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Breakthroughs in Innovation and Reform: Forecast of China's Economy 2017

Author: Source: Date:2017-08-30
Turbulences in China’s stock market in the beginning of the year, following by Brexit and the contentious U.S. presidential election, has cast shadow and uncertainty on the international community in 2016. Although China’s economy has shifted from slowdown to a relatively stable stage, the uncertainty of global economy will continue to pose challenges. China is still a laggard in technological and institutional competency while developing countries such as India and Vietnam are outpacing China with lower production costs. Professor Zhou answered the question of how China can break out from such dilemma and where the opportunities lie.

演讲摘要:
Qiren Zhou, professor of economics at the School of National Development of Peking University, joined the Public Lecture Series hosted by the Shenzhen Innovation and Development Institute in the morning of Jan.18th, 2017. As the first speaker of the Public Lecture Series this year, Professor Zhou delivered his speech on Breakthroughs in Innovation and Reform: Forecast of China’s Economy in 2017.

Professor Zhou began by an overview of the trend of China’s economy in the past decade. China’s economy was developing in full speed in 2007 and 2008, with an annual growth rate of 14.2% and 9.8%. Nevertheless, Professor Zhou identified that a downward sign appears as early as mid 2007. China’s economy then started to drop from an annual growth of 14.2% to 6.9% in 2015, and 6.5% in 2016. The country’s annual growth rate in 2008 was 9.8%. China surpassed Japan in 2009 and became the world’s second largest economy. In 2010, China jumped to be the world’s largest exporter and in 2013 the largest trading nation. The IMF ranked China as the world’s largest economy measured in PPP terms in 2014.

In order to better understand what countermeasures can be employed to re-incentivize China’s economy, Professor Zhou elaborated on the reasons of the slowdown. He attributed the slowdown of China’s economy in recent years to changes in the global context and the domestic scene. With the penetration of globalization in all aspects of life globally, the barriers between developed economies and less developed economies no long exist. Thus the comparative advantages in both developed and developing countries shift constantly. Capital and technological advancements in developed countries become scarce on a global scale thanks to globalization, creating tremendous wealth to people in Wall Street and the Silicon Valley. However, the high cost of labor in developed countries renders their blue collars impoverished and trapped. The high unemployment rate especially in the younger generation is now the headache of policymakers in developed countries around the world. As a result, polarization and growing inequality become rampant, leading to a new wave of populism and protectionism as reflected in Brexit and the recent presidential elections in the U.S. While on the other hand, developing countries are becoming increasingly competitive with progresses in labor skills, capital and technology, thanks to the upward-going learning curve and globalization. Consequently, many developing countries including China and India have seen the emergence of a growing middle class as well as a notable number of people with high income throughout the development stage. The growth rate of average income in developing countries rises far more quickly than that in developed countries. With the expanding domestic markets, developing countries attract more investments in capital and technology. Therefore, contrary to the conclusion reached by Thomas Piketty in his best-seller book Capital in the Twenty-First Century, Professor Zhou claimed that the world economy as a whole is making progresses and reaching to a convergence. Globalization has side effects and indeed contributes to the polarization and increasing inequality in many developed countries but it also narrows the gap between developed and developing countries. The amount of the population rising from poverty line in developing countries cannot be underestimated.

It seems that globalization should have brought prosperity to both developed and developing countries as elites in Wall Street and Silicon Valley have the comparative advantages in capital and technology while developing countries have lower costs of labor. Nevertheless, as Paul Samuelson pointed out that comparative advantage is fluid, the comparative advantages in one country cannot hold for good. The shifts in comparative advantages pose new challenges to both developed and developing countries. Therefore, looking at the domestic scene in China, Professor Zhou emphasized the importance of institutional costs in China’s economy. The secret of China’s impressive economic development in the 1980s and 1990s does not rest in the low costs of labor but in the diving institutional costs. Institutional costs include not only transaction costs but also costs running the economic system and costs not associated directly with the production. The low costs of labor force, land and other factors of production, the reduced institutional costs, the launch of the opening up policy, and the upward-going learning curve constitutes the success story of China’s economy in the past decades.

Now that China’s economy is slowing down, many would blame the rise of labor costs. However, if we look at the increases in each category of China’s economy, nominal GDP has grown more than 8 times in 2012 compared to 1995, total income 8 times, tax 16 times while government revenues 18 times, social security 28 times, and finally transaction costs of land transfer 68 times. It is evident that the increases in institutional costs play a significant role in the current situation of China’s economy. Besides the decreasing demands in the global economy and rising institutional costs, the extravagance of deep-pocket-Chinese entrepreneurs also imposes negative effects on the economy. Moreover, China now is trapped in the middle of the sandwich called world economy where advanced economies still enjoy comparative advantages in capital and technology and developing countries, such as Vietnam and India are catching up, with lower costs of labor. China’s economy will be handicapped if the comparative advantages in low costs of labor further diminish and the country remains a laggard in generating technological and capital prestige.

Anyone who has taken the Econ 101 would be aware of the shape of cost which usually goes down first and then curves up with diminishing returns. We cannot reverse the trend of cost but delay its rise. Therefore, innovation and reform become the core to continue to boom or re-incentivize China’s economy. Professor Zhou went through the example of Israel; a country with a population of 8 million is home to more than 7000 start-up firms. Professor Zhou pointed out that innovations root in its educational system, and that their sense of insecurity fuels their motivations to innovate. In the case of the United States, Professor Zhou pinpointed the clusters of research institutions and innovative firms, and the intimate cooperation between them as the sole engine to innovation. In the end, Professor Zhou reminded the audiences that innovations don’t come out of nowhere and that it requires certain conditions for innovative ideas to sparkle. It requires not only an innovation milieu where ideas, technologies, legal arrangements, investments are brought together, and scientists, inventors, craftsman, and entrepreneurs can interact with each other, but also connectors who can speak the language of scientists and at the same time is aware of business operations.