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Holding Back the Middle Class
Summary:Restrictions on entrepreneurship are holding back the growth of China’s middle class, says Yale finance professor Chen Zhiwu.

By Zhang Qi (
张琪 )
News, page 6, Issue No. 564,  
April 9, 2012
Translated by Zhu Na
Original article: [Chinese]

The interview was conducted in Chinese. It has been edited for length and clarity.

The Economic Observer: What do you think about the rising middle class in Asia?
Chen Zhiwu (陈志武) Professor of Finance at Yale University: Countries like India that became democracies after the Second World War can’t be like the U.S., which has had a middle class for as long as it has been a democracy. This is a common challenge facing Asian countries.
Whether a society’s middle class has the opportunity to grow and develop depends on the freedom to start a business and the resources available to individual entrepreneurs.
The founders of Apple, Dell and Google all came from ordinary families, but the entrepreneurial environment was almost entirely free and there was great fluidity of social classes.
In China there are currently many restrictions in all areas. The development of technology has widened the gap between the big cities and rural areas.

Some people say the middle class is shrinking in developed countries, especially America, as the financial crisis bankrupts middle class households. Will the same thing happen to the middle class in developing countries?
Chen: The focus of China’s financial reform in the past was corporate finance […] but financial products are also actually designed to help individuals and families mitigate risks. If individuals and families can’t buy financial protection for illness and death, then they’ll save instead of spending, and export markets will have to take up China’s surplus production.
Financial innovation in the U.S. over the past decade has been more focused on consumer finance and investor finance.
Private consumption represents 71 percent of the U.S. economy and the financial needs of individuals and families determine whether the U.S. economy can develop faster.
These financial products have made a great contribution to the middle class.

  What are the development prospects for China’s middle class in the future?
Chen: In terms of policy, the most important thing for the middle class is the degree of freedom to start a business.
This is not just about whether entrepreneurs have the opportunity to get rich - when mass entrepreneurship is allowed there are more employment opportunities.
Raising minimum wages [which vary by province] helped the middle class, but it’s more important to look at the underlying causes. As the job and career choices of the middle classes expand, employers must improve their wages, otherwise they will leave.
India has many restrictions in the medical and manufacturing sectors. Foreign investors can’t enter these sectors easily. On the surface it looks like an attempt to protect national industry, but, in the reality, the middle class are paying the price.
Local businesses’ incentive to innovate and introduce new drugs is very small because there’s no competitive pressure.
Of course, China's restrictions on foreign brands and multinational corporations are much smaller than India’s.
The more policies there are to protect national industry, the greater the damage to the middle class, and low and middle income groups.

Front page picture source: www.chinapictorial.com 

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