My remarks on the conference "In Quest Of A Better Word: Economics And Politics"

Last Monday at Kozminski University in Warsaw I attended scientific conference: "In Quest Of A Better Word: Economics And Politics". Among many good lectures my attention has been brought particularly by three of them.

First, a lecture of Professor Justin Yifu Lin (Peking University) about necessity of an active role of government that should play in facilitating structural changes, in addition to an effective market mechanism. Prof. Lin justifies his thesis by perceiving market as a basic mechanism for effective resource allocation (neoclassical approach of invisible hand of the market) while economic development process. That process of continuous technological innovation and structural transition entails structural changes, among which the most important are: industry diversification and upgrade of the most prospective economy branches, and finally harmonization of hard and soft infrastructure (maintenance of economic, health and social, and cultural standards of population). Upgrading requires coordination and proactive prevention of large externalities to firm’s transaction costs and returns to capital investment affected by them. The principles of the theory have been utilized by China over last four decades of transformation process enabling succeed not only in struggle against poverty, but significantly upgrading average standard of living of the entire nation.

Second lecture that brought my attention was given by Prof. Gang Fan (Peking University) about the Chinese pragmatic approach to institutional changes and an attempt to anticipate what will be in next 25 years, especially regarding democratization of the China’s political system.

With reference to institutionalism, according to Prof. Fan, over last 20 years total-factor productivity (TFP) contributed approximately at 40% in China’s GDP and 20%-25% of said TFP has been a results of institutional changes, such as: legal environment adjustment, business environment facilitation through institutional reforms, proactive government factors. Prof. Fan’s thesis that ‘institution matters’ has been supported by scientific research evidence collected during last 20 years in 30 provinces, measuring relative progress toward market economy and its institutionalization.

Prof. Fan confirmed there is a need for further economic reforms within next 25 years, especially in such areas like: state-owned enterprises, private enterprises environment, reinforcement of the “rule of law”, further institutionalization of market institutions.

In regard to political prediction of Prof. Fan, one could summarize it as “everything is possible in relatively enough long term”. Putting a question on eventual changes in political system of China must be well thought-through, especially considering redirection towards democracy.

The culture of China dramatically differs from Western civilization, not only defined by MBA definitions of low- and high-context, but mainly in terms of election, perception of senate (5000 history before Republic, China had never had official election) or religion. The foundation of Chinese culture is pragmatism defined as a search for the best solution for the country political order to the contemporary World challenges in order to achieve stability and sustainability in economic growth of the country.

This approach requires stability in terms of political situation. Recent years of observation of the World events: revolutions, civil wars, the Arab Spring demonstrate relation between lack of political stability and poor economic development. Furthermore, Prof. Fan added that from Chinese perspective, the democracy system also is not performing very well in recent years.

Prof. Fan depicted process of his critical thinking about the learned lesson from the above mentioned observations, leading to the following conclusions:

1.      Key issue of the democracy is a majority rule.

2.      Majority interests may have "myopia" position on the policy issues. That could be perceived as populism.

3.      Minorities interests sometimes might not be represented by majority.

4.      "Louder" minority can hijack policy-making.

Prof. Fan put a question: “How to pursue long-term interests of majority without abandoning interests of minority, meanwhile protecting it against hijacking by louder minorities?

Prof. Fan answer is Meritocracy (authoritarian regime), since in such circumstances China rather will refrain from redirecting its political system towards democracy. Instead of that, China will adjust its leaders to the upcoming changes.

This statement explicitly declares China has chosen its own way in political system selection, which according to their perception of the World and upcoming challenges is the most accurate system for effective country governance. That is extremely important to understand, while crafting any long-term strategy, either for private entity or for country’s policy makers. 

Third lecture that brought my attention was given by Prof. Poznanski (University of Washington). He familiarized audience with Confucianism philosophy and its impact on life of average Chinese family. Confucianism underlines the importance of the family and social harmony, which guarantees stability of economy.

As a sum up, I need to refer to this in terms of the Third Pillar Pension System in China. The Confucianism approach of Chinese might not seem important only for narrow-minded observers. The social harmony based on family relations is from the economic point of view also a kind of substitute of China Pension System (CPS). However, the China Pension system (CPS) is emerging and has been transforming and upgrading from an enterprise- and state-administered pension system, to a multi-tier one. In 2014 FIRST pillar of the CPS covered 842 million urban employees and residents in both urban and rural areas, whose pension spending was CNY 3.56 trillion of accumulated surplus. The SECOND pillar of the CPS contains 23 million participants with more than CNY 880 billion assets. The THIRD one accumulated CNY 1 trillion. 

Summarizing the conference, it was worth to participate it and familiarize with various perceptions depicted on background of China's economy.