As reform measures laid out at the Third Plenary Session of the 20th CPC Central Committee continue to interest the international academic community, CSST recently interviewed Margit Molnar, head of the China Desk at the OECD Economics Department, and Mian Abrar, head of news at Daily Pakistan Today and chairman of the Global Development and Connectivity Institute in Pakistan. The two China experts shared their views on impressive policies unveiled at the landmark meeting.

Further, high-standard opening up

Hailing the plenum as a watershed moment in China’s history, Abrar asserted that the session presents a major opportunity for China to set its direction to meet the emerging challenges with the global landscape transforming drastically.

“I was impressed by the Chinese leadership’s resolve to continue steadily expanding institutional opening up, deepening of foreign trade system reform, expansion of foreign investment and outbound investment management system reform, optimizing regional opening layout, and improving the mechanism for promoting high-quality joint construction of the Belt and Road Initiative,” Abrar said.

In his view, opening up and development reflect the Chinese nation’s longstanding tradition of inclusiveness and integration. From systemic reform to institutional openness, China is integrating its efforts to support high international economic and trade standards and actively participating in negotiations on international economic and trade rules.

“Thus, China is moving towards further high-level opening-up, which has shifted its focus from passive to proactive openness, from open development to development-oriented openness and from opening up to promote reform to reforming to promote openness,” Abrar said.

Molnar noted that the key opening up measures in the past decades were decisive in setting the path for China’s take-off. The launch of reform and opening up, followed by another milestone of WTO entry, and several more rounds of opening up allowed China to integrate into the global artery of trade and investment and reap its growth dividends.

“In the current juncture, when growth engines sputter, reducing barriers to trade and investment could bring about the desired boost to growth. There is still room to reduce tariffs and non-tariff barriers as well as barriers to entry and restrictions on conduct of foreign enterprises,” Molnar said.

Adjusting central-local fiscal relations

Regarding adjusting central-local fiscal relations as a novel measure, Molnar said revenue assignments and expenditure responsibilities will be better matched through this move. “Measures like this have long been awaited and will have a broad impact once the objective (of better matching revenues and expenditures at local levels) is achieved.”

Molnar explained that better aligning revenue sources with spending responsibilities can happen in two ways: either decentralizing revenues or centralizing spending. According to the subsidiarity principle in economic theory, spending should be decentralized to the lowest level of government that is able to account for externalities. In countries, however, where there are sizeable horizontal inequalities across government units, greater decentralization would lead to greater inequalities and a greater chance that the least wealthy regions will not be able to finance their core responsibilities.

Stressing that fiscal transfers are powerful tools to reduce horizontal inequalities, Molnar pointed out that in China they have become more effective over time in reducing inequalities. As China has several levels of government due to its sheer size, the issue of horizontal inequalities arises not just across provinces but across prefectures and also counties. Moreover, the gap between revenues and spending is the greatest at the lowest levels.

“Stepping up fiscal transfers to provinces as well as making sure that those transfers get to the lowest government levels resulted in a sharp reduction of within-province inequalities in per capita spending over the last 15 years, according to our estimates,” she said. “However, greater decentralization would require even greater transfers.”

Thus, to better align revenue assignments with expenditure responsibilities, China sees recentralizing the financing of some key public services such as health and education as a preferred approach, Molnar observed. The delivery of those services would still be organized at the local level, but their financing would be guaranteed by the central government. This would be an important step to ensure that a minimum level of public services is provided across the country.

“The CPC plenum appears to go into this direction, which the OECD has been recommending for many years,” Molnar added.

“Further deepening reform will guide efforts in tapping the potential of the world’s second-largest economy, offering a sense of continuity and certainty, and inject fresh growth momentum into global economic growth,” Abrar predicted. “It is a holistic development policy which outlines comprehensive reform guidelines across various key areas including the economy, legal system, culture, education, and others for advancing Chinese modernization.”