Commentary RESEARCH

Stimulating potential

Aria

2024-04-17 08:31

ZHANG YUYAN
China Daily

New quality productive forces of an open economy can create new advantages

Developing new quality productive forces is an important path to respond to profound and complex changes in both the international and domestic environments and to achieve healthy, stable and rapid economic development. Compared to traditional productivity, new quality productive forces emphasize high technology content and innovation-driven development.

In the growth model proposed by economist Robert Solow, economic growth is determined by the input of labor and capital plus a residual value, namely the part of the economic growth rate that remains after subtracting the growth rates of labor and capital inputs. This residual value was later termed the "Solow residual value".

Since it contributes to economic growth, the Solow residual value transforms into total factor productivity, which refers to the part of economic growth that cannot be simply explained by the quantitative increase in labor and capital inputs. Analyzing the basic components of the Solow residual value can, to some extent, provide us with a key to understanding new quality productive forces.

A basic fact revealed by economics is that sustained and rapid economic growth comes from the continuous improvement of labor productivity. The direct driving forces behind productivity enhancement are technological progress, specialized production, and trade, while the indirect driving force is institutional conditions. It is easy to understand how technological progress leads to productivity improvements. Market exchanges can occur spontaneously, but large-scale, widely participated division of production and reciprocal exchange require universal and effective institutional conditions, such as the protection of property rights and the honoring of contracts.

Assuming there is no technological progress, individuals, businesses, or countries can create and obtain trade benefits through the "exchange of what one owns for what one lacks", "exchange of abundance for scarcity" and "exchange of one's expertise for one's ineptitude", thereby achieving more efficient use of resources and a general increase in economic welfare. The underlying logic of classic trade theory lies here. The "three exchanges" mentioned here come from the Chinese classics Huainanzi (Great Words From Huainan) and Shiji (Records of the Grand Historian) in the Western Han Dynasty (206 BC-AD 24).

Regarding the benefits of division of labor, Adam Smith's The Wealth of Nations in 1776 offered a detailed analysis. The author observed the production and division of labor in a small British pin factory, finding that productivity had increased by hundreds of times due to simple division of labor, which is decisively influenced by the depth and breadth of the market. The author emphasized that without a formal judicial and administrative system to give people a sense of security over their property rights and confidence in people's adherence to contracts, a country's commerce and manufacturing could seldom develop for long.

The focus on developing new quality productive forces should primarily be on three key components of total factor productivity. The first is to encourage technological innovation. The second is to continuously expand the market size to make the division of labor and specialization more detailed and the potential trade benefits greater. The third is to further enhance the protection of property rights and contracts, and expand their coverage, that is, to ensure the market plays a decisive role in resource allocation and better utilize the role of government. The "quality "in new quality productive forces should and must include the quality of institutions. In fact, in promoting economic growth, these three elements interact with and are inseparable from each other.

Economic growth potential can be explored from both incremental and stock perspectives. To increase increments, on the one hand, countries or enterprises can increase investment in scientific and technological innovation research and development to generate more scientific and technological innovations; on the other hand, they can steadily advance institutional innovations primarily focused on rules and standards, especially innovative institutional outcomes that align with international high-standard economic and trade rules.

Innovation does not simply mean increasing technological investment; it also means ensuring the quality of the investment, that is, truly making the best use of people and resources under full consideration of market demand and objective conditions, so that the wealth growth brought by new quality productive forces better meets people's needs. At the same time, relying on legal and institutional protections for property rights, division of labor, trade, and market expansion can proceed smoothly.

The key to unleashing potential and revitalizing stock lies in further removing systemic and institutional barriers, forming effective incentives, and significantly reducing transaction costs. The far-reaching Industrial Revolution was driven by the use and popularization of James Watt's steam engine. However, Watt did not invent the steam engine but improved it. In fact, the steam engine appeared decades before Watt, but it was not widely used until the Watt era. The most critical reason was that wages in Britain were much higher than in continental Europe at the time, making it profitable to use machines instead of labor.

Today's world shares many similarities with the situation more than two centuries ago, mainly manifested in the profound changes in the relative prices of production factors such as knowledge, data, innovation ability, and related institutional conditions compared to other factors.

From the perspective of developing new quality productive forces, increasing increments and revitalizing stock is both a development proposition and a reform proposition. Specific measures, such as the comprehensive removal of foreign investment access restrictions in the manufacturing sector, were included in this year's government work report. Introducing foreign investment and encouraging the flow of capital, technology, talent and other resources essentially expands market capacity. Increased external market competition may pose risks and challenges for individual enterprises. However, this is also an indispensable path to enhance the competitiveness of enterprises and jointly elevate the productivity and welfare of China and the world.

The next step involves pushing for deeper reforms through greater openness. First, substantial efforts should be made to accelerate the construction of a unified national market. While aligning with international rules and standards, a highly efficient, standardized, fair competition and fully open national unified market should be built.

Second, further intensify unilateral openness. In response to the China-EU Comprehensive Agreement on Investment, which has been stalled due to political issues, China could consider implementing it unilaterally and selectively, using this as a lever to build an open world economy and to pry open China-EU economic and trade relations. Proactive steps have already been taken, such as implementing unilateral visa exemptions, zero tariffs and reducing the negative lists among other openness measures on a large scale. China has made commitments to open its service industry, allowing European investors to invest in medical services in certain Chinese cities.

Third, aim for higher levels of rules and standards, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and the Digital Economy Partnership Agreement, and actively participate in negotiations with the goal of joining these organizations. Negotiations can help promote understanding and comprehension of the current global economic and trade system while benchmarking with these standards can guide the evolution of domestic industries and advance domestic reforms.

In addition to "bringing in", openness also involves "going global". It can be considered to extend the domestic circulation overseas to better coordinate the domestic and international dual circulations. China and Southeast Asian countries such as Vietnam, Laos, Cambodia, Thailand and Myanmar have high economic and trade interdependence, share a long history of cultural exchanges, and have established mechanisms such as the Lancang-Mekong Cooperation. Perhaps in policy or institutional design, a certain degree of "national treatment" could be considered to be granted to the five countries. Although there are still many steps to take, it may still be a way or direction beneficial for high-quality opening-up.

The author is an academic member of the Chinese Academy of Social Sciences, director of the Institute of World Economics and Politics at the CASS and chief expert of the National Institute for Global Strategy at the CASS. The author contributed this article to China Watch, a think tank powered by China Daily.

 


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2024-04-17 04:32
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