Liutang Gong[1]
Overview
As China enters a new development stage, the Chinese economy faces increasing complexity, severity, and uncertainty in the external environment.
In the new development stage, drivers of China's economic growth are shifting from traditional factors such as capital and labor to innovation, necessitating strategic adjustments in economic development.
The key to developing new productive forces lies in the enhancement of total factor productivity. This requires accelerating the construction of a modern industrial system, advancing the creation of a unified national market, and achieving a higher level of openness to form new comparative advantages.
During the 11th group study session of the Political Bureau of the Communist Party of China (CPC) Central Committee, General Secretary Xi Jinping emphasized developing new productive forces is an endogenous requirement and a pivot for high-quality development, and that efforts should keep up to promote innovation and accelerate the development of new productive forces. From an economic perspective, new productive forces represent a leap in productivity, addressing the urgent need for new economic growth drivers and theories in light of changes in the international landscape and the evolving stages of China's economic development. The development of new productive forces is an intrinsic requirement for promoting high-quality economic growth and a crucial component of the Chinese path to modernization, thus carrying significant strategic importance.
I. High-Quality Development Imposes Higher Requirements on Economic Growth and Calls for New Growth Drivers
1. Maintaining a Reasonable GDP Growth Rate is Fundamental for Achieving the Goals of the New Development Stage
In 2019, China's per capita GDP reached $10,000. In 2023, China's per capita GDP rose to $12,700, further narrowing the gap with high-income countries while imposing new demands on economic growth. Therefore, maintaining a reasonable GDP growth rate is crucial for the goal of building a modern socialist country.
2. Avoiding the "Growth Trap" Requires Sustaining a Reasonable Economic Growth Rate
Empirical evidence suggests that in nations with large populations, once their per capita GDP exceeds $10,000, economic growth rates tend to diverge significantly, resulting in the so-called "growth trap." To avoid this trend, China must strive to sustain a reasonable economic growth rate.
II. Changes in the International Landscape and China’s Economic Development Stage Call for New Development Theories
1. Increasing External Complexity, Severity, and Uncertainty in the New Development Stage
Firstly, with global economic growth diverging, growth expectations declining, and world trade levels falling, the trend of global economic growth shows both an overall reduction and increasing divergence among countries. Swings in countries’ monetary policies adversely affect the global economy, leading to lower growth expectations and a slowdown in economic growth worldwide. Secondly, high interest rates and elevated risks characterize the current global economic landscape. Inflation levels in developed countries remain relatively high despite having eased from peak levels, while the increase in interest rates further exacerbates global economic and financial risks. Thirdly, the divergence in global economic growth and the complexity of inflation levels heighten the uncertainty in monetary policy adjustments. In 2024, monetary policies in developed regions like the U.S. and the Eurozone are expected to undergo directional changes, and there is significant uncertainty in the monetary policies of East Asian countries such as Japan and South Korea, with Japan already ending its two-decade-long negative interest rate policy in March.
2. New Drivers of China's Economic Growth in the New Development Stage
Since the reform and opening-up over 40 years ago, China has risen to the world's second-largest economy with a GDP of 126.1 trillion yuan and the largest manufacturing country, accounting for about 30% of the global manufacturing share. Meanwhile, the country's position as the largest goods trader, the second-largest service trader, and the largest foreign exchange reserve holder have consolidated. As China enters a new development stage, its drivers of economic growth are shifting from traditional factors such as capital and labor to innovation, necessitating strategic adjustments in economic development.
In this new stage, China has proposed new development concepts and accelerated the formulation of a new development paradigm. So far, China's comparative advantages are shifting from being export-oriented to focusing on domestic market consumption. Thus, the report of the 20th National Congress further stresses the full, accurate, and comprehensive implementation of China’s new development philosophy. It calls for the acceleration of the construction of a "dual circulation" development pattern, which takes domestic development as the mainstay, with domestic and international development reinforcing each other. The report also emphasizes the organic combination of expanding domestic demand with deepening supply-side structural reforms to enhance the endogenous momentum and reliability of domestic circulation.
3. The Shift in Development Drivers in the New Stage Necessitates New Theoretical Guidance. The Proposal of New Productive Forces Addresses This Theoretical Need and Carries Significant Strategic Importance for Promoting High-Quality Development
The new productive force theory enriches and expands on traditional economic growth theories, which emphasize the importance of factor inputs (such as capital, labor and land) and total factor productivity (TFP) in economic growth. The development of economic growth theories is also a process of deepening our understanding of TFP. Narrowly, TFP primarily refers to technological innovation, while broadly, it encompasses all factors influencing production beyond capital, labor, and land, including technological innovation, institutional environment, and human capital levels. The new productive force theory, constructed based on China’s economic practice, deepens the understanding of TFP at micro, meso, and macro levels, enriches economic growth theories, and provides new directions for development.
Formed through practice, the new productive force theory offers strong impetus, support, and guidance for high-quality development. In this unprecedentedly changing era and facing the accelerating evolution of a new round of technological and industrial revolutions, the development of new productive forces accentuates China’s advantages from its socialist market economy, large-scale market demand, comprehensive industrial systems, and abundant high-quality labor and entrepreneurial talent. The formation of the new productive force theory will expedite the transformation of these comprehensive advantages into new comparative advantages.
III. Focus Areas for Developing New Productive Forces
1. The Key to Developing New Productive Forces Lies in the Enhancement of Total Factor Productivity (TFP)
New productive forces represent a departure from traditional economic growth modes and productivity enhancement paths. The development of new productive forces is characterized by improvements in technology, efficiency and quality, with enhancing total factor productivity (TFP) being the key to this development. Overall, continuously improving TFP, introducing new production factors, and upgrading traditional production factors are three crucial components of sustained economic growth. Analysis shows that the fundamental reason for the divergence in growth rates among countries after their per capita GDP exceeds $10,000 lies in their TFP differences. Therefore, developing new productive forces primarily requires continuous TFP improvement, the introduction of new production factors (such as data), and the upgrading of traditional factors. Furthermore, efforts in these three aspects require continuous growth in technological research and development (R&D) investment and improvements in the R&D structure.
2. Developing New Productive Forces Requires Accelerating the Construction of a Modern Industrial System
In the initial stage of economic development, the contribution of the primary sector to the economy steadily declines, while the secondary sector's contribution increases, and the tertiary sector begins to expand. Simultaneously, employment in the primary sector decreases as more jobs shift to the tertiary sector. During the second stage of development, the value added by both the primary and secondary sectors continues to diminish, whereas the tertiary sector’s contribution keeps growing. Employment follows a similar pattern, with reductions in the primary and secondary sectors and increases in the tertiary sector. In the final stage, the value-added shares of the primary, secondary, and tertiary sectors reach a stable equilibrium, as does the distribution of employment across these sectors.
Comparing the growth rates of the three sectors, the primary and tertiary sectors generally grow at a slower pace than the secondary sector. From the early stages of the reform and opening-up to the 18th National Congress of the CPC in 2012, the Chinese economy completed its initial stage of economic development. Since the 18th National Congress, the economy has been transitioning through the second stage. To sustain economic growth, it is imperative to ensure higher labor productivity across the primary, secondary, and tertiary sectors; to promote the upgrade of the secondary sector through innovation while maintaining its growth rate within an appropriate range; and to develop modern services to achieve a high growth rate in the tertiary sector.
3. Developing New Productive Forces Requires Accelerating the Construction of a Unified National Market and Advancing Regional Development Strategies
Solid economic growth must be supported by the development of all regions. Historically, certain regions in China have developed ahead of others, but as economic development in these regions reaches a certain stage, growth rates tend to slow down. From there, overall economic growth increasingly relies on the advancement of underdeveloped, less-developed, and rural areas. To promote economic growth in these areas, institutional changes—specifically in the relations of production—and the acceleration of the construction of a unified national market are necessary. The development of new productive forces and the promotion of economic growth can also benefit from facilitating the flow of production factors, building a unified market, and improving factor efficiency.
4. Developing New Productive Forces Necessitates a Higher Level of Openness
Economic growth requires the combined effects of domestic demand (consumption and investment) and external demand (imports and exports). In recent years, the contribution of imports and exports to economic growth has been declining. While expanding domestic demand, it is also essential to consider the role of external demand in China’s economy, particularly the impact of imports and exports on economic growth. Developing new productive forces necessitates achieving a higher level of openness.
[1] Professor Liutang Gong is a professor of applied economics at the Guanghua School of Management, Peking University.
