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Wu Jinglian:China Economics Prize Awards Speech

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I am honored to attend National Economics Foundation “China Economics Prize 2016” awards ceremony. Let me first congratulate the two winners who are so richly deserve the honor.

 

First of all, I would like to say that the decision of National Economics Foundation to award the “China Economics Prize 2016” to Professor Yingyi Qian and Professor Chenggang Xu, in recognition of “their contributions to incentive mechanisms for government and corporates in transitional economies”, is an appropriate choice, and meets expectations of many economists.

 

The past four decades have witnessed China’s great economic achievements driven by the reform. Several generations of Chinese economists have made contributions to promote the reform and opening up. However, China faces serious challenges since economic reform and political reform are far from completed. Economists are devoting entire energy and thought to tackle difficulties and find solutions for the sustainable economic development and social progress. Professor Yingyi Qian and Professor Chenggang Xu are outstanding economists in promoting reform in the past and in tackling obstacles at present as well. They highly deserve the honor. Moreover, the award from National Economics Foundation not only honors the two professors, but also recognizes and commends economists who have made professional contributions to China’s reform.

 

Yingyi and Chenggang share two prominent praiseworthy characteristics which are worth following.

 

First, they have a strong spirit of professionalism, and commit to excellence.

 

They both have received professional economic training. Even under such background, it is still an important choice that if they can adhere to professionalism and dedicated to academic norms and professional requirements.

 

In addition to general requirements for scientific practitioners such as having clear concepts, reasonable arguments, and logical discussions, economics has some other requirements.


As the object of economics research is a complicated system consisting of interacted factors, special tools are needed to analyze such a complex system. The control observation thought experiment, which was named as abstract method by Marx, is one of the important tools. It fixes relative secondary factors via strict assumptions, and extracts the essential contents from complex facts, so as to form the ideal simplified theoretical model to observe the benchmark and reference of the reality, thus exposing contradictions and promoting theories. Economics has accumulated a great deal of economic wisdom, and formed a series of basic theoretical models named as “model” and “theorem” over the past three hundred years. These basic theoretical models are not a direct description of the real world, but the necessary economics tools to study of the real world. Economics demands a thorough understanding of basic theories, only by which researchers can stand on shoulders of predecessors to observe the reality and put forward their own theories. The speech Economics, Economists and Education on Economics by Chenggang published on the first issue of Comparative Studies in 2002 stated that the thorough understanding of existing benchmarks is of vital importance to economists, and only by taking it as the rule and benchmark to observe reality, can economists spot issues and promote theories. Yingyi also mentioned it in Understanding Modern Economics (published on the second issue in 2002 Comparison of Social Economic Systems), and pointed out that economists must be equipped with several benchmark and references of related issues, otherwise analyses would be fragmented or lack of focus and depth.

 

Unfortunately, people in China often believe that knowledge of each individual is only from their experience rather than practice, thus the accumulation of knowledge from predecessors is neglected. Besides, it is common to see that people think the theory “is not consistent with reality” as long as there is a difference between the reality and the theory, thus they deny existing benchmark states the truth. Therefore, academic discussions usually become a nasty argumentation with no shared benchmark or settled conclusions.

 

The first time I discussed this issue with Chenggang was in 1993. At that time, he had just returned to Beijing after the China Conference of the Chinese Economists Society in Hainan. Domestic economists were classified into two groups in the discussion of security markets during the conference. One believed that, according to Arrow-Debreu General Equilibrium theory, the stock market could positively promote economic development once it could be open. While the other group stated that the open stock market only brought chaos to Chinese market, proving Arrow-Debreu General Equilibrium theory was divorced from practice. Chenggang worried the prospects of economics in China if economists had such understandings on basic theories and methodologies.

 

While, as a responsible economist, Chenggang and Yingyi did not only worried about the future, but also tried their best to change the undesirable state quo of economic research.


Chenggang published an article that year to illustrate characteristics of security market and root causes of existed issues in Chinese security market based on the latest development of microeconomics (China’s Economic Reform and Modern Microeconomics by XU Chenggang (1993), published on Reform, the fifth issue in 1993). In 2002, he made above mentioned speech, offering a comprehensive discussion on modern economics methodologies. He claimed that the five “irrelevance theories”, namely Arrow-Debreu General Equilibrium theory, Modigliani-Miller theorem, Coase theorem, Lucas’ theory on Money Neutrality, and Becker-Stigler Optimal Deterrence Theory, were the most important basic theories in studying institutional issues. He discussed their significance to institutional studies and clarified common misunderstandings in China. For example, Arrow-Debreu General Equilibrium theory is a theoretical model established under strict assumptions of a completed market with no information asymmetry. In other words, the equilibrium of Pareto efficiency can only be achieved under the assumption of Arrow-Debreu. Take it as a benchmark, we can derive the institutional interpretation of differences between planned economy and market economy. Yingyi stated the same principle in Understanding Modern Economics.

 

Their illustrations are the essence of economic methodologies, which are definitely listed on the must-read entry references for graduate students.

 

Yingyi and Chenggang follow norms and requirements of modern economics in their research, and made stunning achievements. The institutional interpretation of reasons why Chinese private enterprises have emerged as a new force and promoted economic growth from them is one of the vivid examples.

 

Why did Chinese economy display a scene of prosperity in the early 21st century rather than recession expected in 1990s is a heated discussion in the world. One of the key questions is why private enterprises can not develop in Soviet Union after economic reform, but grow rapidly in China. Many studies focused on the single phenomenon with a narrow perspective did not offer a convincing answer. While Yingyi and Chenggang compared different institutional environment of the survival and development of private enterprises in the Soviet Union and China from the perspective of institutional environment being the most important incentive to enterprises’ development. The article Why China’s Economic Reforms Differ (Ecnomics of Transistion, June 1993, 1(2)) put forward M-form hierarchy theory and offered institutional interpretation to the rapid development of private enterprises in China. It is known that Lenin described the planned economy as a “national syndicate”, namely a state-owned company, or Party-State Inc., the typical structure of which is a highly centralized unitary-form (U-form in short). Yingyi and Chenggang took U-form of large companies as the reference, and compared it with the Chinese economy. Such comparison showed although the Chinese economy maintained characteristics of state-owned company, it was no longer the U-form but multi-divisional form (M-form for short) after several decentralization reforms after 1958. Within this economy, each local government had its own independent interests from the country’s overall interests, and had incentives to help the development of local enterprises, which allowed for the development of township enterprises. In spite of my view that the Chinese economy at that time was much more a holding-form (H-form for short) than a M-form, since M-form enterprises have separate revenue and expenditure departments and do not have balance sheet, the characteristics that Chinese economy at the beginning of the reform period differs from the U-form of the Soviet Union economy is no doubt a reasonable answer to the different reform results achieved in China and the Soviet Union.

 

The second praiseworthy quality shared by Professor Yingyi and Professor Chenggang is the great courage to challenge theories.

 

Once applying the benchmark to the reality, contradictions are easy to be found. It is then necessary to modify or relax assumptions and propose further theoretical explanations. It will challenge existing theories and views, including the dominate theories and prevailing views, and even theories that challengers they themselves believed to be right. Proposing such challenges requires courage.

 

A prominent example is Chenggang’s theory of decentralized authoritarianism. The dominate view that local decentralization and local government-led competition were main forces in promoting China’s economic growth prevailed for a long while. Some even believed it was the best system. However, after studying the whole process of reform and the bureaucratic system in China, Chenggang, with decentralized authoritarianism, produced an institutional interpretation to the economic growth over the past three decades and the current challenges (see The Institutional Foundation of China's Reform and Development, The Journal of Ecnomic Literature, 2011, 49:4). He confirmed that the decentralized authoritarianism formed by the local decentralization reform was the very basic institutional structure in China and the institutional foundation of regional competition and experiments led by local governments as well. In the early stages of reform and opening up, this system stimulated local governments at all levels to promote local economy, creating a rapid economic growth lasting for years. However, with the economic development, a large number of social and economic problems beyond the scope of GDP have become increasingly prominent. Regional competition has become a major obstacle because it fails to solve incentive and information problems. Moreover, as governments at all levels hold a large amount of economic resources, corruption has become a chronic problem of decentralized authoritarianism. Therefore, the economic development and social progress can only be achieved by completely changing this system.

 

Since this system is closely related to interests of many institutions and a large number of people, it is clear that putting forward to change this system demands great courage.


Since the third plenary session of the 14th CPC Central Committee passed the Decision on Several Issues Concerning the Establishment of a Socialist Market Economy in 1993, the overall reform began to move forward. Yingyi was first contracted by the issue of state-owned enterprises reform. At that time, there were two dominant views on objects of enterprise reform. One was the “joint-stock company” composed of state shares, corporate shares and public shares; the other was the contracted management responsibility system for enterprises by the original managers. Analyzing the above two systems with modern enterprise theories (literature review on modern enterprise theories by Yingyi, see Yingyi Qian (1989), Enterprise Theories on Works on the Frontier of Modern Economics (I) edited by Yushi Mao, Min Tang, the Commercial Press, 1989), it is easy to found a system loophole. That is to give residual control right and residual claim rights, to a large extent, to insiders in the name of “the separation of ownership and management”. Such practice was affirmed as a statutory system in Law of Industrial Enterprises Owned by the Whole People in 1988, which in fact, provided a theoretical basis and legal basis for the insiders to control companies. In order to clarify this major theoretical and policy issue, Yingyi and I wrote On Corporatization in 1993 (see The Economic Daily, August 24, 1993) to explain the nature of corporate system, emphasizing the importance of establishing a corporate governance structure for the owner and the manager. The main point of view was later adopted by the third plenary session of the 14th CPC Central Committee in 1993 and the fourth plenary session of the 15th CPC Central Committee in 1999, and became the theoretical explanation for corporate restructuring. In 1994, Yingyi and Professor Aoki Masahiko co-compiled the book Corporate Governance in Transitional Economies: Insider Control and the Rold of Banks (China Economic Press, 1995), introducing relevant experience and discussions of foreign countries.

 

Although these efforts did not fully addressed the problem of insider control being out of control during the reform of state-owned enterprises (the recent published Opinions of the CPC Central Committee and the State Council on Perfecting the Property Right Protection System to Protect the Property Rights According to Law regards the “state-owned property rights facing risks of the loss of state-owned assets resulted from insider control and related transactions because of the unclear relationship between ownership and agents” as a major flaw of China’s property rights system), they warned people to limit insider control.


Over the years, Yingyi has been busy in managing School of Economics and Management of Tsinghua University. It undoubtedly reduces his efforts in economics, and our enjoyment from his economic research. But at the same time, we have gained an educator. Yingyi studied educational issues in China with rigorous approach, and put up the mission of college education. He came up with ideas of “significance of ‘useless’ knowledge”, “ ‘to enjoy’ being better than ‘to know’ ”, “cultivating a ‘man’ being more important than a ‘talent’ ”, and systematical answered basic questions of “what to learn”, “how to learn” and “why to learn”. In the words of his own, those are his “different thinking on educational ideas which are accepted by the majority”. In other words, he is challenging educational ideas and system that have long been existed and become increasingly authoritative.

 

I would like to conclude with my sincere wishes to the two winners to make continuous contributions to the development of economics.








◆please indicate the source if authorized: National Economics Foundation

◆photo:National Economics Foundation