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Seriously Tackling Problems Regarding the Path to Industrialization and the Economic Growth Mode during the 11th Five-Year Plan

Sep 01,2005

Wu Jinglian

"Macro control" had dominated the year 2004 -- more scared than hurt. But it should be noted that since the implementation of the policy of reform and opening-up began, whenever growth was accelerated, it would soon slowed down due to the resources bottleneck and mounting inflation pressure. This has happened many times. Will it happen again? Can we rely on this high-input and low-efficiency extensive way of economic growth to steadily realize the goal of industrialization and modernization? At present, the state is working on the 11th Five-Year Plan. At this crucial time, we should think coolly and seriously about solving the problem regarding the path to industrialization and the economic growth mode.

I. How to Understand the "New Path to Industrialization"

Since the 16th Party Congress, the Central Party Committee has repeatedly emphasized that China should take a "new path to industrialization". But until now, the cadres and people still have divergent views over what is the new path to industrialization. Therefore it is hard for the idea to be implemented correctly.

"New" is against "old". The old path to industrialization refers to the one taken by the advanced industrialized countries in the early years of their industrialization. It was mainly a path to which growth was realized through huge investment. The industrialization taken by Stalin stressed heavy industry. Actually it was a deformation of the old path to industrialization under the condition of socialism.

The new path to industrialization refers to the one taken by the advanced industrialized countries during the modern economic growth period since the second industrial revolution. The most important characteristics of modern economic growth lie in the fact that the growth was not realized through the input of capital or other resources, but by the accumulation and rise in the efficiency of human capital (human knowledge and talent).

According to the research of many economists since the 1950s, the rise of efficiency propelling modern economic growth is mainly due to three reasons:

First, the extensive application of "science-based technologies". Before that, technological progress was mainly based on the experience accumulation by craftsmen. Although Watt himself cared much about the progress of the experimental sciences and he did apply some theories of thermo-dynamics in improving his steam engine, it was only one of the few cases. Most the technological changes were small changes based on experience. As the incentive system beneficial to the scientific and technological innovation has inspired the enthusiasm of high-quality talent and enterprises in applying new technologies after the second industrial revolution, new techniques, new materials, new energy and new products have been created and widely used, thus accelerating technological progress.

Second, the service trade is surpassing the development of industry. The fastest-developing industry in the UK and America since the early 20thcentury was not industry, or heavy industry, as some economists predicted during the mid-industrialization period. It was the service trade, especially the productive service trade, engaged in the pre-production, mid-production and post-production services for industry and agriculture. The development of the service trade played an extremely important role in reducing costs, especially trading costs. Industry and the service trade have been integrated. Therefore, the industrialization in the latter period was also called "service trade-industrialization".

Third, the application of modern information technology has enabled the overall efficiency of the economy to be raised unprecedentedly. The advanced industrialized countries started informationization from mid-1950s after realizing industrialization. But that is not to say that unindustrialized countries cannot be involved in modern information technology. IT has nowbeen extensively used as a mature technology in all aspects of modern social life. The later rising countries should naturally come from behind by taking advantages of late development and raise their efficiency by using this technology under economically reasonable conditions to "bring along industrialization with informationization."

II. The Causes for the Existence of the Old Path to Industrialization Characterized by "Heavy Industrialization" and its Adverse Consequences

After the First Five-Year Plan, China followed the traditional path to industrialization of the Soviet Union, aiming at catching up and surpassing the Western countries in industrial and agricultural output by developing heavy industry at the high cost of resources. This growth mode with high input and low efficiency had caused extremely serious economic and political consequences. After the reform policy was adopted, the Central Party Committee repeatedly stressed the necessity of raising economic efficiency and changing the mode of growth. But regrettably, not much result has been achieved. What has hindered this effort are, in addition to inadequate understanding, the systems and policies related to the traditional path to industrialization and economic growth mode, which include:

First, the governments and officials at various levels still hold the power of resource allocation, which go against the principle of the socialist market economy, such as the power to approve the lease of land and the power to affect the grant of loans.

Second, the "eight indexes headed by total output" used during the planned economy is still applied in cadres’ appraisal, economic development level rating and assessment of officials’ performances.

Third, the financial and taxation system with the productive value added taxes as the main tax item, under which the central government and local governments share the financial revenue, is still encouraging the governments to prioritize the high-priced and profitable heavy industry and ignore service industry.

Fourth, the low-price policy and free allocation system for production elements such as natural resources, capital, labor and foreign exchanges which were aimed at developing resource- and capital-intensive industries under the planned economy still exist. Distorted prices of key elements have caused the distorted costs and abuse of rare resources.

Due to the existence of these conditions, the country is likely to stray away from the proper path to industrialization when time is fit for it.

During the 10th Five-Year Plan (2001-2005), China proposed the principle of prioritizing economic structural adjustment. It is completely right if we understand the policy from the perspective of making better use of market mechanisms to improve resource allocation efficiency. But the question is who (the market or the government) will adjust the structure, how (through market price changes or administrative decrees) the adjustment is made, and in what direction the structure will be updated. Under the previously mentioned system and policy environment, many government officials regard industrial structure optimization as developing the high-output value and the high-income heavy-chemical industry. Thus they use their power of resource allocation to push the "heavy-industrialized" industrial mix, creating a series of negative consequences.

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