According to New Structural Economics’ “Growth Screening and Market Capitalization” framework, the government cannot fail in its goal to play an active role in helping enterprises with their transition and industrial development. By following this model, which provides neither a dangerous over-participation, nor an unproductive lack of participation on the part of the government, a Chinese city will not only be a competitive player on the market, but will also succeed in continuing down a path of technological innovation and enlightened progress.
From 1979 onwards, China began a great period of reform, opening up to the global market. During the past 33 years, China has achieved an economic miracle, with an average annual GDP growth rate of 9.8%. In 1979, China’s per capita income was only $182 American dollars, less than one third of the average in African countries at the time. In 2012, China’s per capita income had grown to $6,100 USD, making it an upper-middle-income country. China also achieved tremendous progress in development during this process. At the beginning of the reform, there were only 170 million urban residents in China. By 2012 this number reached 710 million. The urbanization rate increased from 17.9% in 1978 to 52.6% in 2012, which means an average annual increase of 1%.
Last year, the report of the 18th National Congress of the Communist Party of China proposed a method of industrialization, information technology and urbanization for future development. The report also set a development goal for a new type of urbanization. This article discusses simply the relationship between economic development and urbanization, urban competitiveness and sustainable urban development, as well as New Structural Economics’ view of how to strengthen urban competitiveness.
Economic Development and Urbanization
At the very beginning of China’s reform and opening up to the world market, the income level in China was extremely low, and matched with a low level of urbanization. As of 2012, China has become an upper-middle-income country whose level of urbanization has already exceeded 50%. From a global perspective, the average urbanization of worldwide low-income countries was 28.3% in 2010, less than 20% of the rate of middle-income countries, which was at 48.3% according to the statistical indicators of the World Bank. At the time, the average level of urbanization of high-income countries had increased to 77.6%. The rates in Britain, the US and Japan were respectively, 80%, 83% and 92%.
Why is the increase in income levels met with an increase in urbanization? This is due to the fact that at the low-income stage, industrial patterns are dominated by agriculture. At the agricultural stage, the labor force is tied, or bound rather, to the land. Production in China, during this time in history, was decentralized and population scattered in rural areas. With economic development came technological innovation and a gradual transformation of the industrial structure from agriculture to manufacturing, then again from manufacturing to a post-industry era service sector. With progress came a larger production scale and a more complex process of production. It was therefore profitable to have concentrated populations to decrease the transaction costs of production and trade. A relative concentration of population is also advantageous for the exchange of knowledge and promotion of new ideas. As the economy continues to develop, the population of urban citizens will continue to grow, fitting the growing needs of the booming industry. It can therefore be said that urbanization is a result of the modern economic growth of a country or society.
The 18th National Congress of the Communist Party of China predicts that China's per capita income levels will be double the 2010 figures by the year 2020. In 2010, China's per capita income was at $4,400 USD, making its double $8,800 USD. In order to reach this goal, China’s average annual economic growth rate will have to reach 7.7% during this ten-year period. This growth rate is much higher than that of developed European and American countries, however, if this goal can be attained, the Renminbi currency will continue to appreciate. In 2020, China’s per capita income may reach the current value of $12,700 USD.
In accordance with the statistical indicators of the World Bank, China can be counted as a high-income country once its per capita income reaches $12,700 USD. The 18th National Congress of the Communist Party of China put forth that China will become a prosperous, democratic, and harmonious modern socialist country by 2049, as it will celebrate the 100th anniversary of the foundation of the People’s Republic of China.
In reality, I estimate that even if China’s average annual growth rate of GDP only attains 5%, and per capita income growth is only 4.5% during the years 2020 to 2049, China’s per capita income level can still reach between 40,000 – 50,000 USD. With this growth trend, the speed of urbanization in China can still increase by 1% annually for the next 10 or even 20 years, keeping it on par with the impressive growth rate we have witnessed historically. After China reaches 75% urbanization, the rate will only continue to gradually develop to 80% or to an even higher percentage.
Urban Competitiveness and Sustainable Development
In the process of rapid urbanization, not only will the number of cities increase, but so will the total urban population. Consider the statistics already available for a number of Chinese cities that prove this trend: the population of Beijing in 1949 was 4.2 million, but by 2010, according to the Sixth Census, it had increased to 19.61 million; the population of Shanghai was 5.2 million and increased to 23.47 in the same time; the population of Guangzhou was 1.05 million and soared to 12.7 million. These urban populations increased by 3.7, 3.5 and 11.1 times, respectively. While some cities have seen historic development and urbanization, some have taken the opposite direction from boom to gloom. For instance, the US city of Detroit had a population of 0.28 million in the year 1900. Much like the now urbanized cities of China, it witnessed a rapid increase in urban population with a rise to 1.86 million, or 5.6 times the population of 1900, by the year 1950. However, by 2010, the population of Detroit actually decreased by nearly two-thirds, reducing its population from 1.85 to 0.71 million.
Why do the populations of some cities continue to grow while others’ have decreased? I believe that one of the important reasons can be described by a quotation from “Mu Min”, a chapter from the book Guanzi by an ancient Chinese philosopher. In this chapter, the philosopher claims that if a country were wealthy, even people in far away places would venture to that country. “Water flows downward, yet people walk upward”. While it is true that this ancient Chinese proverb is suitable for a country, it also perfectly describes the development of a modern city. If the economy of a city develops well, and income and standard of living keep rising, then people will relocate to this area. However, if in the process of the economic development of a city, economic growth experiences stagnation or even recession, the income will stop increasing, or in worse cases decrease, and the population will gradually decrease as well, while workers search for more prosperous regions and job opportunities.
The precondition of a rising income level in a city is the continuous improvement of labor productivity. The base of this improvement is constant industrial upgrading and technological innovation. If the products and services provided by the city are competitive on international and even domestic markets, more and more people will be attracted to this city. Urban development will be sustainable when industrial and technological developments have entered a “virtuous cycle”. If the situation is contrary to the previous, however, the city will atrophy.
Once again, we can take Detroit as an example. Detroit is one of the automobile manufacturing centers in the USA, and was once world-famous as the capital of the world’s market for automobile manufacturing. In the early 20th century when the automobile industry emerged, several large American automobile empires, like Ford, GM and Chrysler, placed their headquarters in Detroit. During this time, the boom of the American automobile industry was leading the world, and Detroit had a high level of competitiveness, rapid economic development and increasing employment opportunities. This led to population agglomeration. In the 1980s, however, as Japan, Germany, and South Korea’s automobile industry became more powerful and successful on the international market, Detroit’s automobile industry gradually lost its competitive advantage. The loss of this advantage, coupled with a lack of urban industrial transformation, caused a drop in the competitiveness of the city as a whole. Many supporting businesses went bankrupted and closed their doors, not only because of reduced employment opportunities, but also due to the declining levels of public services (this is due to less tax revenue for the local government). All of these factors made the city less and less attractive to talented individuals, who would start to look to other cities for their business and innovation. Soon Detroit’s economic development found itself in a downward spiral. With less fruitful economic development, the urban population naturally decreases as well. Of course, urban sustainable development is decided by a number of factors, but the key factor is the competitiveness of the economy—driven by the continuous updating of technology and constant industrial improvement and transformation. Only in this way can the income level of residents continuously improve and the city’s development be sustainable.
New Structural Economics and City Competitiveness
How does a city breed technological innovation? How does it develop and transform its industry to give itself a competitive edge?
After returning from the World Bank, I put forward the idea of “New Structural Economics” as a third addition to the burgeoning field of developmental economics. In this “new structural economics,” I emphasize the importance that a nation, an economic body, including cities, in order to become competitive in the course of its transformation, must develop its industry in accordance with the comparative advantage of its naturally endowed factors of production and minimize the cost of these factors. If at the same time it is able to reduce the high costs incurred by transportation, electricity, and other infrastructure related to industrial production and sales, as well as those caused by imperfections in its financial and legal systems, then the industry has the potential to be domestically and globally competitive.
Furthermore, new structural economics emphasizes that an economic body must possess an effective market and a proactive government to ensure healthy economic growth. Only in an effective market can the relative value of various factors reflect their relative demand, encouraging firms to select industries based on comparative advantage. Only a promising government can make the most of a competitive market environment, helping to improve the hard and soft foundations of industry and minimize business costs.
New structural economics therefore promotes the proactive development of industry, providing a framework for analysis and opportunism.
Firstly, in the course of industrial development and transformation, the government must select industries which possess a potential comparative advantage in that particular region. How do we select an industry with a potential comparative advantage? New Structural Economics examines the experiences of several developed countries and regions, postulating that the best way to find an industry with a comparative advantage is to search for a domestic or foreign economic body possessing an income level two to three times that of local industries, and that has seen substantial growth within the past two or three decades. These industries often sport a potential comparative advantage. Why? A comparative advantage is “comparative”. If an economic body has been able to maintain a high rate of economic growth for twenty, thirty years, this indicates that all of its industries are likely to be in accordance with its comparative advantage, because only in this state can it form a competitive advantage. In twenty, thirty years of high-speed development, income levels and capital accumulations will make dramatic gains. Industries that used to be competitive will slowly disappear as wages rise, and eventually require industries with more concentrated capital. If local income is at a similar level, then the difference in comparative advantage is small. When the industry which serves as a frame of reference for the economy begins to lose its competitiveness and local incomes become lower than its income level, the costs of the factors of production will be lower than that of the economy’s frame of reference, and thus they will be able to compete with relatively low production costs, seizing a portion of its market. This is the first step – find a standard frame of reference, and select industries with potential comparative advantage.
The second step is to go local, looking for any privately run local business that are already in the industry. If they exist, they often have low income levels and have an advantage in terms of production costs. If so, why do they lack competitiveness in comparison with the industries of the economy’s frame of reference? The reason an industry established with low income cannot compete is because they have high business costs. In turn, these high business costs may be the result of an imperfect infrastructure, business environment, or poor financial support. In response, the government should take the opportunity to help companies overcome these restrictively high business costs. Once these obstacles are removed, companies can enter into the industry with confidence.
Thirdly, if an industry has no privately run local businesses and is completely new, the local government can play its part by carrying out investment promotions to attract firms to serve as a frame of reference for the economy, attracting those firms that are losing competitiveness due to rising incomes, and taking advantage of local wage costs to breathe new life into the industry. In that case, why are these companies not investing? Are they not familiar with the local situation? Is it due to a lack of infrastructure, business environment, or financial support? Perhaps an inefficient government is to blame? The government should deal with these restrictions and continue to promote investment, establishing a new source of local economic growth.
Fourthly, due to continuous scientific and technological advances, various new products are constantly emerging. These industries may not have a frame of reference within their economy. If local businesses that display potential for profit see this and take the opportunity to enter the industry, the local government should analyze these businesses to identify potential bottlenecks and obstacles for their further development. Perhaps they lack human resources, perhaps their transportation systems are backward, or perhaps the business environment is unhealthy. Whatever the reason, the government should foster improvement and help bring out their potential.
Fifthly, in the course of economic development, industries are constantly evolving. During this process, only continuous advancements in infrastructure and the business environment can help minimize transaction costs. If a nation, if the government of the economy has the ability to provide these basic needs to its various industries, it would be ideal. However, one inescapable fact is that resources are limited, including the government’s money, time, and energy. Under these circumstances, establishing local industrial centers or development zones, as well as perfecting their infrastructure and business environment and thereby attracting domestic and foreign investment, will maximize the utilization of limited resources in economic development. This style of development may also assist in the formation of industrial clusters, further decreasing transaction costs.
Sixthly, economic development is accompanied by continuous scientific and technological development. Pioneering enterprises are needed to introduce new technologies and forward industrial evolution; these are the so-called “crab-eating” enterprises. Pioneering enterprises risk failure and must pay the price of failure, but at the same time can indicate to other enterprises whether the region in question is at a stage of development where it can accept the new industry. If a pioneering enterprise succeeds, this is a message to other firms that this new industry possesses a comparative advantage, thus attracting competition and preventing the pioneering company from monopolizing industry profits.
Thus, regardless of whether a pioneering company fails or succeeds, it will provide society with useful information; however, the gains from success and losses from failure are disproportionate. Therefore, in order to encourage pioneering efforts, the government should provide pioneering companies with incentives such as tax discounts and credit assistance.
By following this framework of action, the government can be effective in preventing companies from taking inappropriate measures in the course of its development and transformation. As a result, cities will be able to maintain their standing in a competitive market in the wake of scientific and technological advances. With competition cities can continue to develop, avoiding situations like that of Detroit.
The above is merely a discussion on the sustainable development of cities. This development in turn is reliant on various other factors such as environmental stability and social harmony. However, the economy is a foundation. If a city’s economy is competitive, then it will provide favorable conditions for other factors related to its sustainable development to develop. It is hoped that the above discussion may assist, through the promotion of urban competitiveness and sustainable development, in forwarding scientific development, and helping to realize the two “Millennium Goals” and the Chinese Dream of the Great Chinese People’s Revival as proposed by the 18th CPC National Congress.
The author is the Vice Chairman of the National Association of Industry and Commerce and head of the National School of Development at Peking University. This article is based on the author’s statements in the International Forum on China’s Sustainable Development held on October 12th, 2013. Translated from Chinese. Editor: Daniel Singer (Contact:dnsinger@gmail.com).
