The 11th Five-Year Programme endorsed by the recent plenary session of the National People's Congress (NPC) in March catches the world's attention by its clear-cut message: China decides to change its economic development from extensive growth to intensive growth.
The new programme has several important features, among which the most important three are as follows: The first is the paradigm shift from "plan to "programme. The word "plan that has been used over the last few decades is adopted from the former Soviet Union. It refers, in essence, to the command economy under which resources were allocated through administrative means and orders. In 2000, China declared the establishment of a market economy, but without any fundamental changes in the way the government controls economy. Now, the Chinese government announces its decision to adopt a new approach to economic management for next five years (2006-2010), involving how the government will guide the economic development in a market economy. The transition from "plan to "programme is more than a change of word; rather, it signals a fundamental transformation of the government functions. In each of the past five-year plans, there was a series of imperative indexes, whereas the number of restrictive indexes has been greatly reduced in the new five-year programme. In the chapter titled "Objectives of Economic Development, the programme puts forward 22 numerical criteria, among which only 8 are restrictive, or obligatory for governments at all levels to achieve, and the rest are all anticipative, pointing out the direction to head for. On top of that, the programme demonstrates the resolution of the Chinese government to implement a major change in the way it manages the economy.
The second is the notion of scientific development, calling for a balanced and coordinated growth between industry and agriculture, between economy and society, and between human and nature. An important element of this harmonious growth is the change of the growth pattern.
The last is the emphasis on promoting development through reform.
A central theme running through the next five years is the change of the growth pattern: from extensive growth that relies mainly on input of resources to intensive growth that is supported by improvement of efficiency.
NECESSITY OF A CHANGE IN THE GROWTH PATTERN
Ever since the first Five-Year Plan in 1953, China had copied the model of former Soviet Union to realise its industrialisation and modernisation. The Soviet model had two important features: First, the economic growth was pulled by investment and input of resources; and second, the priority was given to the development of heavy industry. Such an extensive growth pattern had given rise to a confluence of economic and social problems, especially the catastrophe of the "Great Leap Forward movement since 1958.
As early as in the mid-1950s, Chinese leaders became aware that such a road would bring about severe economic and social problems, but little could have been done to change the direction until 1976 when the "Cultural Revolution was put to an end. Only then was the central leadership determined to heal the wounds and attempted to rectify the road. As a consequence, China's economic structure was readjusted twice, respectively in 1979 and 1981. The key to both readjustments was to restore agriculture, light industry and service sector that were damaged in the preceding decades. Soon afterwards, it was proposed that the growth pattern be changed, which was especially verbalised in the 9th Five-Year Plan that the extensive growth would be replaced with intensive growth. Unfortunately, the prior efforts did not turn out to be effective, because they were only corrective measures dealing with the distortion of industrial and consumption structure, which was the result of the old growth pattern, or the old road of industrialisation. However, the root of the problem remained intact. In other words, the problems of the old road of industrialisation or old growth pattern had not been addressed.
Another main reason for the incomplete change of the growth pattern was that the heritage from the old system and the old road of industrialisation was still inhibiting the progress; governments at all levels went back to the old track spontaneously in dealing with economic issues. To conclude, (1) The power of resource allocation was still in the tight control of governments at all levels; (2) The GDP growth was still used as a key index of performance evaluation for government officials; (3) The fiscal revenue of governments at all levels came mainly from production-based VAT, both of which were directly connected with the production value; and (4) the factor price was seriously distorted. In a planned economy, the factor price was set by administrative organs as low as possible, including salary, loans and natural resources. The situation remained unchanged even after 2000. During the 10th Five-Year Plan period (2001-2005), in particular, some of the problems were aggravated instead of being eradicated. For example, due to the accelerating urbanisation, a huge amount of land resource fell into the hand of the governments at all levels for arbitrary allocation.
On the other hand, the development of the market economy increasingly required the government to provide a healthy legal environment. But in reality, efforts in legislation and socio-political reform lagged behind. A natural consequence was that many of the economic contracts could not be performed. As governments at all levels played an important role in protecting the security of businesses and ensuring the performance of contracts, some businesses colluded with or even bribed the local officials for their own gains.
Given the realities, the growth pattern problem has become more acute during the past five years.
During the 10th Five-Year Plan period (2001-2005), all regions vied with one another in increasing the growth rate through huge input of capital and resources, which gave rise to a new round of overheated economy in China since the fourth quarter of 2003. Admittedly, all the negative impacts of this overheat were caused by the reinforcement of the old growth pattern. The comparative advantage of China lies in the abundant human resource, whereas our natural and capital resources are in severe short supply, not to mention a very vulnerable eco-system. However, our resources were not allocated in accordance with the comparative advantage, but were rather invested to develop capital-intensive heavy and chemical industries, causing serious deterioration of the environment and the shortage of resources. The most prominent problems were as follows: (1) Improvement of economic efficiency was sacrificed as the weakness was fully exposed while the strength was not given a play; (2) There was a grave shortage of coal, electricity, petroleum and other resources, and a great tension in transportation; (3) The ecological environment was damaged; (4) The unemployment problem was worsening; (5) The development of the service sector was inhibited; and (6) Long-term and short-term financial problems were invoked.
In the last two years of 2004 and 2005, the government was fighting bitterly with various socio-economic problems brought about by the old growth pattern. The economic overheat and the subsequent quench gave us a good lesson. Just pointed out by President Hu Jingtao, also Secretary General of the Central Committee of the Communist Party of China (CPC), should we fail to change the growth pattern fundamentally, we would eventually use up all our resources and destroy our ecological environment; then we would be too shamed to face our people, our history and the coming generations.
Behind all these economic consequences are not only short-term risks, such as distortion of investment and consumption structure and problems of resources and environment, but also long-term risks - under the law of decreasing investment returns, investment efficiency keeps declining, and excessive investment relies solely on bank loans, exposing the banking and financial systems to a financial crisis following an accumulation of huge non-performing assets. Especially given the fact that the transition period of China's accession to WTO is coming to close by the end of this year, Chinese enterprises will be facing intensive global competition, and if they and the Chinese economy fail to improve efficiency, grave problems are almost inevitable. Not only China itself will be affected, and eventually, the global economy will suffer.
In the recent two years, a debate has been going on in the academic community as well as among practitioners. Through a comprehensive retrospective review of the history and theories of China's economic development, most people have come to a practical consensus. It has not been easy to arrive at such a consensus, given that, for many years in the past, China has long been under the influence of the Soviet Union and the so-called Stalinist Socialist Road to Industrialisation. This school of thought has been regarded as the orthodoxy of economics, or Marxist economics. Through serious and extensive discussions in the past two years, most people have recognised that it is an out-dated theory mirroring the earlier growth pattern of the leading industrialised countries from the late 18th century to the late 19th century. This obsolete theory has been criticised thoroughly by modern economics, and some of the early industrialised countries have shifted to modern growth pattern as early as in the late 19th century, relying primarily on technology development and efficiency enhancement. The shift was realised through a series of measures and means: the first was the wide application of science and technology; the second was the fast growth of the service sector, especially of the production-based service sector; and the third was the informationalisation that had helped the post-industrialised countries improve the national economy and efficiency.
MEANS OF REALISING A PARADIGM SHIFT IN GROWTH PATTERN
Based on the historical experiences, the 11th Five-Year Programme identifies the strategic focuses for next five years, and maps out the four basic means to realise the shift in the growth pattern. The first is to enhance the capacity of proprietary innovation to "build an innovation-oriented country in the words of President Hu Jingtao. The second is to develop advanced manufacturing and to upgrade the Chinese manufacturing industry through optimising the industrial structure and adding the knowledge content in products. The third is to speed up the development of the service sector, especially the production-based service. The last is to push forward the construction of the new countryside in the process of urbanisation.
The means to realise the change of the growth pattern is feasible in theory and practical from the experience of other modern economies. However, the anticipated change requires the support of a viable economic system that can only be built through reform.
No matter from what perspective, the key to the success is the establishment of a viable system that can facilitate the change. Take for instance the advance of science and technology. The notion was put forward as early as in the mid-1950s, calling for more efforts in technological advance and innovation. But under the old system, these goals were difficult to attain, because we had adopted from the former Soviet Union a set of bureaucratic systems of education, science, and R&D at the cost of academic prosperity and technological advance. To reverse the situation, a key challenge is to form an independent and self-disciplined science community and an incentive system with scientific discovery priority as the core. With regard to technology, the most important thing is to create a healthy environment of market competition and a sound system of intellectual property rights protection such that innovators can gain real benefits. As for the development of the service sector, a good legal environment has to be created to effectively protect intellectual property rights and ensure the performance of contract.
It is an imperative to remove all the structural barriers to realise the change of the growth pattern. At the Third Plenary Session of the 16th National Congress, the Central Committee of the CPC approved the decision on improving the socialist market economic system. The decision developed an overall programme to further advance the newly established market system, covering the areas of enterprises reform, financial reform and socio-political reform. However, the implementation of the decision has met with great resistance. On one hand, the newly established market system is not without deficiencies, and as a result, many social and economic problems have arisen during the process. On the other hand, a few followers of the old system have tried to take advantage of these problems to ignite an anti-reform emotion. This leads to a heated debate over the market-oriented reform in the past two years.
The debate was put to an end at the plenary session of the NPC this year when the Chinese leadership expressed explicitly its strong support for the reform. When joining the discussion of the Shanghai delegation on March 3, President Hu Jingtao pointed out that the socialist modernisation must be pushed forward from a new historical height, and that the socialist market system must be improved through further reform and opening up, allowing the market to play a fundamental role in resource allocation. At a press conference on March 14, Premier Wen Jiabao echoed President Hu's determination, emphasising that the reform and opening up must be carried out unwaveringly, and that the path of socialism with Chinese characteristics must never fall back regardless of difficulties and setbacks.
Therefore, a key issue in the next five years is the deepening of the reform and improvement of the market and legal systems, which in turn is conditional on the improvement of economic environment and social-political system, and more importantly on the change of government functions. Many of the difficulties in the change of the growth pattern can be attributed to the governments at all levels who are managing lots of things that they should not manage and are not capable of managing well. Consequently, a huge amount of resources are invested to increase the growth rate of GDP at the cost of economic efficiency and environment. On the other hand, the governments have failed to take the due responsibility for what they should be responsible, for example, the creation of a sound legal environment. As early as in 1997, the 15th National Congress of the CPC proposed that we build a socialist country with the rule of law; but not enough efforts have been done in creating a sound legal environment and ensuring the justice in law enforcement. In the end, intellectual property rights were inadequately protected, and the service sector was underdeveloped due to lack of a necessary legal environment. To conclude, it is the government that determines whether the market system based on the rule of law can be improved. It should stop muddling with things beyond its responsibilities and capacities, and focus on what it should take due care but have failed to manage well, including providing a healthy legal environment, maintaining the stability of macro-economy, delivering public service products, like obligatory education, and building a basic social security network, etc. The genuine change of government functions involves the integration of these two aspects. Once it is done, we can secure a healthy institutional environment, and subsequent change of the growth pattern. This is nevertheless a daunting task that is often accompanied by misery and resistance; it takes great courage and wisdom for anyone in the world to revolutionise him- or herself. However, no matter how difficult the task will be, we must work together to materialise the change of government functions and to improve the market economic system for a long-term and sustainable development of China's economy.
The author is Baosteel Chair Professor of Economics at CEIBS. This article is based on the speech delivered by Prof. Wu Jinglian on April 6 at the forum, "China 2006: Policy Initiatives and Implications. The original version is in Chinese and has been approved by the author.
