2018 Reports

Alternatives to Debt-driven Growth: Continuing in China's 40 year of Reform

Stiglitz, Joseph E.

For the past decade or more China has been engaged in a major reform of the economy, moving away from the manufacturing export led growth model to one based on domestic demand. Too much of China’s growth over the past decade (and even earlier) was financed by debt. There is an increasing consensus that the rate of accumulation of debt is not sustainable. High levels and rates of increase of debt are associated with a higher probability of having a crisis. Resources get wasted in crises, and there is typically much suffering. But there is also typically a waste of resources before a debt crisis hits. At the local level, to too large an extent, there is an alternative finance mechanism which is problematic in still other ways: selling off government land. It has been associated with corruption, poorly managed urban areas, and, again, the misallocation of resources. In the private sector, there has been considerable institutional innovation in the provision of finance, but many of these innovations have resulted neither in increased efficiency or stability. While there is a need to tighten financial regulations, ensuring that more lending is intermediated by well-regulated banks, and on-lending is not allowed, it is important to look for other ways of financing domestically driven expenditures. This paper looks at two such ways, taxation for the financing of public sector expenditures and equity for that in the private sector. There is much scope for increased tax financed growth in China. Well-designed taxes can actually increase—or at a minimum do not impede—the efficiency of the economy, stimulate domestic demand, and address other key problems facing the Chinese economy and are consistent with principles of equity. The paper looks at the benefits to be achieved from carbon taxes, a financial transactions tax, including on cross-border capital flows, capital and inheritance taxation, and property, land, and natural resource taxes. The paper explains the advantages of equity finance over debt finance, but success in this area requires a better institutional framework for ensuring transparency and good accounting standards, with strong systems of accountability. The shift to greater reliance on taxation and equity finance can not only enhance economic and financial stability; it can even improve the efficiency and equity of the economic system. And this would be the best way I believe, for China to continue in its 40 years of reform.