Synchronization of New Industrial Revolution and Supply-side Reform




A new industrial revolution marked by new technologies, wide access to the Internet, and computerization across all sectors is changing the world. Lifestyles, thoughts, and the political and social structures of human society are all being affected . The familiar physical and biological environments and contours are being changed by big data. The narrowing gap between virtual reality and real life is creating a new world, a new economy, and a new normal. All this determines the global economy in which China must find its place by deepening its reforms, a key move as structural reform focusing on the supply side comes into focus.


We must observe and analyze China's economic reform in the context of restructuring and transformation of the world economy but also from the perspective of the new industrial revolution (the fourth industrial revolution), the supply-side structural reform, and the relationship between the two.


Facing Increased Risks


After decades of economic globalization, trade and investment continue to grow at a rapid pace. Industrialization is taking off in many countries, creating new emerging economies. The world GDP now exceeds US $70 trillion. In purchasing power parity (PPP), this represents US $118 trillion. In terms of PPP, emerging economies in 2015 accounted for more than half of the global GDP, or 57.6 percent, accounting for more than two-thirds of global economic growth, exactly 68 percent, and China alone represents half of that figure.


However, it is clear that this pattern of development has reached its limits and the guiding thought has to be renewed. Some U.S. economists now believe that many countries in Latin America, Asia, and Africa have been wrong to blindly follow the neo-liberal policies advocated by the IMF and the World Bank, supported by the West, especially the United States. The result is the current recession and stagnation in these countries. The 2008 financial crisis is also the result of the shortsighted economic and financial policies that were enforced for too long. To this day the global economy is suffering the consequences of this crisis.


The risks are increasing: while economic recovery stalls in developed countries, economic growth in emerging economies and developing countries has slowed down. The business cycle, monetary policy of the Fed, and a strong dollar weigh on commodity prices, particularly on crude oil. Countries exporting natural resources, such as Brazil, Russia, South Africa, and Indonesia, are affected by the debt crisis, a lowering of credit, capital flight, and currency devaluation. These factors are already having an effect: the global economy is entering a deep restructuring period with the distribution of wealth and redistribution of interests among various actors accelerating.


The monetary policies of major economies are diverging, causing the external environment for economic development of emerging countries to deteriorate and making it harder for these countries to orient domestic regulation and restructuring. In a time of greater interdependence than ever between developed and developing countries, the proliferation of risks and interactions between them could trigger a crisis that could radiate out from a weak link in the world economy, a scenario we should all be alerted about.


Opportunities and Challenges of the New Industrial Revolution


The new industrial revolution is a historic opportunity as it allows the growth mode and business patterns of the global economy to be reshaped, the modes of production and lifestyles, the ecological and cultural environment to be renewed and improved. It is a motor that drives the restructuring and economic change in all countries, which requires cooperation and coordination of different stakeholders.


The new industrial revolution has its origins in the digital revolution of the mid-20th century. It is characterized by progress and the merger of new technologies based on big data and the development of the Internet, with the advent of new industrial production methods, new products, and even entirely new industries. Innovation and sharing are defining features of this revolution that are radically changing traditional production, management, and consumption. It is a subversive revolution expected to result in harmonized coexistence between man and machine, but also between man and the environment. We are only at the beginning of this revolution.


What are the opportunities and challenges of this revolution? What relations should be regulated?


The first concerns the relationship between labor and capital. It is increasingly common for manpower to be replaced by automation because of technological progress. Foxconn, for example, once employed millions of Chinese workers but robots are gradually replacing them. The Charoen Pokphand Group has a modern poultry plant that provides two to three million eggs per day for the Beijing market — it employs only a dozen people. This replacement of people with machines will only widen the gap between the return on capital and labor remuneration. However, China must develop its manufacturing industry and cannot afford to let it weaken.


The second concerns the relationship between talent and innovation. The capacity of talent and innovation is the core competitiveness in the new industrial revolution, whether in the fusion of new technologies, "Internet Plus", or artificial intelligence. Their development will depend on the talents and their ability to innovate.


New products and new industries are changing very quickly, upsetting the old production and value chains. Research and development, production, marketing, and consumption now all proceed on digital platforms on a global scale, which can be shared by all. Internet + 3D printing can make anyone a "designer + producer + consumer," presenting an economic proposition of the supply side. Supply and demand must be coordinated, both must adapt to and support each other. Focusing solely on demand does not address the current situation and will not work in the future.


The third concerns the relationship between the government and the public. Along with the blurring of boundaries between the physical, biological, and digital worlds as well as increasing interactions between them, the social governance, the interactions between the public and government, the formulation and implementation of policies and the reactions of society have become "flattening."


It is not by chance that China raised the issue of modernizing the national governance capacity and system. The current system of public policy and political decision-making, established before the onset of the new industrial revolution, is too heavy to operate efficiently. The information sharing system is incomplete. In particular, the supervisory and regulatory systems have not adapted to the sudden economic changes, and are slow in response. The recent measures taken by the Chinese government to stanch the stock market have illustrated these limits.


The new industrial revolution is changing the lifestyles and careers of citizens through green commuting, low-carbon consumption, new channels of providing medical services, mass entrepreneurship and innovation, as well as social networking.


Are these new technologies harmful to normal human relations? With the dominance of the smart phone, the question arises as to the gradual disappearance of face-to-face exchange, which many worry will cause social problems. With the new industrial revolution, the Chinese economy is facing a restructuring and transformation. It must be based on a new concept of development, and adapt and guide the "new normal" situation to promote sustainable economic development in the long term.


Accelerate Supply-side Reform under the New Normal


What is the relationship between the new normal and the supply-side structural reform? And what is the latter about?


Chinese GDP growth and economic development have reached a plateau; to improve, the pace, structures, and engine of the economy have to be adjusted. This situation is called the "new normal." The supply-side structural reform entails providing means to release and develop productive forces, pushing forward the restructuring through reform, reducing superfluous productions and low value added, increasing medium and high value added production, and better adapting supply to fluctuations in demand; in a word, to increase the total factor productivity.


Studies show that long-term economic growth is determined by the potential growth rate. This potential is defined as the maximum growth rate for an optimal allocation of resources i.e., the maximum level of productivity for labor, capital, and technology available. The real GDP growth hovers around its potential level.


To assess this potential level of the Chinese economy, a research group dedicated to the study of the "middle-income trap" from the Development Research Center of the State Council conducted extensive studies. The results of these studies indicated a potential growth of 9.8 percent over the period from 2001 to 2005, 11.2 percent between 2006 and 2010, and 9.7 percent between 2011 and 2015. The level is estimated to be 6.5 percent for the coming period, from 2016 to 2020.


During this period of more moderate growth, the challenge is to maintain the dynamism of the economy and to achieve a growth rate equal to or above potential, and this is an acid test for China's economic regulation. In this context, we understand the importance of carrying out the supply-side structural reform.


In 2014, China's GDP per capita at PPP stood at US $12,880, or 23.6 percent of that of the United States. For China, with a population of 1.37 billion people, this result was miraculous. The country, however, is in a delicate phase of transformation of its economic structures, from predominance of the manufacturing industry to services. This is the context of China's "new normal" stage.


Some people compare the structural reform to the Reaganomics in the United States. This comparison is groundless given the different context and objectives. China's supply-side structural reform cannot just copy foreign experience; it should be based on its actual situation to solve the structural problems and lay a solid foundation for sustainable development.


Professor Hu Angang of Tsinghua University explains in clear terms the general idea of this reform.


First, we need a stable macroeconomic policy i.e., the need to maintain the growth rate at around 6.5 to 7 percent, cut taxes and adjust local and national taxes, as well as a prudent monetary policy.


Second, we must develop a targeted industrial policy that optimizes the structure of supply. This means concretely supporting the development of strategic new industries, strengthening the competitiveness of labor-intensive industries, assisting in the upgrading of traditional industries, and closing zombie companies.


Third, we should adopt more flexible measures at the micro level to stimulate business vitality and boost consumption. China at present has about 20 million businesses. Simplifying administration, creating a fair and transparent market, and encouraging fair competition are essential.


Fourth, we must implement viable and adaptable reform policies and see to their effective enforcement. To be specific, they should be coordinated, value the initiative of local authorities, and take regional disparities into account. What's more, evaluation and supervision should be enhanced, so that the policies could be recalibrated and improved when required.


Fifth, the social policy must provide basic public services and basic social security for the population. The well-being of the citizens is crucial for the success of the first four points.


For the period of the 13th Five-year Plan, the supply-side structural reform boils down to reducing excess real estate inventory, production capacity, tax burden and interest rates for businesses. On the other hand, it implies a better return on investment, improved supply capacity and innovation, as well as preventive measures against regional and systemic financial risks and social risks.


In the long term, the supply-side structural reform is a necessary approach to meet the trends of China's economic restructuring. Take urbanization for example: in 2014, the urbanization rate was 55 percent, a rate that will rise to 70 percent by 2030 according to estimates. This means that 200 million citizens living in the countryside will become city dwellers. If we add to this number some 250 million migrant citizens (working far from their place of residence), there are approximately 450 million people who will settle in cities within 15 years. Thus, economic restructuring, especially reform focusing on the supply, is a necessary condition for China's stable and sustainable economic development.


Following the 2008 financial crisis and thanks to reflections on conventional economic theory and demand-driven macroeconomic levers, many countries have accorded renewed attention to neo supply-side economics and supply-side managment. In a time when China is still working to acclimate itself to and navigate the "new normal" situation, it is very important to establish a mechanism of the new engine of economic growth.


At present, China is facing severe constraints on the supply side, which must be tackled through deepr reforms and innovations. The country must both respect the decisive role of market rules in allocation of resources, and manage demand and supply. Especially during the 13th Five-year Plan and the period following it, rational supply management will be a key mission of the government in its efforts to play a better role in building a socialist market economy of Chinese characteristics.


HE YAFEI is former deputy foreign minister and former deputy director of the Overseas Chinese Affairs Office of the State Council.