By Hy-sang Lee
September 11, 2015
China is at a critical juncture in her economic development. After 35 years of historic growth, its economy is decelerating amid a worldwide loss of confidence in Beijing’s economic management. Beijing needs to bolster its economic growth strategy with plainly sensible programs so as to reassure those unnerved Chinese who are stashing money overseas, and spooked global investors who have reacted sharply to the negative data coming out of China.
In fact, Beijing happens to be in the midst of formulating its thirteenth five-year plan, to encompass the years 2016-2020. Faith in China’s market-based economic reforms, meant to be the basic strategy for the twelfth five-year plan (2011-2015), has been shaken by the government’s poor handling recently of the stock market and exchange rate. But Beijing could give new life to market-oriented reforms with a decisive program of cleaning up the environment as a quantitative easing measure, accompanied by efforts to steer consumer businesses to some of the cleaned sites, as a flagship program of the new five-year plan.
Specifically, this recommendation consists of four parts. First, move away from the traditional practice of making economic stimulus expenditures primarily through provincial governments. Second, establish a corporate-type agency within the Ministry of Environment Protection, to buy up highly polluting factories near big cities, demolish them, clean their sites, develop green areas on many of the sites, and sell the rest cheaply to private firms attracted by consumer business possibilities, such as amusement parks, popular concert fields, sport facilities, motels, eateries, health care facilities, nursing homes, and college campuses. Third, work closely with provincial governments throughout the process from acquiring factories through selling the resulting sites, to honor their interests in protecting local jobs and revenue sources during and after the cleanup. Finally, fund the new agency by issuing two central-government bonds, one denominated in renminbi and the other in U.S. dollars.
In the Mao Tse-tung era, provincial and local governments were mere administrators of centrally determined expenditure programs and tax collection. Since liberalization began in 1978, much of the power to tax and spend devolved to localities, partly because they have been innovative economically, including the very first step in Deng Xiaoping’s reforms, the family-responsibility system in agriculture. This decentralization has facilitated rapid economic growth for China because local governments have a self-interest in efficient tax collection and investment in the growth of their own economies. However, flaws have emerged in decentralization, in terms of both consumer welfare and economic growth. In particular, local governments have significant control over spending for the social safety net and environmental protection, two significant costs for modern societies and in China’s case two outlays often neglected in favor of fast growth. As the other side of that coin, infrastructure and industry have widely been over-built.
Beijing is currently struggling with the over-investment and the underdeveloped safety net for aging, unemployment, and serious illness. Though their incomes have increased, many Chinese are reluctant to increase their spending rapidly enough to offset decelerating investment and production. And the degraded environment not only disgraces what GDP growth is reported, it also directly retards that growth whenever China stages a major international event and suspends industrial production for weeks prior in a large area around Beijing for cleaner air. The slowdown in economic growth had a role in the recent actions by Beijing to support the stock market and adjust the exchange rate.
China has sought to switch its economic growth engine from exports, infrastructure and real estate over to consumption, without significantly strengthening the social safety net. Yet it has failed to find a self-powering engine for consumption growth itself. It has tried deliberate urbanization as the engine, but urban areas historically grew along with or after economic development. Now that China already has many large cities thanks to exports and industries, a new stage of economic growth could be jumpstarted by encouraging the citizens of these cities to step up their spending. But China’s big city dwellers cannot boost their spending much faster than they are now, overcoming their deep urge for saving, given crowded restaurants, movie houses, amusement parks, limited mass-spectator sports, and other available consumer services. They could perhaps be induced to open their wallets wider, if destinations not far from their homes are developed offering entertainment and other services in a cleaner environment.
Chinese metropolises are typically surrounded by industries spewing toxic material. The prime case in point is the province of Hebei, which surrounds Beijing. The size of Nebraska, it reportedly produces twice as much crude steel as the total U.S. output. Millions of citizens in Beijing, Handan (the largest city in Hebei with a population of 9 million), and Xintai (rated the most polluted in China), lack access to any enticing spots for a weekend visit. The Ministry of Environmental Protection (MEP) has repeatedly ordered these heavily polluting provinces to cut down their industrial capacity, but has run into local self-interest. In any case, pollution is best considered a national output cost, since individual producers can finish and sell their products without paying for it.
This combination of a need to improve the environment and a possibility of opening up new places for consumer activities, in the context of slower economic growth, calls for the deployment of the now-standard policy of quantitative easing to tackle the pollution problem boldly, while developing new venues for consumption growth at former industrial sites as a major secondary program. The idea of quantitative easing has been dormant in China, probably because any blanket increase in money supply is likely to flow not to lean and ambitious private enterprises, but to the fat state-owned companies and provincial governments, which are the major sources of redundant investment. However, quantitative easing aimed exclusively at the country’s unhealthy air and water would be a clearly sensible policy.
The anti-pollution program could be financed with central government bonds. With the current disinflationary period set to last for a while, the renminbi bond would be sold directly to the People’s Bank of China, so that working on the environmental project would at the same time expand the money supply and stimulate the economy. This would be quantitative easing par excellence. After economic growth picks up, the bonds would be sold to households to moderate their consumption pickup and free resources for the environmental cleanup. The onds issued in dollars would slow the ongoing foreign-capital flight and help maintain domestic liquidity and production. After prosperity returns, their issuance could be terminated.
The proposed MEP agency would buy as many heavily polluting factories as Beijing’s political will would allow during the next five years, say 300 or 400 of them, including many steel mills (out of some 1200 in China), along with chemical, cement, and other industries around metropolitan areas. Many of those selected would belong to centrally owned enterprises, for which the purchase need not entail money transfers other than accounting changes. But the private firms and local governments that own the rest should be paid fair compensation. However, even market-value compensation would not be large amounts in these times of globally depressed commodity markets. Thus, now is the ideal time for Beijing to liquidate the pollution predicament it has allowed to intensify for so long. Given low costs for factory buyout, most of the program budget would be expended on labor for dismantling and cleansing, especially the latter as some of the sites would be particularly toxic. A large labor budget, however, would help with rehiring the workers of the demolished establishments.
As to selling the cleansed sites, it is difficult to gauge how many of them would attract private buyers. The factories bought should be the heaviest polluting, not the most desirable locations. But land-scarce China should exercise ingenuity in finding profitable users of the sites as a means of securing a new engine for consumption growth. Finally, there is a case for spending a portion of the bond proceeds on protecting the workers of the purchased factories, in part to weaken opposition to the proposed programs. Perhaps it could be done as the vanguard of upgrading the social safety net in China.
Hy-sang Lee is a retired professor of economics at the University of Wisconsin-Oshkosh. He is the author ofNorth Korea: A Strange Socialist Fortress, 2001.
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