What Common Sense Economic Policy Looks Like

Caixin: How a New Idea for Revamping the Economy Is Taking Shape
Caixin: No clear definition of “structural reform on the supply side” has appeared yet. What is its core idea?

Xu Lin: I think the core idea is to reduce transaction costs created by institutional arrangements. Businesses are paying quite high costs in transactions, taxation, financing and social security. High transaction costs in China are mainly created by institutional hurdles. Reforming the supply side will reduce costs and make it easier for enterprises to do business. It will encourage business innovation, boost quality and efficiency of the supply system, and improve the supply structure. Eventually, supply side reform will lead to higher productivity of the economy and improve enterprises’ competitiveness.

Does the idea mean China will reduce its reliance on investment, consumption and exports for growth, as well as fiscal and monetary stimulus policies?

There has been no change on official expressions regarding monetary and fiscal policies. And no one has denied the role of the troika of economic growth, namely investment, consumption and exports. The fifth plenum of the Communist Party’s 18th Central Committee again mentioned the role of the three. So emphasizing the supply side doesn’t mean giving up the consumption side.

For the 13th five-year period, from 2016 to 2020, investment, consumption and exports will continue their functions. But more attention will be paid to the effects of investment, while people’s consumption will upgrade through innovation on the supply side. Competitiveness will be more important for export goods. For the next five years, the room for growth driven by traditional forces will be extended through reforms to the supply side.

...What is the theoretical foundation for supply side reform? How do we create demand through it?

Supply-side economics emphasizes deregulation on the supply side and cutting taxes. It was adopted in Western countries by leaders such as Margaret Thatcher, who pushed forward privatization in Britain. In China, most experts are talking about new supply-side economics that include some Chinese features. China started to expand domestic consumption in 1998 as a long-term strategy of the central government. There is no new theoretical framework. People will support reform from the supply side when they realize that the traditional way of expanding consumption will have a negative impact on the economy in the long run.
Supply side reforms are the pragmatic, common sense and simple approach to economic reform. Remove barriers and let the market sort out the allocation of labor and capital. This is what China is supposed to have been doing the past few years, but it's still not off the ground yet.

No comments:

Post a Comment