Premier proposes ‘double engines’ to help China escape middle income trap

The first engine of growth is a more liberalized market where people are encouraged to do business creatively. In addition, China has a high savings rate of 50 percent, providing ample financial resources for internally derived growth.

Li used two interesting examples to suggest that market reforms could create economic miracles. The first was rural and agricultural reform in the late 1970s. The reform stimulated agricultural productivity so that China could produce enough food to feed its huge population and per capita rural income rose 15 percent per year in real terms during 1978-85. The second was a small village in eastern China he visited recently. The village had 700 families who opened 2,800 e-business shops delivering more than 30 million items everyday to different parts of the world.

If the free market is considered as a new engine of growth, in Li’s mind, government is an old one but needs polishing. What he said in Davos was what the State Council has actually done in China under his leadership.

The major reform in government is to reduce the number of checking and approval rights granted to different government organizations so that private as well as state firms will have fewer restrictions in doing business. It will also reduce the scope for corruption as well.

Li suggested that the function of government will also change to meet the demands of society and people in the new situation. More public services should be created, such as urban infrastructure, waste treatment facilities, public health and education. Central and local governments should find better and more efficient ways to provide these services. Public facilities and services may not be entirely financed by the government itself. Private capital can play an important role in breaking the bottlenecks of financing and efficiency improvement. For example, in 2014, a waste water treatment facility in western China cost 300 million yuan to build and a German water services company contributed 70 percent of the capital. By allowing private and foreign capital to participate in the construction of public facilities, China can easily accelerate her urbanization process.

Li’s speech was clear and powerful with many new creative concepts and ideas that we have not heard before. By encouraging tens of millions of private firms to engage in business and creation and redefining the role of government, he is confident that China will be able to sustain a relatively high level of economic growth for the next one or two decades. China needs a peaceful external environment and it will not just focus on its own affairs without paying serious attention to the rest of the world.

A vast domestic market, large population, high savings, hardworking and creative ability of 900 million workers and a proactive government means China has an ability to maintain a middle-high level of growth and create a new economic structure of middle-high quality. By doing so, China has a good chance to escape the so-called middle income trap. This is the most powerful message I have read from Li. It will greatly help the rest of the world understand China better as one of the world’s leading economic powers.

Yao Shujie is professor of economics at the University of Nottingham and University of Chongqing.