Priority for further reform

Restructuring the economy to maintain growth should improve people's living standards and narrow the wealth gap

China has been facing obstacles in various aspects of reform. If the 7 to 8 percent annual growth rate is not maintained, many social problems will come to the fore, the most challenging of which is unemployment. Only by "making the cake bigger" will economic restructuring be achieved and these problems solved. So the question is: How to restructure the economy to make the cake bigger?

The major economic restructuring needed is undoubtedly industrial upgrading. Today, China has become the world's factory, but the problem is that the value added to the product is too small compared to the gross export value of $1.8 trillion. "Made in China" products are still regarded as low-end, high-polluting and labor-intensive. With labor costs continually rising, the gap in production costs between China and the United States and Europe has been narrowing, while the cost advantage compared to the members of the Association of Southeast Asian Nations has vanished. That Chinese products can still occupy the global market is merely because of the limited production capacity of countries like Vietnam and the Philippines. As such, increasing the added value, ensuring product quality, enhancing enterprise productivity and gradually moving up the value chain is undoubtedly the only way to go.

The kind of economic restructuring that should be brushed aside is that relying on short-term consumption growth. Admittedly, a slow and gradual increase in domestic consumption, which reduces reliance on external consumption, is the correct approach in the long term. However, to truly boost domestic consumption, household incomes need to be raised and the social security system improved. Otherwise, boosting consumption is merely empty talk.

So how can China enhance enterprise productivity and push forward industrial upgrading? If China's economic growth in the past 30 years can be summarized as benefiting from external opening-up and internal reform, then China's economic reform now should go the opposite way, namely internal opening-up and external reform.

So what should be opened up internally?

First of all, open the city gate and abolish the household registration system. As a policy to cope with the price scissor for agricultural and industrial products, it was necessary to build a national economic system that focused on heavy industry during the era of planned economy. However, it has already become a hurdle hindering labor optimization and resulted in the distorted distribution of resources. Over the past 30 years, the line of defense in regard to the household registration system has been slightly torn down in small and medium-sized cities. However, control in Beijing, Shanghai, Guangzhou and many other provincial capitals remains strict. The reasons for this include shortsighted local protectionism and the slow progress of urbanization.

 

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