(Yicai Global) March 20 -- Since the financial crisis, monetary and fiscal leverage has produced an illusion of economic stability that has made the government reluctant to bear the pain of reform.
"In such circumstances, the time won by monetary and fiscal policies is wasted, causing policy space to get smaller and smaller," said Lou Jiwei, chairman of China's National Council for Social Security Fund and the country's former finance minister. "At last, it is necessary to carry out reform under tight monetary and fiscal conditions, which entails more intense pain and more difficulty in reaching a consensus, prone to left- or right-leaning populism."
Lou made the above remarks in a luncheon speech at the 2017 annual meeting of the China Development Forum hosted by the Development Research Center of the State Council and organized by China Development Research Foundation and held at the Beijing Diaoyutai State Guesthouse from March 18 to March 20.
Coping with the financial crisis, the government should appropriately use tools to leverage, including monetary policy and fiscal policy, and carry out financial regulatory improvement and structural reform to improve total factor productivity amid this process, Lou said. "In this way, total supply capacity can be boosted, thus pushing forward structural reform. But the monetary and fiscal leverage has resulted in an illusion of economic stability, making the government reluctant to bear the pain of reform, and wasting the time won by monetary and fiscal policies."
From a global perspective, the responsibility and wisdom of key politicians is more needed in such difficult times. They can not only unite the people, but also formulate the correct policy order to promote the reform and improve the supply, Lou said.
He also stated that globalization is the cross-border allocation of capital, technology, tradable products and services, as well as labor, land, etc. Due to the different stages of development, the demographic structures and natural conditions of different countries, the optimal allocation of resources in a globalized environment is multi-win. At the same time, the mobility of various factors is insufficient and different, and the form of that mobility is also different. Too much control and barriers can lead to lose-lose or multi-lose outcomes, and it remains uncertain whether short-term cross-border capital flows are good or not. "Under the current financial regulation, we are also considering how to cooperate and regulate short-term cross-border capital flows," he said.
Lou underscored once again the necessity for global coordination. After the outbreak of the global financial crisis, global leaders faced a common disaster and unanimously strengthened policy coordination. However, in the face of high leverage, productivity stagnation, slow overall economic growth, deteriorating income distribution, intensified trade frictions and prevailing populism, the global economy has failed to achieve substantial and sustainable recovery. And the policy space of countries in the world is narrowing, so to call for global coordination becomes even more necessary.
"Is there any end point for competitive tax reduction? In the past, China's corporate income tax rate was 25 percent, which was in the global median, but now it has gradually become a high-level tax rate," Lou said. "For example, can any country impose a positive entry tax and a negative exit tax at the same time? Is it necessary to revise the existing bilateral tax treaties? China has nearly 100 bilateral tax treaties, should they be re-negotiated? What is the outcome of a policy of global retaliation?"
Lou argued that using neighbors to offload risks will only elicit retaliatory counterattacks, whereas reform, opening and cooperation will lead to a bright future. "The crisis may also trigger conflicts and confrontations, which none of us want to see, and we stand at the crossroads," Lou said.