[Comment] Development in defiance of the Washington consensus

from The Guardian

China has carried off the world's largest reduction in poverty by grasping that market economies cannot be left on autopilot

Joseph Stiglitz

China is about to adopt its 11th five-year plan, setting the stage for the continuation of probably the most remarkable economic transformation in history, while improving the wellbeing of almost a quarter of the world's population. Never before has the world seen such sustained growth; never before has there been so much poverty reduction.

Part of the key to China's long-run success has been its almost unique combination of pragmatism and vision. While much of the rest of the developing world, following the Washington consensus, has been directed at a quixotic quest for higher GDP, China has again made clear that it seeks sustainable and more equitable increases in real living standards. China realises that it has entered a phase of economic growth that is imposing enormous - and unsustainable - demands on the environment. Unless there is a change in course, living standards will eventually be compromised. That is why the new plan places great emphasis on the environment.

Many of the more backward parts of China have been growing at a pace that would be a marvel, were it not that other parts of the country are growing even more rapidly. While this has reduced poverty, inequality has been increasing, with growing disparities between cities and rural areas, and coastal regions and the interior. This year's World Bank world development report explains why inequality, not just poverty, should be a concern, and China's plan attacks the problem head on. The government has for several years talked about a more harmonious society, and the plan describes programmes for achieving this.

China recognises, too, that what separates less developed from more developed countries is not only a gap in resources, but also a gap in knowledge. So it has laid out plans to reduce that gap.

China's role in the world and the world's economy has changed. Its future growth will have to be based more on domestic demand than on exports, which will require increases in consumption. Indeed, China has a rare problem: excessive savings. People save partly because of weaknesses in government social-insurance programmes. Strengthening social security (pensions) and public health and education will simultaneously reduce social inequalities, increase its citizens' sense of wellbeing, and promote consumption.

If successful, these adjustments may impose enormous strains on a global economic system that is already unbalanced by America's huge fiscal and trade imbalances. If China saves less - and if, as officials have said, it pursues a more diversified policy of investing its reserves - who will finance America's trade deficit of more than $2bn a day? This is a topic for another day, which may not be far off. With such a clear vision of the future, the challenge will be implementation. China is a large country, and it could not have succeeded as it has without widespread decentralisation. But decentralisation raises problems of its own.

Greenhouse gases, for example, are global problems. While America says that it cannot afford to do anything about it, China's senior officials have acted more responsibly. Within a month of the adoption of the plan, new environmental taxes on cars, petrol and wood products were imposed: China was using market-based mechanisms to address its and the world's environmental problems. But the pressures on local government officials to deliver economic growth and jobs will be enormous. They will be sorely tempted to argue that if America cannot afford to produce in a way that preserves our planet, how can they? To translate its vision into action, the Chinese government will need strong policies, such as the environmental taxes already imposed.

As China has moved toward a market economy, it has developed some of the problems that have plagued the developed countries: special interests that clothe self-serving arguments behind a veil of market ideology. Some will argue for trickle-down economics. And some will oppose competition policy and corporate governance laws. Growth arguments will be advanced to counter strong social and environmental policies. Such allegedly pro-growth policies would not only fail to deliver growth; they would threaten the entire vision of China's future.

There is only one way to prevent this: open discussion of economic policies to expose fallacies and provide scope for creative solutions to the challenges facing China. George Bush has shown the dangers of excessive secrecy and confining decision-making to a narrow circle of sycophants. Most people outside China do not fully appreciate the extent to which its leaders, by contrast, have engaged in extensive deliberations and consultations as they strive to solve the enormous problems they face.

Market economies are not self-regulating. They cannot simply be left on autopilot, especially if one wants to ensure that their benefits are shared widely. But managing a market economy is no easy task. It is a balancing act that must constantly respond to economic changes. China's plan provides a road map for that response. The world watches in awe, and hope, as the lives of 1.3 billion people continue to be transformed.

· Joseph Stiglitz, a Nobel laureate, is professor of economics at Columbia University and the World Bank's former chief economist
© Project Syndicate