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The Strategic Choice for China’s Economy during Global Economic Transformation

On November 2, 2009, Study Times published an article entitled "The Strategic Choice for China’s Economy during Global Economic Transformation." [1] This article analyzes the global economic transformation behind the current financial crisis, Obama’s new policy, lessons learned from the failure of Japan’s economic restructuring in the 1980s, and suggestions for China’s strategic transformation. The following is a summary of the article.

I. Focus on the global economic transformation behind the financial crisis

From the perspective of the long-term business cycle, the current world financial crisis is, in essence, a crisis of the world business cycle. The world’s economic history shows that a global economic crisis has often been the drive and opportunity for major scientific and technological innovation and new industries. … Now that the period when the IT industry was the engine for economic growth has ended, there is a lack of new industry to be the economic growth engine. Thus the huge amount of capital accumulated during the high-tech period flew to the real estate and financial industries. Financial investors and real estate developers jointly created a deformed engine for U.S. economic growth: a virtual economy. From this perspective, the global financial crisis is essentially a business cycle crisis. As a result, our key strategy dealing with the financial crisis should be not simply to reconstruct the financial order, but to remake an industry in the real economy.

The looming new economy has the following three characteristics.

First, a new energy revolution is solving the problems of human civilization that could not be solved within the framework of the industrial economy. Energy and environment are global difficult problems that constrain sustainable growth of the industrial economy. … The new energy revolution, with renewable energy at its core, marks the birth of a new wealth manufacturing model and production method for human beings.

Second, new energy will enable a series of new industries and new technologies. … A leading industry should have three major characteristics: it affects the overall economy, its technology is universally adopted, and it constitutes the basic industry for economic development. The emerging new energy revolution has all of the above three characteristics.

Third, the incentive mechanism for the new energy revolution has matured. … Among the economic stimulus plans in response to the financial crisis, energy and environment have suddenly become the investment targets of developed countries. This is definitely not a consequence of the developed countries all of a sudden having raised their moral standard for protecting the environment. Rather it is an indication of the formation of an incentive mechanism for new energy and environmental industries. The reason why the financial crisis became an opportunity for the new energy revolution is that the economic crisis greatly damaged traditional industry and its incentive mechanism, bringing the advantages of a growing new industry to light, and ushering in opportunities for marginal industries, which can now enter  the decision making horizon for government and business investment.

II. Obama’s new policy aims to promote economic transformation and seize the new economic heights

First, the purpose for Obama’s new policy of developing new energy sources as its core strategy is to seize the new economic heights. The way the U.S. is responding to the financial crisis is to treat the financial crisis as a crisis of a hollow real economy, and to use the development of new energy as a way of reviving the U.S. economy and occupying the strategic high ground of the new economy.

Second, Obama’s new policy focuses on the long-term goals of economic development and structural adjustment, rather than immediate economic growth. Since Obama took office, his three-step plans are all about how to advance structural reform and strengthen economic competitiveness. The first step was the "American Recovery and Reinvestment Act of 2009," passed by Congress, with a 787 billion investment, which established developing new energy as the core of the revival of U.S. economic long-term goals. The second step was to stress test companies in crisis, so as to strengthen the U.S. economy’s microstructure function. The third step was, after six months of deliberation, the announcement of Obama’s Remarks on the 21st Century Financial Regulatory Reform, on June 17, 2009, at the White House. This started the financial system reform from the angle of system innovation, to create a positive financial environment for the new economy.

Third, Obama’s new policy raised the development of the ecological economy that combines high-tech and eco-focused concepts as a strategic priority to rebuild the U.S. image and to enhance its competitiveness. … The U.S., a country with innovative and adventurous spirit, can often make strategic decisions and choices during periods of major change. This is worthy of our research and study.

III. The lesson learned from the failure of the Japanese economic transformation during the 1980s
As early as the 1980s, having achieved huge success in its strategy of catching up with developed countries, Japan also experienced a period of world economic transformation similar to what China is facing today. In the 1980s, when the world economy went through a transformation from the electric economy to the information economy, Japan and the U.S. adopted two different strategies, resulting in two completely different paths of development after the 1990s. The failure of the Japanese economic transformation during the 1980s raised several issues that are worth consideration.

First, Japan did not realize the limitations of the model of "growth by following," but instead mistakenly viewed it as a growth model that creates miracles. The high speed economic growth in Japan after World War II is a typical model of "growth by following." Its advantage came from two aspects: first, after the introduction of Western technology, Japan gained technological advantages through second-round innovation, that is, innovation after its introduction from the West. Second, the cost advantage during the initial economic growth period helped it receive the industries transferred from Europe and the U.S. With these two advantages, Japan achieved high economic growth, catching up with other developed countries, and "squeezing" into the development space of the U. S. and Europe.
The advantage of the model of "growth by following" is to catch up with others while learning, instead of leading the trend through original innovation. … But Japan has not recognized the limitations of the model of "growth by following." In fact, Europe and the U. S. have also been confused by an illusion about such a temporary high growth model. … During the late 1980s, there was a widely recognized view of a “Japan threat” in the U.S., triggering competition between Europe, the U. S., and Japan. Today when we look back, this is clearly a misunderstanding: Japan cannot become a threat to Europe or the U.S. using the model of "growth by following."

Second, when facing global economic transformation, Japan did not respond strategically, but rather continued along the traditional thinking. … Under pressure from the U. S., Japan mistakenly chose the expansion of domestic demand as its strategic plan for new economic growth. They lost sensitivity to the global economic transformation with the satisfaction of economic achievement. To ensure continuous growth, Japan’s strategic focus remained on the existing traditional industries, channeling the huge capital surplus accumulated during decades of economic growth into domestic consumption. A large amount of capital entered into real estate and the stock market, leading to the bursting of the real estate bubble, and the financial crisis, which dragged the Japanese economy into a downturn for more than a decade. At the same time, the U. S. reallocated its social resources to the new high-tech economy as a strategic priority, resulting in the U. S. being the biggest winner in the information economy in the 1990s.

Third, Japan mistakenly attributed its economic recession to the failure of its monetary policy. … Throughout the 1990s when the Japanese economy was in a predicament, Japan did not reflect upon its growth model, but blamed the financial crisis, following the Keynesian theory and monetary theory. Japan failed to fundamentally reform its unique institutions such as the government-led economy, the monopoly of large business, and lifetime employment, which inhibited innovation. Japan’s economy has thus been lingering in a low growth path because of adopting the model of “growth by following.”

IV. Breaking through traditional thinking: some thoughts on promoting China’s strategic transformation
China has three advantages that support its transformation: First, we have begun to realize the limitations of importing growth models. Although we have not yet recognized such a limitation at a model level, people have begun to realize it from the perspective of transition in growth modes. Second, we are very sensitive to the new energy revolution and ongoing global economic transformation. Third, China’s cost advantage will continue to play a role in the new economy. At the same time, we are also facing three major obstacles: First, obstacles from vested interest groups. The 21st century has seen the Chinese economy enter a phase of heavy industry. Two vested interest groups were formed in the process of wealth accumulation, namely monopolistic business groups and local governments at various levels. As the monopolistic business groups are the source of tax income for the local governments, the two groups relied upon each other, forming an obstacle to strategic transformation decisions. Second, the obstacle of success-led habitual thinking. The success of China’s reform has achieved world acknowledgement. In the face of this success, we may be repeating the scenario Japan experienced during 1980s. We may gain strong self-esteem amid the views of the “China threat theory,” making the mistakes Japan made during 1980s, and forgetting the limitations of importing growth models. With the habitual thinking of simply applying our past experiences to the future, China’s economic transformation would be an empty word. Third, the obstacle of lack of motivation for transformation. Major economic transitions often come from opportunities created by major economic crises, as a crisis provides motivation for change. China is one of the least impacted countries in the current financial crisis, and is generally considered the first country to walk out of the crisis. This is obviously a good thing, but it has also formed an obstacle for China to meet the challenges and opportunities of global economic transformation. We may lose motivation to transform in our satisfaction with good growth momentum.

To this end, I hereby propose some thoughts on promoting China’s strategic transformation.

First, we must strengthen our awareness of the limitations of importing growth models. We should reflect upon the limitations of China’s reform model, and the successes and lessons from past transformation during the new China’s 60 year history from the perspective of responding to the world and China’s economic transformation. Without the transformation of China’s economy and society from a politics centered policy to an economy centered policy, starting in 1978, we would not have achieved the economic success we have today. Similarly, if we fail to achieve the transition of the growth model, we will not have a better tomorrow. We should strengthen the sense of crisis among all party members.

Second, policies should change direction from assuring growth to facilitating transition. Macroeconomic data from the first half of the year shows that China’s economic growth began to stabilize and recover. This indicates that the growth oriented policies in response to the economic crisis have achieved their goal. In such a situation, China’s strategy should change from assuring growth that helps recovery from crisis, into promoting transition that recreates the growth engine.

Third, under the guidance of the Concept of Ecological Civilization, we should deepen the reform of government functions, and break through the obstacle of the government’s vested interest groups. The key is to promote reform of government functions, management methods, and management objectives. According to the requirements of the Concept of Ecological Civilization raised at the 17th CCP National Congress, if we want to promote the eco-economy, green GDP, and a low-carbon life style as the goal of transition, the key is to promote transitions in government management and management objectives.

Fourth, I suggest to strengthen strategic planning and theoretical research into the eco-economy under the guidance of the Concept of Ecological Civilization, so as to provide theoretical support for China to enter an era of eco-economy. From the heights of transformation of the economic structure, against the background of transitions in the world economy, we should explore the laws of ecological civilization and eco-economy, new growth models, and new civilization models suitable for China and the world’s harmonious growth. This is a new challenge and opportunity after the establishment of a market economy with Chinese characteristics.

[1] Study Times, November 2, 2009