist economy is a planned economy built on a foundation of public ownership." It wasn't until the party's 14th National Congress in 1992 that creating a market economy — with certain characteristics of socialism built into it — was identified as the goal of China's economic reform agenda.

The progress of the reform push launched since then was a result of policymakers' astute judgment and delicate policy maneuvering, as well as their willingness to try out modern economic theories and reform practices. More government officials started working closely with economists and adopted lessons from the latest studies in economics when designing policies to reform institutions in the 1990s. For example, the 1985 Bashanlun Conference in a cruise ship sailing down the Yangtze River and the 1994 Jinglun Meeting in Beijing were turning points in this exercise, where prominent economists and policymakers gathered to work out a blueprint to open up the economy further.

Qian and Xu are from this generation of economists who have made a major contribution to China's reform process. Many of them grew up when the country was still reeling from the effects of the Great Famine and the Cultural Revolution and have seen firsthand how the country emerged from the ashes of this political chaos. They have applied modern economic concepts such as game theory, information economics and contract theory when studying China's economy, which has shifted gears over time. For example, Qian and Xu tried to explore the key forces shaping China's economic growth by looking at how different levels of governments and types of businesses functioned. Xu attributed China's fast-paced growth to the central government's strict control over political power while decentralizing economic power, which motivated local governments to compete against each other to push up GDP growth in their respective provinces. Qian and his colleagues called the idea "fiscal federalism" and analyzed the incentive systems for government agencies and enterprises built into this approach. Meanwhile, both Qian and Xu have also helped to improve the public's understanding of complex economic principals, especially the relationship between the market and the rule of law.

Despite making significant strides, China's reform process must still overcome several hurdles. As reform deepens, new challenges have emerged, which calls for more research and discussions at a theoretical level on how to overcome these problems. Reluctance to learn from sound economic theories has hindered the reform process. There is an urgent need for authorities to pay attention to economists' findings.

Instead of focusing on how new ideas in the field of economics can be used to solve real-world problems, China has a long tradition of debating whether modern economics theories should be accepted or ignored. Some experts have argued that China's development is a special case, which can't be fully guided by current principles of economics. Instead, relying on its own experiences to figure out the direction for its reform agenda is the key to China's success, as aptly illustrated by then-leader Deng Xiaoping's remark about the need to "cross the river by feeling the stones." Deng's emphasis on learning by doing was an important strategy at the early stage of the reform process. But the modern market-driven economic system prevalent in most parts of the world has evolved over several decades, while China is striving to build a similar system from scratch over a much shorter time through its reform push. It would be impossible to achieve this goal without a deeper understanding of modern economics that reflects market rules, according to renowned economist Wu Jinglian.

China's reform process must overcome several hurdles and requires guidance from modern economics theories to do so. Government officials need to work closely with experts, while economists should focus more on helping clear major bottlenecks to China's economic transition. China needs more academics — especially young scholars with a deep understanding in modern economics — to devote their life to researching issues linked to China's economic transition.

Hu Shuli is the chief editor of Caixin Media.

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