Grey Income and the Unbalanced Economic Structure Xiaolu WANG
Author： Source： Date：2017-08-30
Xiaolu Wang, researcher at the National Economy Research Institute, China Reform Foundation, joined the Public Lecture Series hosted by SZIDI, and delivered a speech on Grey Economy and the Unbalanced Economic Structure.
Wang believes that China’s recent economic slowdown is due to a series of unbalanced structural phenomenon. Ever since the mid-90s, the proportions of investment and the rate of currency supply in China’s economic structure have outpaced GDP growth. Besides, the country’s economic structure has been captured by the phenomenon of “overcapacity”, with continuous decline in capital productivity.
With China’s accession to the WTO, an export-oriented economic growth model has alleviated its syndrome of overcapacity. However, as the global economic system struggled to rebalance in the aftermath of the 2008 global financial crisis, China’s export dropped from 20% to a negative growth rate and overcapacity in its economy aggravated.
Wang holds that as one of the largest economies in the world, China’s economy cannot rely on external demand to drive growth. Rather, domestic demand should be the core engine to sustain growth. Nevertheless, in the past two decades of rapid economic growth, the proportion of domestic consumption in GDP dropped from 63.3% in 1990 to 49% in 2010, failing to promoted long-term economic growth.
Wang points out that institutional and structural factors including government actions and policies play an important role in exacerbating the situation of unbalanced structure. The crucial reason behind such a situation is the imbalance in the distribution of income, in particular, grey income.
What’s behind the grey income? There is a variety of grey income and you just can’t track its source or prove their legitimacy. Wang goes on and claims that in fact grey income consists in substantial amounts of illegal income. The most outstanding reason to the existence and overspread of grey income rests in corruption. In the context of excessive power concentration and discretionary power, corruption and money trading become epidemic. Moreover, defective legal system and institutions, the lack of surveillance on the government, and monopoly in the market and of resources are all among the primary reasons causing tremendous amount of grey income.
Wang shows less optimism towards China’s economy in the upcoming two or three years. He argues that the recovery of economic growth cannot be achieved by stimulating policies. Stimulating policies from the government can only have short-term effects but generate long-term harms. It is essential to restructure and reform in order to revitalize the economy. The key is to adjust savings rate, investment rate and consumption rate. According to Wang, the old growth model that relies on government stimulus policy will generate high financial stakes, and what’s worse, lead the country in the Middle Income Trap. Nevertheless, if China can indeed implement structural reform, the country is likely to sustain a high growth rate for ten to fifteen more years. The GDP per capita would go beyond 20,000 USD and China would join the club of high-income countries.
Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
Wang believes that China’s recent economic slowdown is due to a series of unbalanced structural phenomenon. Ever since the mid-90s, the proportions of investment and the rate of currency supply in China’s economic structure have outpaced GDP growth. Besides, the country’s economic structure has been captured by the phenomenon of “overcapacity”, with continuous decline in capital productivity.
With China’s accession to the WTO, an export-oriented economic growth model has alleviated its syndrome of overcapacity. However, as the global economic system struggled to rebalance in the aftermath of the 2008 global financial crisis, China’s export dropped from 20% to a negative growth rate and overcapacity in its economy aggravated.
Wang holds that as one of the largest economies in the world, China’s economy cannot rely on external demand to drive growth. Rather, domestic demand should be the core engine to sustain growth. Nevertheless, in the past two decades of rapid economic growth, the proportion of domestic consumption in GDP dropped from 63.3% in 1990 to 49% in 2010, failing to promoted long-term economic growth.
Wang points out that institutional and structural factors including government actions and policies play an important role in exacerbating the situation of unbalanced structure. The crucial reason behind such a situation is the imbalance in the distribution of income, in particular, grey income.
What’s behind the grey income? There is a variety of grey income and you just can’t track its source or prove their legitimacy. Wang goes on and claims that in fact grey income consists in substantial amounts of illegal income. The most outstanding reason to the existence and overspread of grey income rests in corruption. In the context of excessive power concentration and discretionary power, corruption and money trading become epidemic. Moreover, defective legal system and institutions, the lack of surveillance on the government, and monopoly in the market and of resources are all among the primary reasons causing tremendous amount of grey income.
Wang shows less optimism towards China’s economy in the upcoming two or three years. He argues that the recovery of economic growth cannot be achieved by stimulating policies. Stimulating policies from the government can only have short-term effects but generate long-term harms. It is essential to restructure and reform in order to revitalize the economy. The key is to adjust savings rate, investment rate and consumption rate. According to Wang, the old growth model that relies on government stimulus policy will generate high financial stakes, and what’s worse, lead the country in the Middle Income Trap. Nevertheless, if China can indeed implement structural reform, the country is likely to sustain a high growth rate for ten to fifteen more years. The GDP per capita would go beyond 20,000 USD and China would join the club of high-income countries.
Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
