Learning from China’s economic philosophy and policy — V

In addition, China’s innovative mind-set is also reflected in finding solutions for better working of economy in an inter-connected way, allowing supporting large economy-wide goals. For instance, in terms of finance, it has evolved efficient solutions in taking the different levers of gathering, and planning employment of finance. In the bond market, for example, the country has connected these levers in an ‘interbank bond market’, giving greater centralized role to banks in gathering otherwise quite spread-out finance from bonds, for directing finance in a more holistic, purpose-driven sense towards broader economic goals. Moreover, a meaningful non-neoliberal role of public sector in China, as it strongly appears in this particular case of directing finance to greater productive, and allocative efficiency obtaining endeavours, also likely helped put the bond market on more stable grounds. In this regard, ‘The handbook of China’s financial system’ indicated the following: ‘While a centralized exchange market exists to enable nonbank institutions and individuals to invest in bonds, it accounts only for a small share of the bond market. Interestingly, the biggest part, listing about 89% of all bonds outstanding at the end of 2018, is another segmented market – the interbank bond market, which mainly serves the investment needs of banking institutions. The dominance of this largely bank-driven interbank bond market deeply connects the bond market to China’s banking reforms, and in particular to both its interest rate liberalization of its currency, the RMB. ’ The importance of infrastructure investment was felt by World Bank, for instance, where in the early decades of its existence it significantly focussed on providing funds for infrastructural investments in member countries. For instance, in the 1960s Pakistan was among those countries that were provided a significant amount of funds in this regard. Later on, the focus of World Bank receded, perhaps prematurely as many developing countries needed greater, and more prolonged assistance – which is of course not to say that they should not have continued on their infrastructural enhancement pathway from their own, and other bilateral/multilateral sources, which many of them, also did – and moved all the more, apparently rather too quickly towards funding social sectors. On the contrary, Pakistan, for instance, under decades of neoliberal, and related austerity – aggregate demand squeeze policies – assault has neither spent anywhere near expenditure on infrastructure, and sadly not even much in the social sector as well; a consequence, among other factors, but among reasons due to lack of role of public sector, and austerity policies, generating at the same time unwarranted elevated levels of interest payments. Highlighting this shift, the author’s February 6, Business Recorder (BR) published article ‘IMF and WB conditionalities, and domestic policy – IV’ pointed out: ‘Tracing this shift of funding emphasis by World Bank, from infrastructure to social sector spending over time, the same [2008 published] book [‘Beyond the World Bank agenda: an institutional approach to development’] pointed out: “Eight-three percent of all pre-IDA loans to poor countries went to power and transportation projects; not a single loan was for education, health, or other social sectors. .. Overall. .. more than 60 percent of all loans went to infrastructure in the 1950s and 1960s. .. .The new lending focused mostly on agriculture, with some additional commitment to social spending such as education and water supply and to “technical assistance, ’ which aimed to build technical capacity in the newly independent states where it was particularly weak. By 1965, 15 percent of overall spending was going to agriculture (compared to 9 percent in 1960) and 5 percent to social spending (compared to 0 percent in 1960). .. Overall. .. social and agricultural spending amounted to about 19 percent of the total, compared to 4 percent in the 1950s. ”’ This, of course, did not mean that the importance of infrastructural investment was any less immense for developing countries, particularly Pakistan. The country should have continued to invest in a prioritized and deeply meaningful way, utilizing budgetary allocations, development assistance, and private finance. Such investment is crucial for building the foundation of the entire economy. Furthermore, it creates essential incentives for both public and private investment to flourish in other areas, such as the social sectors, agriculture, and industry. Unfortunately, the healthy momentum of the 1960s diminished over time. During that era, infrastructural investment was highly purpose-driven, focusing specifically on building dams to secure and streamline the country’s water sources and energy needs. Since then, Pakistan has seen only occasional spurts of activity. Infrastructural investment has not been pursued in a long-term, wide-scoped, mission-driven, or meaningfully planned manner. In the case of China, infrastructural investment received immense importance. It is hoped that lessons learnt from their experience will not only help further augment the infrastructural emphasis under CPEC, but also their experience will more widely be implemented in general also in Pakistan with regard to infrastructural investment, including many other areas in which China has immensely excelled, a number of which, for instance, are being discussed in this series of articles. The same handbook pointed out in this regard: ‘Infrastructure is crucial for economic growth, particularly in developing countries. .. .China’s economic success in the past decades can be partly attributed to a sustained high level of investment in infrastructure. Aside from the role of the government, the financial sector also played a crucial role in mobilizing resources for infrastructure investment. .. .China’s infrastructure investment increased 20-fold between 2000 and 2017, according to statistics from the National Bureau of Statistics (NBS). .. Total infrastructure investment was RMB17. 3trn in 2017, or 21 percent of GDP. .. .Infrastructure investment in China is usually government-led and serves two important yet distinct policy roles. The first role is promoting economic development. Local governments are incentivized to maximize investment in infrastructure in order to boost growth, which is also, in part, owing to the close association between economic growth and government official promotions. .. In its second role, infrastructure investment is also an important policy tool for managing economic cycles. During economic downturns, the central government has often resorted to infrastructure spending to support growth, such as the “4-trillion stimulus” mandated in 2009 in response to the global financial crisis. As discretionary capital spending with likely high fiscal multipliers and job creation, infrastructure investment is regarded as effective counter-cyclical policy tool. ’ Here, two important lessons are; firstly, public sector in a mission-oriented, non-neoliberal role focussed on building infrastructure, especially the employment of local government since it is closest to the investment in terms of presence – more on this with regard to involvement of local governments in this regard in subsequent paragraphs – and secondly, when GDP growth starts to slow down, government’s policy intervenes in a mission-oriented, counter-cyclical way – and not pro-cyclical way, which should be avoided given its misgivings in not appropriately taking the country out of the downturn in any appropriate way, where very short-term stability is reached, which in turn not only takes a lot of growth sacrifice, but also does not provide a basis for sustainable economic growth – where infrastructure is also used as part of the overall counter-cyclical policy. Moreover, not only infrastructural investment was prioritized in China, but creative policy was adopted to enhance the productivity of investment, and efficiency of implementation of these investments. The same handbook indicated in this regard ‘. .. financing of sustained high levels of investment in infrastructure. .. has been a key factor in China’s economic success over the past decades. .. the complex system of fiscal and financial arrangements by government, focusing on the important role played by the quasi-fiscal entities such local government financing vehicles (LGFVs), allowing them to mobilize resources far beyond budget constraints. .. [Also, ] infrastructural projects are largely carried out by the public sector, as they usually have high economic returns but much smaller financial returns to the investors themselves. Local governments are the main executioners of infrastructure projects in China. ’ Another lesson Pakistan can learn from China’s economic policy approach is its ability to evolve innovative solutions for economic development—specifically through the establishment of ‘quasi-fiscal entities. ’ Pakistan should emulate China’s innovative financing approaches to invest in development by utilizing avenues beyond the traditional budget to fund infrastructure, such as public utilities and roads. Hence, Pakistan should look to establish a policy vehicle that is only partially dependent on the national budget to lay the foundation for investment endeavours, while financing the rest externally. This strategy will protect fiscal space, allowing more resources to be directed toward crucial investments in resilience, the social sector, and welfare needs. Moreover, adopting this approach will lower the need to borrow from bilateral or multilateral sources to fund infrastructure investments. Consequently, this will reduce pressure on foreign exchange reserves, stabilize the currency, improve debt sustainability, and strengthen the overall balance of payments. Highlighting specific details with regard to the characteristics of LGFVs, the same handbook pointed out: ‘They usually satisfy most or all of the following characteristics: 1. They are majority- or solely-owned by the government. 2. Their managers and employees are supervised or hired by the government officials. In some cases, they are operated directly by government officials. 3. They enter into contracts with local governments for building and operating infrastructure. Sometimes there is no clear contract, yet they directly report to local governments and carry out projects as instructed [which should be avoided to enhance accountability of involved local governments, and for greater accountability gains]. 4. Part or all of their assets are public assets (such as land, roads, and public utilities) transferred to them by local governments. 5. They borrow from banks or financial markets with explicit or implicit guarantees from local governments. ’ Moreover, the same handbook indicated that ‘Many LGFVs receive regular subsidies from the government’. Also, it pointed out with regard to financing framework for funding of LGFVs ‘Starting capital for LGFVs usually came from local governments. To make sure LGFVs have sufficient start-up capital, local governments usually transfer some of their public assets to them. Typical assets include (1) central government funding for infrastructure investment; (2) land use rights; (3) public physical assets, such as roads, bridges, and buildings; (4) local government nontax revenues, such as utility fees; and (5) tax benefits. These asset transfers not only help LGFVs to meet certain capital requirements for projects and borrowing but also provide them with collateral assets and income streams that they may borrow against. Once sufficiently capitalized, LGFVs could obtain additional project financing through multiple channels. Bank loans are usually the most important source of financing, accounting for around 60% of LGFVs’ total interest-bearing debt in 2017. LGFVs may borrow from national and regional commercial banks, most notably China Development Bank (CDB), which provides financing for government projects nationwide. LGFVs may obtain market financing by issuing corporate bonds or from the stock market. They may also get financing from the shadow banking system. .. ’ On the contrary, lack of economic institutional quality, diminished role of government under neoliberal, and austerity policies, and lack of policy innovativeness in Pakistan, along with high interest-bearing treasury bills – on account of highly sub-optimal taxation policy keeping revenues low, calling for filling financing gap from bank borrowing – all keep commercial banks highly risk-averse. Hence, commercial banks land majority of their deposits, in general, into treasury bills and that too heavily stacked towards short-term nature due to for instance policy uncertainty, and greater exposure of country to external shocks, along with banks sadly being highly perceptive to profit signal that high interest rate provides; not to mention banks less incentivized by government to partner in long-term economic missions also leading to lack of investment towards infrastructural projects, for instance. (To be continued. ..) Copyright Business Recorder, 2026

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