Xu Jianguo—one of the selected scholars of “China Youth Economists” in year 2013 of The Beijing News

From the newly-published economic statistics of the first half year in 2013, it can be seen that the economic growth in the second quarter has decreased to 7.5% year on year and 6.8% compared to the first quarter, which is the lowest speed in recent years. Also the growth of industrial added value and investment in the fixed assets further declined. At that time, people were beginning to say that economic stimulus would be launched in the second half year because of the economic recession. And meanwhile, the idea of ‘sustained economic growth’ or more implicit expressions and steady growth once again became the main theme of economic commentary.

Faced with the situation to keep the economic growth rate more than 7%, what is sustained in “sustained economic growth”? Speaking of sustaining economic growth, which implicates the current speed is slow, what is the appropriate economic growth?  

Our economic growth is actually not slow

One objective standard to evaluate the pace of economic growth is whether resources are fully made use of in the economy. The most important index is the unemployment rate. The labor force is the most significant resource in the economy. If notable unemployment exists, it shows that economic activity is below its potential level, or that the economic growth rate is below its potential. So, is there mass unemployment now? Wages for migrant workers are still rising, while stress related to employment for university students is severe, which seems contradictory. One important consideration is that for university students’ unemployment, attention should not only be paid to graduating year. At the beginning, these children of good fortune have high expectations, but after not finding a satisfying job, they continually adjust their expectations with time, and slowly join the army of job seekers. It is very likely that large scale unemployment doesn’t exist.

Of course, when economy grows slowly, the increase in resident income will also slow down a bit. The key is that data shows that when the economic growth rate slows, the household income growth rate falls less, which means that the proportion of household income in GDP will increase. For example, in the second quarter of this year, the growth rate of GDP was 7.5%, while the income growth rate of urban and rural households was 7.85% on average (6.5% and 9.2%, respectively), exceeding the growth rate of GDP, which indicates that the proportion of household income in GDP increased. Supposing the structure adjusts, it would seem that slowing growth a bit would lead to a structural adjustment.

So what’s the excess production capacity all about? Excess production capacity can be regarded as ‘unemployment’ of ‘non-human resources’, but is it evidence showing that economic growth is not reaching its potential? The answer depends on the cause of the excessive capacity. If the excessive capacity is produced by an excessively fast expansion that is not demanded by market at that time, it only indicates an investment mistake, but not a problem of ‘unemployment’ which should be fixed.

So, if there is no apparent unemployment, why would we call the current growth rate low? Well, it is low, if compared to the previous years; in 2007 the peak was over 14%, and now it has approximately halved, which is certainly much lower. However, there is no reason the 14% rate should be sustained, not to mention that there are side effects to simply pursuing speed exclusively, which has been quite obvious by now.

In psychology there is a rule called conservative adjustments, which refers to the phenomenon that people's adjustment of expectation is relatively slow, past experiences are usually the starting point for such adjustments. Applying this rule to Economics, it is known as adaptive expectations, which means that people adapt their expectations with newly acquired experiences. In light of this, our expectation for economic growth seems to be highly affected by the high rates of the last few years. If we look at other countries in the world, developing or developed, we would find that our rate is by no means low, but in fact very high.

Loose monetary policy leaves problems for the future

If the economic “stimulus policies” are put in effect to “sustain economic growth”, what results should be expected? This depends on what types of policies are put in effect.

The first possibility is like previous loose monetary policy, which is returning to the old path of extensive management, and continuing to leave the problem for the future. This type of growth maintenance maintains previous mistakes, it sustains inefficient investments, and sustains the short term interests for some people, rather than sustaining long term stable growth. Fortunately, it seems that this government is not willing to keep maintaining this type of growth. What is not clear is that whether the policymakers can still remain clear and have a coherent line of thought under the pressure of an economic slowdown. 

The RMB 4 trillion investment at the end of 2008 is long past. Implementing a proactive fiscal and monetary policy at the time when the economy was sliding downward should not be criticized, and however you look at it, paying more than 40 US dollars for oil was one of the few good deals in recent years. Nevertheless, spending money and wasting money are two different things. Hurriedly launching a large number of projects, it was difficult for the NDRC to not avoid some mistakes. Looking back, the callback of the world economy would also have been a good opportunity to adjust. The general economic conditions at that time were very good, the crisis was an opportunity; however, unfortunately we missed it.

The second method is modestly adding some fiscal expenditure and choosing some projects for investment to marginally accelerate economic growth or alleviate the decline in the growth rate. An analogous situation is that in 1998, when the economic downturn began, the government decided to build highways to increase demand, which also laid a sound foundation for the later construction of infrastructure.

Now, what should be repaired? Reconstruction of city roads, old cities and underground systems can probably be taken into consideration. Whether one likes it or not, the trend of future urbanization is urban population agglomeration. So to further improve the infrastructure, management level and capacity seems to be an infallible general direction. Moreover, high-speed railway network is a worthwhile and economically-feasible investment in developed areas. The high-speed rail network can further be constructed if the conditions warrant it. What needs to be improved is evaluation and management of projects as well as the improvement of investment efficiency.   

Another way is tax reduction. Positive fiscal policy has two meanings; the first aspect is increasing expenditure and the second aspect is tax reduction. Nowadays, enterprises shoulder a very heavy burden and they can hardly make profit, therefore tax reduction is a way out, for example, the tariff rate can be further cut down. The direction of future finance and taxation should gradually replace the tax in circulating sections with the fiscal revenue, so as to lessen the distorting effects of tax. 

Now there’s already no room for “Stimulus”

In fact, the most fundamental strategy of steady growth is to propel some basic institutional reforms. Taking agriculture as an example, it is hard for the agricultural industry to further develop without promoting reasonable land transfer and scale management. Therefore, it is very urgent to push land systems into further reform. To give another example, long-term economic growth depends on people. The several hundred million migrant workers wandering between urban and rural areas, a loss of human resource accumulation all because they have no stable expectations for the future, is the country’s largest waste. The reform of the household registration system, which can enable migrant workers to work in towns but also to live and work in peace and contentment, is the top priority related to the future growth potential.

Let’s come back to the discussion of introducing “stimulus” policies and “sustaining growth”. Actually, I don’t have negative feelings towards these words, as they sort of remind me of the first cup of coffee in the morning. However, people who drink lots of coffee all know that after working a whole day, especially over-time, it’s useless to have coffee.

In today’s economy, the room for “stimulus” is not that large. If some measures must be taken, we might as well discuss more specifically and stick to facts. Construct the road where it should be constructed. Build the railway where it should be built. Reconstruct the old city as it should be done. No more general talks about “sustaining growth”. Speaking generally, it’s not even clear what is sustained.