Editor's Note:

China has maintained momentum for further reforms. However, the country is now also confronted with a variety of challenges. How can China smoothly deepen its reforms? Can China avoid the middle income trap? Global Times (GT) reporter Chen Chenchen talked to Carlos Magariños (Magariños), chairman of the Global Alliance of SMEs, former secretary of state for industry in Argentina and a non-resident senior fellow with the Chongyang Institute of Financial Studies, Renmin University of China, about these issues.

Carlos Magariños Photo: Chen Chenchen

GT: The Third Plenary Session of the 18th CPC Central Committee has published a series of decisions on China's future reforms. It's widely believed that great efforts are needed in order to make breakthroughs in China's reform process. What's your view?

Magariños: I think the document released by the plenum is bold, ambitious and points in the right direction.

The key to move all the reforms outlined there forward, in my view, rests in the balance between long-term gains of the reforms versus the short-term efforts demanded by it.

Reforms are not goals in themselves. It is reasonable to expect some "reform fatigue" after so many years of economic and social reforms. Particularly if some segments of society perceive they have already achieved improved living conditions. That is normal in every country. It happened in Latin America's reform process and it happened in other Asian economies. But I would say the reason to argue for more reforms in China is not for the interests of the business sector or foreign investors. It is mostly in the interests of the Chinese people. Stopping reforms is the sure way toward the middle income trap.

GT: Chinese society, in this current transitional period, is facing various problems. It is not likely to address them all at the same time. What should the top priority be, in your eyes?

Magariños: Basically it should be to continue strengthening human development in China. What I mean by human development is to go beyond income per capita and think of health, education and other social factors. That is the most important issue.

In order to achieve that, you will need to increase productivity, and give urgent priority to the environmental dimension. The lack of a healthy environment is already placing high costs on your price system.

In such a context, it is important for the Chinese industrial complex to continue its way up the technological ladder, making continuous investments in key areas, where China has already achieved excellence or could make rapid technological progress.

That strategy will, by the way, help moderate any potential impact of the loss of the demographic bonus, the effects of which are probably going to fade away in the years ahead.

GT: Judging by your experiences in Latin America, after these countries went through rapid expansion in the 1960s and 1970s, they hit the middle income trap, from which they haven't fully escaped. How can China avoid this fate?

Magariños: While keeping dynamism in the world markets China will have to pay increasing attention - as it certainly does - to diversifying and multiplying its growth engines, rebalancing its economy by acting in several directions simultaneously, if it wants to avoid the possibility of falling into a middle income trap.

No doubt, years of high speed economic growth have created objective conditions for accumulation of potential economic bubbles that should be kept in check. Equally important, China's long-term inflation should be kept in check.

Regarding Latin America, the region has made tremendous progress in recent years. For the first time ever we have the same number of people living in middle class (spending more than 10 dollars per day) and poverty (spending less than four dollars per day), with near 30 percent of the population in each of those social segments. Those in poverty traditionally outnumbered the middle class.

Over the last decade, the population living below the poverty line was reduced by 50 percent. That's from a combination of economic programs and social programs focusing on stimulating the economy through direct money transfers from the government to poor people.

GT: China's economic influence is climbing quickly, especially in neighboring countries. But meanwhile, Chinese investments overseas do encounter some challenges, including local protests against some Chinese projects over land issues or environmental concerns. How do you see China's competitiveness when judged against other powers among its neighbors?

Magariños: It depends on the sector. There are a number of sectors where China is at the technological frontier, like high voltage transmissions, high-speed rail, advanced coal technologies, renewable energy or supercomputing, to mention just a few.

Nevertheless, China's production system has to raise the productivity of every ton of water, soil or air taken from the planet either in China or abroad, in its own interest and without disregarding local protests. You see protests all over the world and this is the result of a renewed consciousness on the importance of our "natural" environmental capital.

GT: A Chinese diplomat once said it is very important for big powers to shake off the zero-sum mentality in the economic field too. What's your view?

Magariños: Let me give you the example of South America, which was considered by many, over many years, to be the so-called "backyard" of the US. However, during the economic reforms of the 1990s, most of them market oriented, the privatization process of state-owned companies across the region brought lots of European players, especially Spaniards.

One could have expected Europeans to play a role in post-Berlin Wall Europe more than in Latin America. Even though they were not very active investing in the privatization process, the American companies benefited from the prosperity spurred by the market-oriented reforms.

I believe that thinking in a zero-sum mindset is a thing of the past. To the extent new investments spur growth, there are new business opportunities for all players involved. Players will move from one sector to another, some will lose and some will win.

GT: How do you see the zero-sum mentality over economic competition between China and other major powers in China’s neighboring countries?

Magariños: Maybe the competition is fiercer here because Asia is hosting the biggest share of an emerging global middle class and there are still many regulatory gaps to be closed with other markets around the world in terms of environmental regulations, quality standards, and others of the sort.

There are also many regional players going through a structural transformation process within their societies at different stages, and many extra-regional powers trying to take their share. All the same, I think Asian regional trade and integration platforms could play a positive role in creating some room for a better understanding of real problems as well as a sense of opportunity when it comes to trade and investment flows.

GT: When talking about Asian countries’ economic cooperation, some regional observers believe it is time for Asian nations to spend the money in places they are involved in, for instance, to cooperate and improve regional infrastructure like railways and roads. How do you see this argument?

Magariños: I would say, overall, it was a good policy, in the sense that helped create the conditions for the people of the region to live better lives. Now, I see the global economy at a new dawn, with a renewed role for emerging economies. In terms of purchasing power parity they account today for around 50 percent of global GDP.

By 2020, Asia could host as much as 54 percent of the global middle class. All this would demand more food, energy and infrastructure and you need to seek ways and means to promote investments. Why should this necessarily be at the expense of your reserves or reserve-building policies? There are many ways to expand infrastructure investments, including opening those sectors to public-private partnerships and equity investments.