Op-Ed Contributors

Economic advice for policymakers

By Ma Jun (China Daily)
Updated: 2010-07-20 07:51

China has started formulating its 12th Five-Year Plan (2011-2015) by soliciting the advice of officials and economists. The focus of the previous four five-year plans was on setting economic growth targets, which was usually surpassed by growth in real terms.

Relative to the established goal, China's economy has always been overheated, because regardless of whether the central government set a growth target or not local governments have shown more enthusiasm in pursuing fast rather than planned growth. Under such circumstances, it is more important to maintain macroeconomic stability, instead of staring at a planned growth target, for volatility is what an economy fears most.

Major macroeconomic fluctuations in China have been caused mainly by internal factors, except for occasional external ones such as the global economic crisis and the 1997 Asian financial crisis.

If China's economy, fueled by fast rising investment and bank loans, continues to overheat with emerging inflation and assets bubble, the central government has to take macro-control and tightening measures to cool it down, which in turn would result in economic downturn, unemployment and other social tensions. To reduce these pressures, the central government has to announce a new round of stimulus. This type of economic growth model is unendurable.

Accordingly, finding ways to prevent the government-led economy from overheating has always been the biggest challenge for the country's policymakers. To achieve macroeconomic stability, four drawbacks in the system have to be rectified.

First, the system to appraise local governments' performance, which acts as an incentive for officials to pursue fast GDP growth, should be changed. Overheating of the national economy has almost always been caused by excessive investment by local governments. Once the central authorities loose the money supply, the impulse of local investment is bound to grow. So, to achieve macroeconomic stability the incentive mechanism of local authorities has to be changed.

The Scientific Outlook on Development, advocated by the central leadership, demands that local governments pursue sustainable development and pay greater attention to environmental protection, resource conservation and improvement of people's livelihood. Unfortunately, few substantive changes have been seen among local governments in this regard.

In an ideal system, local governments' performance should not be judged on the basis of fast GDP growth at the cost of social causes and the environment. On the contrary, governments ignoring social causes and violating environment protection laws should be punished. This would help the governments' function to change from direct engagement in economic activities to providing public services.

Second, the central bank should be granted more independence in drafting the monetary policy. China lags behind many countries when it comes to tightening the monetary policy independently (such as raising the interest rate). A good monetary policy should be based on proper perspective. What the central government needs to do is to set a target for currency growth and then authorize central bank officials to handle the concrete financial instruments.