Fact Box

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On the up-and-up


The Chinese economy has been growing rapidly over the past decades. The country's per capita GDP reached $12,551 in 2021, approaching the threshold for a high-income country, which, as set by the World Bank and the United Nations, stands at $12,695.

While aiming for high-quality development in the next stage, the country should stimulate innovation, and follow the law of comparative advantage in order to cultivate competitive enterprises. In this way, the economy will dynamically grow, generating more job opportunities, having balanced and coordinated growth and realizing inclusive and sustainable development of the economy. By following the law of comparative advantages, enterprises will be viable and require no fiscal subsidies to survive, therefore the government will be able to channel more financial resources to upgrade human capital and narrow the urban-rural as well as regional development disparities. Also, enterprises with stronger competitiveness will have greater willingness to adopt green technologies, observe environmental regulations and embark on the path of green development.

By following the law of comparative advantage, products with a comparative advantage globally can fully tap the potential of both domestic and international markets; while products without a global comparative advantage could help China draw on global resources to meet domestic needs to open up and develop. By following the law of comparative advantage and consequently promoting dynamic growth, capital can be accumulated quickly, turning it from relatively scarce to relatively abundant and lowering returns to capital while raising returns to labor. This will help strike a balance between equity and efficiency because low-income groups mainly live on salaries while high-income groups benefit more from capital gains.

Based on new structural economics, industries in a developing country such as China can be classified into five categories. The first category consists of industries that still face a long distance to the global technological frontier. One such example is the equipment industry. The same type of equipment which is sold at 1 million yuan ($157,100) in China could be priced at 5 million yuan in Germany due to the latter's higher quality and superior technology. In the second category are industries that are already at the global technological frontier, such as China's household appliances industry.

The third category contains industries that have already lost their comparative advantage, such as the labor-intensive industries in China, which in the past were highly competitive in the world, but now have gradually lost their competitiveness due to the rising cost of labor in the country. The fourth category comprises industries with a short innovation cycle, such as those related to information and communications technology. These industries have a shorter innovation cycle, ranging from 12 to 18 months, and rely more on human capital than physical capital. In the fifth category are strategic industries, such as those related to national defense, which China must develop independently.

China is still lagging behind developed countries in the traditional industries, including manufacturing and service sectors, and is endeavoring to catch up with the leaders. In these fields, China could learn from developed countries through the introduction of advanced technologies and expertise and then re-innovate, which incurs lower costs and risks, and serves as an advantage for latecomers.

The new industrial revolution and emerging sectors are characterized by shorter innovation cycles and rely mainly on human capital, providing an opportunity for China to compete directly with the front-runners.

China boasts a large pool of high-caliber talent, and has the world's largest market, which gives new technologies, products and business models huge space for application and experimentation. In addition, China enjoys the world's most complete industrial system, which enables it to provide the supporting hardware required in new economic fields, which is beneficial to technological innovation. Therefore, China should make good use of its advantages to strive for high-quality development and achieve technological innovation and industrial upgrading by observing the law of comparative advantages.

Currently, the COVID-19 pandemic is still raging across the world, bringing difficulties and uncertainties to the world economy. In many developing countries, the vaccination rate is still low and the risk of resurgence of the novel coronavirus remains, which poses a grave challenge to foreign trade and cross-border exchanges. In addition, the turbulent global landscape and rising geopolitical tension are adding to the woes of global economy. These are also obstacles that China's economic development needs to overcome.

As a developing country, China enjoys latecomer advantages in traditional industries. In new economic fields, China stands at the same starting point as the developed countries, and as a country with a vast base of high-quality labor to tap, China boasts strength in human capital. Moreover, the country's huge domestic market and complete industrial system should enable it to surpass developed countries in the future.

China is now building a new development paradigm with the domestic circulation as the mainstay and domestic and international circulations reinforcing each other. The bigger the domestic market, the stronger a country's capacity to absorb its products. Therefore, China should focus on its own economic development regardless of how the international situation changes by taking advantage of its big domestic market, making good use of its advantages as a latecomer in industrial upgrading and technological innovation, and stay committed to deepening reform and opening-up. In this way, the country will be able to achieve medium-to-high speed growth despite the global uncertainties, which will also bring development opportunities to other countries and support a global economic recovery.

The author is dean of the Institute of New Structural Economics at Peking University.