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Harry X. Wu:

Beijing’s Interference Creates Economic Minefield


Beijing’s Interference Creates Economic Minefield

Source:Harry X. Wu

Chinese economist Harry Xiaoying Wu points out how unrestrained government interference in the Chinese economy leads to distortions in resource allocation.



Beijing’s Interference Creates Economic Minefield

By Pei-hua Lu
From CommonWealth Magazine (vol. 615 )

Analyzing Chinese economic data and statistical information has always been one of the toughest jobs for researchers. There is the government’s official version of the purchasing managers index (PMI) for different economic sectors, but also PMI surveys released by Caixin, an influential Chinese business magazine. A growing number of analysts not only look at the government’s GDP growth forecast, but attach greater importance to the so-called Li Keqiang index, which was created by the Economist magazine based on three economic indicators used by China’s incumbent Premier Li Keqiang.

A Chinese economist based in Japan, Wu began to doubt the reliability of China’s GDP-measuring methodology more than two decades ago. He later established his own econometric model and built the first “China Industry Productivity Database,” which covers 37 sectors across the economy over 35 years, and the “China Economic Growth Database,” which covers a century of economic activity.

Since the Chinese economy began to slow down in 2012, experts around the world are most concerned about the risks resulting from a “hard landing.” Wu has drawn considerable attention with the assertion that the Chinese economy has been growing at a rate of only four percent, and that the country’s severe overcapacity is “a good thing.”

Liu Meng-chun, director of the First Research Division (Chinese economy) of the Chung-Hua Institution for Economic Research (CIER), points out that interpreting statistical data is Wu’s strength. Since he lives in Japan, he is more open-minded than other Chinese economists, Liu believes.

After studying economics in China, Wu did his doctoral research at the University of Waikato, New Zealand from 1988 to 1993. In the wake of the violent crackdown on the Tiananmen Square protests in 1989, Wu abandoned plans to return to China. Instead, he went on to pursue his post-doctoral studies in Australia.

During his career he has done research at universities in Australia and Hong Kong, and now serves as an adjunct professor at the Institute of Economic Research of Hitotsubashi University in Japan.

In the early days of his research, Wu focused on employment problems in China’s economic development while gradually developing an interest in measurement issues such as GDP estimates. Wu drew the attention of British economist Angus Maddison with the publication of a paper in the academic periodical Review of Income and Wealth in March of 1993. The paper, titled “The ‘Real’ Chinese Gross Domestic Product (GDP) for the Pre-Reform Period 1952-77,” reassessed Chinese economic performance based on Wu’s own econometric method.

 “He is such a prestigious person; I did not expect to get a fax from him,” says Wu in recalling his excitement upon receipt of the fax from Maddison more than 20 years ago while on a research fellowship at the University of Adelaide in Australia. Subsequently, the two economists became close friends and joined forces researching the Chinese economy. That’s when Wu’s research changed direction toward productivity and economic growth issues.

Backtracking from Market Forces

Why does Wu believe that excessive overcapacity is a good thing? Wu came to this conclusion after examining the total factor productivity of the Chinese economy.

He compared the two decades during which China, Taiwan, South Korea and Japan experienced economic booms. Wu discovered that, during these economic growth periods, the per capita GDP of these four countries rose from US$2,000 to US$8,000. However, in terms of total factor productivity growth, China lagged behind the three other countries. This means that China's rapid economic growth is fueled by investment and not by productivity gains resulting from technological progress and management innovation.

Wu points out that after China’s accession to the World Trade Organization at the end of 2001, Western scholars believed that China would adopt a market economy approach. However, the Chinese government believed it was enough to superficially meet the treaty’s obligations while in reality protecting Chinese enterprises through subsidies.

 “If you are able to bring a project to Zhejiang, you may not have to pay rent for land, and they will turn a blind eye to the environmental cost,” notes Wu in highlighting indirect subsidies. Wu hates the smog in Beijing, where he often travels for meetings.

He concludes that the core problem of the Chinese economy is unfettered government interference, which leads to a distorted resource allocation. China’s 4 trillion yuan economic stimulus package in the wake of the 2008 financial crisis only aggravated the situation, causing negative total factor productivity growth and eventually leading to overcapacities.

“When there is no alternative to cutting overcapacity, which will definitely cause an economic slowdown, the decision-makers will finally wake up,” Wu told a large China symposium in October last year.

In late 2012, Chinese Premier Li stated for the first time that the government would leave the economy to the market. At the time, Wu praised the Chinese government for taking the right road. However, Beijing returned to the old road of investment-driven growth as soon as the world economy slowed down, out of concern that an economic slump could spark a political crisis.

 “Hebei Province is able to produce steel for the whole world. Now the government says the entire world does not need that much steel and that it hopes that Hebei cuts production in half. But Hebei Province says, what are we going to do about the wages for so many people? The central government doesn’t have any money, so Hebei Province doesn’t do [what they were told to do]. The central government can only continue to build houses, launch the One Belt, One Road [initiative]… perpetuating the already distorted structure,” argues Wu, adding that the first Xi-Li administration has not produced any clear economic reform results so far.

Ending Opportunism

When China launched its “mass entrepreneurship and innovation” campaign two years ago, Wu criticized the policy as putting the cart before the horse, arguing it was a fallacy to think that the efficiency problem could be solved by pushing for innovation.

Wu elaborated, saying that if the government put so much emphasis on innovation, the public would be misled into believing that China's main economic problem was a lack of innovation, and not an issue of notoriously low efficiency resulting from longtime government-led resource allocation.

Asked whether there is a way out for Taiwan’s economy, Wu does not mince words, stating that Taiwan should stop behaving like an opportunist.

“China’s development model has already reached the end of the road; its efficiency is too low. The smartest way for the Taiwanese economy now is to find its own road.”

Translated from the Chinese by Susanne Ganz