Meeting new challenges

Maximizing the economic potential of the growing internal domestic market will require removal of barriers and preferences, many of local origin, and enhancing the mobility of people and labor. The status of migrants (those with rural registration living in cities) will have to be upgraded to full citizenship. This in turn means that urbanization must work.

China's population is now just over 50 percent urban. The massive investment in urbanization under the leadership of the new premier will drive growth, enhance mobility and is required to make the pattern of urbanization orderly and efficient. Also needed are enabling reforms of the fiscal and financial systems to support such investment.

But urbanization by itself is not sufficient. It is crucial that it be driven by expanding employment opportunities in the urban sector rather than declining options in the rural and traditional sectors. Such opportunities require structural change, growing household incomes and the rapid expansion of a range of service sectors. It is easy to see that the elements of the changing growth pattern and supporting policy are closely linked and complementary.

The State has a massive (by Western standards) balance sheet. Assets include reserves that amount to almost half the GDP, land, dominant ownership of the State-owned enterprises and more. Public debt is less than 50 percent of GDP. This has enabled China to maintain macro stability even when imbalances emerge and to sustain high levels of public sector investment to support growth. It was a key element in weathering the 1997-98 Asia crisis and again in 2008-09.

Chinese leaders and policymakers are unlikely to follow the Western model of smaller balance sheets and large unfunded liabilities. But that leads to the major challenge of the effective management of public assets. There are ways to manage these assets that impede or promote the expansion of competition, market efficiency and dynamism. There will be debate within China about the benefits and costs of alternative models and more generally about the details that will define the evolving role of the State.

Finally, meritocracy has deep historical roots in China. And generally citizens accept market outcomes if the competition is fair, and the elements of social insurance and security are adequate. Both require development. Recent rising anger and social tension is linked to the perception that there are insiders and outsiders and that economic outcomes depend more on relationships than superior competitive performance. An important priority for China's new leadership therefore, are actions that signal to the people that there will be a determined assault on this pattern and a commitment to a meritocratic egalitarian society.

Over the next few months, all of China and much of the rest of the world will be watching as the system reforms emerge. A huge amount is at stake, within China and in the rest of the global economy. The mood is optimistic. It has been a good start.

The author is a Nobel laureate, a member of the Advisory Board of the Institute for New Economic Thinking and academic council chairman of the Fung Global Institute.

(China Daily 03/27/2013 page8)