• China’s Gradual Approach: Talking to David Dollar

    How has China’s unprecedented rise in prosperity reshaped debates not over whether governments should intervene in developing economies, but when and where they should do so? How might China’s economic policymakers now respond as the country’s vast working-age population gradually grows old? When I want to ask such questions, I pose them to David Dollar. This present conversation focuses on Dollar’s new edited collection (co-edited with Yiping Huang and Yang Yao) China 2049: Economic Challenges of a Rising Global Power. Dollar is a senior fellow in the China Center at the Brookings Institution, and host of the Dollar & Sense podcast on international trade. From 2009 to 2013, Dollar was the US Treasury’s economic and financial emissary to China, based in Beijing. Before his time at Treasury, Dollar worked at the World Bank for 20 years. He was the country economist for Vietnam during 1989-1995, a period of intense reform and adjustment.


    ANDY FITCH: China 2049’s preface cites, as the “foremost driver” of unprecedented economic growth and stability over the past 40 years, “the reform policy, or transition from the central planned system to a free market economy.” A couple pages later, however, your preface adds: “it appears puzzling that, after four decades of…transition, China’s economic policy still looks quite different from the free market system.” Could you first steer US audiences through some of these interpretive nuances?

    DAVID DOLLAR: Three main reform measures in China together represented a giant stride from a planned system to a market economy. First, the household responsibility system returned agriculture to family farming, with use-rights over land akin to private ownership. China (and Vietnam as well) started economic reform as largely agrarian societies, with 80 percent of the population in the countryside. And grain production immediately went up 20 percent, evidence of the superiority of the market over collectivization.

    Second, in preparation for joining the World Trade Organization, China unilaterally dropped import barriers and investment restrictions, opening up space for an export-oriented private sector — first of foreign, and later of domestic private firms. In that process thousands of state-owned enterprises (or SOEs) went out of business, with millions of workers laid off. But this strategy worked, because it quickly created jobs in export processing to replace the lost public-sector jobs. China never had an ideological campaign against SOEs, but rather allowed the private sector to grow up around the state firms that survived.

    China’s third major reform came out of its longstanding commitment to fiscal and monetary prudence, probably developed in reaction to the terrible toll of hyperinflation at various points in the civil war. So while, as we highlight, a reformist China engaged in modest financial repression (state intervention in the financial sector), which gave SOEs some boost through their preferential access, still they had to operate in a world of hard budget constraints. The SOEs that survived have generally not been a drag on the budget, though they are less efficient than private firms.

    Here China 2049 emphasizes that some features of China’s gradual approach may have helped economic growth in the early stages of reform, but have now become millstones. Policies tend to create their own special-interest groups who benefit and want to perpetuate these policies. A key challenge for China involves now moving to dismantle those policies no longer helping. In this category we emphasize ending financial repression, completely dismantling the household registration system, and opening up remaining economic sectors to foreign investment and trade.

    Advocates for free-market principles sometimes suggest that the dismantling of a nation’s planned economy inevitably catalyzes growth, by incentivizing individual effort and efficient resource allocation. And those types of societal shifts certainly did happen in response to Deng-era reforms. But could we also start to factor in how late-20th-century China’s vast reserves of available labor (particularly from rural regions), its fortuitously timed entry into new international trade regimes and investment/production networks, all contributed to a virtuous economic cycle — in which a preceding era’s cultivation of industrial and human capital (as well as surprisingly high savings) could get harnessed towards expanded production, driving further investments, further productivity gains, and further global market share?

    Certain achievements from the Mao era did lay this foundation for rapid growth: basic education and healthcare for the whole population, rudimentary infrastructure, fiscal and monetary prudence. And ironically, Mao’s encouragement of population growth, followed by Deng’s one-child policy, created an extreme demographic dividend — with the dependency ratio falling from 80 percent in 1978 to 40 percent by 2008. That meant a huge wave of new workers ready to take jobs in factories, while just entering their prime saving age. Similarly, without relatively welcoming policies from the US, and eventual WTO membership, it is hard to see how Chinese manufacturing could have created so many jobs. Each of these ingredients (good human capital, high savings, a favorable external environment, macroeconomic stability) played a critical role in China’s success.

    Now to start looking at what China’s economic stewards themselves got so right, could you outline this book’s basic case for why, rather than pondering whether concentrated government presence in a national marketplace is “good” or “bad,” whether Chinese industry has thrived “because of” or “despite” significant state intervention, we ought to explore when precisely an emerging economy might benefit most from which kinds of state intervention? What might make “the Stiglitz effect” more conducive to mobilizing industrial-scale production? What might make “the McKinnon effect” more conducive to promoting corporate innovation crucial to a service-based economy? And then more concretely, what made market-distorting governmental support for SOEs a particularly effective policy approach in the 1980s and 90s, but less so ever since?

    Financial repression centers around controlling interest rates at levels below what would clear the financial market. To make such a system work the authorities then have to limit alternative savings options — by restricting capital outflow, and by controlling the expansion of stock and bond markets. Crucially, China never let real interest rates become sharply negative, so these limitations of capital outflow (and the development of domestic capital markets) never became too onerous. As Ronald McKinnon has pointed out, a repressed financial system imposes a kind of tax on households, who get a substandard return on investment. And on the lending side, credit has to be rationed. If the government does a poor job of this, then investment efficiency will suffer and growth may be harmed.

    An alternate view comes from Joseph Stiglitz, who sees the financial system in developing countries as rife with market failures. In particular, large projects (such as a highway system) or long-gestation projects (such as power stations) would likely provide economic benefits, though an immature financial system won’t be able to fund them. But a repressed financial system may enable the government to undertake such large projects, which have spillover effects that benefit the whole economy, raising the return to capital. So we argue that, in the early stage of reform, China’s mild repression enabled the government to fund infrastructure, and to keep the state-enterprise system from collapsing completely. As noted earlier, millions of workers left the SOE sector in the 1990s, but millions also stayed. SOEs contributed to social and political stability, basic foundations of China’s growth.

    On the other hand, the fact that none of the SOEs became globally competitive companies (and that in general SOEs have lower productivity than private firms) debunks the idea that “picking winners” emerged as an important benefit of China’s financial repression. And while infrastructure and SOEs probably benefitted most from low interest rates, it is worth noting that in the early 2000s China also developed a mortgage market surprisingly deep for a developing country. Starting with this development, households began to get some direct benefit from the state-controlled financial system.

    But if you accept our argument that much of the benefit of financial repression comes from funding infrastructure and housing at an early stage of economic development, then these benefits naturally diminish over time. China has built up infrastructure and housing to a point at which the risk is over-supply (not under-supply). Overall leverage in the Chinese economy remained remarkably stable in the period from 1990 to 2008, an indication that loan-financed investment had a high return — with both debt and GDP rising in proportion. Since 2008, however, there has been a steep, secular (or seemingly long-term) increase in debt-to-GDP ratios, reaching levels that historically have signaled risk of financial crisis. So China has reached a point at which efficiency in investment becomes more important than the sheer quantity of investment.

    Financial reform is tricky, in that many developing countries (and rich ones) have had financial crises in this transition to more market-oriented systems. But we endorse a careful move towards greater flexibility of interest and exchange rates — and more competition in the provision of financial services, including from foreign firms.

    Again with longer-term trajectories in mind, could we consider Chen Bai and Xiaoyan Lei’s account of China’s late-20th-century demographic dividend gradually transforming into a 21st-century demographic debt? What most acute pressures does this demographic shift place on traditional family structures? How will it exacerbate social strains particularly in rural communities? What broader macroeconomic and fiscal challenges does it pose for policymakers now projecting that their society will, in many respects, get old before it gets rich?

    Demographics probably offer the best example of how China’s challenges interact, and how policy reforms need to work together. The population over 65 will increase from about 200 million today to 400 million by 2049, while the overall population declines slightly. Within this group the most rapid rise will occur among people 85 and older, from fewer than 50 million today to more than 150 million in 2049. Taking care of this elderly population would pose a challenge in any situation, but China’s challenge gets compounded by rural-urban divides. Most of the elderly live in the countryside — though often their working-aged children have moved to cities as migrant workers (frequently while leaving school-aged children behind). Rural health systems remain weak compared to urban ones, so taking care of the elderly will require a combination of more permanent migration to cities plus strengthened rural service delivery.

    China now needs to completely scrap the hukou registration system that limits permanent migration — as well as to unify rural and urban pensions, health insurance, and educational systems. Just think of all the complicated possibilities as people age. Some of the elderly may want to move from the countryside to the city to be near working-aged children, but can they get fair access to healthcare and perhaps eventually to assisted living? In other cases migrant workers may want to retire and move back to the countryside to be near aged parents, but will these migrants have portability of their pension, and access to healthcare in their communities of origin? So pension, hukou, and healthcare reform all need to go together.

    Dealing well with ageing is first and foremost a social issue. But it also has economic implications. Even as China’s overall workforce shrinks, the 55-64 year-old cohort will increase dramatically. Keeping this group and the “young olds” (65-85) healthy and active offers China’s best hope for staving off dramatic labor-force decline. Improving rural education is also critical, because about half of China’s future workers go to school in the countryside, and deficiencies in their education will affect economic growth for years to come. Finally, and less obviously, further opening of the economy can help with these adjustments, because foreign investors can bring new models and technologies to retirement living and healthcare.

    Alongside this new normal in demographics, your book sketches a new normal for economic growth itself. For a variety of reasons, your various authors conclude that China no longer can produce ever-increasing quantities of low-cost industrial exports for ever-expanding global markets. And China 2049 substantiates your claim that the past decade’s growth slowdowns and increased financial risks suggest not cyclical, but rather structural adjustments in the Chinese economy. So first, let’s say policymakers (or ordinary citizens) tell you they have no interest in transforming into a Japan-style innovation economy, given that country’s longstanding difficulties boosting its own growth rate. Which internal and external pressures would you cite to make your basic case that no better alternative growth model exists for present-day China?

    Growth accounting assumes four basic sources of growth: expansion of the labor force, investment building up the capital stock, increased human capital per worker, and productivity gains (which come in turn from technological advance and improved market efficiency). China’s export-orientation phase helped with at least three of the four: creating jobs so that the urban labor force could expand, providing demand for the factories built through investment, and increasing productivity by bringing in new technology from abroad (as well as making markets more efficient through competition). But now, as the world’s largest exporter, China faces serious difficulties trying to get its exports to grow faster than the world market. The run-up in debt-to-GDP over the last decade shows signs of diminishing return on investment. And productivity growth has slowed dramatically since the global financial crisis.

    Looking ahead, China can expect its labor force to shrink. China has done a great job getting more young people into college, but this ratio would have to keep climbing in order to provide an ongoing source of growth. So China’s growth rate naturally has slowed down — and bolstered innovation and productivity is the best hope of resisting this trend. China’s productivity slowdown also has been much steeper than earlier cases, such as South Korea’s. It’s realistic for China to aim to reverse some of that. Keep in mind all of the innovations that will touch every sector of life: carbon-free technologies, self-driving cars, a vaccine for COVID-19, other cures and medical advances. Within a few years, China will have the largest scientific labor force, and spend the most on R&D. So again it seems realistic for China to aspire to produce its fair share of innovations.

    More broadly, China 2049 gives the impression that policymakers at this point know many of the most pivotal economic changes China still needs (making SOEs compete with private enterprises, creating a level playing field for market entry and exit, accelerating urbanization, providing pro-family financial support for young parents, reinforcing retirement security, boosting macroeconomic demand, mitigating rural-urban disparities, improving infrastructure efficiency), but also that we shouldn’t assume any of this will happen instantaneously — or inevitably. Which domestic impediments to China’s ongoing economic transition seem potentially hardest to overcome?

    Again economic policies, whether good or bad for overall growth, tend to create special-interest groups who benefit from and seek to maintain such policies. China’s registered urban population, about 40 percent of the total country, benefits from the migrant-worker system. Migrants make up about half the urban labor force. They contribute to GDP and tax revenue. But they receive a substandard set of public benefits — which means the urban registered get more. You see this particularly in education, with cities like Shanghai having outstanding schools whose students place near the top in international tests. China has repeatedly announced the dismantling of this registration system, but that system remains the reality, especially in flagship cities like Beijing, Shanghai, and Guangzhou. The greatest national productivity gains would come from allowing more people to move to these cities, but registration has stayed tightly controlled.

    Another source of resistance to reform comes from the remaining restrictions on foreign investment and imports — typically in SOE-dominated sectors, such as auto manufacturing (where SOEs operate in 50:50 joint venture with international auto companies), or services like telecom. These protectionist arrangements result in substandard goods and services. They also represent the main source of tension with foreign partners like the US. Partners complain that their firms either get completely shut out from lucrative markets, or else have to operate via joint ventures, with their technology getting transferred to a Chinese partner (who might eventually become a competitor).

    China’s financial system offers an additional example of a sector closed off from foreign competition, and dominated by state-owned incumbents. While this repressed financial system keeps interest rates relatively low, it also limits competition from the stock market (where issuance is tightly controlled), and from foreign institutions. That keeps China’s big state-owned banks comfortably profitable.

    In each of these policy areas, though, you do see signs of change. Hukou has become less important in small cities. The auto sector has seen a lowered import tariff, and an opening to 100 percent foreign-owned plants. Financial services too will have 100 percent foreign-owned firms. So change does happen, but also often gets resisted.

    Similarly, your book suggests that, for longer-term diplomatic negotiations between China and the US: “There is important common ground…. The only trick is that the Chinese reform will likely remain gradual.” What most persuasive case can you offer to US policymakers for why it’s in their self-interest to pursue this common-ground approach, even when it does not play out on their own preferred timeline?

    China and the US have the world’s two biggest economies. For the next 30 years no other economy will likely come close in size. So we consider it essential for China and the US to cooperate on global challenges that affect the welfare of everyone. Most obviously, both countries need to reduce carbon emissions and limit the damage from global warming. There is no way that either China or the US would have signed up for the Paris Accord without the other’s participation. The US has now pulled out, while China has stayed in with the expectation that the US will come back eventually. But if the US were to permanently give up on carbon-reduction policies, then we can’t imagine a global solution that avoids catastrophe.

    Nuclear nonproliferation offers another example. China and the US cooperated well on the sanctions that brought Iran to the table and resulted in a UN-brokered agreement. On pandemics also the two countries have cooperated well in the past, especially around Ebola. If we get lucky and scientists discover an effective COVID-19 vaccine, it would be best for the world if the US and China cooperated in manufacturing and distributing it quickly and widely. But right now you see basically zero cooperation, while the two hurl accusations across the Pacific.

    To us, these global issues are much more important than bilateral economic tensions between the two countries. We urge China to open up unilaterally and to remove remaining distortions — because this would both benefit the Chinese people and lay a better foundation for international relations. But even if this pace of reform seems slow to American leaders, smart diplomacy would prioritize the most important concerns, the global challenges, not the bilateral frictions.

    So now picking up Peter Petri’s description of a “technological Cold War” setting in (at least provisionally) between China and the US, could you sketch some global implications here: say in terms of decelerated innovation, extensive redundancies and inefficiencies, increased national-security risks, incompatibly bifurcated networks, and pointless polarized choices imposed on the rest of the world? And in distinction to those undesired outcomes, could you flesh out what a “pragmatic strategy to achieve a reasonable level of technological interdependence based on secure foundations” might look like?

    Worldwide we have seen a slowdown in innovation and productivity growth over the past 20 years. That may sound paradoxical, because we have had constant innovations with smart phones, smart appliances, social media, and the like. But those inventions simply haven’t had the economic impact of earlier inventions, such as railroads, electricity, the internal combustion engine, and aircraft. One popular economics framework assumes a version of diminishing marginal returns — that the transformative innovations already have been found, and that what remain are more modest changes. Similarly, from a global perspective, the big developing countries (China, India, and others) began far behind the leaders in terms of productivity levels. Through opening and reform they have now partially caught up. But further convergence looks more difficult, since growth rates tend to slow down as countries develop.

    So here again we argue that strengthening the innovation ecosystem has become more important than ever. The US and China are overwhelmingly the largest sources of R&D. For now an extraordinary amount of integration still exists between these two innovation systems. China’s top technical students come to the US for undergraduate and graduate training. Many remain for part (or all) of their working life. Researchers in the US and China collaborate, publish, and patent together. Innovative companies like Apple focus in particular on these two biggest consumer markets. Major US multinational firms keep expanding their research labs in China, to take advantage of the millions of STEM students turned out each year.

    A number of factors have upset this cooperation, however. China has been slow to improve intellectual-property rights, and to address issues of forced technology transfer. Security tensions have risen between the two as China’s military increases its size and capabilities, and its activities in the South China Sea and globally. The most recent US National Defense Strategy identifies China as a strategic competitor, and the US has taken various actions to retard China’s technological advance.

    Some de-coupling of the Chinese and US tech sectors seems inevitable. The practical question becomes whether this split stays limited to a small number of technologies with clear military application, or expands to cover most commercial activity. If the latter, then the losses to China and the US look quite large. Duplicative research and inventions, and competing standards in the two economies, will add further inefficiencies. Each country’s return on R&D will drop. And if forced to choose between China and the US, even some of the closest US allies (themselves key commercial and innovation hubs) may go with China, because integration with China is the future of the Asian economy.

    China and the US both are showing some isolationist, protectionist sentiment right now. The US wants to bring manufacturing back to its shores through trade and investment restrictions. China has its “Made in China 2025” program, which aims to substitute domestic production for today’s tech-sector imports. Of course each country also has interest groups pushing to maintain open trade and investment. But if both economies go down the protectionist road, that surely will harm global innovation and growth. If only one does, then the more open economy will likely have a large advantage in terms of innovation and growth. Cutting ties with each other would cause problems, but cutting off from the whole world would be much worse.

    By extension, now within the context of late-20th-century institutions like the WTO and the IMF promoting their own world-historical run of global prosperity, and with an increasingly powerful China since having emerged as a pillar of (and major net creditor for) this global economy, how should such institutions today modernize themselves to reflect the increased stature of China and other emerging economic powers? And which of today’s open disputes or latent frictions have the greatest potential to derail that preferred trajectory?

    Chinese officials like to say that they support these international economic institutions set up under US leadership at the end of World War Two. Many Chinese actions back up that claim. China has largely lived up to its commitments under the WTO, and has changed policies when it lost WTO cases. It lends resources in parallel with the IMF, to augment their impact. For a time in the mid-2000s China had an undervalued currency, and a large current account surplus, but subsequently allowed its currency to rise. In recent years this current account balance has dropped close to zero, unlike in Northern European countries that have become the main source of global imbalances. China also contributes to concessional resources that the World Bank uses to support the poorest countries.

    In other respects, however, the US believes that China falls short as a “responsible stakeholder.” Much of this disagreement stems from China seeing itself as a developing country, whereas from the US point of view China has the world’s number two economy and the most international trade — so China now needs to take on more responsibility. For example, while China has lived up to its WTO commitments, those come from a deal made 20 years ago. China has been reluctant to take on new commitments in areas such as investment, services, cross-border data flows, IPR protection, and subsidies (the modern trade agenda). China also lends large amounts of money to other developing countries through its Belt and Road Initiative, but that lending’s lack of transparency and accountability falls out of line with global norms.

    So how might a longer-term “grand bargain” most constructively combine Chinese support for the WTO pursuing that modern trade agenda you describe, and America accepting the growing clout of developing countries?

    We consider it in China’s interest to take on more responsibility fulfilling WTO commitments to this modern trade agenda. It would also help for China to harmonize BRI projects with other global development lending. That all has become even more urgent with the coronavirus crisis. Many countries that have borrowed from China can’t service their loans, and China will need to work with the Paris Club and other creditors on debt relief for these cases. Without coordinated action many countries will likely default, which will become one more burden on China’s financial sector.

    That kind of coordination will both benefit the Chinese economy and allay concerns about China’s actions straying outside global norms. At the same time, China’s weight in the IMF and the World Bank today remains far below its weight in the world economy. More generally, the weight of developing countries needs to increase significantly, and the US must recognize its own interest in inviting these countries to play a greater role in global governance (which does mean the US itself having less individual power). We also argue that a grand bargain for this whole international system will be easier to implement than reforming each institution one-by-one.

    China 2049 likewise points out that while it makes sense for the world to rely on single monopolizing institutions to perform roles such as global arbiter on trade disputes, or last-resort provider during economic crises, development banks historically have been (and perhaps should be) plural and complementary. So let’s say a Chinese-led Asian Infrastructure Investment Bank embraces the 2009 Zedillo commission’s practical recommendations to: “increase the voting shares of developing countries…reestablish the focus on infrastructure and growth…streamline the implementation of environmental and social safeguards to speed up project implementation.” What most tangible benefits might such an approach bring to the region and to the world if done right? And how might such an approach complement the work of the World Bank and its sister institutions?

    The World Bank originally funded infrastructure projects — first in war-torn Europe, but soon turning its attention to the developing world. Its agenda has since widened considerably, reflecting the many different ingredients that go into successful economic development. But the World Bank has moved away from infrastructure to a large extent, and for the wrong reasons. Big infrastructure projects bring significant environmental and social risks, and pose complex tradeoffs. The World Bank and the regional development banks have grown very risk-averse, so that financing infrastructure through them has become quite costly and time-consuming. Developing countries don’t want to bring infrastructure proposals to these banks, because of their costly processes. That’s one reason why China’s BRI has been so popular. But this direct lending from Chinese banks often goes too far in the other direction: towards a lack of transparency, accountability, and environmental and social safeguards.

    We view the Asian Infrastructure Investment Bank as a promising innovation in this space. China started this multilateral bank, which now has more than 100 members, including most advanced economies (Europe, South Korea, Australia) aside from the US and Japan. The bank has not closely aligned with the BRI. India, for example, does not want to participate in the BRI, which it sees as a strategic ploy by China. But India has borrowed the most from AIIB so far. AIIB’s procedures require competitive bidding on projects, independent accounting, environmental-impact assessments, public disclosure — yet its leadership has committed to more flexible approaches and faster processing times. It remains to be seen how well this will work, but AIIB could potentially provide a good example of China bringing welcome innovation to the existing international system.

    Returning then to the tenacious place of concentrated state power within China’s own economy: as I read your book, I kept thinking of recent calls to break up dysfunctional market concentration within the US — as well as of demoralizing projections that this COVID-driven economic crisis will push us in the opposite direction, towards substantially more concentration. What prospects do you see for COVID to impose its own structural (again rather than cyclical) changes on what had looked (just late last year) like a new economic normal perhaps taking China much of the way to 2049?

    COVID-19’s structural impact does give reason to worry. One way to think of our main recommendations for China is that they all involve more market entry and competition. Migrant workers should be able to move where they choose and have full access to public benefits. Protected economic sectors should open up to more entry from private and foreign firms. Financial markets especially should open up in this way. Students and researchers should flow back and forth across the Pacific. The US and China need to work together on reforming global institutions and the international economic system. But COVID-19’s lasting impact looks likely to work against all of these possibilities. And China 2049 does help to clarify why COVID-19 will probably exacerbate some longer-term negative effects on global growth.

    Even when a reliable vaccine emerges, everyone will recognize the potential for future viruses. And this particular virus already has dramatized those risks of globalization that make isolation tempting. Of course, as a long-term strategy, isolation seems impossible to achieve anyway. Even countries with almost no integration into the world economy, like North Korea, have suffered from this pandemic. Isolating your country will probably not protect you from the next pandemic either, and will just make you poorer. Global cooperation and robust economies and bigger safety nets will protect the whole world much better. And right now this idea of enhanced global cooperation might sound like a bad joke, but one advantage of thinking ahead 30 years is that you have more time for isolationist, protectionist waves to pass.

    While COVID-19’s lasting impact will probably set China back, it also will set back the US. If anything, we think that economic convergence will accelerate, because the pandemic will have greater effects on US growth than on China’s. The New York Stock Exchange has taken a strikingly minor hit as of late-May. The S&P 500 actually remains up over the past 12 months. The market expects the large companies listed on this index to thrive in the new environment. Millions of small firms will probably close, producing more market concentration. Consolidation seems almost inevitable in sectors such as airlines, hotels, even autos. This increasingly oligopolized American economy will struggle to generate innovation, start-ups, and productivity growth. So yes, those concerns you mentioned do seem valid.

    Finally then, for another quick comparison to recent US trends: I’ve seen increased calls even among professional economists to step back from an overreliance on quantitative metrics shaping policy priorities, and to re-articulate a more qualitative conception of what our ultimate end goals should be — say a tangible sense of economic dignity for all Americans, rather than just a certain numerical threshold for average or median income (or, needless to say, for aggregate GDP). I also see a spreading assumption that neoliberal-era cost-benefit analyses routinely advanced their own ideological agenda (prioritizing positivistic data and profit-driven calculations, for example), while claiming to provide a more neutral comparative account. So even as you call for a cost-benefit approach to future Chinese policymaking, what qualitative values would you like to see instilled in such cost-benefit considerations from the start?

    The starting point for economics is enhancing human welfare. We tend to judge such progress in terms of what we can measure. In developing countries, estimated GDP growth often provides the most regular and reliable data point, so it gets a lot of attention. Also, when everyone is poor, as with China at the beginning of reform, then expanding the pie really does offer the only way out of poverty.

    As China has moved into middle-income status, however, two important developments have changed the policy discussion. First, people have more diverse wants once their basic needs get met. Second, many more types of data become available, allowing a much broader and more nuanced assessment of welfare. Satellite imagery now can track pollution levels in different cities. We can measure the economy’s carbon output. China’s household surveys on poverty levels and social indicators (such as infant and maternal mortality) are quite good. Micro indicators on travel, movie-ticket sales, automobile ownership, housing, financial transactions, wealth — these all offer useful angles. And surveys can look at qualitative aspects of life, such as people’s level of happiness, or satisfaction with their government.

    China’s five-year plans have always included both a general growth target and targets for numerous economic, social, and environmental variables. We now recommend scrapping the growth target, which tends to get the headlines and the priority focus — and elevating the social and environmental targets. A key challenge for China’s government going forward will involve managing tradeoffs among the different wants. Providing desired levels of environmental safety or health protection will likely impose costs in terms of economic growth and income. And tastes in these competing priorities will remain heterogeneous. One group may want to reduce environmental or health risks to nearly zero. Another group may have more tolerance for a balance between safety and broader economic gains.

    The frictions between these different tastes manifest quite clearly in the US. But they also exist in China. Urban residents’ resistance to welcoming more migrants has strengthened in the wake of COVID-19, for fear that these migrants will accelerate the spread of contagious diseases. You can’t possibly manage all of these tradeoffs in a way that makes everyone happy. At best, you can hope for a sufficiently inclusive decision-making process, so that everyone feels their view has been heard. Our instinct suggests that inclusive decision-making processes here would shift the focus from macroeconomic growth to more micro and qualitative indicators of progress and fulfillment.