Sina Golden Kirin Forum: David Daokui Li on how to unleash China's economic dynamism

The Sina Finance 2021 Annual Conference and 14th Golden Kirin Forum was held online on December 2. David Daokui Li, Mansfield Freeman Chair Professor at Tsinghua University’s School of Economics and Management and Director of the Tsinghua Academic Center for Chinese Economic Practice and Thinking (ACCEPT), attended and delivered a speech.

What can be done to unleash the vitality and growth potential of the Chinese economy? In his speech, Li said that the market should be allowed to play a decisive role in resource allocation, while the government should also play a more effective role. He suggested that we should “rework” government and economics.

What is government and economics? Professor Li explained that the goal of government and economics is to examine government behavior via economic analysis in order to better understand how the economy operates and improve economic policy development. "It is to position the government's behavior so that the government can function better and the market can function better,” he said.

Li pointed out that the rationale behind an effective government and market is that the government must have the correct incentives and behavior.

How can the government's incentives be adjusted to promote effective government behavior? Li explained that first, it is necessary to strengthen the incentives of governments at all levels, including political incentives as well as economic incentives. "Economic incentives do not just mean that individual government officials should be paid enough—it is not this simple. The government at all levels is itself a participant in economic activities, with very clear economic incentives,” he added. “When left with enough fiscal revenue, governments will have the incentive to seek development.”

Li said that over the past decade or so, local governments have been busy with one main economic issue in particular—engaging in infrastructure construction, with airports, high-speed railways, urban roads, and beautification projects in many places, which are very well built.

Professor Li believes that infrastructure should indeed be a step ahead. But current infrastructure has already reached a high level in most areas, with the exception of particularly remote prefecture-level cities. Most cities have new areas which are built very well, with wide roads and underground electricity networks to avoid power poles. These areas are well-developed, but have yet to attract more residents.  

Li pointed out that in the past, local governments spent a lot of energy on the construction of new areas, taking on heavy burdens and significant debt. Calculated as one, such invisible and visible debt accounts for more than 50% of GDP. As a result, many local governments at all levels are carrying heavy burdens and do not have the heart to attract new residents to build their population, as this requires more money.

"Right now, the incentives are incorrect. The current incentives are to pay off debt and engage in infrastructure construction, not to grow the population and conditionally attract people from outside areas,” he said.  

How can this problem be solved? Professor Li believes that the existing local debt must be transferred away, easing the burden of local governments. Furthermore, local governments should be given new goals to promote the attraction of residents from outside areas.

Second, the government should cultivate the carbon market. Low carbon is a national policy, and now there are two ideas. One idea is to learn from Europe and adopt a cap-and-trade system. The second idea is to implement a carbon tax so that enterprises will feel the price of their emissions. Of these two ideas, the second is far better than the first. By simply adding a carbon tax, the government can cultivate a large market for carbon reduction. If something goes wrong in the short term, the government can correct the market and make some adjustments, Li explained.