China's Economic and Social Problems by Gregory C. Chow

Author:Gregory C. Chow [Chow, Gregory C.]
Language: eng
Format: epub
Tags: Development, Public Policy, Social Policy, Economic Development, Political Science, Business & Economics
ISBN: 9789814590433
Google: nAW3CgAAQBAJ
Goodreads: 29385748
Publisher: World Scientific
Published: 2014-06-02T00:00:00+00:00

PART 3

Economic Policy

CHAPTER

From Economic Theory to Economic Policy Analysis

Good academic economists often do not know how to give good policy advice. When they leave the ivory tower to serve as advisors to the government, many begin to realize their shortcoming in this regard. How can economic theory be successfully applied to the formation of good economic policy? I will try to answer this question by providing some personal experiences in advising China’s government in its market reform during the last 30 years as recorded in a television interview conducted by Diyi Caijing Daily or “First Financial Daily” in English. Other topics are also covered below.

1. The Necessity of Price Reform

“First Financial Daily”: As an experienced economist, what do you think about China’s reform and opening up during the last 30 years?

Chow: China’s reform from a planned economy to a market economy was not easy to accomplish. In 1953, China started its first five-year plan. Many people accepted the idea of planning. To change the belief in planning to accepting the operation of market economy was not easy. I admire Deng Xiaoping for believing that the change was correct and for guiding the change. To direct the Chinese people to change, he advised, “Cross the river by feeling the stones.” That is to say, based on the experience of reform, take the next step forward.

“First Financial Daily”: You just mentioned that the reform should be gradual and be carried out step by step. As far as I know, you also participated in the decision-making of the reform process. Can you tell us the story of your participation?

Chow: Price reform was the most important step, as I related to the Chinese Premier in 1984 during our first meeting. Just giving autonomy to state-owned enterprises was not enough because the decisions of these enterprises would not be economically efficient unless the enterprises are guided by market determined prices. If we do not let the market forces of supply and demand determine prices, economic resources would be misallocated. At the time the prices of many inputs supplied to state enterprises were set too low, leading to misuse of these resources. Also the price of housing was very low when workers paid only a few yuan for their monthly rental. Another example was the foreign exchange rate of the RMB, leading to the low official price of the US dollar. This created a shortage of the dollar, requiring special permits to buy the dollar for the import of foreign goods. All these prices should be set by the market forces of demand and supply to achieve efficient allocation of resources.

“First Financial Daily”: Reform began in the agricultural sector under the household responsibility system. This reform was very successful. Why?

Chow: According to economic theory, optimum output should be determined by setting marginal revenue equal to marginal cost. If the producer is required to pay a fixed cost, his marginal calculation will not be affected. The household responsibility system amounts to charging the farm household a fixed amount of their output and leaving the rest for its own use.

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