Exploring a New Road to Industrialisation in Line with China's New Realities
By Wu Jinglian
The overriding theme of 2004 was "macro-regulation" for China. Despite worries and panics, the nation seemed to have a safe voyage. But what perplexes us most is why this happens repeatedly since the reform and opening-up whenever we try to speed up the economic growth but have to slow down due to the bottleneck of resources and the pressure of inflation. Will such a problem become a lingering nightmare? Will the labor-intensive growth pattern featuring high investment and low efficiency ensure sustained industrialisation and modernisation? The nation is developing its "Eleventh Five-Year" Plan, and at this critical moment, we must discover a new and proper road to industrialisation and economic growth pattern.
Ever since the 16th National Congress of the Communist Party of China (NCCPC), the Central Committee of the CPC has been advocating "a new road to industrialisation". However, no consensus has been reached throughout the country on what the new road should look like, which invariably increases difficulty in implementation and leads to deviation from the initial goal.
The so called "new road" is defined in contrast with the "old road" which was adopted by leading industrial nations in the early period of industrialisation, featuring an economic growth relying heavily on huge investment. Stalin's road to industrialisation, which gives priority to the heavy industry, is actually a variation of the old road in the socialist context.
In contrast, the new road to industrialisation is the one followed by leading industrial nations during the modern economic growth stage since the Second Industrial Revolution. The economic growth of this stage depends more on an accumulation of human resources (both the knowledge and the competency) and improvement of efficiency than on the input of capital or other resources.
According to the research of many economists since the 1950s, efficiency in the modern economic growth can be improved through three major sources:
First, the extensive application of "science-based technology". Prior to the modern economic growth, the technological progress was driven by small-scale reforms based on experience. The situation was not changed until the Second Industrial Revolution, when the institutionalisation of scientific discovery and technological innovation ignited the great enthusiasm and creativity of the talented and the active application of new technology in the production. This in turn led to a steady flow of new designs, new materials, new energy and new products, and their extensive use accelerated the advance of technology.
Secondly, the aggressive outgrowth of the service sector over the industry. The economic sector boasting the fastest growth in both UK and USA since the early 20th century was not, as some economists predicted in the middle of the industrialisation era, the industry, particularly the heavy industry, but the service sector instead, especially the production-supportive services delivered before, in and after the industrial and agricultural activities. The development of the service sector is a key factor for the reduction of cost, the transaction cost in particular. Indeed, the industry and the service sectors were such integrated at this stage that it is often accredited as "service-industrialisation".
Thirdly, the application of modern information technology (IT) in various industries that has boosted unprecedentedly the entire economic efficiency. The relatively backward nations who are still in the process of industrialisation also need to take advantage of the opportunity to realise the "IT-driven industrialisation".
Ever since the "First Five-Year" Plan, China has been following the traditional road to industrialisation initiated by the former Soviet Union. Eager to catch up with and even surpass the western countries in terms of the industrial and agricultural value, China over-emphasised the development of the heavy industry in spite of the huge cost of resources, resulting in serious economic and political impact. This was not changed until it adopted the reform and opening-up policy, and realized the need to improve the economic efficiency and change the economic growth pattern. The effect, unfortunately, is not satisfactory. What restrains the progress, beyond the mindset or mentality, is the fact that the market is plagued with traditional institutions and policies supporting the old road to industrialisation and the old growth pattern.
For instance, the privilege of resource allocation is still in the control of the governments and the officials at all levels, violating the rule of the socialistic market economy; the gross product value is still used as a key index to scan a competent cadre, rank the economic development levels of different regions, and evaluate a government official's performance; the production-based VAT system is still encouraging the government officials at each level to focus on the development of the heavy industry featuring high cost and high profit. In addition, the low price policy on production factors like the land, capital, labour and foreign currencies, and the free-of-charge appropriation system to support the traditional road to industrialisation under the planned economic system, have resulted in serious cost distortion and the abuse of the already scarce social resources. The existence of these negative conditions, in due course, shall evoke the deviation of the industrial road.
It is advocated in the "Tenth Five-Year" Plan that the adjustment of the economic structure shall be the top priority for the country. Improving the efficiency of the resource allocation is a correct idea, but the question is whether such an adjustment should be realised through the price mechanism of the market, or through the administrative decree of the government.
Under the present system and policy environment, government officials equal the optimisation of the industrial structure to the development of heavy industry with high production value and high revenues. Consequently, they take advantage of their privileges on resource allocation, and always give priority to the heavy industry, regardless of the region's comparative advantage in resource endowment. In contrast, they are less motivated to make efforts to accumulate knowledge, improve efficiency, encourage technology innovation, and develop value-added activities.
The economic growth and industrialisation based on high investment, high consumption and intensive capital input have already invoked a series of economic and social problems, putting in peril the sustainable growth of the national economy. Such kind of growth pattern, though pushing up the production value, brought little benefit to the public. As commented by some members of the Economic Committee of the Chinese Political Consultative Conference, "we have consumed huge amounts of non-recyclable resources, and are blamed for environment pollution and trade 'dumping', but the cake of profit is taken mostly by others."
At the same time, some provinces and cities with advantages in developing hi-tech or service industry are switching their focus to the heavy industry, while some districts in serious shortage of water resources are ironically taking water-consumptive metallurgical and chemical industries as their main lines of industry. The consequence of prioritising heavy industry and high production value is shocking: not a few areas are experiencing a severe shortage of resources, coupled with deterioration of the environment and increasing unemployment. As Mr. Hu Jingtao, General Secretary of the Central Committee of the CPC pointed out, if the excessive consumption of resources, the over-pollution of the environment, and the extensive economic growth can not be curbed and changed, we "would be too shameful to face the history, to our people and to our descendents". At the last year's Central Economic Working Meeting, it was pointed out that we "must unswervingly reverse the current status featuring high-consumption, high-pollution and low-output; we must change thoroughly the economic growth pattern, building an economical industrial and consumption structure, and exploring an economical road with Chinese characteristics". China has a huge potential in conserving resources and improving efficiency. We are bound to find a new road to industrialization in line with China's current development so long as we follow a well-defined guideline and use proper methods.
In particular, efforts can be made in the following lines:
First, change the mindset shaped under the traditional industrial framework, and develop a scientific development perspective, making it a fundamental national policy to save resources, increase efficiency and sustain a steady economic growth.
Secondly, promote the prosperity of science and technology, and encourage the institutionalization of scientific discovery and technological innovation. In the meantime, reforms should be carried out in the educational sector to promote the development of education and the accumulation of human capital.
Thirdly, encourage the development of the service sector and strive to generate more value with fewer resources. Industrial enterprises should move upward along the value chain from simple processing to production-oriented services including proprietary R&D and branding, to increase the added value of products. The government should create a better environment for the development of the service sector.
Fourthly, rectify the biased emphasis on the "hard-ware" over the "software" and on the production over the service in developing the IT industry. The service function of the IT industry should be strengthened to facilitate the application of IT in various industries and to improve the entire economic efficiency.
Lastly, speed up the reform of the economic system and eliminate the price distortion. The government's power in resource allocation should be weakened to allow the market to play its basic role.
(Prof. Wu Jinglian is the leading economist in China, and Bao Steel Chair Professor of Economics at CEIBS.)
