Experts see cracks in China model

By Mike McDonough

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A question that has been on the lips of many participants at this year’s Annual Meeting is whether countries such as Kazakhstan should follow the Chinese model of economic development. After all while Western governments scrambled to bail out their banks during the financial crisis and recession hit the EBRD region, China’s state-led economy performed robustly.

At a panel discussion moderated by EBRD Chief Economist Erik Berglof, however, several distinguished academics and government officials rejected the idea that China offered the best route to economic growth. They also warned that, while necessary to rein in the market’s excesses, governments were susceptible to greed and needed to be kept in check themselves.

“We should not be overwhelmed by appearances. China seems to be doing well,” said Bernard Yeung, Dean of the Business School at the National University of Singapore. “But I don’t think the Chinese model is going to be that fantastic when you move further forward.”

Professor Yeung said China’s response to the financial crisis – which included asking banks to increase credit levels dramatically – had sown the seeds for future difficulties: “China is heading towards a lot of problems. The system has not yet faced a real setback and how it deals with shocks is not yet known.”

Kairat Kelimbetov, Kazakhstan’s Minister of Trade and Economic Development described how his government had become a major shareholder in a wide range of sectors that were severely affected by the financial crisis, including banking, mining, energy and real estate. Nevertheless he remained convinced that the private sector was better equipped to manage businesses than the state.

“At the beginning of the crisis there was a big temptation to manage the whole economy by the government,” Mr Kelimbetov said. “How the Chinese do it is a separate theoretical issue, but in Kazakhstan it will not work. We will not replace the private sector. We need to support private sector initiatives otherwise we will fail.”

The Minister added that the Kazakh authorities were preparing a “huge” privatisation programme from the end of the year although he noted that land assets would not be sold to foreign investors as the issue was “too political”.

In Russia too state intervention in the economy increased greatly as a result of the financial and economic crisis. Sergei Guriev, Rector of the New Economic School in Moscow, said the expansion of government ownership made it hard to find directors and managers with no conflict of interest.

“There is always a balance between government and market failure. But I see that the arguments in favour of state ownership are usually overblown. Very often the only solution is privatisation,” said Professor Guriev, who added that Russia has an “unchecked government that wants to grab more and more.”

Meanwhile, Sergey Vasiliev, Deputy Chairman of Russian development bank Vneshekonombank, focused on private-public partnerships (PPPs) in Russia. Following initial enthusiasm about the structures, he recognised that “regional administrations are not ready to handle PPP projects which require a very different set of skills from traditional planning.” He said another significant problem was how to guarantee the obligations of regional authorities with regard to PPPs.

Turning to the financial crisis that sparked the debate about the limits of state intervention in the first place, Professor Yeung said he believed there was a “real kind of cronyism” at play that had prevented those responsible for the debacle from being punished.

“It’s the first financial crisis in the US where I have seen no one being prosecuted yet. No one is in jail yet,” he said. “We have not addressed the basics and identified the culprits. As a result, we don’t have confidence in the system.”

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