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Speeding up the Improvement of the Institutional Environment of the Modern Economic System

Oct 16,2019

By Zhang Junkuo

Research Report Vol.21 No.5, 2019

A strong economic system is vital to the prosperity of a state to be powerful. Building a modern economic system is a major strategic task assigned by the CPC Central Committee in line with the new requirements of socialism with Chinese characteristics in the new era. It is crucial to fulfilling the Two Centenary Goals. The accomplishment of the strategic task requires us to make unremitting efforts in various aspects in accordance with the requirements of the central government. The key is to deepen reform, break down institutional barriers for productive forces and speed up efforts to improve the institutional environment of the modern economic system.

I. Improvement of the Institutional Environment is key to Building a Modern Economic System

The construction of a modern economic system is impossible without a good institutional environment. Speeding up the improvement of the institutional environment that advances and supports sustained and high-quality economic growth is the key task for the development of a modern economic system.

First, institutional environment underlies construction of the other aspects of the economic system and holds the key to the smooth progress of these aspects. With regard to the key tasks of building a modern economic system, the report of 19th National Congress of the CPC summarized six points: deepening the structural reform on the supply side, building an innovation-driven country, implementing the strategy of rural revitalization, implementing the strategy of coordinated regional development, accelerating the improvement of the socialist market economic system and pushing forward all-round opening up. During the third collective study of the Political Bureau of the CPC Central Committee, General Secretary Xi Jinping elaborated the development of the industrial system, market system, income distribution system, urban and rural regional development system, green development system, all-round opening-up system and economic system. It is easy to see that every aspect, be it innovative development or green development, coordinated development, open development or shared development, cannot move forward without an institutional environment and deepening reform. In particular, regarding the international competition pattern faced by innovative development in the coming period, China has striking weakness in the institutional environment, as compared with the developed countries such as the USA, Europe and Japan, which makes it hard for China to adapt to the changes in the domestic and international landscape and the demand of high-quality development. In this context there is a pressing need to speed up the improvement of institutional environment with greater courage and determination. Second, institutional environment is a capacity building that is more essential for a modern country. Building a modern economic system is a major task after we embark on the new journey of building a modern socialist country in an all-round way. Therefore, in a certain sense, the so-called modern economic system is an economic system that is compatible and matched with the overall goal of China’s modernization. So, what does this overall goal require of the economic system? While there may be lists of requirements posed from different perspectives, the following four are the most basic. First, the economic system must be able to fully meet people’s growing needs for a better life, bringing them a strong sense of happiness and gain.

Second, it must a strong prop of national defense security. Third, it must be internationally competitive and capable of dynamic optimization, and keep making adjustment according to the development stage and changes in domestic and foreign economic landscape. Fourth, it must show strong risk resistance and good stability. The modernization of a country requires not only a higher development level, but also enhanced development capacity. There is no one-size-fits-all and once-for-all modern economic system. The key is to build the capacity for sustained and high-quality development while significantly improving the level of development.

Third, institutional environment building is a key step to surmount the “middle income trap”. In the modernization of the late catch-up economy, there is the “system wall” phenomenon besides the “middle income trap”. The core view of the so-called “system wall” phenomenon is that a latecomer economy will find it hard to climb the “system wall” to enter high-income society without a good system. Through a comparative analysis of the economic development and systems in more than 100 countries, the theory finds that when an economy is at a relatively low level of development, it does not have very high requirements for its institutional environment; however, when it wants to break the per capita GDP critical range of $10,000 to $ 12,000, it needs a well-developed institutional environment, otherwise it is hard to climb the high wall and join the ranks of modern countries. Now China’s economic growth and modernization are approaching this critical point, where the improvement of its institutional environment is vital to advancing the country’s modernization.

II. Focusing on Major Issues When Accelerating Improvement of Institutional Environment

After over 40 years of reform and opening up, China has established a socialist market economic system with Chinese characteristics that has shown remarkable superiority and strong vitality amid the rapid development for 40 years. However, it is also important to be aware that the system is far from being perfect since it still has many problems and weaknesses. These problems not only affect the current situation, but also have an even greater impact on long-term development. They are especially incompatible with the requirements of building a modern economic system and must be resolved. In order to improve the institutional environment, it is a must to properly handle the relationship between the government and the market. Following the requirements of “effective market mechanism, dynamic microeconomic entities and moderate macro-control”, we should focus on principal contradictions and major problems to achieve substantial results.

Firstly, efforts must focus on property rights protection and stabilizing the expectations and confidence of private entrepreneurs, something vital to keep China’s economy stable for a long time. To this end, the first step is to further innovate and develop the theory on the primary stage of socialism, clarify the relationship between the primary stage of socialism and the overall modernization goal of China and figure out the long-term nature of the basic economic system. Second, protect property rights must be protected strictly in accordance with the law, with good and stable expectation from property owners. The focus at the stage is that governments at all levels must have strict awareness of property rights and contracts. The formulation and implementation of laws and policies should be in strict accordance with legal procedures, and must be transparent, open and predictable. Third, the business environment must be optimized. The unremitting efforts in recent years have significantly improved China’s business environment, yet it still has room for improvement.


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