Caixin OnlineOpinionEditorial Tough Times Call for Tougher Reform Push
01.27.2016 19:06

Tough Times Call for Tougher Reform Push

Cooling economy a sign that the pace of reform should be quickened to deal with challenges thrown up by the service-driven model
By Hu Shuli
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Cooling economy a sign that the pace of reform should be quickened to deal with challenges thrown up by the service-driven model

The latest official growth figures confirm a loss of momentum in the world's second-largest economy, a development that has had a ripple effect on international financial markets. Data from the National Bureau of Statistics released on January 19 shows that the country's gross domestic product edged up 6.9 percent in 2015, the lowest in 25 years.

Authorities moved quickly to point out that the growth rate still in line with official projections, but this deceleration has created a chilling effect at a time when the country is dealing with overcapacity, mounting risks in financial markets and a slump in industrial productivity.

However policymakers should be more worried about the need for economic restructuring than growth to maintain a sustainable pace of development. The Central Economic Work Conference in December identified a list of priorities to transform the economy from one with a high growth rate to one that can sustain growth based on value addition and efficiency.

These priorities include the need to prune overcapacity, clear up the large inventory of unsold homes, curb government debt and ease the heavy tax burden on manufacturers. The government has also pledged to address some of the problems in governance hampering growth, especially the slow pace of reforms and a lack of accountability and transparency.

China's economy has shown some positive signs. Services have become the fastest growing sector in the economy in the past two years after it overtook manufacturing and construction in terms of output for the first time in 2013. In 2015, the service industry accounted for almost 55 percent of tax revenues. Many emerging businesses that rely on Internet and mobile technologies have grown quickly too. However, experts say a boom in services is not an indication of an overall improvement in efficiency and competitiveness.

The health of an economy depends on the level of investment it attracts, skills of its labor pool and on how innovation contributes to growth. Good governance is another vital element. What China has achieved during its reform and opening up process over the past 30 years serves as a vivid testament to that.

Despite the burst of progress, total factor productivity, a measure of innovation's contribution to growth, has been low since 2000. A rise in income has fueled consumption, but important areas like education, health, finance and public transportation are struggling to keep pace with rising demand. The quality of services offered in these sectors also leaves much to be desired.

Authorities need to overhaul the way it regulates this main engine of growth. One urgent priority is to put in place proper oversight mechanisms to uphold intellectual property rights, improve efficiency and competitiveness.

Since the party's 18th National Congress in November 2012, authorities have carried out a string of changes to streamline the tax regime, attract more private investment and foster innovation. They have encouraged entrepreneurship in many emerging sectors. Meanwhile, we continue to see local protectionism and unfair competition when public officials collude with businesses to bend the law. This is due to the lack of accountability and transparency in the government.

As such, we must create a level playing field in order to modernize services. We should also strengthen accountability and allow the public to scrutinize government affairs. As other post-industrial societies have demonstrated, without a civil society and the rule of law, we will not be able to unleash the potential in our labor force and the use of technology and capital for progress. As Japanese economist Masahiko Aoki has pointed out, what happens in the marketplace actually has much to do with the social system in which it is embedded.

As many researches have suggested, when the income level of a country remains low, its people are drawn towards the idea of accumulating material wealth and are more concerned about economic growth, commodity prices, social order and national defense. But when a country becomes a high or middle income nation, then its citizens pay less attention to material affluence, and place more value on rights to have a say in government affairs, freedom of speech and a clean environment.

A modern government must learn to adjust to these changing priorities by giving the public a greater say in the government's decision. While a government can only do what the law allows, the public is free to do whatever the law does not explicitly prohibit.

As growth is likely to slow further this year, some have been calling for a new stimulus package. These people argue that the impact of ongoing reforms might be felt too late, and warn it is similar to "water that is too far away and therefore, not useful to douse the flames nearby."

Of course, we need growth and stability is a prerequisite for further reform. But it is this need for a quick fix that has put China in such an awkward position today. What we have learnt since the 2008 financial crisis is that government intervention can prop up growth in the short term, but its effects wane significantly overtime.

The only way out of the current lull is to push for further government and economic transformation. A weakening yuan in recent months is seen as a no-confidence vote on the economy that has been too slow to push forward reform.

It's fair to say that the government has done a good job in terms of industrializing the country. But it will face unprecedented challenges when dealing with a service-driven economy. As the country is increasingly relying on innovation to maintain a moderate level of growth, it must undergo further reform and push the government to transform itself. This is also in line with the government's aspiration to strengthen the supply-side economy.

Hu Shuli is the editor-in-chief of Caixin Media

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