Toward the New Goal of National Prosperity

By Wang Jianjun and Wan Renkui,

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Toward the New Goal of National Prosperity

By Wang Jianjun and Wan Renkui,

Outlook Weekly Research Center

It is almost certain that China achieves its 7.5% economic growth target set at the beginning of 2012, which means that China's total annual GDP for the first time recorded more than 50 trillion yuan, equivalent to US$ 8 trillion with per capita GDP exceeding US$ 6,000. This is compatible with the ambitious goal of achieving a moderately prosperous society in all respects by 2020.

From 2003 to 2011, China's GDP average annual real growth was 10.7%, of which six years recorded a growth rate of over 10%, and a growth rate of 9.2% was still achieved in 2009, the most seriously affected by the international financial crisis. During this period, its average annual growth rate is not only much higher than the 3.9% of average annual growth rate of the world economy, and also higher than its average annual growth rate of 9.9% since the reform and opening up.

Recently released data by the National Bureau of Statistics shows that China’s economic growth rate is basically stable. Under the circumstances of global economic recession and the domestic economy running complex, China's economic growth meets no big downturn situation. The International Monetary Fund (IMF) recently has come up with a conclusion of soft landing for the Chinese economy with a steady rise.

This decade is the period in which the fastest-growing and best economic performance has been achieved since the founding of New China. During this period, the economic fluctuations are minimum from year to year, recording a high growth, low inflation, high efficiency and stable development. Even if the world's major economies affected by the international financial crisis are slowing down and even facing a recession, the Chinese economy has maintained a fairly high growth and the first to rebound, and become an important engine driving the world economic recovery.

With beginning of the reform and opening up in 1978, China's rapid economic growth has been going on for 30 years. The continuous quantitative changes have ensured this oriental country qualitative leap in many fields, such as being the world’s second largest economy, the first big manufacturing country, the first export country, etc. constantly setting new records. China's total economic aggregate reached more than 50% of that of the United States, the latest World Bank data showed, the combined GDP of low-income countries will surpass that of GDP of developed countries for the first time in history.

The wealth created by countries of the South for the first time historically overtakes that of countries of the North, the center of gravity of the human development shifts as a milestone displacement. People will find that how China's modernization expands and where to go directly determine not only the well-being, destiny and the great cause of national revival of over 1.3 billion Chinese people in the future, but also affect confidence and expectations of about 4 billion people of other developing countries for getting out of poverty and achieving self-reliance.

China has a population of over 1.3 billion, its per capita resources are far below the world average, per capita fresh water amounting to only 1/6 of the world average, and its richest coal is only about half of the world average. So under these conditions, if China can achieve modernization, then, there is hope for the whole world.

China’s Growth Know-how

During the past decade, why has China's economy grown so fast, and relatively stably, and have people got more affordable? Zheng Xinli, executive vice president of China International Centre for Economic Exchanges believes that these lie in the wisdom and hard work presented by the Chinese people under the CPC leadership and the outstanding performance is reflected in the following four areas:

First, continuously improve the ability to command the market economy. Through macro-regulation, the economic cycle is ironed out so substantially to maintain a balance between the total demand and the total supply, and the decade-long double-digit growth is achieved. That is very rare, and also very inspiring.

Second, continuously come up with theoretical innovations to guide the economic development. The Third Plenum of the 16thCPC Central Committee put forward the people-oriented concept and a concept of comprehensive, coordinated and sustainable development, and promotion of the overall economic and social and human development. The timely advance of the Scientific Outlook on Development as well as strategic thinking on changing the mode of development quickly become the consensus of the whole society, and directly promote the sound and rapid development of the national economy.

Third, include the development of social undertakings in the important agenda and vigorously promote. The Fifth Plenum of the 16thCPC Central Committee strengthens the building of a harmonious society, and makes clear-cut arrangements on social security, income redistribution, and expanding employment, science and technology education, and health care and other social undertakings, which makes this decade the period for the China's fastest development of social undertakings, having benefited the vast majority of Chinese people.

Fourth, steadily and constantly improve the socialist democracy with Chinese characteristics. The consolidation, improvement and innovation of the basic political system including the people's congress system, multi-party cooperation and political consultation system under the CPC leadership, the system of regional ethnic autonomy, and the grass-roots self-governance system, etc. have created a stable political environment for the reform and opening up and for the whole party and the people to concentrate on construction in the past decade.

As a result, the 34-year reform and opening-up and especially the rapid advance of modernization over the past decade in China constitute a stunning turn for the Chinese history. According to British economic historian Angus Maddison estimates, 20 years before the Opium War in 1820, based on purchasing power, China's economy accounted for 33.0% of the global total, and its total economic aggregate was about 20% higher than that of the whole Europe, but, it continued to decline in the past 160 years. Before and after the founding of New China, its economic shares dropped to 4.6%, and remained so till the reform and opening-up in the late 1970s.

The reform and opening-up in 1978 stemmed the raging tide and pull up the Chinese economy to the rapid increase track. By market exchange rates, the proportion of the Chinese economic aggregate rose to about 10% of the world total in 2011, per capita GDP index upgraded to the level of upper-middle-income countries. In this decade, one of the proudest achievements of China's modernization was the successful shift to a middle-income country from a low-income country.

In early 2011, based on purchasing power parity (PPP), the International Monetary Fund (IMF) released a prediction: by 2016, China's GDP will reach US$ 19 trillion (U.S. having US$ 18.8 trillion), and China's economy proportion will account for about 18% of the global economy and for nearly 25% by 2020. In line with the current China's growth trend, its total GDP in 2020 is possibly equal to that of the United States as long as the difference of economic growth between China and the United States remains at 3.5% to 4%.

Rare Opportunities in the World

The next high tide of human industrialization will be set off in countries of the South, one of its 'leader' is undoubtedly China. Hu Angang, Tsinghua University professor, argues that mankind enters the 21stcentury, according to the International Energy Agency (IEA), a new industrial revolution, called Energy Revolution and Environmental Revolution, is taking place. This is the fourth industrial revolution - the green industrial revolution.

Entering the 21stcentury, the most magnificent challenges the world faces are global climate change and its impacts, so the biggest opportunity is green energy revolution to fundamentally change the traditional development mode of economic development and growth in carbon emissions at the same time since 1750s, initiating economic growth and carbon emissions reduction. The most important feature of the fourth industrial revolution is to decrease rapidly dependence on natural elements, and thus even decoupling. Meanwhile, the role of information factor, the knowledge factor, cultural factor, technological factor and human capital factor upgrade quickly. The human race experiences four industrial revolutions on the modern road: during the first industrial revolution from 1750 to 1850, China was a bystander; in the second industrial revolution from 1850 to 1950, China was a laggard; during the third industrial revolution from 1950 to 2000, China was a follower. It is only in the fourth industrial revolution beginning with the new century that China for the first time together with the United States, European Union, Japan and India are leading at the forefront.

Taking China as a case, he emphasizes that China's grain production has nine-year consecutive growth, but only a slight increase of water use by agriculture. Currently, the Ministry of Water Resources studies the possibility of reducing agricultural water use in the future. As China quickly upgrades its level of industrialization, while, its industrial water consumption and energy consumption reach a peak and then decline even decouple, which will be a great revolution beyond history in terms of human development. Affected by the international financial crisis, Europe and the United States has programmed to hold high the 'green flag', but China is too fast to do it first, the EU has full translation of its 12thFive-Year Plan, defined as the world's first "green development program" to carefully study China’s every move.

As China has entered a decisive phase to build a moderately prosperous society in all respects, the Chinese Government has put forward the 'five in one' layout for economic construction, political construction, cultural construction, social construction, and ecological construction. So ecological construction first becomes one of its strategic core objectives, a truly comprehensive plan, further defines the development goals and the grand blueprint by 2020 and marks China’s development featured by green ecological civilization.

Currently, the Fourth Industrial Revolution led by the green energy revolution provides a vast arena for our generation to display their talent. The United Kingdom and the United States were all leading the industrial revolution, and are the 'leaders' of the world economy. China per capita resources is in shortage, especially energy shortage. In order to achieve a comprehensively rise, China needs to become a 'leader' in the wave of the fourth Industrial Revolution. This is an unprecedented opportunity, meaning the hope of China's rise is pinned down on leading the Fourth Industrial Revolution.

Unprecedented challenges

The total China's population is about 300 million more than the population of the 56 high-income countries put together. A modernization program by such a huge population is equivalent to repeating the world-wide modernization historical process in the past two centuries in China, but China has neither relatively favorable domestic resource conditions and environmental capacity as in their early development phase, nor could bring home resources needed by modernization through expanding colonies as they did. For China, on the one hand, while resource constraints such as energy and water resources are enhanced, new pressure to address climate change and reduce greenhouse gas emissions continue to increase; On the other hand, China's modernization is meeting with a new round of worldwide extensive industrialization and urbanization wave, unprecedented competitive pressures we face. Obviously, these constraints on China's socialist modernization process have already constituted a tremendous impact.

Zhang Junkuo, researcher of the Development Research Center of the State Council explained, a phased strategic objective for the modernization is to fully complete the building of a moderately prosperous society in all respects by 2020 during the 10 to 20 years from now on, we should move across the middle-income stage to the high-income society through hard work, and lay a solid foundation for basic realization of the strategic goals of modernization by middle of this century. With a population of over 1.3 billion and a giant economy, how successfully can the 'middle-income trap' be crossed? This is an unprecedented challenge. China is in a critical period of economic and social development, and its per capita GDP reached US$5400 in 2011, still US$ 6600 less than US$ 12,000 defined as high-income level by the World Bank. So it is still on the tough stage to cross over the "middle-income trap".

Since Modern society, a thought-provoking phenomenon emerges world-wide, a vast majority of countries achieved progress smoothly in their modernization infancy and quickly shifted to middle-income countries from low-income level countries. But the development, then witnesses a significant differentiation: a few countries successfully continue the development process, and ultimately achieve a transformation from middle-income to high-income, such as Japan and South Korea. A considerable number of countries fell into a long period of stagnation, unable to accomplish the leap from middle-income to high-income, such as Argentina, Chile in Latin America, Indonesia, Thailand, the Philippines in Asia. World Bank summarizes it as "middle-income trap" phenomenon.

In latecomer countries catching-up modernization process, transition from low-income society to middle-income society and transition from middle income society to high-income society, these two processes are of different nature, face different environments, development patterns and institutional guarantee. At the previous stage, economic development is at a lower level, mainly depends on the advantage of low-cost and matured technology and skills, and industrialization process can take off and reach the middle-income level so long there is basic political and social stability, the requirements for a sound economic system is not urgent. When the economy reaches the level of middle-income, not only many comparative advantages, such as low-cost advantages, will change, and will also face a more complex political and social environment, such as the enhanced political aspirations of ordinary people.

From the experiences of other countries, the key for successfully crossing the "trap" is to realize innovation and transition in two aspects. One is innovation of growth driving-power, from low-cost investment-driven growth into innovation-driven growth. Two is social management innovation, effectively coordinate the interests relationships, and maintain social harmony and stability. Impossible to achieve innovation and transition in these two aspects, the modernization process may stagnate or even reverse. Most of the countries that fell into the so-called 'middle-income trap' are those having problems in the two aspects, and could not overcome the obstacles. However, to achieve these two aspects of innovation and transformation is no easy task, because they have higher requirements for institutional building. The reason why some countries fell into the "middle-income trap" is they failed in institutional innovation and development mode innovation. In this sense, shift the mode of development is not exclusive to China, but inevitable challenges faced by all countries in their modernization processes, and must be accomplished.

Transforming Development Mode Without Delay

Hu Angang and his research team have studied a number of modernization failed cases, the results show that modernization failure is accredited to a variety of reasons. For example, the development process blocked by some domestic social and political unrest, severely affected by external factors due to heavy economic external dependence, at low end of international industry value chain for a long period, etc. due to the weak ability of independent innovation. But, an in-depth analysis can find the key to their development, which is to make timely adjustments. Firstly, as economic growth goes beyond the initial start-up phase, and traditional competitive advantages become decreased, economic development strategies, policies and institutions fail to record timely adjustments, and formation of the new competition advantage is delayed, resulting in underpowered development. Secondly, the economic and social policies have failed to change with the changed stage of economic development and pattern of interests leading to the large income gaps between domestic groups and regions, sharpening social contradictions and causing domestic social and political unrest.

We must take scientific development as the theme and accelerating transformation of economic development mode as the guidance, which is China's overall development strategy. Change the mode of development is a universal challenge faced by all countries as their modernization enters a certain stage. To accelerate the transformation of the mode of economic development is a profound change in China's economic and social fields. On the one hand, to transform mode of economic development is complex, involves in wide-ranging arduous tasks and takes a long time to complete; brings about profound impacts on the future economic and social development, which will result in significant changes on the other hand. The transformation of economic development mode is a complex systems engineering, is connected with both the productivity and production relations, with both the economic base and superstructure, and with the development concept, purpose, strategies and pathways, involves in development quality, structure and efficiency, related to the vital interests of all aspects, to the improvement and development of the socialist market economic system, and to whether the Scientific Outlook on Development can be truly and fully implemented.

Therefore, the transformation of mode of economic development is both an uphill battle and protracted warfare, which must be accomplished through unswervingly deepening reform. That is through unswervingly deepening reform of the economic institutions, political institutions, cultural institutions, social institutions and other institutions to form vibrant, highly efficient, more open institutional mechanisms, conducive to scientific development, and formulate institutional arrangements to help speed up transformation of the economic development mode, thus, achieving new breakthroughs in the transformation of economic development mode in the 12thFive-Year Plan period.

However, in practice, it must be aware that the quantitative goals are relatively easy to achieve, but the adjustment of economic structure, the quality of economic growth, social undertakings, and other goals are more difficult ones. At the same time, as China's economic and social development and people's living standards continue to improve, the broad masses expect continuously improvement of the quality of life and, clean water, fresh air, beautiful environment, etc. The strategic significance of accelerating the transformation of economic development goes beyond that. The world's modern history in the past three centuries is the history for updating development mode. We take scientific development and accelerating the transformation of economic development mode as theme for the 12thFive-Year Plan period and even longer time, and complete another significant historic transformation following the reform and opening-up 30 years ago, which not only lays a solid foundation for building a moderately prosperous society in all respects, but also exerts significant and far-reaching impacts on transforming China as an industrial power into a industrial powerhouse, as a major developing country into a modern power, thus, achieving the great rejuvenation of the Chinese nation on the basis of basic realization of modernization by the middle of this century.

Activate Magnificent Power

The orientation of China's economy in a difficult transition has generated world-wide concerns. Among the diverse opinions, some researchers doubt whether China is able to maintain about 8% economic growth, others even argue that China's sustained economic growth momentum has basically disappeared.

In this regard, Zhang Jun, Fudan University professor believes that cautious about the future of the Chinese economy is necessary, but too pessimistic is unjustified. Understanding the Japanese economy as a typical case, its high growth phase is followed by a substantial growth-rate diving, the main reason is the size of the domestic market is too small, and the ultra-high growth of the Japanese economy long-term heavily depends on exports so cost conditions change more violently against economic growth naturally. In contrast, regional development disparities due to vast territory, China has its own "wild goose mechanism" to buffer the new competition and cost pressures. It is possible in transitional way for regional redistribution of productivity factors to sustained rapid growth for the next 10 years or 20 years.

In fact, the development in the mainland of China presents a trend of smooth transition of growth mode. The central and western regions of China begin making substantial investments in public infrastructure, and vigorously accept corporate investments and factories moved from the eastern region, which at the same time lead to large-scale gathering of low-skilled labor there. Understandably, most of inland province's GDP growth rate exceed 10% while developed eastern regions’ growth rate fall as the total economy expands in the these years. To maintain high growth of China's economy in the future mainly depends on how the development successfully adapts to a new stage of development cost conditions, i.e. a smooth transition to a new growth mode from the original growth mode. Obviously, whether the new cost conditions can successfully induce new growth mode is the key. Conditions to activate the growth potential in China are still spectacular and are reflected by the following three sets of data.

First, infrastructure investments on an unprecedented scale. Even though the infrastructure construction in China has made great achievements, there is still a huge gap with the United States. Regarding railway, for example, the planned railway mileage in China will reach 120,000 km by 2015, only about half of the U.S. 220,000 km. The 90,000 km railway is mainly concentrated in the eastern region while it is by 2015 that the central and western region can have 50,000 km mileage. Over the past 20 years, the rapid development of China's highway amounts to only 70 % of the average density of the OECD countries; there are nearly 100 major cities with 500 million population in China, and now 80% of the cities has no subway, and 90% of subway mileage concentrated in the eastern region.

Second, over the past 30 years, employment created by the manufacturing and service industries increased significantly while the proportion of the agricultural labor force decreased by 30%, with an average annual decline of 1%. Now, the agricultural added value accounts for 10% GDP, and is estimated drop to 5% to 7% by 2030, close to the level of developed countries.

Third, China's urbanization coverage reaches more than 51% with the urban population more than the rural population for the first time. It takes 30 years for urbanization to reach from 20% to over 50%, with an average annual increase of 1%, meaning every year more than 10 million people becoming urban population. Following this trend projection, it requires another 20 years for China's urbanization rate to reach 70%, the average level of the high-income countries.

In the past, economists debate continuously the secret of success of East Asian economies whether by market or government. As matter of fact, the most successful experiences and lessons that can be summed up from the East Asian economies are only one, that is whether policy-makers enable the economy to adapt to changing environment, and whether successful changes can be made as the private economic growth requires policy adjustments. Through the ongoing reform to avoid long-term structural problems, China needs to maintain flexibility of the system to create and ensure high growth for the next 15 to 20 years. In the past 30 years, the Chinese system maintains sufficient flexibility to adapt to the changing environment, and to avoid major external shocking impacts on the Chinese economy. Nowadays, China's economy faces new cost conditions and the new growth phase transition, and the Government policies will play critical role.

New Decade Blooming from Buds

After some 30 years of development, China's traditional advantages are being gradually reduced, but China as a latecomer has some new advantages at the new stage in the new situation. In the context of a new round of technological revolution to flourish and quickly spread, China's basic national conditions and stage of development provide that it can take high-tech advantages for growth by leaps and bounds, with favorable conditions than any other country.

Zhang Junkuo explains that on the one hand, China, compared with developed countries, has a big room for growth and a low-cost advantage. Developed countries in the traditional industries have shaped a lot of production capacity and its market is relatively saturated, growth in demand has small room and is slow-going. Applying new technologies in industries often requires elimination of large-scale old production capacity, faced with the pressure of a lot sunk costs. China is just in the period of rapidly advancing industrialization and urbanization, the domestic market demand is not only huge but growing rapidly. This gives us conditions to directly use new technology to meet the new demand, unlike some developed countries that have to put out a lot existing production capacity.

For example, in order to meet the rapid growth of electricity demand, either directly use ultra-supercritical technology to build 1 million kilowatts generating units to improve energy efficiency and reduce environmental pollution, or directly use the latest photoelectric conversion technology and wind energy technology to build power facilities economically; in order to meet the large-scale needs of steel by urban and rural construction, build world-class large-scale iron and steel complexes by integrating contemporary advanced technology; in order to meet the rapid growing needs of family cars by urban and rural residents, directly use the latest technology to produce energy-saving and environment-friendly cars if the technology and cost conditions allow. Meanwhile, China has huge potential domestic market, which is conducive to the growth of new industries and their large-scale development, to rapidly enhancing international competitiveness, to the rapid recovery of investment costs, to shortening the cycle of application of new technologies, and to promoting faster progress of technology.

On the other hand, compared with a vast number of developing countries, China also has the obvious advantages in technology and production capacity. China is not only close to the global forefront in a number of new technologies and new industries, and even stand on the same starting line with some developed countries in a number of areas, and have the talent pool and research and development capabilities most developing countries and some developed countries do not. Moreover, since China has a relatively complete industrial system and a strong manufacturing capacity, it is able to turn the new technology into practical productive forces.

Therefore, based on modernization progress of unprecedentedly accumulated wealth and institutional advantages, in order to build a moderately prosperous society in all respects and upgrade socialism with Chinese characteristics to even more high stage, it is inevitable to meet the pressing practical challenges of the following four areas:

First, deepen reform of the income redistribution system to release consumer demand potential. To drastically adjust the structure of demand, and achieve economic growth by consumer-driven growth from mainly by investment and export-driven growth is a major initiative to implement the Scientific Outlook on Development and is the primary task for transformation of economic development mode. Appropriately reduce the rate of investment and raise the consumption rate as a precondition to adjust the national income redistribution structure and reform the income redistribution system. In the 12thFive-Year Plan period, if the ratio of consumption increases by 10 percentage points, equivalent to about 5 trillion yuan household consumption, otherwise as goods for investment and export, which will become a powerful driving force of economic growth.

Second, accelerate the reform of the financial system to release capital potential. The focus of financial system reform should be in line with the provisions of the State Council on encouraging private investment, allowing private funds to initiate shared small financial institutions and promoting the establishment of local regulatory agencies, and at the same time supporting the establishment of a deposit insurance system and the implementation of market interest rate. China's foreign exchange reserves reached US$ 3.2 trillion, whose good use can become a strong support for long-term, stable and rapid growth of China's economy.

Third, strengthen incentives mechanisms to release the potential of technological innovation. It is important to encourage increasing investment in technology R&D to enable them to become the carrier of technological innovation. The current focus is to establish incentives mechanisms for technology R&D in the state-owned enterprises, and give full play to the backbone and leading role of the state-owned enterprises in independent innovation. The Universities should also become bases for scientific and technological innovation.

Fourth, improve the institutional mechanisms of integrating urban and rural development to release the labor potential. Guide and encourage the farmland to be relatively concentrated in new-type business entities such as agricultural cooperatives, family farms, agricultural companies and others, accelerate steps for some farmers freed from the farmland into the secondary and tertiary sectors. After 30-year efforts, the agriculture labor force is reduced by some 200 million, and another 200 million in the next 20 years could move out into the secondary and tertiary sectors, by then, the urban and rural residents will share equal income.

As long as we take full advantage of the favorable conditions of potential of the huge domestic market, and strive to improve the capability of independent innovation, and achieve breakthroughs in some technology and industries with advantages, accelerate the development of globally competitive high-tech sectors, we will be able to promote economic and social development by leaps and bounds.