New forces key to innovation, productivity

The Political Bureau of the Communist Party of China Central Committee held its 11th group study session on making solid progress in promoting high-quality development on Jan 31.

During the meeting, the central leadership said that developing new quality productive forces is an endogenous requirement and a pivot of high-quality development, and that efforts should be kept up to promote innovation and faster development of new quality productive forces.

The central leadership stressed that high-quality development has to be supported by a new productivity theory. Since new quality productive forces have emerged in practice and exhibited their strong role in driving and supporting high-quality development, they should be theorized systematically to guide further development.

In a nutshell, the new quality productive forces are primarily driven by innovation and break free from traditional economic growth modes and productivity development paths. They feature high technology, high efficiency, and high quality, and represent advanced productivity required by the new development philosophy.

They are shaped by revolutionary technological breakthroughs, innovative allocation of production factors, and deep industrial transformation and upgrading, with the improvement of labor forces, means of labor, subjects of labor and their optimal combination as underlying elements, and a substantial increase in total factor productivity as a core hallmark.

Marked by innovation, and with high quality as the key, new quality productive forces are advanced productivity in essence.

So, accelerating the development of new quality productive forces is a crucial strategy for governments at all levels in their economic work, both now and for an extended period into the future.

How should we comprehend new quality productive forces? My interpretation is that new quality productive forces are the capacity to enhance total factor productivity. This might sound a bit convoluted, and what exactly is total factor productivity?

As it is known to all, for a business or a nation to engage in production, they need labor and capital. As labor is increased, output rises, and similarly, increasing capital also boosts output.

Yet there is another aspect that is often imperceptible and intangible, which is the enhancement of efficiency. Economists term the efficiency gains derived beyond the increase in labor and capital as total factor productivity. The essence of developing new quality productive forces lies in boosting the efficiency of production, which in economic terms, we refer to as total factor productivity.

Before 2010, China's economic growth was largely fueled by the expansion of labor and capital.

On the labor front, we witnessed a significant migration of the workforce from rural to urban areas, integrating into the global economic circle. At the inception of the reform and opening-up policy in 1978, China's urbanization rate was less than 20 percent, whereas today, it has surpassed 65 percent.

This translates to more than 40 to 50 percent of the population relocating to cities in the span of about four decades, bringing with them an additional 200 to 300 million workers.

It is widely recognized that before 2010, China's economic growth was primarily export-driven. The participation of such a vast workforce in the global economic circle has, without a doubt, enhanced our production capabilities.

Meanwhile, the rate of capital accumulation in China has also been on the rise, resulting in an increase in the savings rate.

Consequently, we can see that before 2010, China's economic growth was predominantly propelled by the expansion of labor and capital. Since 2010, China's economy has entered a phase of transition, which involves several key adjustments as follows.

One aspect of the transition entails the restructuring of the economy, which involves phasing out some overcapacity in some industries and those that are environmentally damaging, while fostering the growth of new quality productive forces. We have seen the rise of emerging industries, such as electric vehicles, as an outcome of such adjustments.

Another dimension of the adjustment is the shift from an export-led growth model to one centered on domestic consumption. This transition has been quite significant, with a rapid increase in the contribution of consumption to China's economic growth since 2010.

The third aspect of this transformation involves driving technological progress and upgrading our production methods. We are transitioning from an extensive, resource-intensive mode of production to one that is propelled by technological innovation.

That is the backdrop against which the concept of new quality productive forces is proposed, indicating that China has now entered a phase where economic growth is driven by comprehensive technological research and development along with innovation.

Economic growth theory tells us that a country's economic growth typically transitions from a phase of relying on labor expansion and capital accumulation to one where economic growth is propelled by technological progress.

China's population growth rate is declining, and the working-age population has actually been decreasing for a few years now. Additionally, the marginal benefits of capital accumulation have become smaller. Therefore, it is imperative to enhance the rate of technological progress, which is a crucial reason for the advocacy of new quality productive forces.

How, then, do we foster new quality productive forces?

If my understanding is accurate, and the objective of new quality productive forces is indeed to boost total factor productivity, then every industry has the potential to cultivate this new form of productive forces.

For instance, in the apparel industry, a company like Shein has risen to prominence. Shein's current valuation of $60 billion is a testament to the power of flexible production. I contend that this flexibility is the essence of enhancing total factor productivity, which is at the heart of new quality productive forces.

Moreover, platform enterprises remain powerful drivers. There might be some notions that platform companies are becoming outdated as we transition into the age of AI. Nonetheless, I believe that the platform economy remains a cornerstone industry in China and has a significant role to play in uplifting new quality productive forces.

First, the platform economy offers a foundation for the real economy, with many sectors now leaning on platform companies to cut costs. I recall that just seven or eight years ago, we were preoccupied with the high cost of logistics. Today, discussions about such exorbitant logistics costs are less common, and this shift is closely tied to the growth of the platform economy.

Second, the platform economy itself fosters the development of numerous technologies. From my perspective, a key competitive aspect of the platform economy lies in its algorithms. These algorithms do not necessitate substantial capital investment; rather, they rely on human intellect. The expansion of the platform economy drives the refinement of these algorithms. This optimization, in turn, stimulates the need for basic research, such as mathematics and statistics, thereby fostering a comprehensive ecosystem.

The talent in the field of algorithms trained and nurtured through the platform economy can then go on to do other things. I believe that this role should not be overlooked.

Third, the platform economy has immense "network effect", which cannot be underestimated. Today, virtually everyone's life is dependent on the platform economy. Economists refer to this as a network effect, where the more people use the platform, the more cost savings are realized by everyone involved. Over the past decade or so, as China's platform economy developed rapidly, the pace of innovation has also quickened, indicating that the platform economy has played a crucial role in fostering national innovations.

Looking ahead, I anticipate that the potential growth rate of the Chinese economy will likely be around 5.5 percent over the next few years, with capital accumulation still playing a significant role.

As we progress, economic growth fueled by capital accumulation in China will continue to wane, ultimately converging to a point where increases in per capita income are dependent solely on technological advancement.

China holds an advantage over other nations in that we engage in long-term planning. Consequently, our efforts to promote the development of new quality productive forces are not only aimed at immediate gains, but also part of a broader strategy to establish a robust foundation for China's economy moving forward.

This is the underlying significance of raising the concept of new quality productive forces.

The writer is director of the China Center for Economic Research at Peking University. The views don't necessarily reflect those of China Daily.