Justin Yifu Lin is one of China’s most distinguished economists and a former Chief Economist and Senior Vice President at the World Bank. We are very pleased to republish here from Asia Times his important article on the Fourth Industrial Revolution. Lin points out that new industries will predominate in China by the time of the People’s Republic’s centenary in 2049. He notes how historically the United States has taken measures to prevent any rising power from being able to challenge its hegemony. China therefore needs to break through the US blockade and to do so it must lead the new industrial revolution. China not only has the material conditions to do this, he argues, but also a number of comparative advantages over the US.
As a national mandate, the 19th National People’s Congress of the Communist Party of China (CPC) in 2017 announced its “Two Centennial Goals”: the first is to complete building a moderately prosperous society in an all-round way in China, which is to be achieved at the 100th anniversary of the CPC in 2021, and the second is to build the People’s Republic of China into a modern socialist power by 2049, the 100th anniversary of its founding.
There are a number of characteristics of a modern country. One is that China’s GDP per capita should reach at least half of that of the United States, the other most powerful country.
China is a large country, which includes the eastern coastal regions with relatively high income levels and the central and western regions with relatively low income levels. The GDP per capita in more developed Chinese provinces and cities, including Beijing, Shanghai, Tianjin, Jiangsu, Zhejiang, Fujian and Guangdong, which have a total population of 350 million, is at the same level as that of the US.
When two economies have the same level of GDP per capita and the same size of population, their technology and industrial achievement should also be at the same levels. Therefore, when the second centennial goal is achieved, the industry and technology in China’s more developed regions with a population of the size of the US will be at the same level as the US.
The fourth industrial revolution has now begun, and 2049 will mark an era in which new industries prevail. New industries in the Chinese regions with 350 million people should keep pace with those in the United States. The US has already changed its relations with China from a partner during the reform-and-opening-up era to that of a competitor.
Since the US became the world’s largest and strongest economy in the late 19th century, it has repeatedly suppressed the world’s second-largest economies that reached 60% of its GDP in order to prevent them from threatening its economic status. A recent example is Japan in the 1980s. At that time, Japan had an economic scale of more than 60% of the US and it surpassed the US in terms of GDP per capita. It was a world leader in the emerging semiconductor sector. As the world’s number one power, the US used its hegemonic advantages to suppress Japan’s semiconductor industry. Japan’s GDP per capita has now declined to 63% of the US while its GDP is only 24% of the US.
Based on market exchange rates, China’s economic scale has now reached 70% of the US. China’s 5G technology has become the world leader in the new industrial revolution. In the past few years, the US has repeated its old tricks and suppressed Chinese companies with groundless accusations, using all of its national resources. If the US succeeds in suppressing China by means of a blockade in the new industrial revolution, China will not be able to achieve its second centennial goal.
How can China break through the US blockade? It can only do this by working hard to lead the new industrial revolution. Then it will not be blocked, but will reach the technological level of the United States in its developed provinces, and achieve a national per capita GDP equal to half of that of the US by 2049. Therefore, it is a necessity for China to lead the new industrial revolution in order to achieve its second centennial goal by 2049.
China’s capability to lead the new industrial revolution
In order to achieve this great goal of national rejuvenation, it is necessary for China to lead the new industrial revolution. But are the conditions there to accomplish this? In this matter, I very much agree with the opinions of Zhao Changwen (Director General at the Industrial Development Department, Development Research Center of the State Council) and Xu Zhaoyuan (Associate Researcher at the Development Research Center of the State Council): The country that leads the industrial revolution cannot be a country with a weak economic and industrial foundation, but it does not necessarily have to be the country with the highest level of economy and industry.
For example: When the US and Germany led the second industrial revolution at the end of the 19th century, the United Kingdom had the highest level of income and technology. The US and Germany were at a stage of catching up in terms of income levels. In terms of purchasing power parity, America’s GDP per capita in 1870 was 76.6% of the UK’s while Germany’s was 57.6% of the UK’s.
Zhao Changwen and Xu Zhaoyuan note in their book China’s Industrial Upgrading in the Background of the New Industrial Revolution that China’s top five innovative cities are Shenzhen, Beijing, Shanghai, Guangzhou and Hangzhou. Together these cities have a population of 84 million, slightly larger than Germany’s current population of 82 million. In terms of purchasing power parity, their GDP per capita has reached 72.9% of that of the US. That proportion is roughly the same as the proportion of America’s GDP per capita to Britain’s GDP per capita when the US led the Second Industrial Revolution in 1870.
In addition, the seven Chinese provinces and cities with the highest GDP per capita, namely Beijing, Shanghai, Tianjin, Jiangsu, Zhejiang, Fujian and Guangdong, have a total population of 350 million, slightly higher than the current total population of 330 million in the US. In terms of purchasing power parity, the GDP per capita in these seven provinces and cities has reached 54.5% of that of the US. Again, this proportion is roughly the same as that of the Germany’ GDP per capita to the UK’s when Germany led the Second Industrial Revolution.
I agree with the conclusion of this book: In terms of GDP per capita, which represents material conditions such as industry and technological levels, China already has the ability to lead the new round of industrial revolution.
I would like to add one point: Not only does China have the material conditions to lead the new industrial revolution, but it also has advantages, especially with respect to the United States, which is now the largest and strongest economy. Here are three reasons for this:
The first reason is that according to the definition given at the G20 Hangzhou Summit, the new industrial revolution is characterized by the intelligent interconnection of people, machines and resources. This is characterized by industry with a short innovation cycle, or what we call “overtake-on-a-curve” industry. That is among the five major types of industries in the new structural economics. A characteristic of this kind of industry is that its research and development cycle for new products is short. Because of this, human capital has become the most critical element in innovation. Human capital consists of two parts: education and inborn talent.
Currently, China’s education from kindergarten, primary school, junior high school, high school and university to postgraduate is not much different from that of developed countries. For technological innovation, inborn talent is more important than education. The incidence of exceptionally talented individuals in a population is characterized by a normal distribution in statistics. The proportion of geniuses in any given population should be the same in any country. However, the key to the success in innovation is not the proportion of exceptionally talented individuals in the population, but the absolute number of such individuals. As China’s population is four times that of the US, the number of geniuses in China should be four times that of the US. China’s enormous pool of human capital gives it an advantage over any country, including the United States, in short-cycle research and development.
The second reason is that after a new technology with intelligent interconnectivity is launched, technological standards are required for applications. The power to set these standards is related to the size of the domestic market of the country where the new technology is developed. When two countries are competing for a new technology, the country with a bigger population and a larger domestic market size will enjoy lower marginal costs to produce its product, due to economies of scale. Its products will be more competitive and therefore more likely to set the global standard in the international markets.
With a population of 1.4 billion, China is the world’s most populous country. In terms of purchasing power parity, China already became the world’s largest economy in 2014. Therefore, when competing with developed countries for the setting of global standards, China has comparative advantages in its population and market size.
The third reason is that China has the largest range of industries, compared with any other country in the world, and can provide a full range of manufactured products for new inventions which require hardware. The path from an innovative technological idea to the mass production of finished products will be the fastest and least costly in China.
These three reasons put China in a favorable position when it competes with the US for leadership in the new industrial revolution. China’s favorable position is evidenced not only by the country’s advantages in 5G technology, but also the number of its “unicorn” companies. According to a report published by the China Investment Research Institute, the number of unlisted “unicorn” companies, established within a decade and valued at more than US$1 billion by private companies equities or public market investors, amounted to 150 in China and 107 in the US in 2018, accounting for 46% and 33% of all “unicorn” companies in the world, respectively.
How can China turn this potential into reality? Zhao Changwen and Xu Zhaoyuan made three suggestions in their book: to further improve the system of property rights and strengthen the protection of intellectual property; to focus on creating a prudent and inclusive regulatory environment; and to maintain the vertical mobility of enterprises. In the new structural economics, these three points refer to the establishment of a fair and competitive market environment.
I totally agree with all these points. From the perspective of new structural economics, both an “effective market” and a “facilitating state” are important. I will elaborate two points about the “facilitating state.”
Firstly, China should self-confidently use industrial policies to support the new industrial revolution. No matter whether a country is catching up or leading the development of new technologies and industries, its government should proactively overcome market failures to facilitate enterprises’ innovation efforts. Of course, market failures that may occur at the catching-up stage and leading stages are different, so the government should adjust its policy direction and support accordingly.
At the catching-up stage, market failures may include external problems related to the entry of new industries and the cultivation of human capital required by new technologies; the lack of capital and risk diversification provided by the financial system; and an imperfect infrastructure of power, transportation, telecommunications and business environment. These market failures cannot be overcome by enterprises themselves and need to be resolved by the government.
As resources and execution capabilities that can be mobilized by the government are limited, the government has to use industrial policies to strategically allocate its resources to support the new industrial enterprises that can make the greatest contribution to job creation and economic growth.
At the stage of market leadership, there will also be market failures. This is because the invention of new products and technologies requires basic research and development. Enterprises are interested in the development of new products and technologies because they can obtain patents, monopolize the markets and earn rents. But they are not interested in investing in basic research whose outcome is of academic interest, that is, a public good that cannot be patented. But without breakthroughs in basic research, they do not have any foundation for the development of new products and new technologies.
Therefore, at the stage of market leadership, the government should focus on supporting the basic research required by enterprises for their development of new products and technologies. Similarly, the government should use industrial policies to allocate its limited resources and capabilities to support basic research. This is actually what the developed countries with advanced technologies have been doing, including the US. This is also the reason why Mariana Mazzucato, Professor of the Economics of Innovation and Public Value at University College London, described the US, as well as other developed countries, as “entrepreneurial states.”
With the above considerations, the Chinese government should cultivate a market environment, but also must take a proactive role. It should not deny its influence in the new industrial revolution in response to the American attack on “Made in China 2025,” nor heed the objections of Chinese who oppose industrial policies on the basis of neoliberal thinking. On many occasions and in many articles, I have said that I have never seen a developing country that can successfully catch up with developed countries without industrial policies. Nor have I seen a developed country that can continue to lead the development of new industries without industrial policies.
In the current situation where the new industrial revolution has already begun, Germany introduced its “Industry 4.0″ strategy and the US introduced its “Strategy for American Leadership in Advanced Manufacturing.” China should follow suit, and self-confidently adopt industrial policies and use its comparative advantages to lead the new industrial revolution.
Secondly, China should continue to deepen the opening of its economy.
Opening is very important to the new industrial revolution. First of all, this is because the economy of scale of the new industries is huge. Although China has the largest single domestic market, its scale cannot be compared with the global market. In addition, while China needs to lead the new industrial revolution to break through the US blockade, it is impossible for China to invent every technology. As in the past, China made use of the “two markets and two resources domestically and globally,” including technological resources.
Meanwhile, the US may attempt to contain and suppress China. If the US continues to block and suppress China’s industries in the new industrial revolution, China must counteract immediately. The US is domineering because it wants to maintain its hegemonic status as “the world’s big brother.”
However, it has failed to gain support from other developed countries, whose first consideration is to boost their own economies and improve the livelihood of their people. These developed countries need to invest a large amount of money to participate or take the lead in certain areas of the new industrial revolution. After a technological breakthrough, they need a huge market to recover their initial investment and accumulate new capital for the next breakthrough. The “two markets and two resources” is a recipe for success in China, and also other countries.
While the US employs a blockade to suppress China and other countries in order to maintain its hegemony, China must continue to expand its opening and allow other countries to benefit from its technological innovation, rapid economic development and huge market. In open world trade, small countries can benefit more than the larger ones. If China continues to expand its opening, developed countries apart from the US will benefit more than China. They cannot afford to lose the huge and fast-growing market of China in the new industrial revolution. They will not sacrifice their own interests to safeguard the hegemony of the US, and the American attempt to suppress China’s new industrial revolution through containment will not succeed.