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China says it's ditching growth targets. That could be good news for the world

Officials at various levels - provincial, county and city - competed in a tournament of who could generate the highest GDP growth rates, and who could expand their local economies the fastest.

Article originally published by The Guardian. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

For years, GDP growth targets have been the be-all and end-all of China’s economy. They were the imperfect but convenient measure of economic expansion and prosperity, the ultimate economic objective for the central government, and the yardstick of achievement for local governments.

Officials at various levels – provincial, county and city – competed in a tournament of who could generate the highest GDP growth rates, and who could expand their local economies the fastest. Some transformed their municipalities into export hubs, some into manufacturing powerhouses, while others mined coal and constructed housing. It mattered less how it was achieved – the goal was to meet, and to exceed, these targets.

The rewards for local officials were plentiful: visibility, respect, the upgrading of their cities to a higher status (Chinese cities are ranked in a tier system), and most importantly, the possibility of being promoted to a higher rung on the political ladder. These were the highly charged incentives to push for GDP growth, and what made the growth model in China work so effectively over 30 years.

This makes it all the more remarkable that, on 22 May, the Chinese premier, Li Keqiang, announced at the opening of the National People’s Congress that there would be no GDP growth target set for this year. This is the first time this has happened since the targets were introduced in 1990. Because of the global coronavirus pandemic, the growth rate of any economy in any part of the world is going to struggle to stay above 0%. It would be pointless, the government has decided, to set a target of 6% when extrinsic factors dictate where the economy is going. But if the move becomes the norm and stays as the default option, it would represent a new mindset, and major progress for China on several fronts.

First, getting rid of targets would signal a shift from a quantity-based economic development model, to a quality-based one. Slowing down the economy would mean less pressure on the environment. It would also mean that local governments could shift their priorities to improving people’s livelihoods, by eradicating poverty, for example, or reducing urban-rural inequality, and providing better social services.

It would free up resources for the entire economy to produce better products, not just more things. So far, the economy has relied on making as much stuff as possible, as quickly as possible. This is a national attitude true of ambitious local officials, real estate companies, private entrepreneurs, and even national universities. But this short-termism means less focus on investing for the long term, and on conducting vital research that does not have immediate gains. Patience is what China needs.

Second, for decades, China has been growing rapidly, but at a high cost: environmental degradation, an imbalanced economy, and perverse incentives featuring an investment craze and a credit addiction. In this world of rapid housing construction, bridges and buildings have been torn down and rebuilt again, and more than 6,000 industrial parks constructed around the country. Not all investment has been productive, and not all resources have been well-used. In recent years, growth has increasingly come from borrowing and spending rather than from rising productivity improvements. The upshot is mountainous debt burdens that now threaten China’s financial stability and thwart economic dynamism.

Third, it may change some of its international practices. The incentives will no longer be about maximising export volumes to help fulfil growth targets. There are pressures for self-sufficiency coming from all directions in the global arena: trade wars, the pandemic, rising geopolitical tensions, and a backlash against globalisation. Practically, this may mean fewer state subsidies to promote exports, less reliance on foreign consumption, and less of a rush to acquire resources abroad. But its shift towards producing higher-quality manufacturing products could also bring its exports into more direct competition with those made in advanced economies.

A potential problem with abandoning the GDP targets is reduced incentives for local officials. These targets have created powerful motivation for these cadres to implement reforms and try novel and creative policies, such as setting up “special economic zones” that mimic open and unfettered markets, or building the world’s first smart cities, such as Xiongan.

But this works less well when objectives are multi-dimensional. If local governments are assessed on a range of factors such as local employment numbers, social stability, environmental standards, and technological development, some may have mutually conflicting goals. Without local incentives to propel the economy, growth rates may slow down significantly. That said, even if China’s economy grows at 5% a year, and assuming that the US grows at 1.5%, its economy will still become the world’s largest within about 10 years, even if it takes several decades for the country itself to become as rich as the US.

GDP growth targets set an expectation, and when unmet, provoke anxiety and pessimism in the population, even when the economy is doing fine. With greater uncertainties around the world, the Chinese leadership may find managing the economy without these targets even harder. But, ultimately, putting more emphasis on the “means” rather than the “ends” of modern development would be a smart move. A China of slower but higher-quality growth may not just be good news for Chinese people, but also for the rest of the world.

• Keyu Jin is a professor of economics at LSE


This article was written by Keyu Jin from The Guardian and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

Article originally published by The Guardian. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

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