"In the Decision adopted by the Third Plenary Session of the 18th CPC Central Committee it was stated that markets played a fundamental role in resource allocation in the past, but now they will play a decisive role, indicating that our nation would like to further emphasize the role of the market mechanism.” Analyzed by Professor Li Ling of the NSD at Peking University.
As far as she is concerned, the capacity of macro-control is inefficient. The so-called macro-control, in many cases is micro-regulation, and lacks meso and macro control. It is recommended that the government should change the direction of regulation. Micro-control should be shifted to meso and macro control rather than intervening in markets from a micro perspective, so as to solve the problem of market failure.
She thinks that our situation nowadays is similar to that of America in the 1960s, which also requires a similar plan to “Great Society” launched by Lyndon B. Johnson, the former American president. Society’s construction can regain people’s hearts, strengthen societal consolidation and reach reform consensus.
Two methods should be used in unison and coordinated appropriately
21ST CENTURY BUSINESS HERALD: Markets will play a “decisive role” in resource allocation as put forward by the Decision. What is the difference compared to the “fundamental role” proposed by the 14th Party Congress?
Li Ling said, from “fundamental role” to “decisive role”, it indicates that our country would like to further emphasize the role of market mechanism. Meanwhile, it is emphasized clearly that the decisive role of a market is confined in economic areas, instead of all areas. This is major historical progress. Even though in 1992, the 14th Party Congress put forward that the market should play a fundamental role in resource allocation, over the past decade of the development, we could see that governments were used in demolition and construction and use their administrative power to allocate resources, resulting in government being “offside” (as in soccer or hockey). It is proposed in the Decision that markets not only play the decisive role in resource allocation, but governments also perform the functions of governments. It indicates that the market mechanism and governments should return to their respective roles.
21ST CENTURY BUSINESS HERALD: As “Do a Better Job of putting into play the role of the government” is set forth in the Decision, does this mean the role of government in resource allocation will change?
Li Ling said, our understanding of the relationship between market and government is deepening. In the past, to our knowledge, we emphasized more the functions of the invisible hand of markets and the disadvantage of government intervention. However, with adequate knowledge of markets failure, we don’t fully realize the value of the visible hand of governments. It is emphasized here that the visible hand of governments must be used in the appropriate places. Otherwise, it is a misplacement and offside of governments. The function of governments is declared in the Decision again. The Government should maintain the stability of macro-economy, strenghthen and optimize public service, guarantee fair competition, strengthen supervision in markets, keep market order, promote sustainable development, promote common prosperity and make up for the markets failure.
Therefore, I think the invisible hand of the market, coupled with the visible hand of governments, which are combined and coordinated to work together, can achieve the optimal allocation of resources, and then form a socialist market economy with Chinese characteristics. The combination system, to a certain degree, properly expands the traditional concept that the government is a night watchman.
A Lack of Macro and Meso Control
21ST CENTURY BUSINESS HERALD: How do you assess the roles that the governments played in macro-control in the past? Have you considered how governments should play the role of macro-control?
Li Ling said, the so-called macro-control in the past actually refers to micro-regulation in many cases. The government, especially the comprehensive reform and coordination, govern many specific details of enterprise management, which they shouldn’t necessarily govern. However, they showed significant deficiencies in supervision of the industry and the overall planning capability of the economy. Someone may say that we have so many industrial policies, which is a kind of management from a meso perspective? However, after careful review, it is not difficult to find that industrial policy is a special case, which is only available in China. Why give preferential treatment to one industry over another? Few people can tell clearly what it is based on. Some people say that we have a lot of planning as well as macro-management. But what I want to say is that our planning lacks integrity, coordination and cooperation.
In order to better play the role of macro-control of government, the government should firstly change the direction of regulations, steering from micro control to meso and macro control, so as to better solve the problem of market failures instead of intervening in markets from a micro perspective. Secondly, from the perspective of macro-control methods, the idea that “using economic, legal and necessary administrative means to manage the economy” has not been implemented, which was proposed in the Decision in the Third Plenary Session of the 14th CPC Central Committee. Originally considered as a supplement to the "necessary administrative means", it is commonly used as a means of government, but economic and legal means are rarely used. Actually, this is still the continuation of the economic inertia of approval under the planning system.
21ST CENTURY BUSINESS HERALD: Decisions proposed to spare no efforts to resolve the problem of imperfection of the market system and oversight of supervision. Have you considered how to solve the two problems?
Li Ling said, the market system itself is a dynamic process of development. Our understanding of market development always lags behind. So it was a small scale peasant farmer economy at the very beginning, then a market system of individual workshops, a market system in the industrial age, and now market systems of the information age that we are experiencing. For example, Internet finance is a brand-new concept. In the evolution of this system, there always exist imperfect parts. Except in self-evolution, which relies on market mechanisms, the government should also conform to this trend, and establish new market trading rules. This requires that the government be proactive and establish smart regulations in its dynamic market development.
When it comes to regulation, it is the weakness of the government. First, our administration departments tend to spend a lot of human and financial resources on working out a lot of planning and establishing many micro policies, rather than on making regulations, because regulations are a very challenging task. Moreover, our institutions and staffing lead us without regulatory capacity which is a problem, as a result our regulations are weak or even non-existent. For example, there are only 300 people in the China Food and Drug Administration (CFDA). How could it supervise all the pharmaceutical businesses from accross the country? In comparison, there are more than 300 million people in the U.S., while there are nearly 10,000 people in its Food and Drug Administration. Therefore, we must put more administrative resources, including staffing and financial resources in the regulatory departments. Otherwise, discussion about strengthening supervision is merely empty talk.
Public service needs macro strategies
21ST CENTURY BUSINESS HERALD: In the Decision, it is said that the responsibilities and the role of government is mainly to maintain macroeconomic stability, strengthen and optimize public services. But it is generally believed that the two functions are in conflict. Before, the government preferred to spend public finances’ monies on promoting economic growth rather than public services. Have you thought how to reverse this inertia?
Li Ling said, changing this inertia mainly relies on changing the assessment mechanism of officials. Directed by the performance assessment of the GDP, rational officials will definitely take advantage of human, financial and material resources, aiming to improve GDP and neglect public services. Therefore, considering the assessment of officials, we should gradually weaken the importance of the GDP, while increasing the proportion of public services, social security and indicators of environmental resources.
At the same time, we must change the mindset of the people. To strengthen public service does not necessarily mean that it will affect the GDP; in many cases it is conducive to economic development. For example, the New Rural Cooperative Medical System we implemented in rural areas, to a certain extent, improved the farmers' willingness to spend, which was conducive to expanding the domestic market. Also, compared to the average level of profit of about 5% in the manufacturing industry, profit of the pharmaceutical and device industry is as high as 18-20%, which is the world's most profitable industry. In this regard we also rely mainly on imports. Moreover, with the development of the economy, the demand for public services continues to increase, so the development of social services also means a huge job market.
I think today in China is the equivalent of America in the 1960s. After experiencing a rapid economic development, we suffered a lot of social problems, which caused many social complaints. In 1964, Lyndon Johnson, then U.S. President， declared in a speech that "we have the opportunity to move not only toward a rich society and a powerful society, but upward to a Great Society." The policy objective is the "Great Society" program, as people say. To this end, Congress passed more than 400 laws, including the "War on Poverty", "protection of civil rights" and health care legislation and so on, which pushed social reforms in post-war America to new heights, ensuring long-term stability in the United States.
I think we also need this kind of “Great Society” plan. Society construction can strengthen social consolidation and reach reform consensus.
21ST CENTURY BUSINESS HERALD: In the aspect of improving and optimizing public service, what challenges do you think we are still facing?
Li Ling said: I think that it is not fragmented to provide public service strategies, and we must have macro ideas. So-called macro-ideas are just the kind of system that we want to build? In this way, people can have a reasonable expectation. We need to develop a macro health reform strategy instead of each sector managing its own group separately. Meanwhile, we are also not doing well on the integrity of reform. For example, our health care, pharmaceutical, medical areas cannot be linked, and the situation of each group working on their own system also needs to be changed. For example, even though it was extremely difficult for the Obama’s Government to promote health care reform, at least within the Obama cabinet there was a unified strategy. Unlike in China, the Ministry of Finance, National Development and Reform Commission, National Health and Family Planning Commission of People’s Republic of China, Ministry of Human Resources and Social Security of the People's Republic of China (MOHRSS) may hold different opinions on the same item of reform. Reform is therefore kidnapped by the interest of aggressive departments.
In many cases, concerning the means of providing public services, how should the government and market divide the labor? We argue a lot about which public service belong in the category of public goods or quasi-public goods and which do not? In fact, public goods is a dynamic concept without a fixed range. I think the scope of public goods is largely associated with political will and ability to spend.
In this regard, we can learn from the experience of the United Kingdom. The United Kingdom clearly stipulates that the government spends 9% of its GDP on financial health for citizens every year. The expenditure of medical and health services per citizen in the U.S. is $ 8,500, while that of UK is only slightly more than $2,000. Merely with this small amount of money, the UK is able to provide a full range of free medical and health care services to citizens. The free medical model in the United Kingdom has such a high cost performance, mainly due to a clear goal. The country establishes viable macro planning centering on this objective, coupled with effective governance, so that citizens have clear expectations and fair guarantees. Segmentation and fragmentation of the health care system in the United States, lacking in macro planning, results in inefficiency and a serious waste, which is a national humiliation. We have to absorb the lessons of the U.S. Medical field as an area which markets failed to function, showing that the government must take responsibility. Medical and health services can mostly reflect governance capabilities.
From innovation of the social management system to the innovation of social construction system
21ST CENTURY BUSINESS HERALD: The central government has set up a “central leading team for comprehensively deepening reform” responsible for the overall design and implementation of reforms. This indicates that the new party and state leaders are determined to promote reforms. Meanwhile, it also reflects that there are some difficulties and obstacles in the reform process. What are they and why do you think they are the major difficulties?
Li Ling said: I think the central government specially set up a “central leading team for comprehensively deepening reform”, which indicates the determination of the government to promote reforms. Past reforms were usually established by the respective administrative departments to develop reform programs. And many times they are the ones that need to be reformed. Do you think they can develop a reasonable reform program? In many cases, the reform program in name, in fact, is a compromise of a non-reform program. In the future, the situation may change because the newly established “central leading team for comprehensively deepening reform” is led by political organs and administrative organs are executive institutions. Only this kind of coordination is effective, and can break past the strange cycle where "national interest is departmentalized and the departmental interest is personalized". Meanwhile, the central government makes the decisions, and administrative departments execute. Decision-making and execution are separate, which is the basic requirement of the modern state system.
21ST CENTURY BUSINESS HERALD: it is said in the "Decision" that there will be decisive results in major areas and key aspects of reform until 2020. We are looking forward to this, but from policy to practice, there is a long way to go. In your opinion, to achieve this goal, what is the most important breakthrough point and what is the major challenge we are facing now?
Li Ling said, the issue of national reform involves all aspects, but I think the breaking point of reform lies in social areas. We should speed up social construction as soon as possible to solve the problem of fairness and inefficient public services. Social construction is the bond to unite the people, so that every citizen can have access to a sense of citizenship and the welfare they deserve. In terms of strategy, we can focus on some issues of the public’s concern, such as the medical field. We should spare no efforts in focusing on getting rid of the revenue-generating component of hospitals, so as to restore public confidence in the reforms. Otherwise it will be too late if we lose the trust of the people. Now, many people are tired of hearing about the reforms: “What you said is wonderful but the change in my life is not big”. What does this mean? It demonstrates that there is a problem in our governing philosophy and capabilities.
While recognizing that the social construction has made great achievements in the past decade, we must reflect on the past road of social construction. From the macroscopic view, the harmonious society and social management system innovation needs the idea of maintaining stability, rather than idea of construction. We should change our ideas and shift from the innovation of a social management system to the innovation of a social construction system, aiming to open up the construction of a "Great Society."
