Some of the world's heavyweight thinkers in economics took centre stage at Beijing's Great Hall of the People yesterday - and offered their insight and wisdom which could have implications for the country's economy and other policy-making.
Robert J. Barro, Harvard University economics professor, addressed the impact of low-probability crises on asset prices. The most important event in the past century, especially from the viewpoint of Americans, is the Great Depression, when GDP of the US, Japan and Western "Europe dropped by 25 per cent in the first few years," he said.
Large-scale wars naturally hinder economic activities. During WWI (1914-18), eight of the 20 OECD countries saw their real GDP decrease by 20-30 per cent. During WWII, nine OECD countries suffered huge setbacks in their economies.
Barro also concluded that, even though price-earnings ratio tended to be low during wars, real interest rates also remained low, as was evidenced in the US. The big exception is the Great Depression, when the US still had high price-earnings ratios because, for all the big falls in earnings, stock prices plummeted even farther.
Barro told China Daily after his speech that "the US is picking on China unfairly" and that China managed to avoid the Asian Financial Crisis by maintaining a pegged and stable currency. But China may need to reconsider its currency policy because it may be in its own interest to let the yuan appreciate by 20-30 per cent.
Barro said it is political factors that have prompted US politicians to target the Chinese. However, he did not believe that the Chinese government objects to a reevaluation of the RMB out of concern for losing low-end jobs.
Barro said the pace of China's economic growth is about right, but it should keep on opening up, for example in the financial sector.
Designing a sound taxation system in a developing economy has its perils, what with the general low level of income and rampant corruption. But Professor James Mirrlees, who was awarded the Nobel Prize in economics in 1996 for his theory of Economic Inspiration under the Asymmetric Information, has been tackling this problem.
"A developing economy usually has a large "informal sector", which refers to small businesses that do not record their transactions clearly or conduct mostly cash transactions. Therefore, it would not be easy for the authority to keep track of all sales, purchases or earnings in this sector."
This "observational uncertainty", plus the usually wide tax base, raises the administrative cost of implementing a progressive tax system. This kind of tax system, which increases tax rates on the margin, assumes that there is perfect information, and levying tax does not entail cost. These two preconditions do not exist in a developing economy.
Mirrlees argued that taxing large corporations is more efficient.
He also proposed a progressive tax designed for goods of different quality. Progressive income tax is not easily achieved, he said, and it is expensive to levy tax on low-income or self-employed people.
Mirrlees said that in countries like India and China, income tax does not raise as much revenue as it is supposed to by its rates, and as a result, the actual ratio of tax revenue from personal income is lower than in developed countries.
Pension systems
Edward C. Prescott did not favour the social security system in the United States, or pension systems of most countries for that matter. The Arizona State University professor and Nobel laureate of 2004 concluded that, if one follows this model, one would be "throwing away as much as 30 per cent of your consumption".
Called "pay-as-you-go", the pension system most widely used in Western countries, pioneered by Germany and Sweden, has every working person contribute a certain portion of his or her income to a fund and retrieve a certain amount of benefits when he or she reaches retirement age. Although it sounds fair, it has two huge, hidden pitfalls: it assumes that, first, both contributions and benefits are proportional, and second, the size of the working population will be kept stable or growing.
Unfortunately these two assumptions can no longer hold. In many EU countries, lower birth rates have led to a shrinking working population, therefore depleting the pension fund.
When asked about China's incipient welfare system, he said a large number of young people moving into urban areas is tantamount to high growth of the urban population.
When asked whether China's extremely high savings rate, compared with that of the US, would actually make a mandatory savings system less relevant or easier to implement, he did not answer directly.
Edmund S. Phelps also touched on the "crisis" issue. The Columbia University professor does not see one in the near future for China, but "if there is a collapse, there will be a remedy, and the result will be improving quality of investment choices".
Phelps focused on technology transfer. He said the China has lagged behind while the West has raced ahead with technical advances.
If China could [without cost] and fully acquire those Western technologies, the two regions would be identical again, and there would be no basis for trade and investment between China and the West.
This is obviously not the case. Phelps argued that China engages in technology transfer in order to become self-sufficient because it wants to avoid high transport costs or gain access to Western goods otherwise not purchasable.
Therefore, the best way is for China to first buy the technology that can be used to boost production of low-tech goods to the Western level. Then China "moves up the tech ladder".
Phelps saw it as natural progress. What the West sees as anomalous and unwelcome "imbalances" are, according to him, "optimal" from both the Chinese and Western points of view. The Chinese need to maintain a current-account surplus to pay for the flow of technology purchases or licensing fees.
