Experts focus on middle-income trap and green concerns
Countries, like companies, have to change their business models as world circumstances change.
In the early 2000s, China’s development model was based on low-wage manufacturing combined with high savings and investment rates. The very success of that model in drastically raising living standards has now led the Chinese government to adopt an ambitious set of policies to upgrade China’s industry, to escape the so-called middle-income trap and to support a green environment.
At a meeting of the State Council, China’s Cabinet, in May 2016, Premier Li Keqiang said of the country’s industrial business model: “China is already a big manufacturing nation, but far from a manufacturing power. … Integration of manufacturing and the internet is an inevitable path of modern industry.”
Justin Lin Yifu, director of the Center for the New Structural Economics at Peking University, in a recent article in the Journal of Chinese Economic and Business Studies, outlined the theoretical rationale for China’s industrial policy:
“The middle-income trap is a result of a middle-income country’s failure to have faster labor productivity growth through technological innovation and industrial upgrading than high-income countries. Industrial policy is essential for the government of a middle-income country to prioritize the use of its limited resources to facilitate techno- ADVANCED MANUFACTURING SECTORS PUSHED BY MADE IN CHINA 2025 logical innovation and industrial upgrading.”
Huge capabilities
China has enormous manufacturing capabilities. According to the Ministry of Industry and Information Technology, China’s output ranks first in the world in 220 out of 500 major types of industrial products. It also has world-leading infrastructure, which puts it in a different class from other middle-income countries.
But China’s comparative advantage no longer lies with low-wage mass manufactur- ing. According to a study by the Boston Consulting Group, manufacturing costs in China rose from about 86 percent of the US level in 2004 to about 96 percent in 2014.
“China is being pressured from both sides,” an unidentified MIIT official told Xinhua. “Advanced economies such as the United States, Germany and Japan have all formulated policies supporting further development of their own manufacturing. At the same time, emerging economies such as India and Brazil are catching up with their own advantages.”
Over the past 15 years, China’s real wages have gone up eightfold. This is a good thing in that it raises the living standard of the people, but it forces companies to find higher value-added products.
During the same period, many Western manufacturing companies, particularly in Germany, Japan, the UK and the US, invested heavily in becoming automated and efficient. Meanwhile, fracking technology cut energy costs in the US.
“The government knows