Wu Xiaoqiu: The power of the rule of law and the role of the system

Editor's note: Recently, Wu Xiaoqiu, former vice president of Chinese People's University, president of the National Institute of Financial Research, director of the Chongyang Institute for Financial Research and national first-class professor, was invited to attend the "China and the Global Economy" forum. He believes that the problems of China's economy are not mainly in the factors of production, but in confidence and expectations. Where does faith come from? From the rule of law. When people have a sense of security and society has a basic bottom line, people will have confidence. The full text of his speech is published as follows:

When I was younger, I focused on and studied economic operations, including short-term economic analysis, and then I kept thinking about where the cornerstone of China's sustained economic prosperity comes from. That is why I am now more concerned about the power of the rule of law and the role of institutions.

1. Use the power of the rule of law to boost confidence and stabilize expectations

In fact, at the moment, I think the most important issue for China's economy comes from confidence and expectations. Over the past 40 years of reform and opening up, we have gradually learned how to play the role of market mechanisms. China has no shortage of international vision, and after joining the WTO, we have a deep understanding of the rules of international economic operation; China is not short of diligence, and the Chinese nation is the most diligent nation; China does not even lack wisdom, the Chinese are very wise, we will learn good things; China is also not short of capital. More than 40 years ago, China lacked capital, and at that time, the meager foreign exchange reserves and residents' savings deposits could not bring China into modernization, and now the capital is abundant, in a sense, China is a country with excess capital; In addition to some key areas of technology, China is not short of most technologies. Therefore, the mainland has a good endowment of production factors. Judging from the statistics, GDP increased by 5.3% year-on-year in the first quarter of this year, 4.7% year-on-year in the second quarter, and 5% year-on-year in the first half of the year. Judging from these indicators, China, as a huge economy with a GDP of more than 126 trillion yuan, can achieve a growth rate of 5%, which should be good among the world's major economies. But there is still a gap in people's microscopic feelings.

How to balance the macro and micro "temperature difference" is indeed a difficult problem. I don't doubt the macro data, let alone the micro senses. The problem of China's economy is not mainly in the factors of production, but in confidence and expectations. Where does faith come from? From the rule of law. When people have a sense of security and society has a basic bottom line, people will have confidence.

I am pleased to see that the Third Plenary Session of the 20th CPC Central Committee specifically mentioned that China should emphasize the role of the rule of law in the future, which shows the essence of China's economic problems. If the rule of law is not perfect, it will be difficult for the various factors of production to function. In China's reality, there are indeed many illegal phenomena. In life, everyone can feel it. For example, in the mainland, banks may ask where the money comes from. Where do I use my money? Of course, this violates people's right to privacy, and any policies and rules should operate within the framework of the law, and cannot go beyond the law. Where the customer's money comes from and what the money is used for is not something that the bank can control. With the income level of ordinary people, what to do with the money is most likely not money laundering and other activities, but normal life or investment needs. In addition, during those three special periods, there were sometimes violations of the rule of law, and some of people's thinking is still stuck at that time. A perfect legal system is the standard configuration of modern society and the hallmark of civilized society. If we want to modernize, we must start with the rule of law.

2. Leading and promoting Chinese-style modernization through institutional construction

A country with a sound rule of law, a basic social order, a low-cost tax burden, and a system that motivates people to move forward, will surely prosper. The prosperity and development of society is not dictated by the people sitting in the office, but by the role of the system. Under the guidance of the rule of law and the system, everyone will tend to be rational. Everyone rationally strives to increase their income, and companies also strive to increase profits. As Adam · Smith said, it may be a poisonous flower, but it bears beautiful fruit. We still need to have a deep understanding of the basic principles of the market economy.

We may take it for granted that people's subjective will can be very strong, strong enough to control the economy, but I never think so. The source of China's sustained economic prosperity comes from a sound legal system and a system that conforms to the principles of a modern market economy, rather than from frequent policy adjustments. In my underlying logic, special attention is paid to the role of the rule of law and institutions, and policies only play a fine-tuning role under the framework of the rule of law and institutions. But anyone who has studied economics knows that policy is not everything. When a country's economy is affected by frequent policy adjustments, in fact, the country's economy will be in a state of flux, and this fluctuation is of course not mainly caused by cyclical factors. As I have said on a number of occasions, China's economic problems are largely not characterized by economic cycles, and this is the profound reason why frequent adjustments in economic policy are ineffective. It is not that many policies can stimulate consumption and investment. Don't think that if the down payment drops to 15%, people will buy a house. It's not like that, there's an expectation problem here. Leverage comes into play only when there is anticipation. When there is no expectation or the expectation is weak, the effectiveness of leverage will be greatly reduced, and the policy will be ineffective, which is the basic principle of the modern market economy. The rule of law and the cornerstone role of institutions must be respected. We cannot afford to see the role of policy so much. Respecting the role of the rule of law and institutions is, in fact, respecting the role of the market. The power of the rule of law and the system is the power of the market and the power of reason.

3. Expand the space for Chinese-style modernization with high-level opening up

This is not to say that macroeconomic policy does not work. In modern society, from the perspective of the big cycle, there will be some imbalances in the economy, so there must be some necessary macroeconomic control policies to give the economy and the market some macro guidance, which is very important, and the achievements of China's economic development have contributed to this factor. But let's not be superstitious about it, thinking that it will solve everything. In fact, as long as we return to the track of the rule of law and system, China's economy will be revitalized.

Pay attention to the role of external needs. China has huge production capacity, and the capacity cannot be passively removed, but must gradually expand all demand, including external demand. The expansion of internal demand is of course important, and it involves the level of economic development. The expansion of internal demand requires the increase of employment, the growth of income, and the appreciation of stock wealth, which are important factors for the growth of internal demand, and even one factor can effectively expand demand. If residents' income does not increase, but the stock of wealth increases, demand can also be expanded. If the stock of wealth does not increase, income is declining, and employment is very difficult, consumption cannot grow. This is common knowledge in economics.

For China, external demand is particularly important. We must not think that after China's economy expands, it will be able to balance its excess supply capacity by relying on its own consumption. China is a country with a very important proportion of investment-driven economic growth, so it needs a strong external balance of supply capacity. It is important to emphasize that internal demand is important, but it is not a substitute for external demand. External demand is not only the expansion of total demand, but more importantly, the introduction of higher development standards.

In fact, we have not yet formed international standards in many fields, and many fields are still operating according to international standards. Therefore, in opening wider to the outside world, it is very important to improve the quality of China's economy in accordance with international standards. Only by constantly integrating into the international community can we play a better role in the international community. Many people think that China is strong and the outside world is not important, but they do not see the tremendous role and far-reaching significance of opening up to China. Opening up is a great and profound reform. Only by fully integrating Chinese society into the international community can Chinese modernization be more effectively realized.