The World Bank has warned China that its economic growth model, which depends heavily on exports and state-owned enterprises (SOEs), is unsustainable. Though criticized for some past judgments, this advice from the World Bank is sound. It comes in a report, co-authored with the Development Research Center of China’s State Council, which recommended that Beijing reduce the dominant role of SOEs in order to promote the free market.
Having amazed the world with the dramatic results of the economic reforms launched three decades ago, China now has to manage that success as it moves into a new and more difficult phase of sustaining growth.
What’s standing in the way? Among other things, SOEs, as pinpointed by the World Bank. Undoubtedly, their existence, which smacks of state capitalism, detracts from a free market because these national champions benefit from inexpensive financing and preferred positions in the market. According to a study, state-owned firms, which dominate the banking, energy, telecoms, health-care and technology sectors, account for about 40 percent of the country’s gross domestic product. Their exalted position translates into less economic space for private entrepreneurs, who create new jobs and wealth but have to struggle to find funding.
Nevertheless, many Chinese are wary of fully embracing free-market prescriptions because of their consequences elsewhere. The Washington Consensus of the 1990s ― policy prescriptions for developing countries promoted by the World Bank and the International Monetary Fund ― contained similar suggestions on downsizing the state-owned economy. Given Latin America’s unhappy experiences with the Washington Consensus, it was little wonder that there was a backlash against it in many developing countries.
The truth is that free markets do promote growth and development ― witness Singapore. Therefore, moving towards them is correct, as a general direction. However, the degree and pace of economic reform must depend on social and political realities in individual countries. This is particularly true of large nations like China, India and Indonesia, where there are diverse economic and social constituencies, including the agricultural sector. Competing interests need to be balanced carefully and domestic realities will inevitably tip the scales. It is likely to be one of those areas where it will want to make haste, but slowly.
China will need to find its own way to a freer market, preserving stability while systematically doing away with legacies that have become roadblocks.
