Following the Cash to Promote Competition
Remarks to the China Development Forum Economic Summit
The ultimate challenge is to have vitality in the economy. Vitality in practice takes the form of measured competition. That sounds like an empty phrase, but I would suggest that there are two key aspects to making this relevant. First is that you need to have incumbents sufficiently under pressure that they actually have to adapt, innovate, compete. Second, you need to have enough new entrants having a chance to make it, not just at a small level, but to become potentially the next generation’s incumbents. The importance of this framework is illustrated by the productivity problems in Europe and the ability of the United States to overcome its many growth problems. In short, much of northern Europe saves more and educates better than the United States, but the United States still comes out ahead on productivity growth because of private-sector competition. This framework is quite consistent with the enterprise and investment reform agenda, as I understand it, laid out by the Third Plenum last fall.
First, a definitional point. You will notice that I mentioned that the incumbents have to be sufficiently afraid that they compete. That intentionally does not specify whether the incumbents are state-owned enterprises or not. For many reasons that people at this forum are well aware of, having too heavy a hand of the state is harmful to both economic growth and for political stability. But it is equally important that we recognize that supposedly private entities can be just as protected from competition and just as self-satisfied and deterring of new entrants as public sector entities. Though it is rarer, there are instances around the world, including in the United States, France, and Germany, where public sector entities have been sufficiently under competition that they can be a useful part of the economy. (There is, of course, a separate class of industries and sectors where you see a natural monopoly or at least need a utility model but let’s leave that aside. That is the easy part.)
By almost any metric, China’s state firms are already growing less important: Investment by state firms accounts for a declining share of national investment; the growth of output of state firms is slow relative to that of private firms; and employment in state firms continues to fall, not only as a share of total employment but in absolute numbers as well. The productivity of state industrial firms, as measured by return on assets, has consistently lagged that of private industrial firms and, since roughly the middle of the last decade, has also fallen in absolute terms. A similar pattern is evident in China’s services sector. The return on assets of state-owned service firms in 2008 (the only year for which reasonably comprehensive data is currently available) was only 3.4 percent, only half the level of nonstate firms. Tellingly, with the exception of 2010, since 2007 the return on assets of state firms has been less than their cost of capital. Moving on constructively from here, however, has to be more thoughtful than either a crusade against stateowned enterprises (SOEs) or just letting them hang on where politically convenient.