In places where markets are underdeveloped, administrative measures may be necessary instruments of policy transmission. But there is a price to be paid.
If macroeconomic policies are to have their desired effects, there is a need for an efficient "transmission mechanism" whereby the high-level policy decisions affect economic behaviour at the micro level in an appropriate manner. In a market economy, such a transmission mechanism principally works through the forces of supply and demand, as indeed the macroeconomic policy changes are also effected principally through the use of market tools. The obvious example is the use of interest rates. Whether the objective is to ensure price stability or sustainable growth, or to promote employment, or a combination of these, a higher or lower price for money affects the economic behaviour of the consumer, the investor and other entities in a manner that, hopefully, in the end, produces the desired results.
There may, however, be circumstances that justify the use of administrative measures in the achievement of macroeconomic objectives. Where, for example, the relevant markets are not developed well enough to be relied upon to do the job, or when the markets exhibit the tendency of overshooting and threatening debilitating consequences, resorting to administrative measures may be unavoidable. Administrative measures can be a lot more targeted, in terms of the measures being specifically designed to produce the desired end results without so much affecting other economic activities unintentionally, while the market tools tend to affect everybody. To be sure, administrative measures can also be more effective in terms of producing results more quickly. But, of course, there is a price to be paid and this can take various forms. Overall efficiency in the allocation of scarce resources is one, for there is no bureaucrat who is more efficient than the invisible hand of a properly functioning market, if such a thing exists. Furthermore, administrative measures tend to be blunt and disruptive, notwithstanding the possibility of being a lot more targeted and seeing results quickly. More expensive money is better than no money at all, particularly for those who are credit worthy but are somehow, perhaps for no good reason, prevented from borrowing.
The transmission mechanism for administrative measures in Mainland China is probably a subject that is not much researched upon academically. As with all policy options, there are pros and cons, and these tend to be specific to individual economies, each with their own structural characteristics. I think, however, that it is a very fruitful area for research, particularly in Hong Kong, where there is a strong need for us to understand the Mainland better in order that we may perform our very important role as the international city, and the international financial centre, in China. And, while we have a strong belief and trust in the market, we understand that occasionally the heavy hand of government may well be what is needed to correct market excesses. I myself learned with a great deal of pain in 1998 the simple fact that free markets can also be freely manipulated and that they can overshoot well beyond the level that is conducive to the public interest (particularly in financial markets that are small in relation to international capital). In any case, before market reform is fully implemented and the market mechanism becomes reliable, there are really few viable alternatives for effecting macroeconomic adjustments than resorting to administrative measures.
We are now being presented with empirical evidence on the efficiency of the transmission mechanism for administrative measures in macro adjustment and control. The swiftness with which the macroeconomic data - on fixed investment, GDP, money supply and bank loans - have slowed down is remarkable, something difficult to envisage in a market economy under normal circumstances. But slowing the growth of something so rapidly within three months does raise concerns about the ability of anybody to level it off to a comfortable number. I suppose when the transmission mechanism basically involves what in a market economy is called moral suasion, but on the Mainland is done by administrative order, it is easier for hearts and minds to follow the direction intended. And there is always the possibility of invoking the law if directives are not followed. In the meantime, consumption, which is not the subject of suppression, continues to grow, not much affected by the administrative measures, as intended, and there is a good explanation for a bit of forbearance on the up-tick of inflation given that it was caused by higher food prices. The measures have been, by and large, working well, and one hopes that the side-effects, if any, are being successfully contained at the same time when market reforms can be speeded up to replace gradually administrative tools with market tools in the longer run.
Joseph Yam
23 September 2004
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