Synchronized New Industrial Revolution and Supply-side Structural Reform

By HE YAFEI

A new industrial revolution， evident in new technologies， wider access to the Internet， and computerization across all sectors is changing the world. Its impact encampasses lifestyles， thinking， and the political and social structures of human society. Big data are changing the contours of the physical and biological environments. 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 reforms， a key move as structural reform of the supply side comes into focus.

We must observe and analyze Chinas 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）， supply-side structural reform， and the relationship between the two.

Bigger 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 principle must be renewed. Some U.S. economists now believe that many countries in Latin America， Asia， and Africa have been wrong to follow blindly the neo-liberal policies advocated by the IMF and the World Bank， and 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 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 that of 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 as the distribution of wealth and redistribution of interests among various actors accelerates.

The monetary policies of major economies are diverging， causing the external environment for economic development of emerging countries to deteriorate， making it harder for these countries to orient domestic regulation and restructuring. At a time of greater interdependence than ever between developed and developing countries， the proliferation of risks and interactions between them may trigger a crisis that could radiate from a weak link to the world economy as a whole.

Opportunities and Challenges of the New Industrial Revolution

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

The new industrial revolution originates in the digital revolution of the mid-20th century. It is characterized by progress and the merging of new technologies based on big data and the development of the Internet with the advent of new industrial production methods， new products， and new industries. Innovation and sharing are defining features of this revolution， which is radically changing traditional pro-duction， management， and consumption. It is a subversive revolution that is expected to enable harmonized coexistence between man and machine， and man and the environment.

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

The primary concern is the relationship between labor and capital. It is increasingly commonplace for manpower to be replaced by automation due to 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 supplies two to three million eggs per day to the Beijing market – it employs only a dozen people. This substitution of machines for people 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.

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

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

Third is 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 interaction between them， social governance， interaction between the public and government， formulation and implementation of policies and the reactions of society have “flattened.”

China purposefully 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 cumbersome to operate efficiently. The information sharing system is incomplete. In particular， the supervisory and regulatory systems have not adapted to sudden economic changes， and are slow to respond. The recent measures taken by the Chinese government to stanch the stock market have highlighted these shortcomings.

The new industrial revolution is changing the lifestyles and careers of citizens through green commuting， lowcarbon 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 of the gradual disappearance of face-toface exchange， which many worry will cause social problems. With the new industrial revolution， the Chinese economy is facing 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 supply-side structural reform？ And what does the latter mean？

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

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

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

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

In 2014， Chinas 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 Chinas “new normal” stage.

Some people compare Chinas structural reform with the U.S.s Reaganomics. This comparison is groundless， given the different contexts and objectives. Chinas 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. one to maintain growth 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 supply structure. This means concretely supporting the development of strategic new industries， strengthening the competitiveness of laborintensive 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. Streamlining administration， creating a fair and transparent market， and encouraging fair competition are essential.

Fourth， we must implement viable and adaptable reform policies and supervise their effective enforcement. To be specific， they should be coordinated， encourage the initiative of local authorities， and take regional disparities into account. Whats more， evaluation and supervision should be enhanced， to enable policies to be recalibrated and improved.

Fifth， the social policy must provide the population with basic public services and social security. The wellbeing of citizens is crucial to the success of the first four points.

For the period of the 13th Five-Year Plan， supply-side structural reform boils down to reducing excess real estate inventory， and enterprises production capacity， tax burden and interest rates. 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， supply-side structural reform is a necessary approach to Chinas economic restructuring. Take urbanization for example： in 2014， the urbanization rate was 55 percent， and is estimated to rise to 70 percent by 2030. 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）， approximately 450 million people will settle in cities within 15 years. Thus， economic restructuring， especially reform focusing on supply， is a necessary condition for Chinas stable and sustainable economic development.

Following the 2008 financial crisis， and thanks to reflections on conventional economic theory and demanddriven macroeconomic levers， many countries have renewed attention to neo supply-side economics and supply-side managment. At a time when China is still working to acclimate itself to and navigate the “new normal” situation， it is vital to establish the mechanism for a new engine of economic growth.

At present， China is facing severe constraints on the supply side， which must be tackled through deeper 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 with Chinese characteristics.