Europe’s Lessons for China’s Reformers

BRUSSELS – The most important economic-policy decision of 2013 might well have been taken in November at the Third Plenum of the Chinese Communist Party’s Central Committee, which pledged that the market should be given a “decisive” role in guiding China’s economy. Because China is now the world’s largest exporter after the European Union, and accounts for about half of global growth, decisions taken in Beijing could have a more important impact on the world economy than those taken in Berlin, Brussels, or Washington, DC.

But, while China’s embrace of the market and opening to the outside world has enabled it to achieve astonishing economic progress over the last three decades, the country might now have reached a level of income at which the problem is no longer “too little market.” On the contrary, some of China’s key problems today require a stronger role for government.

Air and water pollution, for example, can be addressed only by more state intervention, at both the central and local levels. The authorities have now made solving the problem a high priority, and there can be little doubt that China has the resources to do so – much as it created the world’s largest manufacturing sector. The fight against smog and water pollution plays to the country’s strength: the availability of huge domestic savings to finance the necessary investment in pollution-abatement equipment.

The dilemma for China’s leaders is that meeting the need for more in pollution control and infrastructure makes it more difficult to achieve their goal of shifting the country’s economic-growth model from one based on investment and exports to one based on consumption. But more consumption today would further aggravate the pollution problem. As a result, economic rebalancing may be delayed by the more urgent need for environmental investment.