《中国的经济制度》后记

张五常

       （五常按：二○○八年我以中、英二语在香港出版《中国的经济制度》，二○○九年在北京再版，今天西方某刊物要刊登该长文的英语全文。苏子云：曾日月之几何而江山不可复识矣！为此我用英语补加一个后记，本要翻为中文，但想到《信报》的读者多属双语人物，不再下工夫。）

Postscript 2014

Steven N.S. Cheung

March 2014

When drafting “The Economic System of China” in the summer of 2007, I was not fully aware that what I believe to be the most efficient of economic systems would soon be under threat.  There were some danger signals: On a general level, Beijing was increasing regulation of the country’s xians (县).  The situation changed dramatically in early 2008, when a New Labor Contract Law was introduced and the southern city of Dongguan was strictly enforcing it.  What was regarded to be one of the world’s leading manufacturing centers was economically shattered.  Many Dongguan factories were forced to farm out product-parts to households or factories so small that the employer-employee relationship became vague.  There was a partial return to the putting-out system popular in England before the (first) industrial revolution.  Other factories simply gave up.  Since 2008, there has not been a single case of significant foreign investment in Dongguan.

Today, the New Labor Contract Law is no longer strictly enforced. In some areas, officials offer incentives to investors by declaring that the law has only a nominal status.  Formally, however, itstill exists.  This episode demonstrates a marked contrast between China today and China in the l980s and l990s.  It used to be that high-ranking officials would acknowledge policy errorsopenly.  Now no such statements are heard.

Corruption has risen sharply, not because of inherent defects in the system, but because of a massive increase in government spending prompted by the 2008 global financial crisis.  Officials everywhere love to spendpublic money, and the crisis gave Beijing a solid justification to do so.  I was in the minority in suggesting that the crisis would not hurt Chinato any great extent.  On 18 November 2008 I argued that only for already-committed public projects, it would be expedient to carry them out earlier.  Two weeks later(2 December 2008), I warned that spending money recklessly under the circumstances would be disastrous.  Then on 20 March 2009 I suggested that Beijing should halt the spending frenzy.  All to no avail!

The central government spent massively.   Directly and indirectly, local governments were encouraged to spendeven more.  The exact total amount is not known.  Various estimates suggest that over a period of five years, central and local governments committed three to five trillion U.S. dollars to various projects.  This kind of money tends to breedcorruption, mainly because it encouragesunder-the-table kickbacks from contractors.  Under ordinary market practice this would be regarded as over-the-table commissions, but in the case of kickbacks the amount is concealed.  Even a modest estimate of a 10% cut of 3 trillion dollars, we are talking about three hundred billion dollars.  With government project money, it is both easy and inviting to give and take such cuts.  In all fairness, however, I do not believe that there exists a country which can avoid a great increase in corruption when government money showered down in abundance from a giant Friedman helicopter.  Corruption is reported to have climbed in India too, and Europe reported likewise.   Neither India nor Europe experienced an increase in government project money anywhere near the magnitude of China.

In “The Economic System of China,” I wrote that highways constructed in the country over one year were long enough to span the entire United States. This rate was soon doubled.  Literally hundreds of tunnels were drilled a year, and at what speed!  It is said that taking the high-speed train from Guangzhou to Wuhan, one would spend more time inside tunnels than under the sky.  In this construction craze there is one redeeming feature, however.  Whereas in other countries a project would likely be halted halfway when corruption is discovered and then it would take years more to complete, in the case of China the projects are always completed when corruption is reported.  Not only completed –- they are beautifully executed.  The high-speed train is supremely comfortable, and the new airports are spectacular.  I have not the nerve to tell my Beijing friends that without the under-the-table kickbacks, we would not experience the phenomenal speed of project execution.

It is easy to see that the Keynesian multiplier floundered.  The reason is that while inputs were drawn from the production of goods and services bearing immediate market values, project investments only promise income returns in the future.  Wages have increased significantly as a result of crowding out, but the investments would yield little immediate returns to cover the rent-component of entrepreneurial contributions.  Under such conditions, the multiplier would necessarily be lower for project investment than if the government simply dished out money to men and women in the streetto spend.

The national debt­­­­­­–– both central and local––has of course skyrocketed, and right now it is anybody’s guess whether the beautifully executed projects would turn out to satisfy Fisher’s condition and yield positive net present values.  High-speed railways have no doubt been built with bullet-train speed, but on checking a year ago I found that ticket income could not yet cover operational expenses, not to mention the interest cost.  Total debt has therefore continued to rise.  My gut instinct is that in due course, China will grow out of this debt burden.  Many people think otherwise.  A few nights ago, I saw an intelligent Chinese lady interviewed by BBC.  She was apparently expert on facts and figures in China, and her view was that it is mathematically impossible for the country to get out of the woods.

It is mathematically possible, but the squeeze imposed on private borrowing has generated a real rate of interest exceeding five percent for such a long period, business failures have now reached an alarming rate.  Hence the paradox: China, generally regarded the world’s leading economic performer since the 2008 financial crisis, is ranked the poorest in stock-market performance during the same period.

Around 2009, local officials began to massage figures to boost the overall growth rate.  Beijing is aware of this data inflation, although they may not be sure of the exact magnitude.  If you ask me, I would not bet that right now, China’s growth rate is still positivein per capita terms.  It is the distribution system for local officials that prompted inflated reporting.  But whereas in recent years the growth rate is overstated, in earlier periods it was understated.  On balance, however, I think that China’s total income and wealth is still understated.  There is no denying the fact that economically the country has become strong.

In “The Economic System of China,” I noted that that system needed some fine-tuning.  What I had in mind was that the mechanism of xian income distribution should be modified and improved.  Two matters concerned me in particular.  First is an asymmetry between contribution and income that often defies rational explanation.  There are xian officials who have contributed enormously but only received incomes of several hundred dollars a month.  One official I know netted two hundred million dollars on a project when it was turned over to the market, but throughout his salary was only one thousand dollars a month.  Because the project in question did not involve outside investment, there was no award moneyto the official-in-charge.  A second matter of concern is that while award money is associated with outside funding, this is mainly tied to the offering of land at low prices as a lureto investors.  When the availability of vacant land dwindles award money would also dwindle regardless of effort otherwise.  Because of rapid growth, a number of the more popular xians are reaching or already reached the limit of land supply.

In the summer of 2013, I gave a talk to a gathering of xian officials.  I focused on the asymmetry between contribution and income, and the consequences if and when land supply runs short.  I argued that while there is no simple solution to these problems, turning the xians to corporations may be a way out.  I explained that many cities in England and the United States are incorporated, but that in the case of China incorporating a xian would be far more complex because the entity must be genuinely business-oriented.  When I suggested that this is a possibility Beijing ought to think about, the audience got very excited.

When writing this postscript, I must say that the economic outlook of China is not good.  I am not highly pessimistic, because the Communist Party of China has a proven ability to make things happen.  Right now, Beijing is busy executing an anti-corruption campaign, on a scale unheard of.  From what I read or heard, the economic floundering discussed above is not yet a matter of prime concern to the authorities.  They will come to realize the need for action soon.  My main concernis that while special interests in China today are far more than ten years ago, I have  yet been able to see that the people now in charge of the economy have a good feel of the working of economic systems.  For good economic policy-making a good feel is a must, far more important than formal knowledge of models, modeling, et. al.

In China, the period between 2001 and 2007 witnessed what must be the most spectacular economic takeoff in history.  What happened has called into question many of the growth theories propounded to date.  For the purpose of economic analysis it is unfortunate that accurate data are not available, mainly because about half the labor force was floating at that time.  During that period I happened to be on site, befriended by numerous investors and officials who shared their knowledge generous.  What unfolded was truly spectacularand something that happens once in many many lifetimes.