Экономические науки/2.Внешнеэкономическая деятельность

Kondybayeva S.K., PhD

Yerkin N., master student

Al-Farabi Kazakh National University, Kazakhstan

Compare and contrast of China model and Washington consensus

Miraculous growth of Chine’s economy in last thirty years has far exceeded everybody’s expectation and imagination. Being the world second largest economy, and number one in global trade, in resource consumption, in foreign reserve, China’s growth is envied by developed and developing countries alike. The reason for this success, wondered by insiders and outsiders, is still to be reflected and debated.

Washington Consensus Point 1: Fiscal discipline. The root cause of Latin crisis was the huge debt piled up by governments. Once the debt reached a dangerous level (> 40% of GDP), significant government budget would pay for interest due. Even little volatility on the bond market would cause default on interest / principal payment, and maybe capital flight and collapse of capital markets. After new money stopped flow into the country, rates shoot up, currency devalued, capital flew out, and economy melted down.

Washington Consensus Point 2: Reorder public expenditure priorities. On the public expenditure side, China’s spending on education, healthcare and social security has increased as percentage of GDP. Although residents’ income has grown rapidly, income growth has considerably lagged GDP growth rate, and the gap between urban and rural residents has widened.

Washington Consensus Point 3: Tax reform. China’s taxation structure has evolved through multiple steps of reform. The current taxation system was established by imitating taxation in European countries, relying more on collecting VAT and business tax, and less on corporate and individual profits tax. In 1984, government changed the SOE’s “ net income transfer ” to 11 categories of “ tax ”, such as VAT, business tax, consumption tax, resource tax etc. “ Net income transfer ” from SOE accounted for 50% of government revenue in 1978, while government revenue took 31% of GDP.

Washington Consensus Point 4: Liberalize interest rate. China is halfway through in liberalizing interest rate. Like many other reforms, China has taken gradual, cautious steps in reforming financial institutions and financial regulations. The process of liberalizing interest rate started in 1996, when China allowed inter - banks lending at mutually agreed rates. Prior to then, sovereign debt and corporate debt were allowed to trade on secondary market, but those markets were very small. Inter-bank lending was the milestone of loosening interest rate regulation.

Washington Consensus Point 5: China depreciated RMB from 3.0 yuan/dollar in 1985, to 4.8 yuan/dollar in 1990, and to 8.6 yuan/dollar in 1994 (and stayed in that range till 2006 ). Along with other economic policies, China export exploded from $ 18 billion 1985, to $ 249 billion in 2000, and $ 1,898 billion in 2011.

Washington Consensus Point 6: Trade with foreign countries has played extremely important role in its rapid economic growth. China became an observer of GATT (General Agreement on Tariff and Trade) in 1982 and a full member in July 1986. Although China intended to be a WTO founding member in 1995, the plan did not work out. Eventually China became a member of WTO in 2001 after a lengthy negotiation on tariff, market access and industrial policy.

Washington Consensus Point 7: FDI played very big role in transforming China by being the first kick on the economy. Initially, FDI were focused on hotel and tourism, as well as low - end productions, such as apparel, shoes, toys that were exported. In 1986, government issued new “Regulations to encouraging FDI ”, in order to attract investment in high - tech, machinery and electronic manufacturing. Under the “ two ends at outside ” principle and GDP growth model, attracting FDI became the task for government officials at all levels.

Washington Consensus Point 8: Privatization. Despite low efficiency and backwardness of China’s industrial structure in 1980s, its volume was massive and ownership was simple. Before economic reform, Chine’s government owned 240,000 + of business units, with about RMB 12 trillion of tangible assets, and hired millions of workers. To transition those business units into market - based free enterprises was an extremely daunting, if possible, task, when major of them were loss - marking and relied on subsidies to stay float.

Washington Consensus Point 9: The administrative process for approval of foreign trade and capital flow has been simplified and improved after 6 rounds of reforms. The bad news is that many projects still need years to gain approval. State Council still holds the power of “ exam and approval ” on 1,700 categories.

Washington Consensus Point 10: The concept of property right contradicts the theory and practice of socialism. Built on the foundation of public ownership, China’s old socialist system does not grant property rights, such as land and house, to citizens. As the “ Law of Land Administration and Management ” states clearly that: “all land in urban areas belong to the state. All land in countryside, except those belong to the state, is owned by farmers collectively ”.

In conclusion, China Model can be summarized as those measures: 1. Keep budget balanced or be in small deficit. Government should issue debt cautiously, and rely on domestic savings to finance investment, if possible. 2. Direct fiscal spending to invest heavily in infrastructure, create jobs, and drive GDP growth. 3. Broaden tax base so that tax rate is moderate and relatively fair. Concentrate the fiscal power of central government. 4. Depreciate currency to stimulate export growth, and peg the currency at fixed rate to dollar. 5. Build export driven economy to leverage on globalization and cheap labor force. Educate people to enhance competitiveness of labor force, provide cheap land to MNCs, and find cheap loans if saving rate is low. 6. Attract FDI by providing tax, and land benefits. 7. Select and promote government officials based on their capability to drive GDP growth and create jobs. 8. Test new economic ideas in Special Economic Zone to allow trial and error. Reform social systems in a gradual, spiral manner. Do not expect a new economic order to work overnight. Rome was not built in one day.

Comparing with Washington Consensus list of John Williamson, China scored perfectly on items of 1, 2, 3, 5, 6, 7, but scored half point on items 4, 8, 9 and 10. Therefore, the total scores of China reform in Washington Consensus test are 8 of 10. China scored very well by any standard, far better than Latin American countries.

On following items, China’s reforms are probably in the middle of road that can be continued. Probably half point can be earned by China in those areas, and another half points is still in the air.

Point 4 - halfway on liberalize interest rate; Point 8 - halfway on privatizing SOE; Point 9 - halfway in deregulation of trade and investment; Point 10 - halfway in granting property rights.

Successful reforms of China economic structures have transformed a large, stale, inefficient planned economy to a dynamic, high - growth, competitive mixed economy. More reforms are certainly needed, particularly in those halfway - through areas. Free market is not perfect, but free market works.

China Model really has no secrets. China’s reform agenda has coincided and overlapped with the Washington Consensus. The John Williamson’s lists were not intended for China to follow, but China reformed nearly every item on the list, with some being more thorough than other. Maybe Washington Consensus list does reflect free - market essentials, and those countries interested in building market economy should follow the list. And China Model can be copied during implementation.

References

1. Lu Wen. China watch from New York - Transform China to a consumption economy. China economic publishing house: - 2015. P. - 232.

2. The impact of aggregate demand on prices, Brookings Papers on Economic Activity, 1975.

3. Wu Jinglian. Next Thirties Years in China. Central Compilation&Translation Press: - 2011. P. - 280.

4. Zhang Weiwei. China Shock. Shanghai People's Publishing House: - 2011. P. - 250.

5. Yu Kefu. China Model and Beijing Consensus. Social science literature: - 2006. P. - 434.