The Sixth Annual Conference of Government and Economics


Originally published April 29, 2024, in Chinese on the ACCEPT website. Translated by ACCEPT. 

Event Summary: The Sixth Annual Conference of Government and Economics

On April 27, 2024, the Sixth Annual Conference of Government and Economics, co-hosted by the Society for the Analysis of Government and Economics (SAGE), together with Tsinghua University’s School of Social Sciences and the Academic Center for Chinese Economic Practice and Thinking (ACCEPT), was successfully convened. The Vice President and Provost of Tsinghua University, Yang Bin, and Dean of the School of Social Sciences of Tsinghua University, Wang Tianfu, both delivered welcoming remarks. In their speeches, the university leaders attested wholeheartedly to the unremitting efforts made by ACCEPT and SAGE since their establishment in 2018, including serving as a platform for high-level academic exchanges of relevant theoretical research and practical knowledge, as well as underscoring their important role in promoting the advancement of government and economics as a field of study. They further expressed their hope that ACCEPT will continue contributing its key advantages in foundational research and coordinating the development of this academic discipline, which can impart to the international community a better appreciation and understanding of the significance of China's path towards economic development, in addition to lending the spirit and strengths of Tsinghua University and China to fostering the academic discipline of economics around the world.

Guest speakers participating in the conference included Eric S. Maskin, 2007 Nobel Laureate in Economic Sciences, Adams University Professor at Harvard Universityand Co-President of SAGE; David Daokui Li, Co-President of SAGE and Director of ACCEPT; Ma Haitao, President of the Central University of Finance and Economics and Secretary-General of the Applied Economics Discipline Evaluation Group under the Academic Degree Committee of the State Council; Dong Zhiyong, Member of the Standing Committee of the Party Committee and Vice President of Peking University, Professor and Dean of the School of Economics at Peking University and Editor-in-Chief of Economic ScienceHuang Xianhai, Vice President of Zhejiang University and Executive Director of the Research Center for Regional Coordinated Development at Zhejiang University; Zhou Li-an, Director of the Faculty of Economics and Management of Peking University and Professor of Applied Economics at the Guanghua School of Management of Peking University; Jane Kabubo-Mariara, Executive Director of the Partnership for Economic Policy (PEP) and Professor of Economics at the University of Nairobi; Liu Peilin, Research Fellow at ACCEPT and Chief Economist of the Center for Regional Coordinated Development at Zhejiang University; and Huang Zhangkai, Associate Professor at the School of Economics and Management of Tsinghua University and Managing Editor of the Journal of Government and EconomicsLi Ke’aobo, Executive Deputy Director of ACCEPT, presided over the proceedings of the conference.

Eric S. Maskin's speech focused on soft budgetary constraints and corporate financing. Soft budgetary constraints are one distinctive way in which financial constraints can fail, manifested when lending institutions encounter difficulties controlling the amount of loans issued to enterprises within a fixed budget, and with enterprises eventually receiving subsidies or loans exceeding expectations. He pointed out that in a centralized economy, funds are concentrated in one creditor, such as a bank or the government. Although some projects may not appear to be profitable from the outset, banks will still opt nonetheless to continue lending in order to obtain potentially high returns, which therefore leads to the problem of a soft budgetary constraint. In a decentralized economy, by contrast, banks and available funds become much more fragmented and dispersed, with individual banks unable to extend their lending and with no other banks willing to continue providing additional funds. This results in a situation where projects are unable to receive further rounds of funding, which therefore leads to a hard budgetary constraint. While soft budgetary constraints are a common feature of centralized economies, in decentralized economies such as today’s China it is unlikely that such a problem would emerge.

Ma Haitao considered how “a new round of reforms to the fiscal and tax system should be designed” as repeatedly put forward by the Central Economic Work Conference last year and the premier's Report on the Work of the Government during this year’s “Two Sessions,” which does not refer narrowly to the reform of any particular aspect, but instead calls for a systematic and comprehensive transformation. In 1983 and 1984, the tax relationship between the state and state-owned enterprises was reformed; and in 1994, the fiscal relationship between the central and local governments was reformed. As for the logical starting point in the latest round of reforms, which is likely to concentrate on the relationship between the government and the market, this must be further clarified. 

In his view, the "new" in this latest round of reforms first and foremost refers to high-quality economic development. In order to undertake deepened reforms, one core issue is to consider how to carry out a renewed round of reforms to the country’s fiscal system under the framework of the "new three and one high," i.e., a new development stage, new development philosophy, new development paradigm, and high-quality economic development. Moreover, these reforms should be based on the five key characteristics that now define Chinese-style modernization: the enormous size of China's population, its advanced stage of demographic aging, an increasingly complex international environment, a challenging fiscal situation, and the ongoing evolution of society’s main contradictions, all of which represent structural problems related to the fiscal and tax system. Thus, when it comes to orienting the next round of reforms, the first step is to become fully aware of the boundaries between the government and the market and the degree of adjustments needed, which means bringing fiscal and taxation policies into direct alignment without separating one from the other. Finally, the question of how to undertake unified planning for the sum total of fiscal resources should be taken into consideration, while the systematic introduction of new objectives, new requirements and associated reform measures moreover should be fully coordinated in every respect.

Dong Zhiyong’s entry point for discussing government and the market looked at progressive changes in their relations and game theory in reference to a local government-backed elevator installation program, having further shared his thoughts on the traditional relationship between the two. He observed that the government's actions can have a far-reaching impact on the functioning of the market in a given economy, with the major achievements made throughout the period of "reform and opening-up" being precisely a result of continuous readjustments to the relationship between government and the market. Therefore, it is essential to thoroughly contemplate and study the relationship between government and the market economy. From the perspective of the main actors, the interactions and mutual engagement between government, enterprises and individual residents are absolutely vital components for ensuring socioeconomic stability and development. Exploring the influence of government decision-making on market behavior, moreover, is very much a worthwhile endeavor, especially as concerns the domain of public goods theory.

Dong noted that China's period of "reform and opening-up" has actually been a process whereby the government gradually reverted to its original role as a referee, setting free the main actors in the market to exert their full vitality. Looking forward to the future, therefore, we should earnestly give full play to the decisive role of the market in the allocation of resources, while remaining resolute in our commitment to deleverage. At the same time, we should move in a timely manner to reduce the non-tax burden on enterprises and residents. Meanwhile, the level of tax cuts ought to be further expanded, including encouraging enterprises to invest in the high-end manufacturing and information services industries, as well as in the green economy, in this way providing a boost to residents' consumption capacity.

According to Jane Kabubo-Mariara, there are at least two rationales for governments to intervene in the market economy: one is to reduce market failures, such as countering monopolies and protecting resources; and the second is to deal with the issue of inequality, including addressing concerns regarding equity and the distribution of resources, responding to crises, and ensuring that the country can escape low-level equilibrium traps. However, there are also government failures to keep in mind as well, such as the negative incentives that governments generate vis-à-vis the market economy: with rent-seeking behavior being a primary example. Under such circumstances, government subsidies do not reach their intended targets, e.g., the poor and farmers, but instead become siphoned off as private gains for other actors. Clientelism is yet another example, including in the case of protectionism, wherein government decision-makers selectively intervene in favor of select individuals, groups or companies in exchange for their political support or economic benefits. A third example is state predation, which occurs when the awarding of career promotions and material benefits to the ruling elite within a given system of government becomes institutionalized.

Kabubo-Mariara also pointed out that government interventions based on misinformation can have a negative impact on the economy. For instance, subsidies for petroleum products in Nigeria have benefited high-income households relatively more than low-income households, which is contrary to the policy’s intended purpose. Favorable outcomes can only be produced through well-intentioned, well-informed and evidence-based government decisions. For example, legislation in Cameroon permitting women to independently use their own wealth or property as collateral to borrow money has boosted the country’s GDP growth, while shifting government investments from subsidizing fertilizers and tractors to the construction of priority roads in landlocked production areas led to increased agricultural production and higher incomes for rural populations.

Huang Xianhai expressed that the relationship between government and the market is not only a fundamental consideration for how to steer Chinese-style modernization, but is also a basic issue concerning how China is to go about handling its relations with the rest of the world. In short, the present question is how to maintain the characteristic features of the Chinese economy while remaining compatible with the world. What is known as “enabling government behavior” refers to the neutral and inclusive empowerment of market players and their dynamic competitiveness, government behavior that supports the creation of a market-friendly environment and the promotion of innovation. More specifically, when compared with the typical “regulatory government,” an “enabling government” not only will ensure that a general range of rules and regulations for a competitive market are put into place, but will also take actions that impact upon market players beyond the realm of  “regulatory” controls. Furthermore, when compared with the selective interventions of a traditional “developmental government,” the involvement of an “enabling government” revolves around providing neutral support for market players to benefit from opportunities, favorable conditions and platforms for development in emerging areas of economic activity. When undertaking interventions in a market economy, the actions and behavior of an “enabling government” comprises three distinctive features: one is avoid price distortions, the second is avoid biased selectivity, and the third is to avoid beggar-thy-neighbor or zero-sum games, the latter of which can also be colloquially called preserving friendly plurilateral and bilateral relations.

If a proactive fiscal policy and a prudent monetary policy can be described as China's first and second most important macroeconomic policies, then an “enabling” industrial policy can be categorized as its third most important macroeconomic policy. In terms of pathways for implementation and related measures, Huang suggested that there are at least four main aspects worth paying attention to. The first is the discovery of new future industries, which means intervening when most opportune in those fields that provide the chance for patents that secure intellectual property rights with both shorter and longer-term life cycles. The second involves making full and effective use of the government’s capacity to direct funding resources into those areas that promote industrial innovation. The third entails fostering new and emerging innovative organizations, especially those organizations that are able to combine industry value chain and platform-based innovations into one comprehensive institutional framework. The fourth focuses on encouraging the exploration of new models for the commercialization of innovations in the science and technology industry based on the three-pronged framework of “empower, commercialize and reap returns.” 

In his speech, David Daokui Li started off by first introducing three basic concepts that define government and economics as a field of study. First, the government has become an important actor in the modern market economy, not only playing the role of a referee but also that of an athlete. The government itself comprises two different subsegments of individuals and institutions: one subsegment refers to permanent government institutions and their civil servants, while the other subsegment concerns the decision-makers and related institutions established by way of political processes. Second, the actions and behaviors of governments directly determine the performance of the modern market economy. Third, the actions and behaviors of governments depend on their own institutions as well as the design of their incentive structures. At its core, research in government and economics aims to shed light on the incentives and institutional configurations of governments so as to let the market more effectively play its part and support the establishment of a higher quality market economy.

Li asserted that the current stage of development for China's economy, and even the modernization process for China as a whole, faces not only the predicament of being put into a "physical stranglehold" in a more tangible and manifest way, but now also faces a more intangible and hidden form of "mental stranglehold"—that is to say, the theoretical basis for China's continued economic development has not yet been fully ascertained, a state of affairs that has since repeatedly become a pretext for certain others countries to criticize China. Cultivating an independent knowledge system for advancing the subjects of philosophy and social sciences in China must necessarily begin with the country’s real-world practice, including elevating the Chinese school of thought to become a new branch of knowledge within the discipline of economics, one that is more universal, more dynamic and more widely received. This too was in fact the original intention for establishing SAGE. There are nine major topics within the field of government and economics, moreover,that are deserving of careful study: including the similarities and differences between government and corporate behavior; how the political system and economic system affect government behavior; government and market development, supervision and regulation; government and enterprise market entry and exit behavior; fiscal and taxation systems and government behavior; government and macroeconomic regulation and control; government and foreign economic relations; government and income distribution; and government and long-term economic development. Regarding research methods, Li called for a comprehensive research paradigm that combines cases, theory, and statistical analysis (CTS), starting from vivid real-world cases, applying a simple theoretical approach, and corroborating the universal applicability of the applied theoretical mechanism through the analysis of statistical data.

After the opening remarks and keynote speeches, David Daokui Li proceeded to open a roundtable discussion with Zhou Li-an, Liu Peilin and Huang Zhangkai. 

Zhou Li-an observed that the core feature of high-quality economic development lies in undergoing a shift from a singular goal in pursuit of economic growth to the incorporation of multiple goals. The same competitive “tournament” between local government still exists as before, but now the specific aspects being targeted are more diverse. More than a decade ago, competition between local governments revolved around the promotion of economic growth, such that “one merit overshadowed a multitude of demerits” for those regions whose economies were growing at a rapid pace; whereas now these regions have to take a larger number of indicators into consideration, such as the ecological environment and production safety. As for what kind of incentives this new mode of competition will present to local officials, or how the “tournament” system will be redesigned to serve the goal of high-quality economic development, at present it remains unclear. 

The “tournament” system for the promotion of local officials in China stems from the country’s own unique political system and political environment, which cannot be replicated in other countries that have adopted Western-style democracy. Given that this model is underpinned by a rigid “hierarchical structure of higher and lower levels of government, the higher levels of government can influence the incentives of lower levels of government by establishing key indicators for evaluating their performance, with such features being uncharacteristic of Western countries. 

Liu Peilin explained that in order to stimulate China’s economic activity several different approaches could be taken. First, a favorable external development environment must be fostered, including expanding the space for sourcing technological assets while promoting external demand. Second, reforms should be deepened and a predictable long-term business environment should be established to provide enterprises with a more predictable long-term trajectory that supports innovation and investment activities. Third, the broader society ought to be guided towards taking a more accurate view of the country’s growth potential, including avoiding underestimating the prospects for its growth rate. Compared with traditional fiscal and monetary policies, the task of guiding people’s expectations does not require expending one’s treasure, while creating far fewer distortions to economic activities. The reports of the 19th and 20th National Congresses of the Communist Party of China both proposed that the country’s national development plan should form the basis for steering its fiscal and monetary policies, which is not to say that this implies a return to a planned economy, but instead suggests that the country’s medium- to long-term development plan should provide an overall direction to guide macroeconomic policies, including in terms of the country’s potential growth rate and ongoing upgrades to its economic structure, among other dimensions. 

In order to accurately identify the potential growth rate of China's economy and avoid underestimating the prospects for the country’s growth rate at this current stage in its development, Liu offered up his own assessment of the situation on at least two different issues. First, as compared with the United States, Japan, and South Korea, there is still room for Chinese's per capita GDP to continue expanding at a medium-to-high rate. Second, the country’s future growth potential should not be underestimated in view of the fact that its so-called “demographic dividend” has begun to erode. Since China's “reform and opening up” began, the main driving force behind the country’s rapid pace of growth has in fact been constant improvements to its productivity and not its “demographic dividend.” 

In view of the notable contradiction currently presented by the country’s shortfall in effective demand, Liu argued that infrastructure construction, which in the past had become a highly effective and efficient sector, is now hardly able to play the pivotal role it once did, which mainly reflects an ongoing decline in demand, and with the issue of increasing government debt having meanwhile made it more difficult to finance new projects. At present, the large-scale equipment replacement and renewal program being pursued by the government satisfies the basic requirements for high-quality economic development. Transferring domestic equipment or relocating production lines to other developing countries with the support of export credits has further created the domestic room necessary to undertake equipment upgrades. Such projects have provided a more favorable flow of funding and a greater guarantee of repayment, which not only serves to effectively advance the industrialization of other countries, but also avoids any allegations that China is setting up “debt traps” overseas.

Huang Zhangkai pointed out that access to human capital is relatively more important than the overall economic system itself, having expressed full confidence in China’s ability to continue producing outstanding talents.

After the main proceedings of the conference, scholars from Tsinghua University, Peking University, University of International Business and Economics, Central University of Finance and Economics, Renmin University of China, and Shanghai University of Finance and Economics, among other well-known universities, also participated in thematic parallel sessions where they had the opportunity to present and discuss their research projects. Participants shared research results and in-depth insights on the themes of Policy and Firms,” “Government and Economic Development,” “Government and Openness,” and “Land and Public Finance.”