Maurits Elen Authors

Larry Summers on China: Market Rewards Should Be Equally Distributed

December 22, 2016

China is facing one of the toughest economic restructurings in world history: changing the growth model of a colossal economy against the backdrop of ebbing domestic growth, environmental degradation, and financial disequilibrium. But in the global political economy, the world looks at China gaining weight in the existing economic order and pushing for greater influence.

Larry Summers, now President Emeritus at Harvard University, has advised the United States on economic affairs for many decades in various roles, meeting numerous times with the Chinese leadership to help deepen Sino-US relations. In this interview, the former Treasury Secretary in the Clinton administration discusses various Chinese domestic challenges, as well as China’s relationship with the rest of the world.

Q. In the past few decades, millions of people have been pulled out of poverty in China but the country still faces, along with the US, one of highest levels of income inequality. How can China make growth more inclusive?

A. In driving prosperity, markets work much better than planned-economies. After all, letting market forces operate so individual initiative can flourish and so individuals are rewarded for taking initiative can produce staggering opportunities and returns.

The other side of markets, however, is that rewards can be very unequally distributed. It is the role of policy to try and make sure that everybody has an opportunity to share in economic growth. There are many dimensions of that, there is giving everybody a chance to compete in the marketplace, that’s why education is so central and it must be made sure everybody can get as good an education as possible, regardless of family background. Taxes must be collected in a fair manner and in which those who are positioned to pay more are expected to pay more. It is important that prosperity be based on giving people what they want, producing new products, and producing old products in more efficient and effective ways, rather than working the system to get monopoly power.

China needs to work on all of these elements. Making sure that opportunities for children are the same, regardless of where in China and to whom in China they are born. Making sure that the success of enterprises depends on the quality of what they sell, not on the depth of their relation with officials in government. Making sure that taxes are collected in a fair way, and making sure that those who lead enterprises and communities do so for the benefit of their stakeholders, rather their own. I think these are all core elements of inclusive prosperity that China should take into account as it moves forward.

Q. China needs to attract more private investment. What can the government do to stimulate private investment in an environment with a relatively low returns on assets?

A. For enterprises to be able to succeed it is key to have a relatively predictable business environment. In a situation where the rules for private enterprises are very unclear, it is going to be seen as very risky to make investments in private enterprises and that is likely to discourage the level of investment. So it comes back to a predictable path for policy and certainly for a non-punitive approach to businesses that are succeeding. It also goes to creating a freer environment in areas relating to in particular the provision of consumer services in China.

Q. Real estate is a driver of Chinese growth, but recently has looked bubbly—asset prices in some cities have risen more than 30% this year alone. What are your views on how Chinese policymakers are dealing with this situation?

A. I think they are pursuing the right kinds of approaches. They are looking hard at various kinds of controls on down-payments and the like. Moreover, they are implementing restrictions on leverage, both for purchasers of homes and for developers.

International experience suggests that when you have residential real estate bubbles it is hard to know, because sometimes real estate bubbles can rise very substantially and keep rising. This makes it very hard to gauge the timing. I think it is a somewhat problematic type of question. But surely the inflated asset prices are a sign of distress and a sign of potential problems to come, and so it is appropriate for the Chinese authorities to respond to that.

Q. What is your broad view on the future of China and the world in terms of growth?

A. I would be surprised if either China or the world economy grew as rapidly in the coming 15 years as they have grown in the last 15 years. Some of that is demographic, some of that is technological, and some of that is political. I think that it is reasonable to aspire to continue significant progress, although I doubt it will be as rapid as it has been historically in the non-crisis years.

Q. Given the slowing growth and other economic challenges facing China today, some Chinese officials have expressed concern about the economy falling into the middle-income trap. What are your views?

A. I never been really a huge believer in the middle-income trap as a concept. I am not sure that it is really true that there a certain levels of development at which growth slows. What is true is that as you get richer, the easiest opportunities for convergence have already been captured. This makes things harder, especially now China has both challenges in maintaining stability in the near term and challenges with respect to the achievement of longer-term growth at rapid rates. Nonetheless, I do not see any reason why China should not aspire to be a significantly larger fraction of the global economy in 2030 than it is today. Certainly China cannot assume rapid growth in the future because it has achieved so in the past. Still, I do think this is a reasonable aspiration for China.

Q. You have written that international economic arrangements need to be adjusted to reflect the reality of a more powerful China—in what ways?

A. China needs to be given more of a voice and have more to say in a range of international fora, in particular the international financial institutions. There needs to be more willingness to learn the lessons of China’s tremendous economic success, but also the canon of traditional Western economics, as Western institutions provide technical assistance to developing countries. I think there needs to be more serious conversations with China about what the nature of the global system ought to be looking like in a go-forward basis, rather than simply conversing in ways that are focused on Western visions and trying to have China to become involved in those Western visions. In general, it needs to be a process of mutual respect in the formulation of international economic policies.

Q. Could you expand on what the lessons of China’s economic success are?

A. It is more for China to draw the lessons from its experience than it is for me. China has certainly demonstrated a power in certain circumstances of a gradual liberalization strategy, they have demonstrated the power of an urbanization strategy, and they have demonstrated that a basic governmental responsibility for education and healthcare can have very substantial benefits.

They have also operated in a model that has had more reliance on administrative controls and direction, and less pure reliance on prices, especially in earlier stages of economic development, than would be the traditional advice of the international institutions. In just what ways those lessons do or do not carry over is subject to ripe debate, but in light of the fact that China has for several decades achieved more rapid growth than anyone else has, over a very long time period, one has to regard that as an impressive achievement, from which the world should be prepared to learn.


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