Stephen Roach Warns China's Policy Incoherence Has Become Evident
Authored by Stephen Roach, originally posted at Project Syndicate,
China was hardly lacking in policy pronouncements in the final months of 2013. From the 60-point reform program issued by the Central Committee’s Third Plenum in early November to the six core tasks endorsed by the Central Economic Work Conference a month later, China’s leaders proposed a raft of new measures to address the daunting challenges that their country faces in the years ahead.
But, seen in their entirety, the risk of incoherence has become evident. The Third Plenum initiatives, for example, have a strategic focus: promoting the economy’s long-awaited pro-consumption structural rebalancing. While the Work Conference’s core tasks embody the spirit of these reforms, they also reflect a tactical focus: “keeping growth steady.” Given the likely tradeoffs between strategy and tactics – that is, between long-term reforms and short-term growth imperatives – can Chinese policymakers really accomplish all of their objectives?
Of course, such tradeoffs have long been evident in most economies – developed and developing alike. What has separated China from the pack has been its strong inclination to place greater emphasis on strategic objectives in charting its economic-development path.
Even so, new tensions between the Third Plenum’s policies and those of the latest Work Conference have raised the question of tradeoffs once again. The consumer- and services-led rebalancing initially proposed in the 12th Five-Year Plan and endorsed by the recently concluded Third Plenum implies slower GDP growth than the 10% average annual rate recorded from 1980 to 2010.
Yet slower growth need not be a bad thing. Employment in Chinese services is about 30% higher per unit of output than in the manufacturing and construction sectors, which means that an increasingly services-led China can accomplish its critical labor-absorption objectives – namely, rapid job creation and poverty reduction – with 7-8% annual growth.
For China, rebalancing and slower growth go hand in hand – and yield the additional benefits of less intensive resource demand, a more subdued rise in energy consumption, and related progress in addressing environmental pollution and income inequality. But the recent Work Conference failed to consider China’s growth slowdown in this strategic context, placing considerable weight instead on the macro-stabilization imperatives of “proactive fiscal and prudent monetary policies.”
Since the Work Conference was concluded, investors have been debating the 2014 growth target. Will the 7.5% objective set for 2013 be maintained next year, as a recent leak from senior Chinese officials seems to indicate, or do the recent pronouncements indicate further deceleration toward 7%?
The answer will be revealed at the National People’s Congress in March. But focusing on a near-term growth target, and fine-tuning fiscal and monetary policies in order to achieve it – to say nothing of yet another credit crunch roiling Chinese short-term funding markets – detract from the emphasis on strategic shifts that economic rebalancing now requires.
Indeed, most of the six major economic tasks for 2014 set by the recent Work Conference – including efforts aimed at ensuring food security, containing local-government debt, and improving coordination of regional development – have little or nothing to do with China’s strategic rebalancing imperatives. Though laudable, they seem disconnected from pro-consumption restructuring.
In fact, only two of the six major economic tasks identified by the Work Conference fit neatly with the Third Plenum’s strategic agenda. The call for enhanced social security is consistent with the Third Plenum’s proposal to allocate 30% of state-owned enterprises’ profits to fund safety-net programs such as pensions and health care. Likewise, the emphasis on markets’ “decisive role” in upgrading China’s industrial structure and eliminating excess capacity is compatible with the Third Plenum’s goal of achieving a market-based shift to a consumer society.
But what emerges from all of this is yet another example of the timeworn “kitchen sink” approach to Chinese economic policymaking – countless proposals, initiatives, and goals that are loosely connected at best, and that are often plagued by internal inconsistencies. A new approach is needed, and it will require three key changes to China’s economic-policy framework.
First, in keeping with global best practice, Chinese authorities need to be far more explicit (that is, transparent) in prioritizing, or ranking, their policy objectives. Setting different agendas on multiple platforms – Five-Year Plans, Third Plenums, and Work Conferences – is a recipe for confusion and potential conflict.
Second, economy-wide growth targets should be downplayed. Such targets smack of the legacy of a state-directed economy – a legacy that runs counter to policymakers’ new emphasis on the “decisive role” of markets.
Finally, there is a need to separate stabilization objectives from strategic imperatives. The former should be handled by an independent central bank with primary responsibility for monetary and currency policies, whereas the latter should be the responsibility of the new Central Leading Group on Reforms, which has just been established by the Third Plenum.
Chinese policymakers’ traditional emphasis on long-term strategy has enabled them to steer past the inevitable bumps on the road to economic development. Now, however, as the authorities set out on a new course aimed at sustaining China’s extraordinary progress, they should act quickly to achieve greater coherence in their policy agenda.
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