The First Annual Weatherhead East Asian Institute China Symposium
"China’s Economic Emergence: Progress, Pitfalls and Implications at Home and Abroad"
April 7-8, 2005
PANEL SUMMARIES
Panel 1: A Model for Success or a Cautionary Tale
Josh Gartner
The opening panel of Columbia’s ‘China’s Economic Emergence Symposium’ examined China's economic successes and failures since the beginning of the reform period. There was broad consensus on many of the most important issues, both complimentary and critical to China. Overall the experts painted a view of the country as having been highly successful in expanding its economy since the end of the Mao era, but as continuing to face numerous critical challenges. Generally, there was optimism for the future of the country, but a tone of caution pervaded much of the discussion.
There was broad consensus on several of the accomplishments of China. For example, the panelists frequently argued that China's rapid economic growth over the last two decades was due in great part to its ability to move to a functioning free market with relative openness. In addition, the country has created a good environment for investment. David Dollar specifically cited lower levels of corruption than other developing countries as an impetus for foreign investment. Similarly, Nick Lardy lauded the government for low tariff rates and the encouragement of greater competition.
Yet for all of the accolades, the experts agreed that there are still endemic problems, many of which are getting worse. The panel argued that the environment, disarray in the banking system and growing income inequality, particularly between city and rural residents, were three of the most serious areas of concern.
The poor state of the environment was a point frequently revisited. So serious is this problem that Carl Riskin argued that “net national wellbeing” lagged well behind measured economic growth, which fails to take into account resource depletion and pollution. Hu Angang and Joseph Stiglitz both used Deng Xiaoping’s ‘white cat, black cat’ metaphor to emphasize that the country now must move to a ‘green cat’ system of environmental responsibility. Professor Stiglitz further argued that it is in the interest of developed nations to help China find efficient methods of producing cleaner energy
On the issue of inequality Prof. Stiglitz made the case that China’s tax system was not nearly progressive enough. Nonetheless, Lardy, Dollar made the point that there was less anger and resentment in the population than one might have expected, although Riskin cautioned that the many demonstrations of recent years indicated that there was a good deal of it about, after all. There was agreement that the current banking system was in serious trouble and would take years to fix.
One of the few areas of disagreement was on the issue of China's pegged currency. Stiglitz disagreed with the assertions that several of his colleagues made that the yuan should be revalued upward. Instead he made the case that government policy served as an impetus for economic growth and stability, and also helped to fight income inequality by protecting poor farmers against cheap agricultural imports. He argued that a currency revaluation would only ease political pressure from other countries in the short-term, but would do little in the long-run.
Panel Two – Public Health in an Era of Economic Transition: Challenges for the New Millenium
Elanah Uretsky
Columbia University
Department of Sociomedical Sciences
A trend of ‘market fundamentalism’, or a single minded pursuit of economic growth since the beginning of China’s market reform era, argued Huang Yanzhong, has marginalized public health issues within China’s leadership agenda. This weakening of China’s public health system served as the basis for a panel on the problems in health care resulting from this shift in policy agenda during the reform era as well as the consequences and reactions to recent epidemic outbreaks in China. Liu Yuanli’s brief introduction reminded the audience that heavy investment in public health and education helped build a strong social safety net in post-revolutionary China that prioritized health care during the country’s Maoist era. An intense focus on economic development in the post-Mao era, however, has caused increasing inequalities in access to health care. Eighty percent of rural Chinese people now lack health insurance. As Joan Kaufman noted, fiscal decentralization has shifted the burden of health care to local governments, forcing many to support systems favoring financial incentives that promote excessive testing and drug sales. In addition, a shifting emphasis toward economic development has weakened the power and authority of the Ministry of Health at both the local and national levels. A current emphasis on market reforms has led the central government to use economic growth, which it equates with development, as a yardstick to measure local government performance. This has consequently distorted the political incentive system, causing local officials to favor economic development over the promotion of public health services. In addition, fear that revelation of a local public health problem will detract from investor interest in the local economy and consequently harm opportunities for political advancement, leads to cover-ups.
The mounting problems associated with increasing inequalities, including access to health care and education, argues Liu Yuanli, threaten to disrupt China’s political and social stability and are thus serving as a lesson to China’s top leaders that public health, while important in its own right, is also critical for the country’s continued sustainable economic growth. As all the panelists noted, the government learned such lessons during the SARS crisis of 2003 after which China’s new leadership has shown increased attention to public health including rural health care. SARS forced the government to restructure public health institutions in such a way that pays more attention to infectious disease. Several panelists believe these lessons have translated into increased prioritization of HIV/AIDS by China’s leadership. According to Huang Yanzhong’s analysis though, HIV/AIDS is not necessarily comparable to the SARS epidemic. He argues that a health problem requires an ‘attention focusing event’ in order to be recognized, defined, and formally addressed. An acute health problem like SARS, which can be identified by an ‘outbreak event’ that is highly contagious and highly pathogenic, is capable of focusing attention on the capacity of China’s top leaders to address such situations. However, Professor Huang also pointed out that the current structure of the Chinese leadership is not prepared to respond in the same way to an ‘attrition epidemic’ such as HIV, which has a long incubation period and more certain transmission routes. Less volatile epidemics, which do not pose as great a threat to China’s social and political stability, will encounter more difficulty attracting attention from top government leaders. Furthermore, government incapacity to generate complete and reliable HIV data make it unlikely that the government will be able to engender the systematic indicators necessary to produce useful feedback that will result in the concrete policy adjustments necessary for a swift response to the country’s HIV epidemic.
Panel 3: The Environment and Chinese Development
Introduction by Panel Chair: Jeffrey Sachs, Director of the Earth Institute at Columbia UniversityProf. Sachs began the afternoon panel by saying that the protection of China’s environment is vitally important for both its own internal development and global environmental issues. Internal issues in China include water resources, energy supply, human health and safety, and ecosystem degradation. From an international perspective, China is predicted to play a pivotal role in global climate change and become the world’s largest energy user, and hence greenhouse gas producer, within a quarter century. Any discussion on carbon emissions management must bring China to the table, but the chronic problems of acid rain, heavy metal and particulate release from large scale coal burning and the associated health and environmental problems are of more immediate concern to many Chinese.
Energy Expert: Professor Klaus Lackner, Dept. of Earth and Environmental Engineering at Columbia University
Prof. Lackner is one of the worlds leading thinkers on the issues of energy and carbon management, and is a champion for carbon capture and disposal technology which can be used to off-set greenhouse gas emissions produced by burning fossil fuels. China is already the second largest carbon emitter after the United States, although China’s per capita greenhouse emissions are eight times lower than the USA.
Prof. Lackner pointed out that China’s annual economic growth is impressive at 9%, however growth in energy demand outstrips this at close to 14% in 2003. Major players in China’s energy market are coal, oil, gas, hydro-electricity and nuclear. The point was made that fast development leads to cutting corners environmentally as opposed to the “technology leap-frogging” that many hope for.
In the next 50 years, resource limitations of oil and gas are expected to be reached. These can be solved either by developing extraction markets and transport infrastructure for fossil fuels, or by substituting with other alternative energy sources. One technology that is presently being considered by the US and Chinese governments is coal liquefaction using the Fischer-Tropsch process. As an example, Prof. Lackner gave the South African company “Sassol”, which produces petroleum for under $45/barrel from coal.
Prof. Lackner pointed out that due to the expected fifty year life-spans of coal plants built today, we need to start thinking about redesigning power plants for carbon capture as soon as possible because retro-fitting in the future will be prohibitively expensive. China plans to build hundreds of coal plants in the next 20 years with an electric generating capacity similar to that of the USA. Examples of improved coal burning designs given were Integrated Gasification Combined Cycle (IGCC) which is more carbon efficient than a normal coal plant, and combustors with the ability to switch to oxygen gas flow and give off a sequestration-friendly stream of pure CO 2 gas.
Water Resources Expert: Professor Upmanu Lall, Chair of the Dept. of Earth and Environmental Engineering at Columbia University.
Looking at China as a whole, Prof. Lall began by noting that while China has a huge water resource of 2,800 billion cubic meters of water annually, however, in per capita terms this amounts to only one quarter of the global average for water availability. He further noted that water shortages in the north exemplified by the seasonal drying of the Yellow river, and alternating floods and droughts in the south present difficult problems in storage and distribution of this already limited water supply. The system is further complicated by increasing industrial water use (now over 20% of total), severe depletion of ground water levels, and a history of decade-long drought/flood climate cycles.
Prof. Lall stressed the importance of water in agriculture and food production which now accounts for 70% of water use in China. Food security is vitally important for China given its immense population. He stated that many models show that China has the capability to sustain itself with food and water for the next fifty years, at least regionally. However, problems will certainly arise due to local unavailability of water, but these can potentially be solved by policy and technology instruments. To address predicted water shortages, China plans to build a huge system of canals diverting water from the west, south and east to the arid north at a cost of many billions.
The Three Gorges Dam on the Yangzi river was built firstly to reduce flooding in southern China but will also generate 18,000 MW of renewable electricity as well as being part of the canal system mentioned above. However, relocation of over one million people, submersion of huge tracts of land and historical buildings, and maintaining water quality are significant environmental concerns.
Prof. Lall also brought up the topic of waste water, because of the significant cost of treatment it represents. At present only between 10-20% of China’s waste water is treated before release, generating high levels of water pollution in rivers and other waterways. While China has begun to implement controls on industrial point sources, the larger issue of phosphates and nitrates from agricultural run-off is also a great problem. Prof. Lall was encouraged, however, by the significant investment in waste water treatment at a local level which is not the norm in other countries.
Climate Expert: Professor Michael McElroy, Dept. of Environmental Science at Harvard University. Chair of the International Research Institute for Climate Prediction.
Prof. McElroy identified ten major issues facing China:
- Speed of Economic development. What took 250 years of development in the West will be accomplished in less than 20 in China.
- Scale. Many more people are involved in this development than were involved in the original industrial revolution. Present population of 1.3 billion in China expected to rise to 1.6 billion by mid-century.
- China’s tendency to follow the western development model at an accelerated pace ignores the geographic and resource constraints of China, and is not the best choice.
- Although similar in size and latitude to the USA, China has only one ocean coast as opposed to two in the States, giving rise to a monsoon climate and large tracts of marginal or non-productive land.
- Coal dominates a huge energy appetite in China, and coal combustion represents a huge material transfer of pollutants such as sulfur, particulate, toxic metals and even uranium to the atmosphere, producing severe health effects and ecosystem degradation.
- The domestic auto industry is growing rapidly and needs to be critically examined. China cannot follow the western model of auto dependence and corollary environmental damage.
- Feeding China will become increasingly difficult given land degradation and desertification trends. China should focus more on labor-intensive crops instead of staples such as wheat to take advantage of their competitive advantage in labor as opposed to arable land.
- Differential development fuels political instability and environmental degradation.
- Demographic transitions, in large part due to the one child policy, will leave China with a massive and aging population.
- China needs help and recognition from the West, which it is not receiving except in the form of business/trade.
Prof. McElroy ended his talk by mentioning that none of the Kyoto protocol signatories (except Russia involuntarily) will meet their carbon emission obligations and so it is “nothing but hot air” and European rhetoric.
Chinese Environmental Expert: Prof. Yisheng Zheng, Deputy Director of the Center for Environment and Development, Chinese Academy of Social Sciences
Prof. Zheng modestly admitted that the environmental problems in China are so huge and complex that even he struggles to grapple with them. He went on to show the World Bank estimates that environmental costs in China directly affect the economy to the tune of around 5-8% of GDP. These “costs” represent both human death and sickness and ecosystem degradation. He pointed out that in the long term, problems of ecosystem damage are even more serious than environmental pollution because they are much more difficult to reverse.
There is a strong debate in China over how the trade-off between the environment and economic development should be decided. Prof. Zheng observed that, in general, the power of local government and business will prevail over the local people and the quality of the environment. However, the State Environmental Protection Administration of China (SEPA) has begun implementation of green accounting methods that have now been accepted by almost all provinces. At present, 30 huge development projects are on hold because they cannot satisfy Environmental Impact Assessment (EIA) legal requirements.
Prof. Zheng used the hydro-development projects on the Nujiang (river) in Yuenan province as an example to show the inadequacy of present decision making systems and policy to protect the environment. He sadly noted that those who know the real environmental costs have little or no power to exert in development decisions. He could not bring himself to agree with the current paradigm in China that “development problems must be solved by more development” and instead quoted Einstein who said “a problem cannot be solved using the system that caused the problem”. Prof. Zheng called for new methods of assessment that take the environment into account before it is too late.
Questions from the Audience:
Several issues were raised by the audience including limitations of oil and gas reserves and coal liquefaction technology, competition and possible conflict for energy resources especially between China and the USA, and China’s role in the international carbon management debate.
A Japanese scholar wanted to know how much alternative/renewable energy sources were used in China. Prof. McElroy said “Nuclear is a minor player now in China since it is too expensive.” Prof. Zheng revealed that there will be five more dams built on the same scale as the Three Gorges project, representing a huge renewable energy source. Hydro-electricity accounts for 20 percent of China’s energy production. Prof. Upmanu Lall argued that a large amount of CO 2 is produced due to the construction of dams, but China will benefit from them for up to a century.
The audience was also curious about the technology that we can expect to see in China in the coming years. Prof. Lackner’s response was that it depends on not just present technology, but also the technology transfer and availability in China. He continued to say that one needs to keep in mind that the many technologies such as carbon sequestration are “not quite there yet” and require foresight and significant research investment before we really know what the possibilities will be.
Full audio recordings of this panel including questions are available online at:
http://www.columbia.edu/cu/weai/china-symposium-2005-agenda.html
Summary of Panel Four – Legal Institutions and Economic Growth in China
The China and Law session was a panel discussion, divided along several thematic subjects with questions posed by the chair. It was then opened for questions by members of the audience.
Panel Discussion
How has law’s role in Chinese society changed recently?
Professor Liebman argued that law concerns itself with a wider range of issues – land and labor disputes are important arenas to which law is now applied. David Weller noted that complex legal instruments have been developed to help China implement its commitments under the WTO, with intellectual property rights as a primary example. Jamie Horsley agreed, noting that WTO implementation helps reformers advance their agendas – it is a tool to restrain abuses of power. Owen Nee added that although law is regulating the market economy, it has not moved into regulating the Communist Party, and that law will not further develop until it does so. Professor Zelin followed up that in most circumstances, much of the legal framework does not yet apply to small business.
Does law have its own force, or do existing power structures still control decision-making?
Professor Zelin noted that China has a deep tradition of laissez-faire attitudes, allowing the market to function on its own, and that the aversion to heavy regulation is manifesting again. Jamie Horsley followed up that the “Administration in Accordance with the Law” program for regulation represents an acceleration of demands for more scientific, democratic, and open decision-making, and that people increasingly feel they have a right to participate. Since the SARS crisis, Professor Liebman warned that ministries have now instituted public spokesperson systems that have choked off the flow of information from within government. But while the press was losing access to some information, he felt that lawyers in the courts were making more demands for openness.
What constituency most strongly supports the rule of law?
David Weller suggested that the WTO creates tendencies toward “rent seeking” by private actors in China, who want international trade laws enforced when it suits their business interests. Jamie Horsley felt that with the maturing of the legal system, every actor in society was aware of law’s development and that everyone is a constituent for legal reform. Owen Nee added humorously that the Chinese have become very litigious, and that lawyers are a major constituency for reform. Professor Zelin confirmed this idea with a historical perspective that litigation was heavily used in earlier eras, challenging the notion that “internal mediation” was the tendency in Chinese society for dispute resolution. The growing comfort level with litigation results from diminished fears for survival, allowing the emergence of more complicated political structures.
What is the role of foreign law in China’s transformation?
David Weller argued that China is searching the world for the best law it can find, and that it most favors laws consistent with its international trade commitments. Professor Liebman confirmed that beyond the US and the EU, China looks to Japan and Taiwan for models.
Selected Questions and Answers
Is there growing confidence in the independence of the legal system, or is the party’s power still unquestionable?
Jamie Horsley believed that the party is in the process of reinvention. Professor Liebman felt that some in the party want to transplant Singapore’s model to China, and that some are even interested in how the LDP in China or the KMT in Taiwan managed to hold on to power for so long. It is understood that legitimacy requires reforms, but the risks it creates for those in power are strongly perceived.
What is the status of property rights in rural areas?
Professor Liebman argued that enforcement issues exist with regard to property rights, even if the problem is acknowledged. Professor Zelin worried about a “bifurcation of citizenship” because of urban registration and the prevention of rural Chinese from moving freely about the country.
Does the internet allow unrestrained criticism of the government? Does it disempower the rural power who cannot access it?
Owen Nee explained that all internet traffic is monitored via its limited points of entry into China. Although things get missed, more control exists than might be expected, and the government has been fighting a fairly even contest to track usage and block dissent. Professor Liebman explained that there is heavy filtering and censorship of blogs. Real names now must be used to register on the internet, and profit-making websites self-censor heavily due to their fears of economic repercussions. He noted that even university websites have been shut down in some circumstances. In reference to the rural poor, he added that although the internet does not reach the countryside, it has made some rural grievances circulate farther than might otherwise be the case.
Will the government really restrain itself with law?
Owen Nee argued that the party has done an excellent job of planning China’s economic transformation. It understands that the Chinese people are the true cause of success, but it was unclear if they would take political steps to allow that success to continue. Jamie Horsley followed up that the government is willing to restrain itself because of its desire to allow the economy to function so as to advance development. She was optimistic that it had a strong interest in being smaller, more efficient, and less corrupt.
Panel 5 Summary: Capital Markets: China’s Achilles Heel?
This panel discussed whether China’s capital markets provide efficient capital for industrial production or serve as a source of weakness for China’s economic development.
According to Columbia University Graduate School of Business Professor Lee Branstetter, the price indexes at the stock markets in Shanghai and Shenzhen have actually fallen over time. This is abnormal given how unusually high China’s GDP growth has been over the past decade. Branstetter blamed the poor performance of China’s stock markets on regulations restricting listed enterprises to under-performing state-owned enterprises (SOEs). Further, only a minority of SOE shares are sold, a condition that further limits the influence of investors, as the government retains majority ownership and control over senior executive appointments In the absence of true privatization of stock-listed companies, dynamic private enterprises have tremendous difficulty securing development capital and have turned to informal capital markets, which operate on the edge of legality.
Mary Darby, Research Fellow at Columbia University’s Chazen Institute of International Business, agreed that China’s financial markets have performed poorly in the past. However, she argued that over the last five years, the Chinese government has enacted reforms to improve the climate for institutional investors, a development likely to improve pricing for securities and reduce stock volatility. Significant changes include the introduction of institutional partnerships with foreign firms, and greater room for investments by Chinese insurance companies and banks. Since 2002, China has allowed approximately 25 foreign institutional investors to invest directly into the A-share market, although a “lock-in” period prevents profits from being moved out of China.
Michael Destefano, Managing Director of Financial Institutions for Standard and Poor’s Rating Group, argued China’s greatest financial weakness lies in the banking sector. While China’s economy has grown at a rate of roughly 10 percent for nearly 25 years, the annual loan growth is 20 percent per year, resulting in a very high ratio of debt to gross domestic product. Due to “social and policy” lending to inefficient SOEs, many loans have gone bad. A full clean up and recapitalization of the financial system would require $600 billion. Even if the system is recapitalized at great expense to the government, the banking system is unlikely to recover, because interest rates are determined by the state and remain very low. China’s strategy of injecting foreign investment may not be successful since it is still difficult to generate returns in the sector.
Professor of International Management at the Massachussetts Institute of Technology, Yasheng Huang, echoed Destafano’s concerns about the state of the banking industry. Huang argued that China’s poor banking system contributes to social instability by squandering the funds of depositors on wasteful projects, while starving the dynamic private sector of credit. In the 1990s, lending policies biased urban areas at the expense of enterprises based in rural areas, forcing these rural private firms to go to loan sharks and form alliances, when possible, with foreign firms to obtain venture capital.
Shang-jin Wei, Advisor and head of the Trade Unit at the Research Department of the International Monetary Fund, presented evidence that China’s high rates of economic growth have occurred, in spite of, and not because of the financial system. Wei stated that China’s capital market is still highly fragmented. His research indicates that capital does not flow to China’s most economically productive regions, but rather to less productive regions with high numbers of SOEs. Wei argued that a reduction of the state’s role in determining capital flows would increase efficiency and potentially raise China’s economic growth rate.
Bernd Schmitt, professor at Columbia University’s Graduate School of Business, discussed what he termed the “consumer revolution” in China. In the 1990s, many consumers were unaware of major global brands. At present, consumers in major cities demonstrate considerable savvy when purchasing a growing quantity of luxury goods. Foreign firms have successfully branded a number of high-end products, while Chinese branding efforts lag behind due to a lack of major capital to invest in marketing. Outside major urban centers, however, products produced by domestic firms dominate the mass market for consumer goods.
