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Pursue Supply-side Structural Reform as Our Main Task to Develop a Modernized Economy

Submit Time:27-02-2018 | Zoom In | Zoom Out

Author:Liu Wei | Source:People’s Daily (January 26, 2018)

Abstract:

The report to the 19th National Congress of the Communist Party of China clearly points out that we should apply a new vision of development and develop a modernized economy. The core of developing a modernized economy is to promote high-quality development, which mainly includes two connotations: one is to accelerate the building of an industrial system that promotes coordinated development of the real economy with technological innovation, modern finance and human resources on the basis of better quality, higher efficiency, more robust drivers and higher total factor productivity; the other is to develop an economy with more effective market mechanisms, dynamic micro-entities and sound macro-regulation on the basis of continuing reforms to develop the socialist market economy. In promoting development in these two aspects, we need to pursue supply-side structural reform as our main task. 

It is objectively necessary to pursue supply-side structural reform as our main task. 

After the 18th National Congress of the Communist Party of China, socialism with Chinese characteristics entered a new era, and the cause of the Party and the country achieved all-round pioneering results and underwent deep fundamental changes. An important manifestation of the historic changes that took place to the cause of the Party and the country is that the principal contradiction facing society has evolved. What we now face is the contradiction between unbalanced and inadequate development and the people’s ever-growing needs for a better life. The evolution of the principal contradiction facing Chinese society is the fundamental reason why we must to pursue supply-side structural reform as our main task to develop a modernized economy. 

Because the basic mode of movement of contradictions is unchanged, development is still the underpinning and the key for solving all problems. In the new era, the principal contradiction facing Chinese society has changed, but its basic mode of movement remains the contradiction between “development” and “needs” and the solution is still meeting “needs” through “development”. Therefore, though the principal contradiction facing society has changed, it “does not change our assessment of the present stage of socialism in China. The basic dimension of the Chinese context—that our country is still and will long remain in the primary stage of socialism—has not changed. China’s international status as the world’s largest developing country has not changed.” This means development is still the underpinning and the key for solving all problems and the Party’s top priority in governance. The fundamental goal of supply-side structural reform is to improve productive forces and better meet the people’s increasing needs for a better life. It links and effectively matches “development” and “needs” through adapting supply systems to changes in need structures effectively. Therefore, in the new era, we need to make efforts on the supply side and deepen supply-side structural reform for development, especially unleashing and development of productive forces as the basis of social development. 

The connotations of the principal contradiction facing society have changed profoundly, requiring us to make great efforts to solve supply-side problems. In the new era, the profound historic changes in the connotations of “needs” and “development” as two ends of the principal contradiction facing Chinese society lead to corresponding profound changes in the movement of the principal contradiction facing society, which has evolved from the contradiction between the ever-growing material and cultural needs of the people and the backwardness of social production to the contradiction between unbalanced and inadequate development and the people’s ever-growing needs for a better life. At present, the main factor restricting the people’s ever-growing needs for a better life is unbalanced and inadequate development rooted in inadequate supply quality, efficiency, structure and level and innovation capacity and manifested in the following aspects: the real economy awaits improvement, we have a long way to go in protecting the environment, in work on public wellbeing there are still many areas where we fall short, poverty alleviation remains a formidable task and there are still large disparities in development between rural and urban areas, between regions and in income distribution. These prominent problems are essentially problems of the supply side of the national economy. The fundamental cause is productive forces’ underdevelopment rooted in major structural imbalances. Supply-side structural reform focuses on solving structural problems and gives priority to improving the quality of supply. The basic point of departure is to make China’s supply capacity better meet the people’s ever-growing, ever-upgrading and personalized needs for a better life and thus realize the goal of socialist production. Only by pursuing pursue supply-side structural reform as our main task to develop a modernized economy can we solve major structural imbalances and lay a solid material foundation for thoroughly addressing development’s imbalances and inadequacies and meeting the people’s ever-growing needs for a better life. 

To effectively defuse the risks in economic development, we need to pursue supply-side structural reform as our main task. A modernized economy is certainly one that can effectively cope with risks. At present, China’s economy faces “dual risks”: the potential inflationary pressure driven by cost and the risk of economic downturn caused by sluggish demand. The main reasons lie on the supply side. For example, the main reason for the emergence of potential inflationary pressure is higher cost of supply-side factors; the underlying reason for slower growth in demand for investment is that opportunities of effective investment can hardly be found due to inadequate supply-side innovation capacity; the main reason for certain restraint on consumption is inadequate mid- and high-end supply. Therefore, to overcome the new imbalance and coexistence of the “dual risks”, we need to pursue supply-side structural reform as our main task to build a modernized economy. 

Supply-side structural reform is the key to building an industrial system that promotes coordinated development. 

An industrial system that promotes coordinated development of the real economy with technological innovation, modern finance and human resources is an important component of a modernized economy. Supply-side structural reform is the key to building an industrial system that promotes coordinated development. 

The real economy, especially the manufacturing sector, should be enhanced fully. The report to the 19th National Congress of the Communist Party of China points out: “In developing a modernized economy, we must focus on the real economy, give priority to improving the quality of the supply system, and enhance our economy’s strength in terms of quality.” The real economy is always the foundation for China’s economy to develop and gain initiative in international economic competition at all stages of economic development. Developing the real economy is the core of and key to building an industrial system that promotes coordinated development of the real economy with technological innovation, modern finance and human resources. The main task of supply-side structural reform is just to revitalize the real economy. Different from demand-side management focusing on the demand end and consumers, supply-side structural reform focuses on the supply end and producers, mainly including three types. The first one is workers as principal factor of production. Supply-side structural reform aims to improve labor productivity and build an educated, skilled and innovative workforce. The second is enterprises combined with means of production. Supply-side structural reform aims to enhance enterprises’ competitiveness, turn Chinese enterprises into world-class, globally competitive firms, inspire and protect entrepreneurship and encourage more entities to make innovations and start businesses. The third one is collections of enterprises—industries. Supply-side structural reform will improve industrial organizations, optimize industrial structures, foster new growth areas and drivers of growth, support traditional industries in upgrading themselves and foster a number of world-class advanced manufacturing clusters. These measures will certainly stimulate economic vitality, accelerate shifting of driving forces behind growth and fully enhance the real economy, especially the manufacturing sector. 

Industrial structures should be fully optimized to improve industrial quality. Optimizing industrial structures to improve industrial quality is an implication of the building of an industrial system that promotes coordinated development of the real economy with technological innovation, modern finance and human resources. Supply-side structural reform aims to guide development of demand with new supply and promote optimization of industrial structures and improvement of industrial quality at three levels. The first one is optimizing allocation and combination of factors of production such as science and technology, capital and workers, enhancing utilization of factors of production, raising total factor productivity and strengthening internal impetuses for economic growth continuously; the second is optimizing existing supply structures and fundamentally addressing the problem of supply-demand gaps through adjusting existing product supply structures and improving product and service quality; the third is promoting industrial optimization and restructuring, making great efforts to develop new industries and new business forms, making great efforts to develop strategic emerging industries and the modern service industry and providing new products and services. Supply-side structural reform proceeds from the production end to promote optimization and upgrading of industrial structures, fully improve industrial level and quality, foster new driving forces and build new engines for sustained economic growth and meet the requirements of the building of an industrial system that promotes coordinated development of the real economy with technological innovation, modern finance and human resources on the basis of enhancing the efficiency of factor allocation, total factor productivity, labor productivity and enterprises’ competitiveness. 

Supply-side structural reform is conducive to realizing effective market mechanisms, dynamic micro-entities and sound macro-regulation. 

An economy with more effective market mechanisms, dynamic micro-entities and sound macro-regulation is another important component of a modernized economy. Its core is organic unification of the three. Only by organically unifying the three can we maximally eliminate various trammels holding back product forces’ development, unleash and develop productive forces, maintain sustained and healthy economic development, inspire creativity and vitality throughout society and achieve more efficient, fairer and more sustainable development of better quality. The very nature of supply-side structural reform is in-depth reform. We should accelerating efforts to improve the socialist market economy, promote reform of state-owned enterprises, accelerate the transformation of government functions and deepen basic reform in areas such as prices, finance and taxation, banking and social security. Only by pursuing supply-side structural reform as our main task to develop a modernized economy can we successfully develop an economy with more effective market mechanisms, dynamic micro-entities and sound macro-regulation. 

It is conducive to realizing more effective market mechanisms. Letting the market play the decisive role in resource allocation and the government play its role better is a major principle we should follow in promoting supply-side structural reform, which deeply influences producers and economic structures instead of just intervening in the aggregate like demand management and puts forward higher requirements on striking a balance between the role of the government and that of the market and improving the socialist market economy. While pursuing supply-side structural reform as our main task to develop a modernized economy, we should follow the rules of the market, be good at solving problems through market mechanisms and let the government shoulder responsibilities with courage and do what it should do. Therefore, we should stick to letting the market play the decisive role in resource allocation, improve market mechanisms, eliminate industrial monopolies and local protectionism, enhance enterprises’ ability to respond and accommodate to changes in market demand and improve enterprises’ efficiency of resource and factor allocation and competitiveness. We should make the government play its role better, and stimulate market vitality through reform on the basis of respecting the rules of the market, guide market expectations with policies, point out directions of investment through planning and regulate market behavior through the rule of law. 

It is conducive to making micro-entities more dynamic. While pursuing supply-side structural reform as our main task to develop a modernized economy, we should deepen reform of the property rights system and market-oriented production factor reform. The purpose of deepening reform of the property rights system is to clearly define, strictly protect and smoothly transfer economic entities of various ownerships and property rights. At present, we especially need to further reform of state-owned enterprises, develop mixed-ownership economic entities and turn Chinese enterprises into world-class, globally competitive firms; meanwhile, we need to support the growth of private businesses and stimulate the vitality of various market entities. The purpose of deepening market-oriented production factor reform is to implement the principle of equivalent exchange and enhance the fairness and reality of market competition. At present, we especially need to introduce a negative list for market access nationwide, sort through and do away with regulations and practices that impede the development of a unified market and fair competition and particularly break administrative monopolies and preclude the forming of market monopolies. Meanwhile, we should improve market supervision mechanisms and bring the market’s role in pricing into full play. Through these two reforms, we can turn property rights into effective incentives and realize free flow of factors, flexible prices, fair and orderly competition and business survival determined by competition. 

It is conducive to sound macro-regulation. While pursuing supply-side structural reform as our main task to develop a modernized economy, we should change the mode of macro-regulation, combine aggregate demand management with in-depth supply-side structural reform, short-term regulation with long-term regulation and aggregate regulation with structural regulation, create a favorable environment for steady economic growth through moderate aggregate demand management and make efforts to effectively address the underlying contradiction of aggregate imbalance through supply-side structural reform. At present, we should develop new methods to improve macro-regulation, give full play to the strategic guidance of national development plans and improve mechanisms for coordinating fiscal, monetary, industrial, regional, and other economic policies; we should deepen reform of the investment and financing systems, deepen institutional reform in the financial sector, improve the framework of regulation underpinned by monetary policy and macro-prudential policy, improve the financial regulatory system and make macro-regulation more and more scientific, predictable and effective. 

(Author’s Employer: Renmin University of China)


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