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By Wu Jinglian
The latest round of macro control measures has hit home. To achieve smooth growth in the long run, the method of economic control must be more market-orientated.
A year ago, people were still debating whether the economy was over-heated.
The debate was soon silenced by the statistics. Investment in fixed assets grew by 53 percent year-on-year in the first two months of this year. The consumer price index has kept rising over several months until October.
Yet, there were still voices that claimed the economy was only "partially" over-heated.
This is a non-existent term.
Statistics used to measure the economic situation are gathered from sectors throughout the country. The figures from each sector indicate that the economy is over-heated.
There is nothing "partial" about it.
In fact two major problems in the economy singled out by top leaders are over-sized investments in fixed assets and a faster-than-normal growth in bank loans.
The number of sectors believed to be too hot has risen from two to nine and even 10.
The government decided to take necessary measures to cool down the economy earlier this year.
Since March, the authorities have worked out several policies to this end.
The central bank raised the rate of deposit reserves twice, allowed more room for floating interest rates and then hiked interest rates.
The Ministry of Finance also announced it will switch the expansive policy to a neutral one.
These market-oriented means are expected to serve the purpose, but they are far from the most effective ones.
What has really reined in the economy is administrative interference in the economy, including supervisory teams sent by the National Development and Reform Commission to investigate malpractice in investment projects, an order issued by the Ministry of Land and Resources to examine land use by development zones and control over bank loans by the China Banking Regulatory Commission.
The administrative interference has in these ways achieved remarkable effects.
The agriculture industry has been revived. Growth in investment, bank loans and money supply has been checked in the first nine months.
But too much reliance on administrative interference in the economy has also had adverse results.
The actual interest rate - the nominal interest rate after deducting the inflation rate - dipped below zero. The price of real estate price has not stopped climbing.
More market-orientated means should be introduced in economic controls.
Administrative interference, or measures initiated and enforced by administrative power, to control trends in the economy will incur difficulties in implementation.
If departments implementing the orders are given the power to decide each case according to their real situation, there arises a possible source of corruption.
If they were not given the power to make flexible decisions, the projects or economic entities they watch over would have to see uniform solutions despite their differences.
When government branches have the right to choose which projects are entitled to bank loans or licences while others are not, errors and low efficiency in resource allocation are inevitable.
At the same time, the effects on the economy of administrative interference cannot last long. When such interference becomes less severe, the economy may sneak back to its old track.
A common misunderstanding about market-orientated measures to control the economy is that they are rigid because they impose uniform treatment to everyone without exception.
This is not so. For example, when interest rates for one-year loans rose by 0.27 percentage points, businesses with different efficiencies will be affected differently.
Businesses with high efficiency can continue their investment regardless of the rate hike. Businesses with low efficiency will find that they cannot afford the higher costs for investment after the hikes.
In other words, the interest-rate hike, a typical market-orientated means of economic control, can deprive businesses which waste resources of access to more resources. In this way, it selects who should get bank loans and who should not.
Compared with the market, not all the government branches have the same wisdom.
The market is the most effective way to allocate resources and to achieve an efficient economy. That is also the reason why we ended our planned economy.
In the last two decades of development, one problem has occurred time and again: when the economy prospers to achieve a new high, it tends to get over heated several months later with a shortage in the supply of coal, electricity and petroleum. Then, the government has to interfere and rein in the momentum to avoid chaos.
The problem occurs because of our aggressive ways of economic development with high input and poor efficiency.
In the short term, it is a cycle of over-heating, cooling down, development then back to over-heating. In the long run, the large investment wasted in the ups and downs accumulates into a huge burden of bad assets for the financial sector.
Economic policies and administrative interference with short term effects will not help stop this cycle and ensure a smooth growth.
Instead, policies aiming at sustainable development should be worked out.
The means that control on the macro economy should be more market-orientated so that economic efficiency will be improved.
A new method of development should be worked out, which encourages technological innovation and nurtures the development of the tertiary sector.
Reform of the economic system should go further. Not only the financial sector, but also the government itself should be reformed.
Last but not the least, education should be improved. Only well-educated human resources can bring about a success in industrialization and modernization.
Note: the author is a well-known Chinese economist.
(China Daily December 2, 2004)
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