The Fifth Annual Conference of Government and Economics Successfully Held at Tsinghua University
Originally published April 27, 2023, in Chinese on the ACCEPT website. Translated by ACCEPT.
The Fifth Annual Conference of Government and Economics
On April 27, 2023, the Fifth Annual Conference of Government and Economics, co-hosted by the Society for the Analysis of Government and Economics (SAGE) along with Tsinghua University’s School of Social Sciences and the Academic Center for Chinese Economic Thought and Practice (ACCEPT), was broadcasted online. The Vice President of Tsinghua University, Yang Bin, and the Chairman of the School Council for Tsinghua University’s School of Social Sciences, Ouyang Qin, both delivered opening remarks. In their speeches, they fully reaffirmed the contributions made by SAGE since its establishment five years ago, including its progress in combining real-world practice with innovations in theory. They pointed out that the Society has provided the discipline of government and economics with a new platform for high-level academic exchanges in this emerging field, which has furthermore advanced the development of related disciplines as well as promoting the coordinated development of basic theoretical research in economics and the social sciences. As one of the events celebrating the 112th anniversary of Tsinghua University, this international conference is also an important part of the university's steadfast research efforts aimed at responding to the major issues facing the global economy and its development, and serves to accelerate the forging of a "Tsinghua School" in the social sciences under the backdrop of a new era of globalization.
Other guest speakers included David Daokui Li, Co-President of SAGE and Director of ACCEPT; Eric S. Maskin, 2007 Nobel Laureate in Economic Sciences, Adams Chair Professor at Harvard University, and Co-President of SAGE; Gao Peiyong, Vice President of the Chinese Academy of Social Sciences; Edmund Phelps, 2006 Nobel Laureate in Economic Sciences and McVickar Professor of Political Economy at Columbia University; Rohini Somanathan, Professor of Economics at the Delhi School of Economics; George Lihui Tian, Vice President of Guangxi University and Dean of Nankai University’s Institute of Finance and Development; Zhang Zhongxiang, Founding Dean and Distinguished University Professor at Tianjin University’s Ma Yinchu School of Economics and Director of the China Academy of Energy, Environmental and Industrial Economics; Chen Binkai, Assistant President of the Central University of Finance and Economics and Dean of its School of Economics. Li Ke’aobo, the Executive Deputy Director of ACCEPT, presided over the proceedings of the conference.
In his keynote address, David Daokui Li first delivered a progress report on the development of SAGE over the past five years since its founding, emphasizing that the sole task for the Society is to promote research in the field of government and economics, while adhering to the values of openness and academic independence. He explained that the Chinese government has played a crucial role in China’s economic development over the course of the past four decades, with Chinese economic thought and practice having provided a direct impetus for the formation of a new academic discipline—namely, the field of government and economics. He expressed his hope that the research efforts undertaken in government and economics will provide a means to systematically summarize the experiences and lessons of the government in its pursuit of economic development in China, which can furthermore be disseminated and promoted worldwide.
Next, Director Li introduced the criterion for guiding research in the academic discipline of government and economics, which includes the “seven tenets” as follows: 1) the government is a direct participant in the modern market economy; 2) the behavior of the government is critical to the performance of a modern market economy; 3) the behavior of the government is an outcome of relevant institutions, and is neither coincidental nor random; 4) the tax system has a direct effect on government incentives; 5) the selection and promotion of officials has an important impact on government behavior; 6) the autonomy of the government affects its behavior; and 7) the field of government and economics is to adopt a research methodology based on “cases, theory and statistics” (CTS). The CTS methodology attaches importance to first acquiring a perceptual understanding from real-world cases, and then moving from this perceptual understanding to one based on empirical rationality by applying modeling approaches and statistical methods. He also expressed that advancing government and economics as an academic discipline cannot simply be a task left to Tsinghua University alone, but instead will require the joint efforts of universities across the country and even the wider global academic community.
Eric S. Maskin commented that the recent bank failures in the United States and Europe have brought back memories of the 2008 financial crisis. In the face of these latest bank failures, governments have moved quickly to calm bank depositors. While it may be too early to conclude that a crisis has been completely averted, one cannot deny the government’s role in supporting the functioning of credit and financial markets, which has been of the utmost importance for maintaining credit stability. Moreover, he noted that the credit market is the lifeblood of all other sectors in the economy and, in a sense, represents the most important market. Unlike the regular market, the impact of a crisis in the credit market will not only often be magnified, but also lacks the means for self-correction: in the process of issuing leveraged loans and high-risk loans, a bank will not consider that its own behavior might affect other banks, which then often leads to the overamplification of impacts from such behaviors on the broader market. In this way, small problems can quickly develop into big problems, and the failure of a handful of banks can precipitate large-scale bank failures.
Maskin proposed that negative externalities in the credit market need to be corrected through ex ante and ex post interventions: after one or more banks become distressed, the government can provide emergency relief to these banks by providing them with enough capital to continue operating and lending. However, such ex post bailout policies could actually encourage banks to take on more risk and make riskier loans, which in turn could fuel a potential financial crisis in the future, creating what is otherwise known as a “moral hazard” problem. Therefore, government measures that support ex ante intervention, and greater market supervision by extension, are vitally important. The most significant form of regulation involves placing constraints on bank leverage and imposing capital requirements. Given the volume of loans granted by any given bank, the government should require that such banks maintain a minimum amount of capital reserves to support these loans, while limiting the amount of loans the bank can borrow from other banks. Thus, by imposing capital requirements and restrictions on leveraged loans, governments will be tackling the problem at its source, thereby preventing banks from getting into trouble in the first place.
Over the past five years, China’s overall fiscal deficit ratio has not exceeded 3%. Gao Peiyong mentioned that this mainly reflects two considerations, and with both being in line with the basic principles that define the subject of government and economics. First, the configuration of macroeconomic policies necessitates performing a cost-benefit analysis: What should the GDP growth target be? How much expansion will it take to achieve this target? What is the appropriate role for fiscal policy? And what is the appropriate role for monetary policy? Undertaking research and analysis into costs represents one of the fundamental questions for the field of government and economics. When making a case for the direction of macroeconomic policy, the proposed stance may lack the necessary restraint if it ignores the possible costs associated with such a policy. Gao asserted that there is a basic principle in government and economics that cannot be overlooked—namely, the Pareto principle. That is, the gains from any macroeconomic approach must be greater than the losses, since an expansionary policy always involves paying a corresponding price to achieve stated goals, which therefore means insisting that the benefits of any policy course remain greater than its costs.
Furthermore, although macroeconomic policies can solve short-term contradictions and problems, they are not omnipotent, since not all cyclical, structural and systemic contradictions impacting the functioning of an economy are of a short-term nature. If we do not fully consider the overall situation, and simply use macroeconomic tools to deal with all of our contradictions and problems, the result would inevitably lead to a deluge of stimulus measures with economy-wide ramifications. Gao stressed that in the face of the threefold pressures of shrinking demand, disrupted supply and especially the strain from weakening expectations, even relatively more robust macroeconomic policies are sometimes unable to have the desired effect, with a large number of problems instead needing to be resolved through reforms. He observed that the rest of the world often regarded China's economy as having a high degree of resilience, a great growth potential and boundless vitality, and yet if the intention is to turn this into a reality, the country must ultimately depend on carrying out the necessary reforms. We must not use macroeconomic policies as the remedy for all problems and we must adhere to a proper view regarding the role for policy versus reform, suiting the medicine to the illness and implementing targeted measures accordingly.
Edmund Phelps contended that innovation often does not in fact come from inventions or discoveries made by scientists. In his book Mass Flourishing, he pointed out that a large number of new products and methods that emerged in the 1880s primarily relied on the wisdom of a multitude of ordinary people. Innovation occurs within the business sector of the economy itself, from the new ways of thinking spontaneously conceived by workers, managers, or ordinary employees to new ideas for producing better products or new ideas for establishing better methods. The dynamism of a given country, and especially in those cases where the level of economic dynamism is comparatively high, can generate a unique set of economic activities, driving the expansion of associated financing, development and marketing sectors and the cultivation of a cadre of managers, which in turn can propel rapid productivity growth, higher wages, and increased levels of employee engagement and satisfaction.
He suggested that whether a country has the dynamism for “indigenous innovation” does not depend on whether it maintains a “free market,” but rather on whether its people have the desire to innovate. Innovators tend to stand apart from mainstream beliefs, have accumulated ample insight, and are capable of thinking “outside the box.” They share the values of initiative, competition and a desire to achieve, all of which have a positive and powerful impact on economic performance. Of course, this dynamism also requires a social and political climate that supports innovation. For China, there are certain difficulties, such as a difficulty in obtaining financing from the banking system, the tendency for companies to be too hierarchical, uncertainty about the prospects for undertaking research and development, and concerns about whether the government would support exploration into uncharted territory. Even so, Phelps remains upbeat that China has the underlying capacity needed to propel this kind of innovation and looks forward to seeing how well the country progresses in this direction over time.
Rohini Somanathan shared some of India's experiences dealing with issues related to identity and public policy, discussing how India might better achieve the dual goals of economic expansion and social justice in the context of a globalized world. For historical reasons, as she pointed out, there still exists large inequalities between different groups of people living in India. During the period of British colonial rule from 1901 to 1931, Brahmins were the highest caste, having at that time achieved a literacy rate of 50%. The groups at the bottom of society, such as the Chamars, Santals and Gonds, meanwhile all had literacy rates closer to zero. After independence, India put in place laws to promote social equality, with the constitution mandating that political representation in the legislature should be commensurate with the proportion of the population shares for each respective minority group, in addition to mandating similar quotas for both federal employment and higher education. Starting in the 1970s, the Indian government implemented a minimum needs program that established certain criteria for the population, stipulating that there must be primary schools within one mile of each village and high schools within three kilometers. But in the decades that followed, and despite access to education having increased dramatically, significant inequalities persisted between different castes and groups—though with the southwestern state of Kerala having been the one exception. In spite of the fact that Kerala also had many disparities, the most important feature of the state is that its population was much more concentrated, which hence made the provision of public goods more practicable, and as a result it enjoyed higher levels of education and greater social mobility.
Somanathan argued that in order to make societies more equal, governments need to throw their weight behind a significant expansion in the supply of public goods. This can help to promote equitable economic development while eliminating the ongoing tension between equity and growth. The provision of public goods not only increases the mobility of disadvantaged groups, but also creates more educational opportunities. In an era of economic globalization, this will likewise have the added advantage of generating higher returns.
After the opening remarks and keynote speeches, Director Li joined a panel of distinguished guests for a roundtable discussion:
George Lihui Tian outlined three major concerns he has about the future of the economy. First, he referred to the potential for market excesses. In an era of rapid advances in science and technology such as our own, there is often a small number of companies whose businesses first take off with the support of debt financing, and permitting they are left to their own devices to continue developing at breakneck speed, capital will continue to flow in as the company uses more and more leverage to expand its scale and anticipated profits, which eventually ends up in its failure and bankruptcy. Thus, if one is to bring an end to this phenomenon, one needs to consult the insights laid out in the discipline of government and economics. The second concern is with government overreach. Governments are indispensable and natural participants in the market economy—playing the roles of both a player and the referee. While the market economy and the planned economy stand in opposition to one another, the government itself need not be incompatible with the former. However, if the government attempts to undertake and get involved in anything and everything, this will simply be a return to the planned economy that characterized economic models of the past. The third concern is with youth disengagement. In our era of revolutionary advances in science and technology, young people should continue striving to make advances in knowledge, promote the development of China, and contribute to changing the world for the better. In the face of the impacts from ongoing transformations, we must counteract the inclination towards “neijuan” (involution) and “neihao” (internal friction), remain confident, modest and calm in the face of challenges, while putting in the necessary effort and having the courage to innovate and blaze new trails.
In returning to the question of the relationship between the government and the market, Tian suggested that the fundamental problem is to give due regard to the study of mechanisms. For instance: 1) What is the role of the government in the real and virtual economies? 2) How can we prevent and punish violations of laws, regulations and rules by market entities? 3) How can we encourage a greater focus on the economics of education, incorporating into all levels of schooling the best practices from the highest caliber education models around the world and mobilizing the initiative of the government to this end? And finally: 4) How should we go about designing other mechanisms such as incentives and supervisory systems? Consequently, he is of the firm belief that researchers should position themselves at the leading edge and contribute new ways of thinking to solve current problems.
In respect to theory and conducting research, Zhang Zhongxiang remarked that we must not merely focus our attention on explaining the particularity of China’s own path to economic development, but instead should comprehensively explore the theory and logic underpinning China’s experience that has universal applicability. By discovering areas of commonality, we can then seek out greater consensus with and amplify our voice in the international community. The discourse power currently enjoyed by India in the international community and its ability to guide the main issues under consideration lies in the fact that Indian researchers are very good at linking up theory with the various phenomena that describe India’s own experience. As for China, based on the realities of the country’s economic development, making new contributions to general theory and summarizing lessons from China’s own experience are equally important, though many Chinese researchers still tend to focus most of their attention on summarizing lessons learned only within the domestic context. Therefore, we must not lose sight of the need to pursue further advances in our theoretical research.
At the same time, when it comes to providing support for basic areas of research, Zhang insisted that we should refrain from only actively championing key projects, but instead give preferential treatment to making smaller advances. For example, youth programs and general projects can bolster the freedom to explore innovative topics in areas of fundamental research—since many major breakthroughs in fact often occur because of seemingly small advances. The market has a powerful ability to identify the potential value generated by new technologies, which means that those innovations with practical value will necessarily reap the rewards of market forces. Thus, long-term support mechanisms established organically between the government and the market will be of critical importance for spurring on innovation.
Chen Binkai suggested that future progress for overall research and learning in the field of contemporary Chinese economics, including the process for furthering its localization in China, may require adopting a greater appreciation for internationalization and standardization: that is to say, relying on international perspectives and standardized approaches to delve deeper into research on topics of interest to China. For that reason, the discipline of government and economics can provide a very promising platform. On the one hand, it establishes an international frame of reference and provides a viable platform for Chinese scholars to conduct research; while on the other hand, it contributes a branch of learning to the international conversation aligned with Chinese practice and with its own systematic discourse.
Regarding the relationship between the government and the market, the question as to how government behavior affects the development of the market and the internal logic behind this behavior represent the main issues currently under discussion in academic circles. Chen regards information efficiency and organizational efficiency to be two of the core concepts that define the interconnected relationship between the government and the market: with the market having a high level of information efficiency and the government having a high level of organizational efficiency. Hence, uncovering the synergies between these two phenomena is a topic of immediate concern for researchers seeking ways to advance related policies.
After the main proceedings of the conference, scholars from Peking University, Fudan University, University of International Business and Economics, Central University of Finance and Economics, Xi'an Jiaotong University and other well-known universities participated in thematic parallel session where they had the opportunity to present and discuss their research projects on topics in the field of government and economics. They shared research that covered the themes of “Government and Economic Development,” “Fiscal Policy,” “Government and Openness,” “Digital Economy and Policy,” and “Land and Local Government.”