Digital technology can boost economic recovery
China is advocating new productive forces, in which digital economy can play a crucial role. The direct impact of digital technology was evident during the COVID-19 pandemic, as it facilitated contactless transactions and shifted economic activities from offline to online. For instance, it helped boost e-commerce, food delivery, and remote research and teaching. Indeed, digital technology played a significant role in sustaining economic activities during the pandemic.
In post-pandemic economic recovery, the role of the digital economy has become even more direct, helping people continue e-shopping, and to order food online and participate in online seminars among other things. But more importantly, the digital economy has created “structural opportunities”, basically involving long-term growth issues rather than cyclical factors.
How to capitalize on digital opportunities
Can the structural and industrial transformation of the Chinese economy continue at the same pace? What role can the digital economy play in this transformation? And as China’s rapidly aging population leads to a decline in labor supply and an increase in the demand for social healthcare, can digital technology, including artificial intelligence, offset the impact of shrinking labor supply?
China is transitioning from a middle-income to a high-income economy, with per capita GDP of about $13,000. A study by Barry Eichengreen, a professor of economics at the University of California, Berkeley, suggests a country’s economy typically slows down after rapid development when its per capita GDP reaches $15,000-$16,000. China is already close to that stage.
There have been talks of China being possibly caught in the “middle-income trap”. In reality, when China’s per capita GDP increases by another $2,000-$3,000, only then it will face the question of whether or not its economy can continue to develop or will stagnate at that level.
The digital economy provides a “structural opportunity” for maintaining growth in that its contribution to the economy’s structural significance is greater than its cyclical significance.
Why do national strategic plans frequently emerge in the field of the digital economy? And how to seize the strategic opportunities offered by the digital economy?
From a macro perspective, China is a global leader in the digital economy. For instance, in terms of the scale, market penetration, the number of unicorn companies and innovation in key areas, China consistently ranks second globally.
From a decision-making perspective, the digital economy has brought about comprehensive changes in people’s lifestyles, production methods and governance, activating the economy in many aspects. And from the government’s perspective, the current challenge lies in achieving longterm growth and how to achieve the second centenary goal of developing “China into a great modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious and beautiful”.
The digital economy has made it possible to sustain economic development in the next phase. For instance, “data as a new factor of production” is a pioneering concept. If data are effectively utilized, they can make the entire production process much more efficient. With the same capital, labor, land and technologies, proper data use can improve resource utilization and increase output.
A key reason for the slow economic recovery is the restrictions on the digital economy, including platform enterprises, which has undermined industry confidence. Although the government now proposes to support platform enterprises, the biggest problem is a lack of confidence in industries, which cannot be changed overnight. In fact, to boost industries’ confidence and help increase investment, the government needs to issue more sustainable policies and change the economic fundamentals.
Digital industrialization crucial for long-term growth
In the short term, however, the simplest way to boost economic recovery is through macroeconomic policies, including monetary and fiscal policies. For instance, in times of economic weakness, increased government expenditure can stabilize demand in the short term. Stable demand means enterprises will get orders, and will hire people and/or increase investment. This will increase employment, and thus consumption, and boost production and investment.
What are the different roles of digital industrialization and industrial digitization?
Digital industrialization is crucial for long-term growth. The production of computers, internet tools, storage devices and chips, which did not exist in the past, is part of digital industrialization. Its contribution to economic growth is actually in providing solutions to industrial digitalization and supporting system problems.
The application of digital technology to an economy changes the operational characteristics of that economy. This can be described as “three rises and three declines”, with the three rises being expanding scale, improving efficiency and enhancing user experience; and the three declines being cutting costs, controlling risks and reducing direct contact.
For example, in the financial sector, a single platform can now provide both payment and credit services to hundreds of millions of users, which traditional financial institutions did not provide in the past.
The most typical example of digital finance is the original Yu’ebao, which pooled tens or hundreds of yuan from every user and became the largest investment fund in the country. It is because of digital technology that many things which were previously not possible can now be done. As such, digital technology offers many possibilities for transforming traditional industries.
An economy needs the cooperation of the market and the government to function smoothly. No economy can thrive by relying on just one of them. The point of contention lies in what role the government should play and how much space the market has to maneuver.
When it comes to developing the digital economy, private enterprises are likely to play the biggest role, not least because private enterprises mostly rely on market mechanisms for their operation even though the government plays a crucial role in their success.
First, the government maintains the market order, which is essential for private enterprises’ smooth functioning.
Second, the government has invested huge amounts in building and maintaining infrastructure, without which the digital economy cannot survive, let alone thrive. For instance, State-owned enterprises are behind the high internet penetration rate and digital network infrastructure. The development of digital technology, digital industries and the digital economy is not possible without the internet and internet networks.
And third, apart from supporting major investments, the government should create an environment to support original innovations. Although more than 70 percent of China’s innovations can be traced to private enterprises, there are still many innovations that require public research institutions and universities.
How can entrepreneurs overcome the economic recovery challenges in the short term? How can they seize the structural opportunities created by the digital economy?
In the banking industry’s digitalization process, we can see the “Matthew effect” — larger-scale enterprises that have invested a lot of resources, manpower and materials in digital transformation can expect better development outcomes. Some smaller-scale banks, too, have attempted digital transformation, but their efficiency has not significantly improved and their returns have remained minimal. Every enterprise needs to find its way of digital transformation.
Moreover, entrepreneurs need to make clear the vital pain points their enterprises face, and strive to solve such issues as much as possible. Addressing the above problems does not mean that entrepreneurs should lose their strategic vision. As long as the application of digital technology can improve operational efficiency, it will yield returns and be sustainable in the long term.
The digitalization trend is irreversible. And although everyone needs to participate in it, they should find the most suitable business endeavor for their enterprises and ensure they function well.
As long as the application of digital technology can improve operational efficiency, it will yield returns and be sustainable in the long term.