NEW DEVELOPMENT CONCEPTS AND SUPPLY-SIDE STRUCTURAL REFORM

NEW DEVELOPMENT CONCEPTS AND SUPPLY-SIDE STRUCTURAL REFORM*

January 18, 2016

A Deeper Understanding of the New Development Concepts

On the philosophy of innovative, coordinated, green, open and shared development, I have talked much at the Fifth Plenary Session of the 18th CPC Central Committee in 2015 and on other occasions. Today, I will not try to elaborate on it from the practical perspective of our work, but proceed from history and reality, and offer some suggestions on how to tackle major issues.

First, we should implement the strategy of innovation-driven development. 

We should put innovation first because it is the primary driving force for development. The force of innovation determines the speed, effectiveness, and sustainability of development. In the case of such a large economy as China, without continued development impetus we will find it difficult to realize sound and sustained economic growth, and we will struggle to double the 2010 GDP and the per capita income for both urban and rural residents by 2020. Of course, coordinated, green, open, and shared development helps to strengthen the impetus for development, yet the core is innovation. Innovation is the key to driving overall social and economic development.

The need to pursue innovative development is a conclusion drawn from the world’s development process in modern times and from China’s practice in reform and opening up since 1978. Pursuing innovative development is fundamental to our strategy in adapting to the changing environment for development, boosting the impetus for development, seizing the initiative in development, and leading the new normal.

Reviewing the world’s development process in modern times, we can see that a country’s or a nation’s capacity for innovation influences its future and can even be the determining factor. 

In the 16th century, human society entered an unprecedented period of active innovation. Achievements in scientific innovation over the past five centuries have exceeded the sum total of several previous millennia. Especially since the 18th century, the world has witnessed several major scientific revolutions, such as the birth of modern physics, steam engines and machinery, electricity, transportation, the theory of relativity and quantum theory, and the development of electronic and information technology. These have led to industrial revolutions in the world economy, including mechanization, electrification, automation and informatization. Each and every scientific and industrial revolution has profoundly changed the outlook and pattern of world development. Some countries have seized the available opportunities, so they achieved rapid social and economic development and increased their economic, scientific and military strength. Some have emerged as world powers. The First Industrial Revolution, which originated in the UK in the 18th century, made the country the world leader. The US took the opportunity of the Second Industrial Revolution in the mid-19th century and surpassed the UK, becoming the No. 1 world power. Since the Second Industrial Revolution, the US has maintained global hegemony because it has always been the leader and the largest beneficiary of scientific and industrial progress.

China has the motivation and the skills required for successful innovation. China’s development and the historical achievements I have mentioned previously can be attributed to its scientific inventions and innovation. Ancient China’s achievements in astronomy, calendar, mathematics, agriculture, medicine, and geography were remarkable. These inventions were closely related to economic activity, providing forceful support to the development of agriculture and the craft industries. The British philosopher Francis Bacon once said that printing, gunpowder, and the magnet had changed the whole face and state of things throughout the world, and that no empire, no sect, no star seemed to have exerted greater power and influence in human affairs than these mechanical discoveries.

Records show that China has 173 items among the world’s most important 300 inventions and discoveries made before the 16th century, far surpassing Europe in the same historical period. China led the world for a long time, and China’s culture and thought, social system, economic progress, science, and technology motivated and led its neighboring countries and regions. Since 1840 China has lagged behind, mainly because we missed the great development opportunities brought by the scientific and industrial revolutions of the 18th and 19th centuries. 

Nowadays, social and economic development throughout the world relies more on theoretical, institutional, scientific, and cultural innovation, while new competitive edges are to be gained through the capacity for innovation. Those countries which advance in innovation will seize the initiative in leading global development. A new round of scientific and industrial revolution is on the way, whose main characteristics are as follows: Major revolutionary technologies are emerging; the transformation of scientific achievements is accelerating; and the form of industrial organization and industrial chains is more monopolistic. Major world powers have adopted new strategies to promote innovation, increased investment in innovation, and made greater efforts to contend for strategic resources in innovation such as talent, intellectual property, and standards. 

Despite being the world’s second largest, China’s economy is obese and weak. Inadequate capacity for innovation is its Achilles’ heel. Innovation-driven growth has become the pressing demand for China’s development. Therefore, I emphasize repeatedly that innovation is development; innovation is the future.

Through years of efforts, China’s overall scientific capacity has improved, shifting from quantitative increase to qualitative improvement. It has now reached advanced international level in some major areas. Nevertheless, China’s core technologies in key fields remain restrained by other countries; China’s scientific reserve is far from adequate to create new industries and lead future global development; China’s industries remain at the middle and low end of global value chains; and China lags far behind developed countries in high technologies for military and security use. Therefore, we must seek development based on innovation, foster new development impetus through innovation, and promote leading-edge development that gives greater incentives to first innovators.

Innovation is a complicated and systematic social program covering all social and economic areas. In pursuing innovative development we should adopt a holistic view, while at the same time attending to key issues and propelling overall development through innovative breakthroughs in major areas and at key points. We should make plans ahead of time, focusing on core economic competitiveness, pressure points in social development, and major challenges to national security. We should improve basic research and research on key general-purpose technologies which have a bearing on overall development. We should improve our capacity for independent innovation, and make major breakthroughs in scientific innovation, striving to push our scientific capacity to a higher level, in an attempt to catch up with and eventually surpass the advanced countries. Driven by major scientific innovation, we should accelerate the application of innovative technology in industry, and build a new industrial system. In this way we can ensure that we possess technologies that other countries have, that we possess technologies that are stronger than those of other countries, and that our technologies are more advanced than those of other countries, so as to increase our overall economic quality and international competitiveness. We should further scientific institutional reform, and promote talent development systems and policy innovation, with an emphasis on cultivating highly educated top-notch talent who master cutting-edge technologies but are in short supply. We should open our arms wider to innovative talent from overseas, and bring together the world’s best minds to contribute to our nation’s development.

Second, we should strengthen overall and coordinated development. 

“Everything has its counterpart.” According to materialistic dialectics, things are universally related; they interact with and constrain each other, and so do their composing elements; and the world is an interrelated whole and also an interactive system. Applying materialistic dialectics, we should grasp the inherent relationship between objective things to understand and handle problems. Authors of Marxist classics value materialistic dialectics, and are skilled in applying them to understand and explore the theory of movement of opposites in the development of human society. For example, Karl Marx proposed that social reproduction falls into two categories – means of production and means of subsistence, and they must maintain a certain ratio to realize social reproduction.

While leading the people to build socialism, the CPC has formed many ideas and strategies concerning coordinated development. As early as 1949, when the PRC was founded, Mao Zedong put forward the holistic approach and the working method of “playing the piano”. He said, “In playing the piano all ten fingers are in motion; it won’t do to move some fingers only and not others. But if all ten fingers press down at once, there is no melody. To produce good music, the ten fingers should move rhythmically and in coordination. A Party committee should keep a firm grasp on its central task and at the same time, around the central task, it should unfold the work in other fields. At present, we have to take care of many fields; we must look after the work in all the areas, armed units and departments, and not give all our attention to a few problems, to the exclusion of others. Wherever there is a problem, we must put our finger on it, and this is a method we must master.” “On the Ten Major Relationships” is a typical example of Mao Zedong’s application of the idea that the world is an interrelated whole to expounding the law of building socialism. In “On the Correct Handling of Contradictions Among the People”, he further raised the principle of “overall consideration and proper arrangement”.

After China adopted the reform and opening-up policy in 1978, Deng Xiaoping analyzed the existing situation and the problems we faced, saying, “Since our modernization program covers many fields, it calls for an overall balance and we cannot stress one to the neglect of the others.” In various stages of reform and opening up, Deng Xiaoping set forth the principle of grasping two links at the same time. Jiang Zemin proposed to handle 12 major relationships that affect overall development in advancing socialist modernization. Hu Jintao put forward comprehensive, balanced, and sustainable development. At its 18th National Congress in 2012, the Party put forward the Five-sphere Integrated Plan for building Chinese socialism – promoting coordinated progress in the economic, political, cultural, social and eco-environmental fields. Later we put forward the Four-pronged Comprehensive Strategy – making comprehensive moves to achieve moderate prosperity in all respects by 2021 (and to build a modern socialist country in all respects by 2049), to further reform, to advance the rule of law, and to strengthen internal Party governance. These all manifest a deeper understanding of coordinated development, and have proved the significance of materialistic dialectics in resolving China’s development issues.

Presently, coordinated development has acquired new features. Coordinated development is the means and the objective of development, and the standard and measurement for evaluating development. In the development of all things, we should address both major and minor problems, and both major and minor aspects of a problem; at the same time, we should focus on major problems and major aspects of a problem. Coordinated development is the unity of the above two theories. A country, a region, or an industry has both strengths and constraints at any given development stage. Accordingly, we should make a targeted effort to resolve tough problems and improve weak points, and at the same time, consolidate and build up our existing strengths. By taking the two measures that complement each other we can achieve high-level development. Coordinated development is the unity of balanced development and imbalanced development. The process from balance to imbalance and then to rebalance is the basic law of development. Balance is relative while imbalance is absolute. Emphasizing coordinated development is not pursuing equalitarianism, but giving more importance to equal opportunities and balanced resource allocation. Coordinated development is the unity of weakness and potential in development. China is in a stage of transition from a middle-income country to a high-income country. According to international experience, this is a stage of concentrated conflicts of interest, in which imbalanced development and various weaknesses are inevitable. In pursuing coordinated development, we should identify and improve our weaknesses, so as to tap development potential and sustain growth momentum. 

In order to secure overall national development during the 13th Five-year Plan period (2016-2020), pursuing coordinated development is the key. We should learn to use the method of dialectics, be good at “playing the piano”, and properly handle the relationships between the part and the whole, between the present and the future, and between major and minor issues. We should weigh our strengths and weaknesses, draw on strengths and avoid weaknesses, and make strategic choices in the best of our interests. Proceeding from the prominent problems of imbalance, incoordination and unsustainability in our development, we should coordinate development between regions, between urban and rural areas, and between material and cultural progress, and integrate the development of our economy and national defense. This is the key feature of coordinated development affirmed at the Fifth Plenary Session of the 18th CPC Central Committee.

We should develop regional comparative edges and improve the distribution of productive forces. We should make special efforts to implement three strategies – the Belt and Road Initiative, the coordinated development of the Beijing-Tianjin-Hebei Region, and the Yangtze River Economic Belt. We should support accelerated development in old revolutionary bases, areas with large ethnic minority populations, border areas, and poor areas. We should build a multi-centered, IT-supported, and open regional development framework which connects the eastern, central, and western regions and runs through the southern and northern regions, so as to narrow regional development gaps. We should continue to ensure that industry helps agriculture and that cities support the countryside; we should implement the policy of giving more, taking less, and loosening control to increase rural incomes; we should balance public resource allocation in urban and rural areas; we should build new forms of relationship between industry and agriculture and between urban and rural areas in which industry promotes agriculture, urban areas support rural development, industry and agriculture reinforce each other, and urban development and rural development are integrated, so as to continue to narrow the gap between urban and rural development. We must adhere to the goal of advancing socialist culture, using the core socialist values to forge consensus and gather strength, using outstanding cultural products to inspire people and boost morale, and using the best of traditional Chinese culture to nourish morality, thereby raising cultural progress to a higher level. We should continue to make progress in both our economy and our defense capabilities; we should continue to pursue civil-military integration through a framework that covers all areas and all production factors and produces high returns; and we should ensure that strengthening national defense and the armed forces is consistent with completing the First Centenary Goal, and ensure the coordinated, balanced, and inclusive development of the two processes. 

Third, we should promote the harmonious coexistence of humanity and nature. 

The purpose of green development, fundamentally speaking, is to serve this end. Human development activities must respect, accommodate, and protect nature; otherwise nature will retaliate against us. This is a law no one can deny.

Engels argued in Dialectics of Nature: The people who, in Mesopotamia, Greece, Asia Minor and elsewhere, destroyed the forests to obtain cultivable land, never dreamed that by removing along with the forests the collecting centers and reservoirs of moisture they were laying the basis for the present forlorn state of those countries. When the Italians of the Alps used up the pine forests on the southern slopes, so carefully cherished on the northern slopes, they had no inkling that by doing so they were cutting at the roots of the dairy industry in their region; they had still less inkling that they were thereby depriving their mountain springs of water for the greater part of the year, and making it possible for them to pour still more furious torrents on the plains during the rainy seasons.

In the 20th century, the eight social pollution nuisances that occurred in Western countries greatly affected the eco-environment and public life. Of these, the Los Angeles photochemical smog in the 1940s caused nearly 1,000 deaths, and 75 percent of local citizens suffered from pinkeye disease. The Great London Smog of 1952 in the UK caused about 4,000 deaths in only a few days during its first outbreak in December, and then nearly 8,000 deaths from respiratory diseases in the following two months; later, the city was stricken by 12 severe smog attacks in 1956, 1957 and 1962. The Minamata disease of 1956 in Japan was caused by methylmercury-containing sewage discharge into Minamata Bay. After eating polluted fish and shellfish, local people suffered from severe mercury poisoning, the number of victims being about 1,000 and the number of people at risk reaching 20,000. American writer Rachel Carson gave a detailed account of the hazards of chemical pesticides in her book Silent Spring.

According to historical records, China’s Loess Plateau, Weihe River drainage, and Taihang Mountains – now sparse in vegetation – were once covered by dense forests and crisscrossed by clear streams, arable farmland and natural pastures; however, deforestation for agriculture severely damaged the local eco-environment. The expansion of the Taklamakan Desert buried the once-prosperous ancient Silk Road. The expansion of the Hexi Corridor Desert destroyed the ancient city of Dunhuang. The Khorchin and Mu Us sandy lands and the Ulan Buh Desert encroached on the beautiful and fertile Mongolian Steppe. The ancient city of Loulan declined as the Peacock River changed its course as a result of reclaiming wasteland for farming and irrigation. The plains in the north of Hebei once abounded with lush woods and meadows, but the land reclamation policy during the Tongzhi years (1862-1874) of the Qing Dynasty reduced the 500-kilometer stretch of pinewoods to barren mountains. We must take warning from these cases.

In treating nature, Engels pointed out: “Let us not, however, flatter ourselves overmuch on account of our human victories over nature. For each such victory nature takes its revenge on us. Each victory, it is true, in the first place brings about the results we expected, but in the second and third places it has quite different, unforeseen effects which only too often cancel the first.” Humanity was born in nature, lives in coexistence with nature, and will finally incur harm by damaging nature. Only by respecting the law of nature can we avoid setbacks in developing and utilizing nature. We must bear this principle in mind and put it into practice.

Since the launch of reform and opening up in 1978, China’s economic development has made historic progress. This is what we are proud of and also what has won the admiration of other countries. Nevertheless, we must be aware that eco-environmental problems have become our obvious weaknesses and a pressing public concern. For example, frequent incidences of environmental pollution have endangered lives and caused widespread distress. We must make every effort to change this situation.

Our predecessors understood the significance of the eco-environment. The Analects of Confucius says, “The master fished with a line but not with a net; when fowling he did not aim at a roosting bird.” Xun Zi argued, “If it is the season when the grasses and trees are in the splendor of their flowering and sprouting new leaves, axes and halberds are not permitted in the mountain forest so as not to end their lives prematurely or to interrupt their maturation. If it is the season when the giant sea turtles, water lizards, fish, freshwater turtles, loach, and eels are depositing their eggs, nets and poisons are not permitted in the marshes so as not to prematurely end their lives or to interrupt their maturation.” Lü’s Spring and Autumn Annals also states, “If you drain off the water to catch fish, how can you miss them? But there will be no fish in the river at all the next year. If you set swamps on fire to catch animals, how can you miss them? But there will be no animals at all the next year.” These ideas – taking from nature at the proper time and to the proper extent – have a great and genuine significance.

The eco-environment has no substitutes. We are not aware of this when we exploit it, yet it is irretrievable once lost. As I previously mentioned, the environment is livelihood, green mountains are beauty, blue sky is happiness, and clear water is wealth. Protecting the environment equates to protecting productive forces; improving the environment equates to developing productive forces. In protecting the environment, we must develop a broad, long-term and holistic perspective. We should not try to save a little only to lose a lot; we should not attend to one thing and lose sight of another; we should not eat our seed corn; and we should not be eager for quick success and instant benefit. Instead, we should adhere to the fundamental state policy of conserving resources and protecting the environment; we should protect the eco-environment like our own eyes and treat it as our own lives; and we should develop a green mode of development and a green way of life, as a support to increasing individual and national prosperity and creating a beautiful environment. Lately, at the meeting on the development of the Yangtze River Economic Belt held in Chongqing, I emphasized that we must prioritize the eco-environment and pursue green development, treat the restoration of the Yangtze River eco-environment as an overwhelmingly important task, and step up our efforts for large-scale eco-protection instead of eco-exploitation. 

Officials at all levels must strengthen their faith in eco-protection and discard development patterns and methods that damage or even destroy the environment. They must not pursue short-term growth at the cost of the eco-environment. We should be firm in promoting green development and the appreciation of natural capital, so that a sound eco-environment helps improve the people’s quality of life and presents a positive image of the country. We should ensure the people breathe fresh air, drink clear water, eat safe food, and enjoy a livable environment. We should ensure the people receive the real environmental benefits from economic development, enjoy life with a blue sky, green mountains, clear waters, and a better environment than ever before, and step into a new era of eco-progress.

Fourth, we should establish a new system of opening up. 

China’s development achievements over the past 30 years derive from opening up. The prosperity of a country and the rejuvenation of a nation mostly rely on responding to the call of the times and propelling historic progress.

Economic globalization is the trend we have to recognize in planning our development. The concept of economic globalization became popular after the Cold War ended in 1991, but it is not a new phenomenon. As early as the 19th century, Marx and Engels elaborated theories on world trade, world markets, and world history in The German Ideology, Manifesto of the Communist Party, Economic Manuscript of 1857-1858, Capital and other works. They pointed out in the Manifesto of the Communist Party: “The bourgeois has through its exploration of the world market given a cosmopolitan character to production and consumption in every country.” Marx and Engels’ perception and arguments revealed the nature, logic and process of economic globalization, laying a theoretical foundation for us to understand the concept today.

Economic globalization underwent three general stages. One, colonial expansion and the formation of the world market. Western countries, through plunder, occupation by force, and colonial expansion, had largely completed the carve-up of the world before the outbreak of World War I in 1914, bringing all regions and nations into a single capitalist world system. Two, two parallel world markets. After the end of World War II in 1945, a number of socialist countries emerged, and colonial and semi-colonial countries declared their independence, which divided the world into two camps and formed two parallel markets in the international economy. Three, economic globalization. As the Cold War ended in 1991, opposition between the two camps and the two parallel world markets disappeared; interdependence between countries increased; and economic globalization quickened its pace.

Correspondingly, China’s relationship with the world also underwent three stages. One, from national seclusion to semi-colonialism and semi-feudalism. Before the Opium War of 1840, China was isolated from the world market and global industrialization. After that, during the wars against Western aggression, China suffered repeated defeats and fell to the status of a poor and weak country.

Two, sole alliance with the Soviet Union and national semi-seclusion, and then complete seclusion. After the founding of the PRC in 1949, China explored the path of building socialism in sole alliance with the Soviet Union and in semi-seclusion from the rest of the world, and almost completely separated itself from the international community during the Cultural Revolution. 

Three, multidimensional opening up. After reform and opening up in 1978, China seized the opportunity presented by economic globalization and steadily opened ever-wider to the outside world, marking a historic change.

Practice has proved that to develop and grow stronger, we must comply with the trend of economic globalization, adhere to opening up, and make full use of advanced scientific achievements and management experience. During the early period of reform and opening up, when we lacked strength and experience, many people doubted whether we could benefit from reform and opening up without becoming corroded and being swallowed up by the dominant Western countries. In those years, we came under heavy pressure in pushing the negotiations on China’s accession to the General Agreement on Tariffs and Trade and the World Trade Organization. Looking back today, we chose the correct direction of development by opening up the country and going global.

Twenty or even 15 years ago, the major propellants of economic globalization were the US and other Western countries. Today, China is considered the biggest driver of global trade and investment liberalization and facilitation, resisting various forms of Western protectionism. This proves that as long as we consciously support the trend of global development, we can grow stronger and lead world development.

In promoting open development, the domestic and international situations we face now are quite different from the past. On the whole, we have more favorable factors, but we also face significant risks and challenges that are by no means negligible. This can be seen from four perspectives. 

One, the international balance of power is changing positively in an unprecedented way. The rise of emerging markets and developing countries is changing the global political and economic landscapes. There is an irresistible trend towards multipolarity and democracy in international relations. The West-dominated global governance system is finally showing signs of change, but the competition to gain dominance in global governance and the formulation of international rules is fierce. Since Western developed countries retain advantages in the economy, science and technology, politics, and military affairs, there is a long way to go to build an international political and economic order that is fairer and more equitable. 

Two, the world economy is gradually emerging from the shadow of the global financial crisis. Western countries are maintaining the momentum of economic recovery through reindustrialization. The structure of the international industrial division of labor has changed, but protectionism remains severe worldwide. The formulation of international economic and trade rules tends to be politicized and fragmented. Emerging markets and developing economies are still sluggish, and the global economy has not yet found new engines for full recovery. 

Three, China’s share of the world economy and global governance has increased rapidly. China is now the world’s second largest economy, the largest exporter, the second largest importer, the second largest source of foreign direct investment, the largest holder of foreign exchange reserves, and the largest market for tourism. China has become a major factor in changing the world political and economic landscapes. Nevertheless, it remains the case that China’s economy is big but not strong, and our per capita income and living standards are not in the same league as those of Western countries. We need to work harder to turn our economic strength into international institutional authority. 

Four, China’s opening up has reached a better balance between bringing in and going global. The opening-up pattern has changed from mainly bringing in to both bringing in and going global on a large scale, but the corresponding law, consultancy, finance, personnel, risk management, and safety controls cannot meet the practical needs, while our mechanisms remain weak in supporting high-standard opening up and large-scale going global.

This means that the overall environment for open development is more favorable than ever before, but the conflicts, risks and contests we are facing are also unprecedented, setting delicate traps for any potential negligence. On the subject of the next steps in open development, the Fifth Plenary Session of the 18th CPC Central Committee made pertinent provisions, and I also set out some requirements in the speech at the second full assembly. I hope we continue to explore and practice, raise our awareness and ability to address the overall situation both domestically and internationally, and improve the effectiveness and raise the level of opening up.

Fifth, we should practice the people-centered philosophy of development. 

This was initiated at the Fifth Plenary Session of the 18th CPC Central Committee. It displays the CPC’s fundamental purpose of serving the people wholeheartedly, and the historical materialist viewpoint that the people are the primary force for propelling development.

As mentioned in ancient Chinese classics, “There are some fixed principles in governing a state, among which benefiting the people should be the root.” The people-centered philosophy of development is not an abstract, abstruse concept. We will not restrict ourselves to lip service or idle reflection, but put it into practice in all areas of social and economic development. We should maintain the people’s principal position in the country, and fulfill their expectation for a better life. We should continue to realize, safeguard and develop the fundamental interests of all the people. We should ensure that development is for the people and by the people, and that its fruits are shared among all the people. We should, through furthering reform and innovation-driven development, improve the quality and increase the benefits of development. We should produce more and better material and cultural products to meet the growing material and cultural needs of the people. We should fully stimulate the people’s initiative, enthusiasm and creativity, and provide the platform and environment for all workers, entrepreneurs, idea generators, and officials at all levels to play their innovative role. We should adhere to the basic socialist economic system and the socialist income distribution system. We should adjust the structure of income distribution. We should improve the mechanism of redistribution regulating income distribution mainly through taxation, social security, and transfer payments. We must safeguard social fairness and justice and narrow income gaps to ensure that development offers greater benefits to all the people in a fair way.

In nature, the philosophy of shared development represents the vision of people-centered development. It reflects the demand of achieving shared prosperity in stages. Shared prosperity is a primary goal of Marxism; it has also been an ideal of the Chinese people since ancient times. Confucius said, “Inequality rather than scarcity is the cause of trouble; instability rather than poverty is the matter of concern.” Mencius said, “Respect others’ elders as one respects one’s own, and care for others’ children as one cares for one’s own.” The Book of Rites gives a detailed and lively description of “moderate prosperity” and “great harmony”. 

According to Marx and Engels, communism will eradicate the opposition and differentiation between classes, between urban and rural areas, between mental labor and physical labor; it will adopt the distribution principle “from each according to his ability and to each according to his needs”, so as to achieve shared development of all and the free and well-rounded development of individuals in the real sense.

Of course, there will be a long trek through history to reach this goal. China is still in the primary stage of socialism and will remain so for a long time to come. Therefore, we cannot do what is premature, but this does not mean we should do nothing in realizing shared prosperity step by step. Instead, we should start to do what is appropriate to the current conditions, accumulating small successes and moving towards prosperity for all.

In the early years after the founding of the PRC, Mao Zedong pointed out: “Since we are implementing such a system, such a plan, the country can grow more prosperous and powerful year by year, and we will see that happen. The prosperity is shared prosperity and the power is also shared by all the people.” During the reform and opening-up period, Deng Xiaoping emphasized shared prosperity on many occasions. As he said to several colleagues from the CPC Central Committee in December 1990: “Since the very beginning of the reform we have been emphasizing the need to seek common prosperity; that will surely be the central issue some day. Socialism does not mean allowing a few people to grow rich while the overwhelming majority live in poverty. No, that is not socialism. The greatest superiority of socialism is that it enables all the people to prosper, and common prosperity is the essence of socialism.” Jiang Zemin also emphasized, “Achieving common prosperity is a fundamental principle and essential characteristic of socialism, and we absolutely cannot vacillate on this issue.” Hu Jintao also required, “We should ensure all our people share the fruits of development and move steadily towards shared prosperity.” After years of hard work, quality of life has improved significantly and people have a fairer share of the benefits of social development; this is a remarkable achievement.

The philosophy of shared development, put forward at the Fifth Plenary Session of the 18th CPC Central Committee, emphasizes four points. 

One, the beneficiaries are all the people. This is about the coverage of shared development. Shared development means development fruits are shared by all the people, each enjoying his or her share. They are not to be shared by the few or by a special group. 

Two, the development benefits to be shared cover all fields. This is about the content of shared development, including economic, political, cultural, social and eco-environmental achievements. We should safeguard the people’s rights and interests in all these respects. 

Three, development achievements are shared through concerted efforts. This is about the means of realizing shared development. It is through jointly contributing to development that people enjoy the benefits of shared development. The process of contributing together is also the process of sharing benefits. We should practice democracy, widely gather the wisdom of the people, and encourage their efforts, so that all the people participate in and dedicate themselves to shared development and share a sense of fulfillment. 

Four, shared development is realized step by step. This is about the process of achieving shared development. As a Chinese proverb goes, you will not make a strong man out of one meal. Shared development must extend from lower to higher levels and move from imbalance to balance. It must be differentiated even at an advanced level. Our policy design should be based on the national conditions and the future socio-economic development level. We should neither hesitate to move forward, nor be niggardly with necessary investments, nor aim too high, nor spend on deficit, nor issue empty promises without providing real gain. 

These four points are interconnected, so we must understand and tackle them as a whole.

In terms of implementing the philosophy of shared development, the 13th Five-year Plan proposed many tasks and measures which can be distilled down to two points. One, we should give full rein to the people’s enthusiasm, initiative and creativity, gather their strength to advance Chinese socialism, and “make the cake bigger”. Two, once the cake has indeed become bigger, we must cut it fairly, so as to demonstrate the full strength of socialism and make the people feel a greater sense of gain. We should expand the middle-income class and gradually form an olive-shaped income distribution structure. In particular, we should make greater efforts to help people in difficulties and win the campaign against rural poverty. Implementing shared development is a big issue. From the top-level design to the “last kilometer” of policy implementation, we should make continuous efforts to mark new milestones in our progress.

Supply-Side Structural Reform

At last year’s Central Conference on Economic Work, I emphasized supply-side structural reform. This caused a lively discussion and won recognition both domestically and internationally. Some colleagues later told me that they were not quite clear about the concept and the related discussions. Here I would like to explain it in more detail.

First, I want to make it clear that the supply-side structural reform we have raised is different from that of conventional Western supply-side economics. We cannot see it as another version of the latter. We must prevent people from using it to advocate neoliberalism or to disseminate negative press reports. 

Western supply-side economics emerged in the 1970s. At the time, the demand management policies of Keynesian economics were failing, resulting in the stagnation of Western economies. Supply-side economics emphasizes that supply creates its own demand, so supply is the key to economic development – to increase production and supply, tax cuts are a must to increase savings, investment capacity, and incentive. This is the Laffer Curve invented by the leading supply-side economist Arthur Laffer. Moreover, supply-side economics holds that tax cuts demand two conditions – one, reducing government expenditure to balance budgets; two, restricting monetary supply to stabilize prices. Supply-side economics emphasizes tax cuts and overstates the role of tax rates. This theory is too definitive, emphasizing supply while ignoring demand, and emphasizing market functions while ignoring government intervention.

What we have raised is “supply-side structural reform”. As I mentioned at the Central Conference on Economic Work in 2015, the word “structural” is critical to the full expression, although we can call it “supply-side reform” for short. The key to our supply-side structural reform is to release and develop productive forces, to adjust structures through reform, to reduce ineffective and lower-end supply while increasing effective and medium- and high-end supply, to make supply structure more adaptive and flexible to changes in demand, and to increase total factor productivity. This is not only about taxation and tax rates; it is a strategy designed to resolve China’s supply-side problems through a string of policy measures, in particular by promoting innovation in technology, by developing the real economy, and by improving the quality of life. Our supply-side structural reform emphasizes both supply and demand, aims both to develop productive forces and to improve relations of production, allows the market to play its decisive role in resource allocation and the government to fulfill its functions, and looks to both present and future. From the perspective of political economics, the fundamental goal of our supply-side structural reform is to improve the country’s supply capacity, so as to meet the people’s material, cultural, and eco-environmental needs, which are becoming more extensive, more sophisticated, and more individualized, and to ultimately realize the purpose of socialist production. 

Supply and demand are the two basics of the inner relationships of the market economy. They are opposite and unified, interdependent, and mutually conditional. New demand generates new supply while new supply creates new demand.

Supply side and demand side are the two basic means of macroeconomic regulation. Demand-side management addresses economic aggregate problems, focuses on short-term macro regulation, and propels growth mainly by adjusting taxation, fiscal expenditure, and money supply to stimulate or restrain demand. Supply-side management tackles structural problems, creates growth drivers, and boosts growth mainly by optimizing the allocation of production factors and by adjusting the structure of production to improve the quality and efficiency of the supply system. 

Reviewing world economic development, we can see that whether a country focuses its economic policies on supply side or demand side depends on its macroeconomic conditions. It is a one-sided perspective to ignore either of them. Supply side and demand side do not replace each other but coordinate with each other.

Now and in the future, China’s economic development is facing and will encounter problems on both the supply side and the demand side, while major problems exist in the former. For example, some industries have severe overcapacity problems, however we are still relying on the import of key equipment, core technology, and high-end products, and the vast domestic market is not in our own hands. For example, agricultural growth has maintained good momentum, but the supply of agricultural produce is not adaptive to changes in demand – milk has not met the demand for quality and won public trust; there is a shortage of soybean while corn is overproduced; and agricultural produce in general is overstocked. For example, despite great purchasing power, our consumption demand cannot be met by domestic supply; much money is spent on outbound shopping tours and overseas online shopping, for goods ranging from jewelry, cosmetics, brand handbags, watches, clothes, and other luxuries to electric cookers, toilet lids, milk powder, feeding bottles, and other daily necessities. Statistics indicate that in 2014 China’s outbound travel expenditure exceeded RMB1 trillion.

These facts prove that China is not short of demand, but the supply of quality products and services fails to keep up with changing demand. Inadequate effective supply has caused spillover in demand and a severe outflow of consumption. To resolve these structural problems, we must promote supply-side reform.

Profound changes are afoot in the international economic structure. The global financial crisis broke the global economic flows in which developed economies in Europe and the US relied on borrowing-driven consumption; East Asia provided high savings rates, and cheap labor and products, and Russia, the Middle East, and Latin America provided energy and resources. As a result, effective demand in the international market has fallen sharply, and economic growth lags far behind potential production capacity. In major countries, the problem of population aging has become more severe; the growth rate of the working population is decreasing; social costs and production costs have risen rapidly; traditional industries and their growth have declined; and emerging industries have not gathered sufficient size and growth momentum. Against this background, we should start with reform on the supply side to redefine our position in the world supply market. 

Domestically, China’s economy is facing five problems, namely, a slowdown in the growth rate, falling prices of industrial products, falling business profits, falling fiscal revenues, and rising economic risks. The major causes of these problems are not periodic but structural – the supply structural mismatch is severe. As the marginal benefit of demand management falls, overcapacity and other structural problems cannot be resolved simply by stimulating domestic demand. Therefore, we must concentrate our efforts on improving the supply structure, so as to push the supply-demand balance to a higher level.

To promote supply-side structural reform, we should start with production. The key is to resolve overcapacity effectively, promote industrial restructuring, reduce enterprise costs, develop strategic emerging industries and modern service industries, increase the supply of public goods and services, and ensure that the supply structure is more adaptive and flexible to changes in demand. In short, measures are required to cut overcapacity, reduce excess inventory, deleverage, lower costs, and strengthen areas of weakness.

In recent years, a number of Chinese enterprises have succeeded in promoting experimental supply-side structural reform. For example, various cellphone brands have competed fiercely in the domestic market, both foreign brands like Motorola and Nokia and domestic brands, pushing some to the edge of bankruptcy. In response to the situation, domestic cellphone enterprises upgraded production, promoted original innovation, aimed at the high-end market, and launched high-end smartphones. These smartphones have met the demand for more functions, higher speed, clearer images, and more fashionable appearance, thus seizing an increasing market share in both domestic and international markets. The international cellphone market also features fierce competition. Once monopolistic brands such as Motorola, Nokia, and Ericsson no longer hold sway – some no longer even exist. After New Year’s Day, I visited a company in Chongqing. The thin-film-transistor liquid crystal display they produce is a successful example of supply-side reform. In recent years Chongqing has developed the industries of laptops and other intelligent terminal products, as well as Chinese brand automobiles, forming the world’s biggest electronic information industrial cluster and the country’s biggest automobile industrial cluster. One of every three laptops in the world was made in Chongqing. This proves that as long as we advance supply-side reform aimed at the market, industrial upgrading can be achieved. 

Based on international experience, a country’s development is fundamentally driven by the supply side. Time after time technology and industrial revolution have improved the productive forces, creating unimaginable supply capacity. Nowadays socialized mass production has a distinctive feature: Once historic innovation has been achieved on the supply side, the market will respond with immense trade volume. According to one article, at the Meta-Council on Emerging Technologies, 2015 World Economic Forum, a panel of 18 experts compiled the list of the top 10 emerging technologies of 2015; these were fuel cell vehicles, next-generation robotics, recyclable thermoset plastics, precise genetic engineering techniques, additive manufacturing, emergent artificial intelligence, distributed manufacturing, “sense and avoid” drones, neuromorphic technology, and digital genome. Last year during my visit to the UK, Professor Konstantin Novoselov and Professor Andre Geim from the National Graphene Institute of the University of Manchester, co-winners of the 2010 Nobel Prize in Physics, told me about the R&D of graphene and its application prospects. Graphene is a promising new material that is winning forceful support from the British government and the European Foundation for Research and Development. Technology innovation has brought scientific progress and will add impetus to economic growth. Therefore, to push forward supply-side reform, we must uphold the new development concepts and vigorously develop new technologies, industries, and forms of business, so as to continuously provide endogenous impetus for sound and sustained economic development.

* Part of the speech at a study session on implementing the decisions of the Fifth Plenary Session of the 18th CPC Central Committee, attended by principal officials at the provincial and ministerial level.

(Not to be republished for any commercial or other purposes.)