China’s New Economic Model

Joseph E. Stiglitz

Joseph Stiglitz is a Nobel laureate in economics. His latest book is Making Globalization Work.


Joseph E. StiglitzChina’s success since it began its transition to a market economy has been based on adaptable strategies and policies: as each set of problems are solved, new problems arise, for which new policies and strategies must be devised. This process includes social innovation . China recognized that it could not simply transfer economic institutions that had worked in other countries; at the least, what succeeded elsewhere had to be adapted to the unique problems confronting China.
Today, China is discussing a “new economic model.” Of course, the old economic model has been a resounding success, producing almost 10% annual growth for 30 years and lifting hundreds of millions of Chinese out of poverty. The changes are apparent not only in the statistics, but even more so in the faces of the people that one sees around the country.
I recently visited a remote Dong village in the mountains of Quizho, one of China’s poorest provinces, miles away from the nearest paved road; yet it had electricity, and with electricity had come not just television, but the internet. While some rising incomes came from remittances from family members who had migrated to coastal cities, the farmers, too, were better off, with new crops and better seeds: the government was selling, on credit, high-grade seeds with a guaranteed rate of germination.
China knows that it must change if it is to have sustainable growth. At every level, there is a consciousness of environmental limits and the realization that the resource-intensive consumption patterns now accepted in the United States would be a disaster for China – and for the world. As an increasing share of China’s population moves to cities, those cities will have to be made livable, which will require careful planning, including public transportation systems and parks.
Equally interesting, China is attempting to move away from the export-led growth strategy that it and other East Asian countries have pursued. That strategy supported technology transfer, helping to close the knowledge gap and rapidly improving the quality of manufactured goods. Export-led growth meant that China could produce without worrying about developing the domestic market.
But a global backlash has already developed. Even countries seemingly committed to competitive markets don’t like being beaten at their own game, and often trump up charges of “unfair competition.” More importantly, even if markets are not fully saturated in many areas, it will be hard to maintain double-digit growth rates for exports.
So something has to change. China has been engaged in what might be called “vendor finance,” providing the money that helps finance the huge US fiscal and trade deficits, allowing Americans to buy more goods than they sell. But this is a peculiar arrangement: a relatively poor country is helping to finance America’s War on Iraq, as well as a massive tax cut for the richest people in the world’s richest country, while huge needs at home imply ample room for expansion of both consumption and investment.
In fact, to meet the challenge of restructuring China’s economy away from exports and resource-intensive goods, China must stimulate consumption. While the rest of the world struggles to raise savings, China, with a savings rate in excess of 40%, struggles to get its people to consume more.
Providing better social services (public health care, education, and nation-wide retirement programs) would reduce the need for “precautionary” savings. More access to finance for small and medium sized businesses would help, too. And “green taxes” – such as on carbon emissions – would shift consumption patterns while discouraging energy-intensive exports.
As China moves away from export-led growth, it will have to look for new sources of dynamism in its growing entrepreneurial ranks, which requires a commitment to creating an independent innovation system. China has long invested heavily in higher education and technology; now it is striving to create world-class institutions.
But if China wants a dynamic innovation system, it should resist pressure by Western governments to adopt the kind of unbalanced intellectual property laws that are being demanded. Instead, it should pursue a “balanced” intellectual property regime: because knowledge itself is the most important input in the production of knowledge, a badly designed intellectual property regime can stifle innovation – as has been the case in America in some areas.
Western technological innovation has focused too little on reducing the adverse environmental impact of growth, and too much on saving labor – something that China has in abundance. So it makes sense for China to focus its scientific prowess on new technologies that use fewer resources. But it is important to have an innovation system (including an intellectual property regime) that ensures that advances in knowledge are widely used. That may require innovative approaches, quite different from intellectual property regimes based on privatization and monopolization of knowledge, with the high prices and restricted benefits that follow.
Too many people think of economics as a zero-sum game, and that China’s success is coming at the expense of the rest of the world. Yes, China’s rapid growth poses challenges to the West. Competition will force some to work harder, to become more efficient, or to accept lower profits.
But economics is really a positive-sum game. An increasingly prosperous China has not only expanded imports from other countries, but is also providing goods that have kept prices lower in the West, despite sharply higher oil prices in recent years. This downward pressure on prices has allowed Western central banks to follow expansionary monetary policies, underpinning higher employment and growth.
We should all hope that China’s new economic model succeeds. If it does, all of us will have much to gain.