Update: Joseph Stiglitz Says China Must Learn Lessons of Reagan-Era Reforms

Nobel prize-winning economist Joseph Stiglitz has issued a warning to Chinese policymakers — learn well the lessons of the U.S. administration of the 1980s when it comes to enacting supply-side reform, or face spiraling inequality.

Speaking at the China Development Forum in Beijing over the weekend, Stiglitz said supply-side reform should benefit the nation as a whole, rather than enriching rent-seekers and benefiting only one group of people by letting them exploit others.

Reagan-era tax cuts and deregulation ultimately resulted in slower economic growth, increased inequality and concentrated ownership in some industries, Stiglitz said.

China began supply-side reforms, which include cutting industrial overcapacity, three years ago. But excessive capacity cuts have led prices of commodities such as coal and steel to surge, alongside the profits of upstream companies — most of which are state-owned.

Meanwhile higher commodity prices have squeezed the profit margin of private companies, which tend to be in downstream sectors.

Companies in industries such as coal, steel and energy have made up more than 70% of the profit of the entire industrial sector in the past two years, Ning Jizhe, a deputy director of the National Development and Reform Commission, told the forum. Ning said China needed to “systematically improve industrial capacity” and take changing supply and demand into consideration.

Stiglitz also said China needed to spend more on research and development and education, and provide more job opportunities for women and the elderly, as well as investing more in manufacturing and services instead of in the real estate sector.

Despite enormous success in economic development, Chinese governments, especially local governments, have an insufficient tax base and have to rely on land sales, which has led them to spend inadequately on public services including infrastructure, education, health care and elder care, Stiglitz said. Expanding the tax base in areas such as property, capital gains and carbon emissions could help to resolve the issue, he said.

Land investment doesn’t create value, and merely causes inflation, Stiglitz said. Therefore a booming property sector diverts resources away from areas that could have created value, he said. Long-term prosperity for the Chinese economy will be derived from the manufacturing and services sectors, not from real estate, he added.

Contact reporter Liu Jiefei (jiefeiliu@caixin.com)