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Background and Features in the Formation of the Chinese Economy’s Growth Mode of "Low-Cost Competition"


By Liu Shijin

I. Special Conditions and "Factor Combination Superiority" for China’s Current Industrialization Process

A discussion on China’s road to industrialization or new industrialization is in essence a discussion on China’s modern economic growth. Dr. Hollis B. Chenery defined industrialization as "modern economic growth". The "startup" of industrialization or modern economic growth depends on a series of related factors, such as market demand, capital accumulation, introduction of modern and contemporary industrial technologies and the labor force that has left traditional agriculture and has received vocational training. Relevant systems put these factors together and provide a foreseeable guarantee. The startup and advance of China’s industrialization process also relies on these general conditions. But it is the special conditions of this process that can demonstrate its unique features.

In a relative sense, China’s industrialization process has received the support of some important special conditions since the beginning of reform and opening up.

The catch-up advantage is what has often been mentioned. It involves technologies and also systems, policies and even concepts. The former include information technology. When the automobile industry was booming in the United States in the early years of the 20th century, it was impossible for the industry to use the Global Positioning System (GPS) on the navigational equipment. The latter include the organizations and mechanisms such as the World Trade Organization. It was impossible for the early international trade disputes to harmonize through the organizations such as the WTO. The so-called catch-up advantage is mainly demonstrated in the fact that the latecomers can complete a largely same growth process at even lower costs or with even higher quality than the forerunners through learning and digestion. The catch-up advantage can be shared by all catch-up industrial countries. China’s unique features are that the country has stronger diversity and inclusiveness in utilizing the catch-up advantage because it has a large economic scale and tangible disparities and is in the period of economic transition. Few countries in the world can digest the technologies and experiences of the forerunning countries in so wide areas as China does.

The catch-up advantage is also easy to be misunderstood. A typical example is the slogans and ideas advocating a "leapfrog development". The wish of the latecomers to catch up with and surpass the forerunners is not difficult to understand. But a leapfrog development is mainly manifested in the fully replaceable technologies or management expertise. It is unlikely to find expression in the development period that has characteristics of "natural growth". When the technology of fiber optics appeared, the latecomers do not have to worry about the investment in copper cable communications like their forerunners. They can directly use fiber optic communications and technologically surpass their forerunners within a period of time. But it is fairly unlikely for a big country to "leapfrog" the period of industrialization and directly enter the "information age". Mobile phones and the Internet cannot replace houses and cars. With the existing technologies, steel and cement are still indispensable for housing construction and auto making. When it comes to corporate development, competitiveness is generally developed through competition. And competition is a process, and any attempt to abolish this process and pin hopes on the notion that the introduction of new equipment and technologies can form considerable competitiveness will be a misunderstanding of the essence of competitiveness and also a misunderstanding and misuse of the catch-up advantage.

Another special condition is China’s super-large or huge population. When we say China is a big country, we primarily mean it is a country with a big population. It will be an unprecedented event for a population of over 1.3 billion to basically realize industrialization in the next 20 to 30 years. None of the industrialized countries has a population size like that of China. Even the most populous United States has only one-fifth of China’s population. Huge market and low-cost labor are two important advantages currently enjoyed by the Chinese economy. But both of the two advantages are based on a large population. As an objective reality, large population has existed in China for a long time. Other developing countries also have the unique feature of having a large population. Only after a country embarks on the path of industrialization, large population can turn into the advantages of huge market and low-cost labor. Fortunately, China has embarked on the path of industrialization and has demonstrated more tangible advantages in market and labor cost because of its super-large population size. In addition to the expression in market size, market advantage is also demonstrated in the multiple levels of the market, which in turn provide opportunities for progressiveness and diversification in the course of economic growth. The mass supply of labor and the weak supply end in the supply-demand relationship of the labor market will ensure that low-cost labor will continue for a fairly long time.

The demand or supply formed on the basis of the world’s largest population size can in a certain degree form a "market force" that has an important impact on the supply-demand pattern in the related sector around the globe. After the Chinese economy has become an important part of the world economic link, the mutual constraint between China’s domestic economy and the international economy has become visibly stronger.

The third special condition is the excessively abundant rural population in China’s seriously distorted economic structure. The policy separating urban areas from rural areas and the strategy giving priority to the development of industry and especially the heavy industry, which have been enforced for a long time, have caused a serious asymmetry in China’s structure of the primary, secondary and tertiary industries and in the structure of employment. Currently, more than half of the population and labor force are still producing only less than one-fifth of the total output value. In the end, industrialization must share the fruit of development through the transfer of agricultural and rural population to the non-agricultural industries and the urban areas. In this sense, the tasks of China’s industrialization will be more difficult than any other countries.

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