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A Road Map to Change 1.3B Lives

by Joseph E. Stiglitz, Straits Times, April 11, 2006

While much of the rest of the developing world, following the Washington Consensus, has been directed at a quixotic quest for higher gross domestic product, China has once again made clear that it seeks sustainable and more equitable increases in real living standards.

CHINA is about to adopt its 11th five-year plan, setting the stage for the continuation of probably the most remarkable economic transformation in history, while improving the lives of almost a quarter of the world's population. Never before has the world seen such sustained growth; never before has there been so much poverty reduction.

Part of the key to China's long-run success has been its almost unique combination of pragmatism and vision. While much of the rest of the developing world, following the Washington Consensus, has been directed at a quixotic quest for higher gross domestic product, China has once again made clear that it seeks sustainable and more equitable increases in real living standards.

China realises that it has entered a phase of economic growth that is imposing enormous - and unsustainable - demands on the environment. Unless there is a change in course, living standards will eventually be compromised. That is why the new five-year plan places great emphasis on the environment.

Even many of the more backward areas have been growing at a pace that would be a marvel, were it not for the fact that other parts of China are growing even more rapidly. While this has reduced poverty, inequality has been rising, with growing disparities between cities and rural areas, and between coastal regions and the interior.

This year's World Development Report from the World Bank explains why inequality, not just poverty, should be a concern, and China's 11th five-year plan attacks the problem head-on.

The government has been talking for years about a more harmonious society, and the plan describes ambitious programmes for achieving this.

China recognises, too, that what separates less developed from more developed countries is not only a gap in resources, but also a gap in knowledge. So it has laid out bold plans not only to reduce that gap, but to create a basis for independent innovation.

China's role in the world and the world's economy has changed, and the plan reflects this, too. Its future growth will have to be based more on domestic demand than on exports, which will require increases in consumption.

Indeed, China has a rare problem: excessive savings. People save partly because of weaknesses in government social insurance programmes; strengthening social security (pensions) and public health and education will simultaneously reduce social inequalities, increase citizens' sense of well-being and promote current consumption.

If successful - and, so far, China has almost always surpassed even its own high expectations - these adjustments may impose enormous strains on a global economic system already unbalanced by America's huge fiscal and trade imbalances. If China saves less - and if, as officials have announced, it pursues a more diversified policy of investing its reserves - who will finance America's more than US$2 billion (S$3.2 billion) a day trade deficit?

With such a clear vision of the future, the challenge will be implementation. China is a large country, and it could not have succeeded as it has without widespread decentralisation. But decentralisation raises problems of its own.

Greenhouse gases, for example, are global problems. While America says it cannot afford to do anything about it, China has acted more responsibly. Within a month of the adoption of the plan, new environmental taxes on cars, petrol and wood products were imposed: China was using market-based mechanisms to address its and the world's environmental problems.

But the pressures on local government officials to deliver economic growth and jobs will be enormous. They will be sorely tempted to argue that if America cannot afford to produce in a way that preserves our planet, how can we? To translate its vision into action, the Chinese government will need strong policies, such as the environmental taxes already imposed.

As China moves towards a market economy, it has developed problems that have plagued developed countries: special interests that clothe self-serving arguments behind a veil of market ideology.

Some will argue for trickle-down economics: Do not worry about the poor, eventually everybody will benefit from growth. And some will oppose competition policy and strong corporate governance laws. Growth arguments will be advanced to counter strong social and environmental policies: Higher petrol taxes, for example, will kill the nascent car industry.

Such allegedly pro-growth policies would not only fail to deliver growth; they would threaten the entire vision of China's future. There is only one way to prevent this: Open discussion of economic policies in order to expose fallacies and provide scope for creative solutions to the many challenges facing China today.

US President George W. Bush has shown the dangers of excessive secrecy and confining decision-making to a narrow circle of sycophants. Most people outside China do not fully appreciate the extent to which its leaders, by contrast, have engaged in extensive deliberations and broad consultations (even with foreigners) as they strive to solve the enormous problems they face.

Market economies are not self-regulating. They cannot simply be left on autopilot, especially if one wants to ensure that their benefits are shared widely. But managing a market economy is no easy task. It is a balancing act that must constantly respond to economic changes.

China's 11th five-year plan provides a road map for that response. The world watches in awe, and hope, as the lives of 1.3 billion people continue to be transformed.

The writer, a Nobel laureate in economics, is professor of economics at Columbia University and was chairman of the Council of Economic Advisers to former US president Bill Clinton and chief economist and senior vice-president at the World Bank.

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