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Interview: Weidong Luo

 

Q: Professor Luo, you have been teaching in Zhejiang University and are very familiar with Zhejiang’s economic development. Would you please talk about current difficulties in China’s economy considering economic situation in Zhejiang province?


Luo Weidong (L): Zhejiang is highly dependent on export, with industrial export dependence reached to over two-thirds. Export also greatly contributed to the economic growth of Zhejiang. Under such circumstance, any changes happen on international market may have big impact on Zhejiang’s economy. For example, financial crisis in 2008 also greatly Zhejiang province. Among all economic regions, Zhejiang suffered from the greatest impacts. Since 2008, Zhejiang has been looking for industrial upgrade and improvement of export product competitiveness via restructuring.


At its earlier time, with labor advantages and other advantages, Zhejiang mainly focused on the manufacturing of low-end products. Zhejiang used to enjoy demographic dividend; enterprises in Zhejiang were mainly low in technical level, labor cost, and transaction fees, driving active product export performance. Both the U.S. and Europe offer huge market demands that drove economic growth in Zhejiang.


After financial crisis in 2008, demands from western countries shrank rapidly. China was also facing its own constraint of human capital. The internal and external hits left Zhejiang enterprise with few living spaces. Right after that, entrepreneur credit problem emerged. Since may entrepreneurs flight aboard or went bankrupt, the capital chain was severely broken. This is particular the case in Wenzhou and Yiwu. Many enterprises moved their industrial bases to Thailand, Sri Lanka, Bangladesh, and India. Zhejiang’s economy was pushed to transform.


However, in the last several years, entrepreneurial innovation gradually fueled the recovery. With the development of E-commerce, logistic cost reduced greatly, easing pressures on cost disadvantages. In addition, Enterprises in Zhejiang started to build peripheral offices to transfer manufacturing to Jiangxi, Fujian, Anhui and other places, leaving headquarters in Zhejiang. By doing so, business operation core and manufacturing core are properly separated. Resources pressure such as water, land, labor and social service was also relieved to a certain extent.


The economic performance for the first half of this year (2015) in Zhejiang Province was quite good among all provinces and regions, with a staggering increase rate of 8.3%. Hangzhou’s growth rate overtook Suzhou and many other coastal city and reached to 3.8%. The industrial structure was also transformed towards less export-dependence ones such as innovation, cultural and exhibitions. When income grows, demands will be expanded.


Q: Professor Luo, you did some research on institutional changes and economic development, especially on the “Wenzhou Model”. Would you share your views and suggestion on future Chinese transformation?


L: My earlier study on the “Wenzhou Model” was a result of collaboration. With focus on enterprise behaviors, it studied the growth and development of Wenzhou based enterprises. The study explored positive integration of Wenzhou business behaviors and modern business, but also identified some deviant enterprises behaviors (based by its culture or by institutional system as a whole). I think we can use Wenzhou entrepreneurs’ behavior as an extreme reference.


Chinese enterprises tend to become more “Wenzhou”-like. Many enterprises are following the trend of Wenzhou model. I don't think it is a good sign. For example, cash flow discount. Many enterprises have irrational high expectation on their profits, which I believe already became a morbidity. These enterprises never consider negative profit rate (they should not be blamed for all since they were subject to financing process). They need to flatten financing cost with extremely high profit rate. Since it is impossible to achieve such a high profit rates with investment behavior, they have to conduct speculative behaviors.


Many of enterprises in Wenzhou are just empty shells, making investment very complicated especially for human resource management. So people kept leaving enterprises and developed their own business and tried to live stable life in other cities. I actually believe that China do not need any stimulus, instead, we need entrepreneurial innovation and craftsmanship.


Whether it is real economy or virtual economy, we need to be down to the earth. If we can provide good products, it is not necessary to worry about long-term demands.


I think the government should help enterprises to cool down through policy design, instead of overheating the boiling water. Chinese government has bigger impact on the market compare to the US government and many other governments of developing countries. China may encounter special problems that are not just about free market competition and cannot be solved with American liberalism. Off course these problems cannot be solved with planned economy solutions China had before. But during the process of transformation, the two forces are collaborating while confronting with each other—the government needs market and market needs the government as well. To realize the transformation, government shall take the initiative with policies.  


The state is a violent institute that has its own power. But it can not force enterprises to improve their awareness (it won’t work). The biggest priority of the government is to formulate reasonable policy frame and institutional arrangement to encourage entrepreneurs. This is what the government need to do, and I think one of the most important thing is a stable mechanism of property right.


Many companies change their regulations regularly because they were insecure. There are two way to reduce the sense of insecurity. First, withdraw from the market with doing anything. If the company have earned some profits, then save it in bank or took other safe ways. This extremely unfavorable for China’s economy as a whole.


Real economy will suffer most. Real economy does not have high profit rate as vital economy, and is not as save as traditional agriculture-based economy. So many (real and loyal) entrepreneurs who do not completely resent venture investment but still with great entrepreneurship struggled. They do not want to invest in the stock market or go back to agriculture. They are actually the backbone of private sector. Therefore the government is playing a crucial role. It should offer assurance to enterprises and provide accurate, pro-development motivation for stable, long-term, consistent and predictable actions. If we know what the others want to do, the society will be calm down and focus on precise practice without fear or improper thought. Just like Japan, achieved their growth with gradual accumulation, from over 1% to less than 2%. This gradual accumulation generates valuable and stable fruit. Unlike China, even with double digits’ growth, we still think it will not quench the thirst, and will not solve any problem.


Moreover, entrepreneurs are very sensitive. All countries need legal system to maintain the stability. Under an unstable circumstance, many people expect giant “gold rush” opportunities. After earning huge profit, people still linger to ensure the stability of their money. This is especially true since personal assets have grown big among middle class.


Q: Would you please talk more about base tariff and credit rationing? What is your view? Are there any legal standards?


L: I think for now, the real general capital comes from firstly, property rights, stability of property rights and the standard value of RMB (which is also the largest investment capital); secondly, land, ownership of land and the stability of ownership; thirdly, labor. These are very important general capitals with factors that are capable of converting goods. For the attributes and stability of property rights factors, we need to consider various conditions. For example, what kind of profits and return are reasonable for complicated manpower, say manpower of entrepreneurs? In terms of legal protection, how government officials’ manpower being protected? All labor force of all levels of society has its own value. This value should be backed with legal basis that shall accommodate its creativity and stability. Labor force as a commodity, is different from other types of capitals. As for general capital and core elements, the stability and attribute is extremely important. In China, judicial interpretations are developed by the Supreme People’s Court according to Civil Law and other relevant regulations. The operation is also based on those judicial interpretations. There is some order, but not fully in place. This is a long process. Our discussion on this problem need to be conducted under the “legal” context, and should be professional. Understanding legislative and judicial process of China, such a big economy during its transition period, is crucial for the study of social science and free market.


The Third Plenary Session of the 18th Central Committee proposed the concept of mixed ownership. What is mixed ownership? It is a solution with imagination (I think it is imaginative). But what does it base on? There was some spontaneous fusion in the civil society and was quite successful. In Zhejiang, joint-stock cooperative system emerged at early stage, which can be seen as mixed ownership in a sense. However, it is a longstanding problem for the mixed ownership to find its legal base and we did not solve this problem for over 30 years. From the perspective of culture, mixed ownership is a product of profit culture. For example, people living in the same village know each other very well, so each villager has his/her own scale of assessment. With some rules, they can create business together. There were many similar experiments in Zhengjiang province. It seemed like mixed ownership that evolved from the general concept of ownership is still within the ultimate category.


Q: Yes, Professor Luo, I would like to confirm 2 key words you just mentioned. You said stability, property rights stability, which also includes the labor force. You also mentioned the entrepreneurs. For example, if the compensation of bank executives fluctuated a lot, would you say it is stable or not?


L: State-owned bank is another story. The property of state-owned banks decides the composition level shall be impacted by two forces. First, as quasi-government agencies, state owned banks should fulfill simplified government functions. So we should make bank a special case. Banks also have other ownership and obligation provided by the government, which is not decided by operation capacity, such as performance. Off course, losses do not mean bad performance since banks have to collaborate with regional market on one hand, and face industrial competition on the other hand. That is to say, performance is quite related to independent operation capacity. I believe it is not right to only consider one of the two perspectives. Modern enterprises rely on human capital. With good incentives, banks may loss motivations to issue loan for private enterprise. Because when banks only conduct its missions entrusted by government and do not compete, they will not care about lost and performance.


Q: As you just said, the banks and state-owned large enterprises are special cases, but meanwhile, we need to provide incentive mechanism.


L: We must promote incentive mechanism. Support from the government can be seen as “health care” benefits. According to the two-factor theory, only when we combine the “health care” with incentive, we can realize both two functions. If there is only “health care”, with their business keep shrinking, compensation of bank executive will be far lower than compensations in non-state owned financial institutions since executive compensation of the later kind are designed based on market mechanism.


Q: Many people think that the economics theories are not closely linked with the reality, based on what you just shared with us, how do you feel about it?


L: This is an important topic. Economics, as a huge family, is comprised with a variety of disciplines. I think there are two basic perspectives. The first one is precise, pure mainstream economics. We call it western economics, which is the mainstream. For mainstream economics, we have to deal with the relationship between two elements: the so called micro and macro theories.


There are many other economic disciplines (labor economics, industrial economics, management economics, as well as the application-focused land economics), but this pair of relationship need serious thinking. For example, sophomore students start to learn intermediate micro and intermediate macroeconomics, and study intermediate econometrics in college junior. They may also learn other knowledges such as industrial economics. Part of micro-economics is seen as more basic knowledge. So during training, understanding micro-macroeconomics is related to how we educate our students and the order of their knowledge system. Generally speaking, our students know how to make judgment on specific issues (for example, the significance of the division of labor, trade as source of wealth, no free lunch, marginal substitutes, flexibility) with economics mindset. They understand those economic concepts and their application.


But how to apply basic economic mindset directly in a certain specific field is still a big problem. For example, the hypothesis and development of labor economics and health economics are based on basic economic theories, but the nature of this filed is about labor, healthcare or finance still remain unknown. Because the researcher never investigates it nor worked in these industries. What he had was just a theoretical hypothesis without specific operation methodologies or content (like what is maximum and what to maximize). He thought he studied a specific problem, but it is actually, an abstract problem. Researchers want to explain real problems with what they have learned earlier. But problems in reality are way complicated than they expected. After long-term real practice, they may find that the knowledge they learned earlier fail away from the reality. This is because micro and macro are not dynamically linked. The construction of such link needs practice and some intervene.


Q: So how to solve this detachment?


L: Social survey is very important when receiving university education, that means internship. Economics is not words stay on blackboard, it needs practice. Same principles may have various representation in different fields. There is no “one-fits-all solution” for each specific problem. To solve real problem, we need to be “hands-on” the problem first and then identify economic principles, and what abstract, theoretical knowledge we may need to solve the issue.


Q: Finding correct intern project is also important, it should be related to the field of study.


L: Yes, find internship first. Second, students can choose to do research at school if they are capable. But internship is a must, since they can learn much more than absorbing information in classrooms. They should go to the main battlefield of economics, go to the frontier. In economics, Marshall definition studied the property of wealth, definition and general behavior of human. The study has been greatly challenged, and the core of such research need to be tangible. Students must go out. Some students are too dependent on their own thinking and ignore the outside world. Unfortunately, they are misled by some teachers because those teachers do not want to see the outside world themselves. They are fascinated by the structure of economics and think reality is not true. This is a methodological problem fundamentally.


In the history of economics, almost all the masters value both theory and practice. With his mathematic background, Marshall spend 4-5 years on social research. He visited enterprises, famers, businessmen all over Europe with his wife and also studied documents on governments’ decision making. He was capable of writing the Economic Principle and influenced economics for more than a century.


This is the right way to understand economics, because the decisions he made are not come from abstract symbolic world, but from real person in real world. We should encourage our student to be firm on critical economic mindset, while stay close to the real world and real people. This is very important. During education reform, theoretical innovation is especially needed for economists in China. Moreover, China is also transforming now. There is no other economy experienced such a big scale and complicated transition as China is experiencing right now. This is dual transaction.


It is true that unlike other disciplines, there is no clear definition for the field of economics in terms of internship. Students majored in labor and social security and take internship in the Labor and Social Security Bureau. But it is hard for economics students to find internship program closely related to their major.


Now in China, there are two types of economics. The first type is in-system economics, origin from the west. Another type is “citizen economics”. These “citizen economists” never received any training but are very insightful on the current economic condition. Thy have their own theories although not systematic. About a century ago, economics then was just like today’s citizen science. There were no schools teaching it with so many details. Some journalists, government officials and educated businessmen wrote pamphlets to illustrate their ideas. Classic economics was founded by the amateurs. David Ricardo was a broker, Marshall was a mathematic student, later became a researcher and establish School of Economics. But before that, when talents received professional training on humanities, they formed ideas that are crucial for modern economics. Ideas were developed as a discipline and became mainstream west economics, or neoclassical economics.


When looking forward to the future development, we should understand history of economics. By pooling all thoughts together, we can maintain diversity and promote real academic interaction instead of shutting ourselves down. I also believe the economics should form its own market, on which people argue with each other. If any foundation can promote academic diversity and allow open and honest academic discussion, it will make huge contribution. I hope this foundation can be inclusive.


The foundation should be passionate for science, and should hold basic recognition to the rational part of economics just as famous economists like Coase and Akerlof, pursuing the combination of format and authenticity. This will be a great progress.


In fact, there is a new force in the university—many people of insight who not only received social economics training, but also enthusiastic about reality are making breakthroughs. I think it will take us about 10 years.