As Plenum Starts, an Economist Sees Crisis Ahead; Wu Jinglian argues that predatory officials and rent-seeking bureaucracies will suffocate essential innovation and productivity improvements

NOVEMBER 8, 2013, 12:54 AM

As Plenum Starts, an Economist Sees Crisis Ahead

By CHRIS BUCKLEY

The Chinese state news media has hailed a Communist Party conference on reinvigorating the economy as a triumph even before it opens Saturday. But beforehand, one of the country’s most prominent economists has delivered a warning: China faces a crisis unless big economic changes are accompanied by a political overhaul. Wu Jinglian is one of China’s best-known liberal economists and at 83 has the demeanor of a wizened professor. Yet he is also a policy insider whose books and speeches are widely read in China.He is a senior researcher at central government think tanks, including the State Council Development Research Center, and has trained and advised some top economic officials. His warnings show that, even in China’s policy establishment, there is debate and disquiet about how and whether the government can achieve the changes needed to maintain healthy, lasting economic growth.

“Transformation of the model of economic growth can be achieved only if further marketization of the economy comes with faster democratization and building of rule of law,” Mr. Wu said in a speech that has been widely reported this week by Chinese newspapers and websites.

“If we depart from this cardinal principle, national economic development will return to its old ways, continuing to use massive investment to spur economic growth, reeling between blind expansion and abrupt readjustments, and culminating in a systemic crisis.”

Mr. Wu argues that predatory officials and rent-seeking bureaucracies will suffocate essential innovation and productivity improvements, unless the government adds political and legal changes to its list of liberalizing measures. Total factor productivity, a measure of economic innovation, has fallen in China since 2008, when the government opened up a 4 trillion renminbi, or $660 billion, stimulus package to counter damage from the worldwide financial meltdown.

Mr. Wu believes the previous national leadership of President Hu Jintao and Prime Minister Wen Jiabao shrank from the changes needed to secure China’s economic well-being by reining in state-driven industrial expansion fed by easy credit from state-run banks. He wants their successors, President Xi Jinping and Prime Minister Li Keqiang, to move much faster and also to take on contentious political problems.

“Since 2004, important sectoral reforms have virtually all ground to a standstill,” said Mr. Wu, citing the power sector as one example of promised changes that petered out in the face of bureaucratic self-interest and inertia.

“There was no pressure from a sense of urgency, and so the impetus for reform weakened,” Mr. Wu said. “As well, the obstacles to reform have strengthened, because reform has entered into deeper waters and come up against a range of entrenched interests.”

The perils to China from this crude, ill-regulated industrial expansion go well beyond the economy, he said. “The most palpable is that the three essential conditions for human survival have been destroyed, and our water, air and soil all have problems.”

Some of Mr. Wu’s proposed remedies could be difficult for cautious party leaders to swallow. He wants a much stronger, independent legal system capable of holding party power in check. He wants wide-ranging financial liberalization that he says will end distortions. And he wants a wholesale change of China’s rural land system, which gives officials great power to seize and develop farmers’ fields.

Not everyone who wants Mr. Xi to push economic transformation agrees with Mr. Wu’s case for far-reaching political shifts. Yuan Xucheng, a former official who is now deputy secretary general of the China Society of Economic Reform, maintains that an incremental approach, deferring major political change, remains the best recipe.

“You can’t expect that China’s reforms will be a sprint,” Mr. Yuan said in a telephone interview. “It can only be a fast walk in small strides. If you try to sprint, you run into trouble.”

But Mr. Wu and his camp argue that the problems are too numerous and pressing to allow for patience.

“In my view, China has reached a crucial point when there will be major economic and political problems if we fail to carry out comprehensive reforms,” Mr. Wu said in August.