In the long run, supply-side reform will increase productivity.

 

At the 11th meeting of the central finance and economy leading group on Nov. 10, Chinese President Xi Jinping outlined new tasks for future economic growth, stressing that China should strengthen structural reform to increase the quality and efficiency of the supply system.

Though China has striven to transform the development pattern during the 12th Five-Year Plan (2011-2015), challenges from downward pressure still remain in the process of restructuring. In the long run, supply-side reform will provide an impetus for sustainable economic development and increase productivity.
 

The Chinese notion of supply-side reform is not completely derived from the Western variety. It is rather a move to sustain moderately high growth that conforms to the characteristics of domestic economic development.
 

To cope with the impact of the 2008 financial crisis, China introduced policies to expand demand, which has helped it maintain steady economic growth. As it enters the period of the 13th Five-Year Plan (2016-2020), China is transitioning to moderately high growth by virtue of the first-mover and late-mover advantages. However, it should be noted that expanding and creating demand requires the support of a more efficient supply system that can be brought into being through supply-side reforms.
 

Presently and in the future, inadequate capacity will continue to be a major risk. Supply-side reform is a means of overcoming risk and improving effective capacity to compensate for deficiencies, strengthen advantages and create new points of growth.
 

In manufacturing, the emphasis should be improving the productivity and international competitiveness of products in the middle or at the high end of the value chain, so the industries that produce them can play a stronger role in driving economic growth. Though their international competitiveness has been increased since the 11th Five-Year Plan (2006-2010) these products still account for a low share of exports.
 

The contribution of services to GDP has exceeded that of the industrial sector. However, the service industry on the whole is not competitive, and exported services lack knowledge and technology. Thus, the modernization of the service industry should be promoted.
 

Also, innovation is needed to forster cutting-edge technologies. The world is now undergoing a technological revolution, which presents an unprecedented opportunity for China to develop an innovation-driven model and create first-mover advantages. According to “Research Fronts 2015” by Thomson Reuters and the National Science Library at the Chinese Academy of Sciences as well as the World Intellectual Property Report 2015 issued by the World Intellectual Property Organization, China has already made huge advancements on some fronts, but there are still gaps with developed countries. And it is important to push forward innovation in basic knowledge to fuel innovation in cutting-edge technologies.

In addition, industries that are labor and resource intensive should be optimized. The focus of restructuring on raising the proportion of industries that are higher on the value chain does not mean giving up on those that are labor and resource intensive. Costs are rising for low-tech industries as well as those that rely heavily on labor and resources. These industries are also experiencing challenges in terms of quality requirements, environmental regulations and excess capacity, which are the result of a lack of innovation and product homogenization. If these problems are not dealt with at the root, it is impossible to generate the internal impetus necessary to consume excess capacity.
 

To enhance the nation’s effective capacity, supply-side reform should also involve the process of distribution, exchange and consumption in addition to production. In other words, the key to such a comprehensive deployment is to establish an innovation-driven system.

 

Zhang Qizi is from the Institute of Industrial Economics at the Chinese Academy of Social Sciences.