1050x300-MS-Minimal Reforms can Lead to Poor Economic Performance

Minimal Financial Reforms Can Lead to Poor Economic Performance

Author(s): Michael Spence

Date: Mar 13, 2015

Theme(s): Finance & Macroeconomics

Publications: Opinions & Speeches

Academic Council Chairman Michael Spence writes on the need to pursue multiple objectives to avoid half-baked results.

At a time of lacklustre economic growth, countries around the world are attempting to devise and implement strategies to spur and sustain recovery. The key word is strategy: to succeed, policymakers must ensure that measures to open the economy, boost public investment, enhance macroeconomic stability, and increase reliance on markets and incentives for resource allocation are implemented in reasonably complete packages. Pursuing only some of these objectives produces distinctly inferior results.

China provides a telling example. Before Deng Xiaoping launched the policy of ‘reform and opening up’ in 1978, the country had relatively high levels of public-sector investment. But the centrally planned economy lacked market incentives and was largely closed to the global economy’s major markets for goods, investment, and technology. As a result, returns on public investment were modest, and China’s economic performance was mediocre.

China’s economic transformation began with the introduction in the 1980s of market incentives in the agricultural sector. These reforms were followed by a gradual opening to the global economy, a process that accelerated in the early 1990s. Economic growth surged ahead, and returns on public investment soared, reaching an annual growth rate above nine percent of GDP, shortly after the reforms were implemented.


This article first appeared in World Finance on March 9, 2015.

The views expressed in this article are the author’s own and do not necessarily reflect Fung Global Institute’s editorial policy.