(Li Xianda, the reporter)【Huang Yiping, Vice-President of NSD at Peking University】
I think in China, we are faced with the problem of the middle income trap, which consists of two specific issues. The first is about the past growth pattern, as we all know. On the one hand, the growth rate is fast, and on the other hand, the growth pattern is not sustainable.
When GDP per capita rises from $6,000 to $12,000, a country becomes a high-income country, a goal for which China should strive to achieve.
【Huang Yiping, Vice-President of NSD at Peking University】So the first problem is how to change the growth pattern, making it relatively sustainable. But the second question is how GDP per capita rises from $6,000 to $12,000 through technology progress or innovation, the doorstep for becoming a high-income country. I think this is two problems which could eventually become a problem. I want to share with you a research that I carried out with my collaborators recently.
This subject is "policy institutions and the middle income trap". The subject we studied is related to problems we have encountered in China. What problems will China be faced with and what policies should be adopted to help us overcome the “middle income trap”? There lies a very important motivation in the background. We now have a lot of theories and discussions about growth, though it seems we have a set of policy recommendations which we think is beneficial to growth. Professor Philip put forward a series of measures just now, which are also very specific. In fact, to a large extent, over the past few decades, we have heard about the Washington Consensus, which means small government, support for education, and a non-interfering government which allows markets to play their role. We all accept these ideas in economics.
But I think there are two problems. The first problem is that it seems the actual effects of polices which the Washington Consensus guide developing countries with are not very good. However, those successful East Asian countries, in fact, are criticized by the supporters of the Washington Consensus from traditional pattern. I think the second problem is very important. For different levels of developing countries, are the policies of pro-growth policies the same? In low-income, middle-income and high-income countries, financial liberalization, democratization and competition should be achieved. Are these policies applicable globally and all the same in all countries?
Without normal legal orders or reform in financial market, rapid growth will not truly be realized.
【Huang Yiping, Vice-President of NSD at Peking University】Therefore, the research is a simple empirical research. More than 100 countries are divided into three groups, low-income, middle-income and high-income countries. From the statistics in the past 30 or 40 years, which policies in fact are particularly beneficial to help overcome the problem of the middle income trap? Some polices might not be very important at this stage.
Of course, the analysis is very specific, and there are four aspects of results that I would like to share with you briefly. The first is about the legal environment. We found that the legal environment plays an important and positive role in growth in countries of all income levels. There is no difference in low-income or middle-income or high-income countries. It can even be said that the legal environment is particularly important in low-income countries. If the normal order and justice of laws and regulations cannot be maintained, it is difficult to imagine that rapid growth will be truly achieved.
The second is the financial repression policy that we find interesting. Traditionally, financial repression policies have impacts on the efficiency and are not conducive to growth. However, we found that in low-income countries, financial repression has a positive effect on economic growth. That is to say, if the government controls interest rates, exchange rates, and capital allocation, efficiency is indeed compromised. However, generally speaking, financial repression has a positive effect on economic growth. According to my understanding, there are similar findings in our past research on the China’s economy. We found that financial repression made contributions to China's economic growth in the 1980s and 1990s. But in the past ten years, financial repression had negative impacts on China’s economic growth. In the beginning, it made positive contributions, because despite of the loss of efficiency, financial repression helps savings to turn into investment effectively, and helps us maintain financial stability. But now it has negative impacts, which is consistent with the empirical findings mentioned just now. For middle-income countries, financial repression on growth inhibition becomes very obvious, that is to say, financial reform should be a very important choice. If reform is not carried out at this time, we can hardly move forward. I think the reason is very simple. As discussed just now, finance is related to the allocation of resources. Financial reform also involves how to support innovation activities. It is difficult to adapt to our innovation activities, if only relying on the allocation of capital, in which the government intervenes.
Democracy is good, but in the short term, it doesn’t necessarily bring about more rapid growth. Education and innovation are the keys to development.
【Huang Yiping, Vice-President of NSD at Peking University】The third interesting phenomenon is that the contribution that democratization made to economic growth is not very clear, which we don’t understand in the beginning. For low-income countries, democratization caused a negative impact on economic growth. For middle-income countries, there is no obvious result of how democratization has positive or negative impacts on economic growth. Of course, it is not the same as what we usually understand. We should find a way to understand what the reason is.
As far as I am concerned, there are two reasons. Firstly, maybe democratization itself is not a policy that supports growth. That is to say, democratization is only to ensure human rights, fairness and justice, but not considered as a short-term measure of growth. At least, from the empirical standpoint, we don’t see such results. Of course, I am not against democracy. On the contrary, I am a staunch supporter of democracy. How middle incomes trap maintain rapid growth deserves our deliberation.
Many people say that Taiwan and Korea developed depending on democracy. In history, when Taiwan and Korea moved forward to high-income countries quickly, they were not democratic countries. Of course, there is a natural course at last, and maybe every country will experience it. That is to say, there is a choice between development, fairness and democracy. I don’t want to enlarge what is more important at different time. I just want to simply say that democracy is good, but in the short term, it doesn’t necessarily bring about more rapid growth.
Lastly, as mentioned today, innovation ultimately end ups requiring expenditure on research and development and education, a topic on which I think there is no need to elaborate. If a country can not be innovative, technology cannot progress and the industry cannot upgrade, and it cannot overcome the middle-income trap. In this regard, China has a lot of experiences and of course many lessons. Cai Hongbin, the Dean of the Guanghua School of Management, proposed the importance of education in overcoming the middle-income trap. On this note, I would like to raise a particular issue, which is the quality of migrant workers. Over the past 35 years of rapid economic growth, to a large extent, growth is achieved by turning farmers into workers in the city, which is a very important factor in growth. But the objective fact is that the average level of education is high school, for among one hundred million to two hundred million migrant workers. Their wages have risen from 1,000 Yuan a month 10 years ago to 4,000 Yuan a month now. That is to say, sharp rises in wages have made our industries face a lot of pressure. But the problem is whether graduates of junior schools, whose wages are 4,000 RMB, 5,000 RMB, 6,000 RMB, 7,000 RMB or 8,000 RMB, can adapt to higher levels of manufacturing and services industry or not, which I think is a big challenge. Now we feel that we have the pressure of rising wages with the shortage of labor. If we do not improve the quality of migrant workers, it is difficult to say whether we are faced with the problem of shortage of labor or surplus of labor in the next stage. So I think that if I recommend a policy, the most important is that we should begin to pay attention to the training of migrant workers. Thank you.
(This is the speech given by Huang Yiping at the Fourth Caixin Summit on December 19, 2013)
