Yao Yang: What problems are worth studying in the Chinese economy?
A new approach to political economics is needed, said the senior economist at Peking university, who also identifies aging as the next crucial area for research.
Hi, this is Jia Yuxuan from Beijing. On Thursday, The East is Read published an excerpt from the translation of Chapter 8, titled "中国经济学的过去、现在和未来 The Past, Present, and Future of Chinese Economics", from Yao Yang's 2023 Chinese-language book 经济学的意义 The Meaning of Economics.
Today's newsltter continues with the next section of the chapter, "Which of China’s Problems are Worth Studying by Economists Today?"
Acknowledging the profound influence of politics on China's economy and the judgements surrounding it, Yao calls for Chinese economists to prioritize understanding the complex mechanisms of their national economy. He proposes the creation of a macro-political-economic framework that concentrates on the interplay between the market and the unique entities in the Chinese economic landscape: the government, state-owned enterprises (SOEs), and shadow banks.
Yao Yang is Liberal Arts Chair Professor; Dean, National School of Development; Executive Director, Institute of South-South Cooperation and Development; Director, China Center for Economic Research at Peking University.
This chapter was first translated and published by David Cowhig, a retired U.S. diplomat who kindly authorized my colleague, Zichen, to share his translation. Prof. Yao was also conculted, and he himself agreed to this publication with a few minor changes.
Cowihg worked 25 years as a U.S. State Department Foreign Service Officer including 10 years at the U.S., Embassy in Beijing and U.S. Consulate General in Chengdu and four years as a China Analyst in the Bureau of Intelligence and Research of the State Department. Before State, he translated Japanese and Chinese scientific and technical books and articles into English for freelance for six years. Before that, he taught English at Tunghai University in Taiwan for three years.
The Chapter is made up of five parts:
IV. Which of China’s Problems are Worth Studying by Economists Today?
V. Can a Chinese School of Economics be Formed?
The first two parts have been published by Pekingnology, and the third part, as noted earlier, has been published by The East is Read on Thursday. By this, we intend to expedite our content delivery and broaden the reach of Prof. Yao insights. Next, Pekingnology will resume its publication and provide closure to the overall discussion.
Please enjoy Part IV:
Which of China’s Problems are Worth Studying by Economists Today?
China currently has many issues worthy of research. I believe there are several key areas worthy of investigation.
The first area is political economy. China’s economy is closely intertwined with politics, and almost all economic issues involve political factors, which phenomenon is not found in many other countries. Currently, there is a trend for a new political economics to replace institutional economics. New political economy studies phenomena at the intersection of politics and economics, and given the uniqueness and abundance of new phenomena in China, I believe this area holds the potential for significant contributions. Moreover, this issue also involves debates about institutions.
Many international scholars, including prominent economists like Daron Acemoglu, in their writings, though not explicitly criticizing China’s institutions, at least view China’s system as unlikely to be successful in the long term. Acemoglu explicitly proposes two types of institutional classifications, extractive and inclusive, categorizing China as extractive, suggesting it cannot sustain long-term development. However, how do we explain China’s economic achievements over the past few decades? I believe Chinese economists should respond to this issue.
The second area is macroeconomics. While research in other economic fields in China can generally keep pace with international standards, macroeconomics lags behind. Some recent publications are promising, but more work is needed. China’s macroeconomic operation is unique and fundamentally a political economy issue. For example, the Federal Reserve and central banks in other countries can largely maintain independence, but in China, the central bank is under government control, and decisions must consider comprehensive factors beyond just economic and financial issues.
Therefore, we can consider establishing a macro-political economy, a direction that has not been explicitly proposed yet. If we can establish a macro-political economy, it would not only be valuable for researching China but also for other developing countries.
The issue of central bank independence is also subject to debate. Joseph Stiglitz has raised objections, arguing that monetary policy cannot be entirely the central bank’s affair because it involves employment and other issues, and it should not be an independent matter. We see that during financial crises and the COVID-19 pandemic, there has been a lot of tacit cooperation between the Federal Reserve and the U.S. Treasury. So, can we say the Federal Reserve is entirely independent? It’s hard to say.
In China, the situation is even more complex, involving not only the central government but also local governments. Some scholars have studied the issue of financial accelerators 金融加速器 and proposed that the real estate industry is a financial accelerator because it creates many assets, and assets can become collateral for loans, thereby accelerating the lending process. [See, via Google Translate, related articles from the China Financial Research Network 中国金融学术研究网 under the category Financial Supervision]
In China, local governments also act as financial accelerators because they have strong credit. A company that secures a government procurement contract can obtain loans. I saw an advertisement in my building’s elevator for a bank’s “Government Procurement Loan” program, allowing companies to use government procurement contracts as collateral to obtain loans, with a maximum loan amount of 10 million yuan. This way, the growth of government assets acts as a financial accelerator. Local governments in China are a very peculiar entity; their expansion and contraction have a significant impact on China’s macroeconomics and are worth studying by Chinese macroeconomists.
China’s state-owned enterprises (SOEs) are also financial accelerators. One puzzle about the rule of law and economic growth in China is: If China’s rule of law is weak, why does its economy still function? My story is that China’s financial development is incomplete. SOEs can easily obtain loans, but private enterprises need a lot of collateral to secure loans. After SOEs obtain loans, a great deal of money enters a gray area, emerging later in shadow banks, from which it is then lent to private enterprises.
The weakness of the rule by law [rules-based governance not rule of law] in China is advantageous for SOEs since it enables them to lend money to private enterprises. Although this is a product of China’s specific institutional arrangements, I believe it has global significance. It informs foreigners about how China’s macroeconomy operates and offers a new perspective on the role of shadow banking. 虽然这是中国特殊的制度安排下的产物，但我觉得有世界意义，一是让外国人知道中国的宏观经济是如何运转的，二是从一个新的角度认识影子银行的作用。
Therefore, I believe that in studying macroeconomics in China, it is necessary to consider political economy issues, an aspect where Chinese macroeconomics has not performed well. Of course, this is related to the training received by macroeconomists—macroeconomics typically treats institutions as exogenously given, precisely what China needs to explain. Chinese macroeconomists need to break open the black box of institutions, develop macro-political economy, and this has the potential for innovation.
The third area is aging. Japan, during the process of the aging of its population, did not produce any influential economic outcomes because the Japanese are not adept at proposing theories. Many well-known Japanese economists are based in the United States, and their research focuses on highly technical issues, essentially mathematics. This is related to their academic tradition, which emphasizes describing problems rather than proposing theories.
I believe we cannot remain at the level of Japan. China became an aging society in the year 2000 and is now close to becoming a moderately aged population stage. What impact does aging have on the Chinese economy? What effects will it bring in the next two decades? As many developing countries around the world are aging before becoming wealthy, researching the impact of aging on economic growth in China holds global significance. Since China entered an aging society in 2000, and yet its economic growth did not slow down until 2012, subsequent deceleration may be caused by other factors—mainly structural adjustments and declining marginal returns on capital accumulation. Here, several questions are worth studying:
The first is the savings rate issue. After China’s aging, the savings rate did not decrease rapidly and peaked in 2010. Since the early 21st century, people born in the 1940s and 1950s began to enter old age, but those of us born during the baby boom entered adulthood, reaching the highest savings rate. This may be one reason for maintaining China’s high savings rate. Additionally, China is still in its high growth phase, which can also boost the savings rate.
The second is the role of education. As the quality of education increases, so does the return on education, which can effectively compensate for the labor loss caused by aging.
The third is the issue of consumption. In Japan, a significant impact of aging is severe underconsumption because the elderly consume very little. The Bank of Japan lowered interest rates to negative to stimulate consumption and investment. In other words, if you go to the bank to deposit money, not only do you not get interest, but you also have to pay the bank. However, the elderly did not reduce savings in Japan; instead, they increased savings because there was no interest, and their future income would decrease, so they needed to save more for future needs. In China consumption will be driven by at least 150 million more people expected to move to urban areas.
The fourth area is the mechanism for fostering entrepreneurs. The most important issue in economic development that development economics cannot study is: How are entrepreneurs produced? Indeed, whether one can become an entrepreneur is related to one’s character, which economists cannot study. However, economists should study the conditions that favor the emergence of entrepreneurs. In this regard, Professor Zhang Xiaobo’s research on industrial clusters is an excellent example. The issue of industrial clusters first appeared in developed countries 200 years ago, so their economists rarely study this issue. An important part of China’s industrialization is rural industrialization, and we need to study how industrial clusters are formed and what role they play. One of the roles is nurturing entrepreneurs. In a vertical industrial cluster, the leader is usually a trading company that accepts orders, purchases raw materials, and then outsources the manufacturing process to different households, forming an industrial chain.
I want to emphasize once again that the theories and research results that are ultimately remembered must respond to the most important issues of the time. Chinese economists should focus on the most critical issues in China today.