Following Premier Wen Jiabao's denunciation of China's bank monopoly, the Milken Institute's Tong Li outlines fixes for China's helter-skelter financial system in the latest Milken Institute Review

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Following Premier Wen Jiabao's denunciation of China's bank monopoly, the Milken Institute's Tong Li outlines fixes for China's helter-skelter financial system in the latest Milken Institute Review

LOS ANGELES -- EconomistTong Li explains why China risks all in delaying fundamental reforms in financial markets.

"China has, in effect, outgrown a regulatory system that lacks the means to manage the complex, interconnected financial institutions that have popped up to serve the second largest economy in the world," she acknowledges. "The risks in allowing the financial system to lag far behind the maturity of the economy are simply too great to ignore."

Also in this issue:

Karen Eggleston, an economist at Stanford University, brings us up to date on China's crash effort to build a health care system worthy of an economic superpower. "Paralleling Deng Xiaoping's dual-track reforms in other economic sectors," Eggleston recounts, "China enacted health policies intended to protect basic health care for even the poorest citizens while at the same time offering sophisticated, high-tech services to those able to pay. But basic access was not well-defined; nor did the government organize an effective market for insurance as a means of pooling risk over large groups. So when state-sponsored financing largely collapsed because it had been linked to the abandoned agricultural communes and to state-owned enterprises now required to compete with the private sector, there was no Plan B."

Syl Schieber, a former chair of the Social Security Advisory Commission, wrestles with the problem of cutting the fat from armed forces' pensions without undermining incentives to serve in the US military. "In an era in which the trend toward earlier retirement is being reversed by the harsh realities of the bottom line," he writes, "change will need to bring the military system into closer alignment with civilian practices. It could also dramatically reduce the cost of the existing system while continuing to provide a superior benefit for career military personnel."

Bill Frey, a senior fellow with the Milken Institute and a demographer at the Brookings Institution, outlines the surprising findings from the 2010 Census. "The rapidly growing ethnic diversity of the children's population stands in stark contrast to the largely white growth in the senior population," Frey notes. "In effect, the nation's diversity, bubbling up from the bottom of the age structure, has not yet reached the older segments of the population. Half of the nation's infants are now the children of minority parents, and a quarter of them are Hispanics. Compare this to the age 85-plus population, which is 85 percent white."

Robert Dekle, an economist at the University of Southern California, glimpses a silver lining in the special economic zones created in the wake of Japan's catastrophic earthquake. "These zones look like a hybrid of new deregulation and traditional Japanese industrial policies," he writes. "It is an approach that may work in contemporary Japan, with a population that opposes socially destabilizing change but does yearn to be seen again as relevant to the global economy— and wouldn't reject the fruits of growth. If it succeeds, the experiment could act as a catalyst, easing the way for broader efforts to liberalize the economy."

Cliff Winston, an economist at Brookings, asks whether the benefits of tightly regulating who's allowed to practice law really exceeds the costs of reduced competition and innovation in legal services. "The widely accepted justification for licensing lawyers is that consumers don't have the knowledge to distinguish the competent from the incompetent until it is too late," he writes. But it has not always been thus. In the 19th century, the standards for admission to the bar in the United States were minimal. "Though he never went to law school," Winston reminds, "Abe Lincoln went on to dazzle in the courtroom."

Last, but hardly least, an excerpt from Robert Shiller's new book, "Finance and the Good Society," explains where the Yale economist stands on the Occupy Movement… Robert Looney of the Naval Postgraduate School argues for an end to economic aid to Pakistan… and Alan Sanderson remembers the human side of Milton Friedman on the 100th anniversary of his birth.

The Milken Institute Review is sent quarterly to the world's leading business and financial executives, senior policy makers and journalists. It is available by subscription through the Milken Institute and as an app through iTunes. It is edited by Peter Passell, former economics columnist for The New York Times.

Published April 8, 2019