Innovation key to quality development
The recently concluded Fifth Plenary Session of the 19th Communist Party of China Central Committee approved the proposals for the 14th Five-Year Plan (2021-25) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035.
At a time when the world is undergoing great changes and China is facing uncertain external conditions, the proposals are of special significance. Based on an in-depth analysis of the profound and complex changes in China’s development environment and a deep understanding of the strategic opportunities China could capitalize on, the proposals are key to promoting high-quality economic and social development.
Many issues need to be factored in plan
After more than 40 years of rapid development, many factors that facilitated China’s rapid economic growth have weakened, so the country needs to change its development model from one depending on rapid and quantitative growth to one facilitating high-quality and sustainable development. China also has to factor in rising anti-globalization sentiment in many countries, the Sino-US frictions and the COVID-19 pandemic to work out an effective development plan for the future.
In the medium to long term, China faces multiple major challenges, with the first being how to further increase its total factor productivity (TFP) after its industrialization. During the industrialization process, high TFP propels rapid growth. But China has basically completed its industrialization process. In fact, by 2035, the service sector is expected to account for more than 65 percent of China’s GDP, but it is not easy to maintain a high TFP growth rate in the service sector.
The second big challenge is how to raise China’s position in the global value chain and develop its industrial supply chain into a relatively closed loop in the new stage of globalization. China occupies a very important position in the global value chain, but since it still relies heavily on upstream imports of core technologies, it is difficult for it to develop its supply chain into a relatively closed loop.
The third major challenge is the lack of smooth flow of capital, manpower, land and other factors, which undermines high-quality development.
China could become world’s largest consumer market
Despite such challenges, China’s economy also has some opportunities. China is already the second-largest economy in the world, and its 400 million middle-income people could turn it into the world’s largest consumer market. China’s manufacturing sector still accounts for 27-28 percent of GDP, compared with 11 percent in the US. And if China manages to keep the share of manufacturing above 20 percent of GDP in the long run, that alone can hugely propel TFP growth.
The huge opportunities brought about by reindustrialization — industrial digital transformation, and “new infrastructure” that forms the foundation of reindustrialization — will create a huge space for China’s TFP to increase substantially. For example, China’s current urbanization rate is about 60 percent and is expected to reach 75 percent, even 80 percent, by 2035, which means another 15-20 percent of the country’s population will move from rural to urban areas over the next 15 years, creating huge new demand in the process.
To properly meet these challenges and avail of the opportunities, the authorities need to abandon the pursuit of high-speed GDP growth and, instead, promote highquality development driven by innovation and industrial structural balancing, in order to improve people’s well-being.
China’s development has never been confined to a fixed model, rather it is more like an endless exploration of theories and practices, which change with the changes in time and conditions. China’s socioeconomic development determines the approach to development should be different at different stages. By setting the development goals for 2035, the policymakers have given a clear idea about the goals of the next three five-year plans, and the goals the 14th FiveYear Plan will include, so as to lay a solid foundation for the realization of all the goals through 2035.
The communiqué issued at the end of the fifth plenum says innovation will continue to play a central role in China’s overall modernization drive, and self-reliance in science and technology will provide strategic support for national development.
The authorities’ emphasis on innovation has reached an unprecedented level in recent years. The Sino-US trade disputes have exposed China’s bottlenecks in key technologies, such as making chips and aircraft engines. How to clear such bottlenecks, and overcome other challenges constitute a vital part of the new development pattern, which hopefully has been included in the 14th Five-Year Plan.
Compared with developed economies, China is still in the middle and lower reaches of the global value chains, relying more heavily on upstream raw materials, core technologies and core components. To change the situation, as the plenum communiqué says, China will strengthen its science and technology sector, enhance enterprises’ technological innovation capacity, help talents unleash their innovation potential, and improve the overall innovation environment. And increasing research and development funds is an important way to realize those goals.
In recent years, China has attached great importance to R&D, with its budget for the purpose accounting for 2.2 percent of GDP last year, equivalent to the average of developed countries.
But the proportion of input into basic research — which is vital to high-end research and innovation — in China accounts for only 5.5-6 percent of the total R&D budget, far lower than 18 percent in the US and 25 percent in France. In other words, in China, huge amounts are spent on development, not on basic scientific research and the underlying technology. This must change.
Domestic economy to get special attention
When it comes to the “dual circulation” development pattern, the communiqué puts special emphasis on “internal circulation” (domestic economy), saying China needs to develop its huge domestic market to form a new development pattern, especially because over the past decade, the proportion of exports in China’s GDP has decreased from 30 percent to 17 percent, while in 2019 exports contributed only 11 percent to China’s total economic growth.
And in order to promote “internal circulation” in order to sustain its development, China needs to continue deepening the reform of the factor market. Studies show that in the capital market, those resources with high investment returns and market vitality do not easily attract funds while those with low investment returns do. Such kind of ineffective allocation of resources hampers the smooth flow of funds and should be changed.
Further, over the next decade or so, more than 20 percent of China’s workforce is likely to be re-employed in the high-end manufacturing or service sector, and several major metropolitan clusters are expected to be formed.
What kind of reform will ensure these workers head toward the new clusters? Only by using the market mechanism to more effectively distribute the workforce between urban and rural areas, regions and industries, and give full play to the existing labor forces’ potential can China have enough room for further improving efficiency.
Income distribution system needs reform
To form a demand-driven “internal circulation”, China should further deepen the reform of the income distribution system, which comprises primary distribution and redistribution. In China, primary distribution still forms the most basic part of the income distribution system, with the share of individuals and households being only 43.3 percent of GDP, compared with more than 60 percent in developed countries such as the US and Japan.
This has a direct impact on people’s willingness and ability to increase consumption. So, how to raise people’s income through income distribution system reform and encourage them to spend more in the years ahead will become an important element of the 14th Five-Year Plan.