【原创】Efficient Resource Allocation to Take Center Stage ...

Efficient Resource Allocation to Take Center Stage in China’s Economic Development*

Lyu Zheng (吕政)

Academy Member of the Chinese Academy of Social Sciences (CASS), Beijing, China

 [Abstract] China has basically succeeded in its quantitative catch-up with advanced economies and has now entered into a new stage of economic development focused on the greater efficiency of resource allocation. In order to achieve the objectives of the 13th Five-Year Plan for National Economic and Social Development, efforts must be made to reform the “petty-farmer” economic mode of production while promoting specialization, modernization, and economies of scale. The restructuring and upgrade of the manufacturing sector should be focused on existing industries and the development of high-end industries while maintaining China’s comparative advantage in narrowing technology gaps with advanced economies. The goal should be to transform China from a large industrial manufacturer into a competitive one. Technological innovation should be based on demand, supported by projects, carried out by firms through the social division of labor, and work to increase the capacity of large enterprises to integrate the results of innovation. Materialized labor consumption and logistical costs must be reduced, and the quality and level of urbanization must be increased. To assist productivity development, urban citizenship should be granted to rural migrant workers. In addition, the urbanization of those who remain in the countryside should be promoted in order for rural populations to enjoy the benefits of industrially robust, technologically modern and ecologically sound civilization.

[Keywords]economic development stage, efficiency of resource allocation, technology innovation, manufacturing restructuring, urbanization

JEL Classification: E00, L60, O11, O40, Q10

Economic development stage and economic cycle are two different economic concepts. Economic development stage is generally measured by such indicators as level of productivity, industrialization process, economic scale, economic structure, growth tendencies, per capita income level, consumption structure and international trade conditions. Economic cycle refers to the fluctuations and recurrence of prosperity, crisis, recession and recovery in the process of economic development. In order to respond to changes ushered in by a new stage of economic development, policymakers must engage in thorough coordination, planning, adjustment and reform of given economic development strategies, growth patterns, industrial policies, innovation policies and economic relationships. Response to cyclical economic fluctuations requires the employment of short-term counter-cyclical policies including fiscal, monetary, credit and exchange rate policies. In this sense, a shift in economic development stage cannot be directly compared with cyclical economic fluctuations. Proper understanding of the laws of economic development and operation is necessary for responding to shifts in economic development stage.

1. China’s Economic Development Stages: AScientific Understanding

Since the founding of the People’s Republic of China in 1949, China has experienced two stages of economic development. In the first three decades, the primary objectives of economic development were to lay a solid foundation of industrialization and establish an independent and complete modern industrial system. When the reform and opening-up policy was launched in 1978, the new objectives of economic development became the elimination of scarcity and transition from poverty to prosperity. Despite great differences in guiding philosophies, administrative systems, economic regimes, development models and approaches to reform of these two stages, in each case development strategy emphasized economic growth rate while striving to narrow gaps with developed countries in terms of industrial and agricultural output, transport capacity and import and export volumes. The over-arching goal, one could say, was to achieve a quantitative catch-up. By the end of the 11th Five-year Plan Period (2005-2010), this strategic objective was more or less successfully achieved.

1.1 China’s Aggregate Output of Industrial Goods Reaches the Level of Advanced Economies

Since the reform and opening-up in 1978, China has maintained rapid industrial growth, with industrial value-added increasing from 160.7 billion yuan in 1978 to 21.06894 trillion yuan in 2013, which represents a 40.64-fold increase by comparable prices or an annual average growth of 9.7%. China exceeded major industrialized countries including the United States, Germany and Japan to achieve the highest output in the world for more than 220 types of major industrial goods. Within a mere three decades, China accomplished the transition from scarcity in all respects to considerable power in industrial manufacturing. It is fair to say that China has basically accomplished the task of catching up with advanced economies in terms of industrial goods output.

From now on, China’s industrial development priorities will shift towards the efficiency of production factor utilization and striving to narrow gaps with developed countries in terms of industrial structure and technological level. Future industrial manufacturing development will highlight strength and competitiveness as opposed to quantity.

1.2 Relative Overcapacity Has Become a Key Challenge for China’s Manufacturing Sector

For a long period, undersupply was a major challenge for China’s economy, and the expansion of manufacturing capacity was a major economic priority. Contrarily, since 2011, most industrial sectors in China have experienced overcapacity. This overcapacity has been particularly serious for sectors such as metal smelting, construction materials, fundamental chemical engineering, machinery equipment manufacturing and automobile manufacturing. According to generally applied standards of international manufacturing, industrial capacity utilization normally rests between 80% and 90%; comparatively, the average utilization of China’s industrial manufacturing capacity is only 70% to 75%.

1.3 Uncertain World Economic Growth Prospects Led to Export Growth Slowdown

Thanks to the prevailing favorable international trade environment after China’s entry to the WTO in 2001, the import and export of industrial goods in China increased by leaps and bounds in the first decade of the 21st century. The total export of industrial goods went up from about US$223.743 billion in 2000 to US$1,496.069 billion in 2010, an increase of 5.68 times or 20.9% annually over that time period. Since 2011, the growth of the import and export of goods to China slowed significantly.

At the end of the last century, some international economists argued that an IT revolution would iron out cyclical economic fluctuations. Yet the plunge of the NASDAQ indices in 2000 triggered by the burst of IT bubbles demonstrates that the ability of technology to curb cyclical swings was greatly overstated.

Economic globalization faltered after the eruption of the global financial crisis in 2008. In the aftermath of domestic economic crises, advanced economies looked to a strategy of re-industrialization in order to address the disconnect between their virtual and real economies, to correct the excessive dominance of the service sector, to support the development of manufacturing, and to cut trade deficits. In addition, international capital flows slowed and even reversed in some cases, as did industrial relocation. This prevented the further hollowing of domestic industries in advanced economies. Sluggish demand from advanced economies further dampened the growth of international trade, with the annual growth rate of international trade goods down from 14.1% between 2001 and 2007 to 3.8% between 2008 and 2011. Lastly, international trade protectionism emerged as a new trend. Against this backdrop, a decline for China’s export sector was inevitable. Between 2011 and 2013, the annual export growth of China’s industrial finished goods was 11.9%, down nine percentage points compared with the average export growth rate of industrial goods between 2000 and 2010.

During the 12th Five-year Plan period (2011-2015), China’s economic development demonstrated new tendencies and entered into a new stage. This fact is demonstrated by the growing downward pressures on growth, a relative excess of industrial capacity, rising labor costs, a new urgent focus on industrial upgrade supported by technological innovation, a new need to improve the quality of urbanization, rising environmental pressures, an uncertain world economic recovery and growth prospects, slowing international market demand and intensifying international competition. These trends present new challenges to China’s economic development. However, economic development always takes place against a shifting background of many variables: the relations between superstructure and productivity, input and output, and supply and demand. With this shift in its development stage, China’s economic development pattern must evolve from a coarse pattern to an intensive one. To some extent, such a transition will be more arduous than the previous era of high growth rates and requires proactive responses from the government from the macroeconomic to microeconomic level.

2. Development of Agricultural Productivity

In economic development, labor productivity in the agricultural sector is generally below that of other sectors. In China, the presence of a large rural population with limited land and means of production has further widened the gaps between the agricultural and non-agricultural sectors and between rural and urban areas. The small-scale peasant economy is incompatible with the efficient reproduction of agriculture, restricting China’s economic structure and development. From the supply side, 70% of fluctuations of the retail prices of social consumer goods stem from food prices, i.e., high costs and unstable supply of agricultural products. The endowment of agricultural resources and agricultural production efficiencies are the foundation that determines the prices of agricultural products. Prices of agricultural products directly determine the stability of prices of consumer goods in China. Fluctuations in the prices of consumer goods influence interest rates for bank savings and deposits. Given that level of interest rate savings and deposits in China is significantly higher than that of advanced economies, the cost of corporate financing is high.

The reasons for this are: first, regarding capital supply and demand, there is still a hunger for investment; and second, due to unsophisticated agricultural productivity, the fundamental role of agriculture is unstable. From a demand perspective, an important reason for excess industrial capacity is the insufficient effective demand of farmers amid rapid industrial growth. As a result of unsophisticated agricultural productivity and low income levels for farmers, the market for industrial goods in the countryside is narrow. In 2014, the aggregate volume of retail commodity turnover reached 26.2394 trillion yuan, of which rural turnover volume only registered 3,602.7 billion yuan, or 13.73%. Per capita spending on consumer goods by the rural population, which represents 46% of the total, is only 32% of their urban peers.

The fundamental solution to this imbalance is to continue promoting the transfer of the agricultural population to nonagricultural sectors and cities while enhancing economies of scale and intensive use of rural land, thus raising agricultural labor productivity. This strategy reduces the number of surplus farmers, increases the supply of urban labor, and cuts labor cost for firms. Therefore, great efforts must be made to reform the rural land operation model and address the imbalance between China’s small-scale peasant economy and its modern industrial development.

3. Manufacturing Restructuring and Upgrade Should Aim to Foster Technology-Intensive Industries While Maintaining the Existing Comparative Advantage of Labor-Intensive Industries

For manufacturing restructuring and upgrade, the priority is to increase the efficiency of production factor allocation. The direction and objective of restructuring and upgrade cannot be simply understood as the sophistication of China’s industrial structure. Instead, not only should technology-intensive industries be fostered, but traditional comparative advantages must also be maintained. The proportion of technology-intensive and high value-added industries in the manufacturing sector should be increased, and advanced technologies should be applied to transform traditional industries and improve the position of China’s manufacturing sector in the system for the international division of labor.

There are two pathways to follow for the upgrade of manufacturing sector. First, rely on technological revolution, adopt new technologies and develop new products to lead new trends in manufacturing and consumption. Second, apply advanced new technologies in the transformation of traditional industries to improve product quality and performance, lower manufacturing costs, mitigate pollution and enhance the competitiveness of traditional industries. The former represents a revolutionary breakthrough while the latter reflects gradual improvement. As shown by the historical process of manufacturing development since the Industrial Revolution, it took more than a century to apply and improve new technologies before the next round of the industrial revolution was to occur. In most instances, gradual innovation ultimately led to the emergence of new technologies and products. Breakthroughs occurred on the basis of gradual and quantitative change.

After the dawn of the 21st century, the leading products and technologies of material production sectors had mostly been invented in the 20th century. Thus, an important objective of technological innovation is the improvement of existing manufacturing. Products and technologies invented in the 20th century cannot simply be abandoned or completely replaced by brand-new industries and products. Therefore, economic growth cannot be totally based on revolutionary breakthroughs of science and technology. While it is necessary to follow the frontier of contemporary science and technological revolution and proactively develop strategic emerging industries, importance should be given to innovating on existing industrial manufacturing technologies. In the manufacturing sector, the potentials of further economic growth should be first defined as those areas where there still exist gaps between China and advanced economies. Great efforts must be made to catch up with the levels of advanced industrialized nations in high-value-added areas such as the manufacturing of metal and non-metal materials, high performance and smart machinery, automobiles, high speed trains, aviation and aerospace, precision instruments, electronic communication equipment, fine chemical engineering, and pharmaceutical R&D and manufacturing.

On the other hand, China must maintain existing comparative advantages and continue to develop labor-intensive industries. Over the past decade, China’s manufacturing sector witnessed rising labor costs, with per capita annual wages in the manufacturing sector increasing from 14,148 yuan in 2004 to 46,720 yuan in 2013, a nominal wage increase of 3.4 times. Converted to USD, the per capita wage of China’s manufacturing sector was only 7% of that of advanced industrialized nations in 2004; in the interim, this figure has jumped to around 16%. The re-industrialization strategy adopted by advanced economies will cause the return of some manufacturing sectors to the developed world, yet this does not mean that advanced economies will restore labor-intensive manufacturing sectors. Complementarity between China and advanced economies in the manufacturing structure has undergone no fundamental change. In 2014, the total employment of China’s urban manufacturing sectors reached 52.58 million, which only accounted for 6.63% of the aggregate workforce. Hence, the problem is in the structure of labor supply rather than a lack of labor supply. Educational structures need to be adjusted to expand enrollment in vocational schools and increase the supply of technical workers. In addition, the imbalance of China’s regional economic development offers the potential for labor-intensive industries in coastal regions to relocate to central and western regions that have heretofore been sources of labor migration. Moreover, the integrity of China’s industrial supporting system and industrial chain system, and the levels of infrastructure systems such as energy and transport are unmatched by other developing countries where labor wages are lower.

4. Narrow Technology Gaps with Developed Countries in All Respects

According to “Made in China 2025”, a report promulgated by the State Council on May 19, 2015, China plans to join the rank of strong manufacturing nations in the world by 2025; the government has laid out a strategy for developing a strong country through manufacturing. According to this strategy, China needs to accomplish the following seven tasks: (1) develop an independent and complete modern industrial system; (2) develop the manufacturing capacity and output of major industrial goods in the forefront of the world; (3) foster an industrial structure dominated by technology-intensive and high-value-added industries; (4) reach internationally advanced levels of factor efficiency; (5) shift from comparative advantages to competitive advantages for the international division of labor and commodity exchange; (6) promote indigenous innovation, relying on the domestic supply of key technologies to acquire indigenous intellectual property rights; (7) foster a number of world-leading companies and brands. A new stage of China’s industrial development has been ushered in as the efficiency of factor utilization replaces quantitative catch-up as the new priority underpinning China’s ambitions to transform from a large manufacturing nation to a strong and competitive one.

A striking conundrum of China’s industrial development is the overcapacity of traditional manufacturing sectors and the failure of firms to identify new drivers of growth. The following two preconditions are essential for new economic drivers to emerge: first, market demand with broad growth prospects; second, emerging industries or new products supported by the fruits of innovation. These innovations fall into two categories: industrial revolution triggered by revolutionary breakthroughs in science and technology; and gradual improvement in the manufacturing technology of existing industries and products.

According to the history of the industrial revolution in the capitalist world, only three revolutionary breakthroughs ever occurred. Namely, the emergence of modern industry after the invention of the steam engine, large-scale and specialized production lines after the invention of electric power, and the information revolution spearheaded by information technology in the 1960s. At each stage, it took more than a century to apply and improve new technologies before the next round of the industrial revolution could occur. Some believe that our era is characterized by the slow progression of the technological revolution. Inventions of the information age are transforming our ways of life and work in much less significant ways than did the major inventions of the early- and mid-20th century. Traditional technologies such as power generation, automobile engines and the jet plane still play a dominant role. Truly revolutionary innovations are rare, and it takes a long time for them to transform our economy and way of life. Humanity still primarily enjoys the achievements of science and technology from the 20th century, which provide the engineering technologies, materials and manufacturing processes for the invention of new products. This view makes some sense.

As can be seen from the above products and technologies, after the dawn of the 21st century, the leading products and technologies of material production remained those invented in the 20th century. An important mission of technological innovation is to constantly improve on the manufacturing technologies of existing industries rather than to bring about disruptive and revolutionary change. This gives us the inspiration that the emergence of new technologies and products derives from gradual innovation and breakthroughs are achieved on the basis of gradual and quantitative change. Currently, it is still not possible to abandon the above-listed products and manufacturing technologies and replace them with new industries and products. Therefore, we cannot expect that economic growth will only derive from revolutionary breakthroughs of science and technology as new drivers of economic growth. Instead, greater attention should be paid to the improvement of existing products and manufacturing technologies.

Gaps between China’s manufacturing sector and the manufacturing sectors of developed economies include horizontal gaps of industries and vertical gaps of industrial chains. Horizontal gaps are mainly embodied in the system of the international manufacturing division of labor. China’s trade structure is dominated by the export of labor-intensive products and the import of high-value-added and technology-intensive products. For instance, it costs US$105 million for China to import a single mid-sized Boeing passenger plane. In 2013, China exported 35.5 billion pieces of apparel worth US$157.2 billion at the average unit price of US$4.43. In other words, China had to export 23.7 million shirts in order to purchase one Boeing 737 mid-sized passenger plane. It takes 5,000 workers to work for one year to manufacture 23.7 million shirts using 43 million meters of garment materials. In order to climb up the ladder of the international division of labor, China must improve the quality of export products from the textile and apparel industry, foster indigenous brands and thus raise the unit price of exports; China must also accomplish the R&D and mass manufacturing of domestic civil airplanes in order to gradually reduce the import of such products.

Vertical gaps related to industrial chains are reflected in the fact that China’s manufacturing industry is mainly situated at the low-end of the industrial chain, with developed economies at the high end. For instance, in the mechanical manufacturing industry, China relies on imports for 90% of advanced CNC machine tools, 70% of key equipment for automobile manufacturing, 95% of chip manufacturing equipment and 100% of optical fiber manufacturing equipment. In the chemical industry, China already ranks among the highest in the world both in terms of the output and sales turnover of dyestuff, synthetic fiber, chemical fertilizer, pesticides, sodium carbonate, caustic soda, tyre, coating and vitriolic acid. However, China remains highly dependent on imports for high-end special-purpose chemicals, new chemical engineering materials and other technology-intensive and high-value-added products.

For another example, PX products are essential chemical raw materials for the manufacturing of synthetic fiber, pharmaceuticals, pesticides, dyestuffs, printing ink and solvents. In 2011, China’s manufacturing capacity of PX products stood at 8.765 million tons, while imports were 7 million tons. In 2015, China’s import of PX products is expected to reach 30 million tons with an import value of 170 billion yuan. The import price of each ton of PX products was 8,350 yuan in 2010, 11,850 yuan in 2011 and 12,800 yuan in 2013. Japan and South Korea are the major exporters of PX products, and, whenever mass protests occurred against PX construction in China, the import prices of PX products would spike. As a major electronics manufacturer, China accounts for 50%, 68% and 70% of the manufacturing output of televisions, computers and mobile phones in the world, respectively, yet most of the critical components for the manufacturing of these products must be imported. In 2014, China imported 285.66 billion pieces of integrated circuit worth US$218.4 billion. This product alone accounted for 11.25% of China’s aggregate value of imports.

These facts indicate that overcapacity and insufficient supply coexist in China’s manufacturing industry. Insufficient supply exists mainly in technology-intensive and high-value-added industries, where great opportunities exist for domestic firms. Instead of hoping for new technological revolutions to erupt, a more realistic option is to focus on narrowing China’s gaps with developed economies in technology-intensive sectors to create new drivers of economic growth. Technological catch-up can be achieved by upgrading existing industries and narrowing gaps with advanced industrialized nations such as the United States, Germany and Japan, particularly in high-value-added sectors of the industries of iron and steel, non-ferrous metal, non-metal materials, petrochemical engineering, high performance and smart mechanical equipment, high-speed trains, precision instruments, electronic communication equipment, fine chemical engineering and pharmaceutical R&D and manufacturing.