When the severest global financial crisis since the Great Depression directly affects the Chinese economy, economic transition stands out as a crucial measure to surmount the turmoil and create opportunities to ensure China's sustainable economic growth.
However, a black-and-white view of economic transition is not an option. The more critical the transition, the more important a scientific approach on development is needed. We should make clear what to abandon, what to maintain, and what to develop, so that the baby will not be thrown out with the bath water. The following issues should be objectively assessed.
First is the recognition of market principle. In the financial crisis, with the shrinking world market and the diving global economy, the idea of an omnipotent market comes under scrutiny. Policies including government guidance, fiscal stimulus, and employment subsidies are widely applied around the globe. It is without doubt that necessary and effective measures to deal with the crisis and revive the economy as soon as possible are needed.
However, it does not mean one says "no" to the market. On the contrary, only if the policies led by the government are embedded in the market can they act as a pump to refresh the market.
A scientific market economy does not imply simply assigning everything to the market, but rather allowing ways for the private sector to handle itself. Through competition based on market principle, risks can disperse, costs can be reduced, and the optimum allocation of resources can be achieved. When the market fails, government should promptly intervene and correct the errors, to guarantee the rational allocation of resources. This is the basic principle of a scientific market economy.
The financial crisis does not change the scientific nature of the market principle. Rather, the crisis reveals what a reckless violation of the principle can bring. In economic transition, accurately keeping the balance between freedom and intervention, effectively coordinating the relations between market regime and government guidance, and building a scientific development model, are essential in securing the harmonious and stable development of the economy and society.
The second issue is the function of finance. The financial crisis has exposed the drawbacks of American financial capitalism. In the severest stage of the crisis, someone even claimed that "the era of financial capitalism had ended", or "manufacturing is the only protagonist shoring up the economy".
Indeed, manufacturing and services are the main forces driving economic development. Without support from a robust real economy, mere development in the financial sector cannot guarantee overall economic prosperity. Without development of an efficient financial sector, manufacturing and services cannot flourish. Facing this crisis, economic transition should not nullify the functions of the financial sector, but set up a system in which the financial sector plays a more beneficial role in overall economic development.
In fact, until the 1960s, the international transactions of commercial banks were limited in short-term financing for trade, while long-term and large-scale demands in capital were financed by the securities market. After the 1970s, with swift development of international consortium loans, the market functions of banks and securities fundamentally changed, which paved the way for the "securitization" and financial innovation in the 1980s and beyond.
The innovation of financial techniques, the development of operational methods, and the evolution of the financial sector are consistent with the broader trend of world economic development. The financial crisis exposes the ill-applied operational methods and poor regulation, rather than financial techniques. Thus, rebuilding and improving the financial system become the epochal missions of economic transition.
The third point lies in the relations between the global market and the domestic market. The financial crisis has pricked the asset bubbles in the US and resulted in the collapse of consumption bubbles, leading to the shrinkage of the global market. Many believe that the US, the largest market in the world, cannot sustain its status as the engine of the world economy - the US-led unipolar age has ended and dollar hegemony will soon collapse.
Surely the epicenter of the financial crisis is the US, whose economy has been violently battered. The over-consumption of the US, the root cause of global economic imbalance, must be corrected. However, the status of the US as the core of global technology has not been shaken; New York is still the largest financial market in the world; the international liquidity of the dollar is still the indispensable strategic resource in the global economy; and the fundamental consumption capacity of the US will not crumble. Thus, when crisis countermeasures work, the US will still be the core force leading world economic growth.
The BRIC countries (Brazil, Russia, India and China), with their 2.7 billion people and fast-rising middle class, are forming a mammoth potential market and becoming the new engine of the global economy.
To expand in emerging markets does not mean giving up the traditional market, especially when the transition from a potential market to a real one is a prolonged process. Venturing into new markets and expanding domestic demand are contingent on the formation and accumulation of a national productive force as well as indigenous innovation.
In the age of globalization, technological innovation and the technology industry are increasingly borderless so that no country can lead the sector alone in a single era.
Hence, scientific economic transition requires us to keep three balances: the balance between the global market and the domestic market, the balance between advancing new markets and maintaining old ones, and the balance between indigenous innovation and attracting foreign direct investment to innovate together.
Respecting market rules, following the grand trend of global economic development, and forming the scientific idea of an economic transition determine whether we overcome the crisis and construct a new model of economic development or not.
The author is a researcher with the China Institute of Contemporary International Relations.
(China Daily 04/22/2009 page9)