ai Chongen, Mansfield Freeman Chair Professor in Economics and the fifth dean of the School of Economics and Management at Tsinghua University (SEMTU), has long been respected in China for his keen advocacy for the country’s reform aimed at building a market-oriented economy. He was honored as the Economist of the Year by NewsChina recently.
Originally a major in mathematics, Bai was attracted by economics in 1983 when debates on China’s economic reform were swirling on Chinese college campuses which had been re-opened four years earlier, the same year China launched its reform and opening-up program. After graduating from the University of California San Diego in 1988 with a PhD in mathematics, he went on to post-doctorate studies in economics at Harvard University, tutored by Nobel Prize winner Eric S. Maskin. After teaching at Boston College and the University of Hong Kong, Bai joined Tsinghua University part time in 2002 and full time in 2004. He officially took over SEMTU, first led by former Chinese Premier Zhu Rongji, in August 2018. He is also a member of the expert committee for the 14th Five Year Plan for China’s national development (2021 - 2025).
Bai’s research in economics began with comparing different economic systems in different countries. His lasting interest in this field guided his studies of institutional economics and policy proposals for China’s economic reform. His insights are particularly important when China is trying to improve its business environment to tackle the challenge of a growth slowdown and trade tension with the US. “It is the market players, rather than those who draw up documents, who know best if the business environment is good enough or not,” Bai told NewsChina.
From Preferential to Inclusive In the last 40 years, in an imperfect system with contradicting regulations among different departments, governments at different levels in China have been stuck in dilemmas in dealing with their relationships with business. A strict adherence to procedures may hamper investment and thus economic development, while providing preferential treatment goes against the rule of fairness.
In 2014, China ranked 96th in the World Bank’s Doing Business study. Despite this, China achieved rapid economic growth. Bai found in his research that the business environment in China since 1978 was not very good in general as judged by traditional indicators. He believes that the “preferential model,” in which some enterprises received preferential help from governments to overcome institutional obstacles to their projects, might be one of the answers to explain the fast economic growth in an underperforming business environment.
Bai cited an example. Foreign investors need to register companies for their projects in China. After the projects finish, they need to get the registration canceled to transfer the profit to an overseas account. To do this, they have to show evidence that they have paid due taxes and then bring the tax certificate to banks to convert currency and draw the money.
But contradictory regulations from different departments make this difficult, even impossible. Before 2018, there were both national and local tax bureaus in one place. The local tax bureau provided the original tax payment certificate, which the investor needed to give to the national tax bureau in exchange for the latter’s certificate. But banks required the original certificates from both tax bureaus to get the money.
“Similar problems are very common in reality,” Bai told NewsChina. He said some companies in this situation seek special treatment from the government to solve the problem. “When a company wants to make a product, all departments show up to set rules, many of which are made from the perspective of planning,” Bai said. “Unrealistic and contradictory regulations inevitably leave companies at a loss as to what to do.” Given this, the preferential model has helped many enterprises solve their urgent problems and thus facilitated the country’s growth.
“It is worth noting that in the past 40 years, local governments have made great efforts to improve institutional infrastructure. But the job can’t be done overnight or even in 40 years.” Not all enterprises can access preferential treatment. As China’s economy is shifting toward a quality-driven model from a speed-driven model, enterprises are playing an increasingly bigger role in the economy compared with government-led investment. Bai believes it is time the preferential model is replaced by an inclusive model in which all enterprises can operate normally by following the same rules in the same way. Only in this way will enterprises have more confidence.
Bai warned that ending the preferential model overnight is neither realistic nor proper. “If we deny the local governments’ capability and initiative in solving problems case by case and ask them to deal with all cases by the rules, will the economy still have a chance to develop?” Bai said.
To strike a balance, Bai suggested that a special government department be set up for the business environment to start providing one-stop services for select companies. He stressed that the key in this process is to listen more to enterprises regarding the business environment. Bai said he once went to a garbage truck producer to conduct research and found that the company was under the jurisdiction of four government organs parallel with each other, which means its production involves four sets of regulations at once. The person in charge of the company told Bai that if they were to abide by all four sets of regulations, the total load of a truck should be below 500 kilograms, which is “obviously not realistic.” But if the company produced trucks according to realistic demands, it inevitably will violate certain regulations. “In the past, they might risk it, but now as all departments have tightened management and surveillance, these companies are affected more by contradictory regulations,” Bai said.
As some enterprises are supervised by several departments, now each supervising department can order certain reforms to be carried out without proper coordination with each other. “In the end, some enterprises find that if they follow all the directives, they are left with nothing to do. So they simply give it all up,” Bai said.
The root of the contradictory regulations, Bai pointed out, is the planned management of the market regardless of the feeling of market players. This old thinking was not changed during the transition to a market economy. Now it is critical to take market players’ feelings into consideration and give full play to the role of enterprises to improve the business environment.
While China’s ranking at 31st in the World Bank’s Doing Business 2020 study has been much applauded at home, Bai warned “We need to be clear that China still has a lot of room for improvement in its business environment.”
Bai believes that the 10 aspects the World Bank’s latest doing business study covers are not a complete system when trying to evaluate an economy’s business environment. For example, it does not consider the impact of policy stability on enterprise and market expectations, which “is an important factor” in the economy. Bai said that property rights protection, cross-border investment and financial supervision are also complicated factors worth paying attention to in the evaluation.
“At the end of the day, reform is the way toward understanding and getting the business environment that enables growth,” Bai said.