Opinion
Industrial Policies Necessary for Sound Growth
Why does China still need industrial policies
By Liu Ying  ·  2017-01-16  ·   Source: | NO. 3 JANUARY 19, 2017

 

A worker examines a type of super conductor cable in Baiyin, Gansu Province, on March 23, 2016 (XINHUA)

Recently a debate between academics on whether to abolish industrial policies has become heated. As the nation enters its "New Normal" economic phase, choosing either side of the argument will determine the success of China's supply-side structural reform and its sound economic performance.

The industrial policies in question are a set of strategies formulated by the government to promote or readjust development of specific industries, including their organization, structure, plans, support and preferential tax measures. China is now in the mid-late stage of industrialization, and the 13th Five-Year Plan (2016-20) period will be crucial for the nation's economic restructuring and upgrading. Therefore industrial policies are necessary for China, which should study in depth how to formulate strategies that can be well implemented and abolish unsuitable industrial policies, with the aim of supporting the nation's economic growth.

Why does China still need industrial policies? First, after the economy develops to a certain level, there won't be Pareto improvement—action that benefits even a single person without harming anyone else—without government intervention and support. Industrial policies are needed to avoid market failures and enable the government to play its role better.

Second, any developing economy that is catching up and surpassing developed economies needs the support of industrial policies, and China is now at such a stage. Industrial policies exist in most developed and developing countries, and a dozen economies successful since World War II all have such strategies. Foreign experience shows there are many cases of formulating industrial policies to support economic growth. Since the First Industrial Revolution, Western European countries, the United States, Japan and South Korea have all put together industrial policies to stimulate economic growth. In the wake of the global financial crisis in 2008, countries around the world increased their industrial policies. Moreover, since China's economy has just finished transitioning to a market-oriented one, industries and companies are still used to being led by directive or guiding plans. Therefore, China cannot immediately abolish its industrial policies.

Third, industrial policies are also needed for encouraging innovation. Only with more incentive schemes can emerging industries develop in faster and better ways. Strategic emerging industries, innovation, and research and development supporting long-term growth all need the support of industrial policies. As the Internet transforms productivity and modes of production, and new materials, new energy sources, new telecommunication technologies and other innovative technologies and industries emerge, China cannot develop its economy without the support of industrial policies.

China must pay attention to the following aspects to better formulate and implement industrial policies. First, industrial policies must conform to market rules. As a market economy, China must, while formulating and implementing industrial policies, adhere to the important principle that the market should play a decisive role in resource allocation. Industrial policies should not be decided by the government alone.

Second, industrial policies need the government to play its role better. Only when the market plays a decisive role can resource allocation be optimized. But, market failures do happen sometimes, so the government must act as a "night watchman." In the formulation and implementation of industrial policies, the authorities can provide not only public goods, but also incentive policies and other necessary support for favored industries.

Last, formulation of industrial policies must be more thoughtful, and their implementation must be more efficient. Industrial policies are necessary for both the economy at its present stage and the ongoing supply-side structural reform. More importantly, China needs industrial policies that are highly efficient and powerfully enforced. To achieve this goal, the government must make scientific and long-term decisions, better understand industrial development and market operations, formulate industrial policies suited to local conditions, and make timely adjustments.

The five major tasks of supply-side structural reform—namely, cutting overcapacity, destocking, deleveraging, reducing business costs and strengthening weak links of the economy—have raised higher requirements for industrial policies. China should fulfill these five tasks on the basis of maintaining sound and stable economic growth. Overcapacity must be cut through market competition rather than government intervention or other non-market methods. Only with joint efforts from both government and market forces can better industrial policies be formulated and enforced to boost sound, orderly and steady economic growth. n

The author is a researcher with the Chongyang Institute for Financial Studies at Renmin University of China and this is an edited excerpt of an article published in People's Tribune magazine

Copyedited by Chris Surtees

Comments to zhouxiaoyan@bjreview.com

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