Lawrence Lau's talk at China Economic Reform Forum

[mavaro...@gmail.com]

His presentation may be available later at:
http://www.cuhk.edu.hk/v6/en/cuhk/officers/vc_presentation.html

I wrote him an email after the talk, including several questions on
the points he made in the talk. In retrospect, some of my arguments
are not so academically rigorous. Anyway, post for fun.

Dear Prof. Lau:
I have attended your talk today on Chinese economic reform. I
get some questions on several points you acclaimed. Since the time was
tight, I didn't raise my questions right after your talk. Here I
summarize them for your reference:

1. You mentioned the inefficiency of free market mechanism and
government intervention is necessary under given conditions which I
think is correct theoretically. However, your examples are faulty.
Like the double-track price system, it did help reduce the resistance
to reform. But long-term economic pay-off is doubtful. According to my
experience, government or involved enterprises, no party is satisfied.
The government would think it protects the enterprise from competition
thus demand a stricter control over even detailed policies.
Enterprises think they would be able to gain more profit if they are
able to sell at market price. Overall, such system creates a
disequilibrium thus arbitrage opportunities in either direction.
Finally, it's the tax payers who pay the price. A second example you
used is the futures market. You propose a government controlled
inventory system. But I think this place is where market theory
exactly can be applied. Why should government involved if we don't
consider so called national security issues?
2. About corruption. You mentioned a transparent and competitive
market mechanism may be helpful to solve this problem. I come from
Shandong province whose economy is still highly government guided.
Thus corruption is also common. Though people find corruption
disgusting, I find it's more like an unavoidable part in current
China's economy. As well recognized, corruption breaks the basic rule
of market and distorts the normal information flow. However, any
corruption, is still market priced. In short, it plays more like some
unorthodox consumption way. Using a maybe not so appropriate analog,
if we believe government intervention is reasonable under some
circumstances, I see no reason to reject corruption just as some
abnormal control. Although it creates a great disequilibrium in common
economic sense, since we are still having 10%+ annual GDP growth
during the same period, it can't be rejected by econometric ways.
3. You mentioned Schumpeter's creative destruction as a factor to
explain why china's late economy reform has a comparative advantage. I
think this includes a logic error. Your argument is more applicable to
micro and short term business instead of the macro and long term
national economy. This has been proven by Chinese electrical appliance
producers like Haier, TCL, etc. Also they have a high starting point
and no switching cost, but now, they are feeling pains. So in short
term and for individual companies, your point may apply. But given
macro and long-term sector or national economy, I think it's not that
convincible.

Besides the question above, I am considering several problems maybe
related to the forum's topic:

1. The current credit crunch greatly challenges the free market
theory. In your talk I think you are also advocating the neo-classical
way, i.e., the government needs to be an active market player.
Philosophically, I agree with free market theory although I can't deny
neo-classical way theoretically. However, given current government
status in China, I doubt its economic role could be well split from
its political role. Is a Federal Reserve style system more
appropriate?
2. I have been thinking about what the reform really brings us.
What if we apply Solow's growth model to Tang dynasty, with certain
econometric way to cannibalize? Will we have a similar achievement to
what we see right now? As long as the data is available, I think it's
justifiable and meaningful. This may answer a question, are we still
the same people as we are thousands of years ago simply with new looks
and technological tricks, as Hong-ming Gu has said?

I am not an economics major student so maybe my argument includes many
faults. You schedule must be very tight and it's understood if you
can't find time to reply the email. Again, thanks for your talk and
time to read my email.

regards