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Breaking of the Cycle of Economic Contraction Depends on Nurturing and Expanding New Growth Areas

2000-02-14

Liu Shijin

I. It is imperative to pinpoint the breakthrough point for breaking the cycle of economic contraction.

In the first quarter of this year, China’s economy has maintained an overall good shape of growth. But there has been the sign of a weak state for the economy since April. Industrial added value, investment, consumption and export all fell back and commodity prices have dropped for 21 months in a run. Some people worry about whether the economy will further slide down in the second half of the year. All signs indicate that the economy has not come out of the cycle of contraction. It is imperative to break such a cycle.

Researchers at home and abroad have studied from many angles the causes for the economic slowdown in the past few years and put forth some views to explain them. These views involve the economic cycle, the Asian financial crisis, the global surplus capacity, the block of the fund raising channel of the non state-owned enterprises, the expected fall of the households, income and the drastic fall in the growth rate of township enterprises. It should be said that these factors correspond to specific facts, and have their own reasons to certain extents. However, it is necessary to tell which are fundamental, which are derivative, which are primary and at work for a long period, and which are secondary and at work only for a short time. It is particularly important to look at the economy as a process of interrelated continuous cycle and find out from the confused and tanglesome issues the key factor for breaking the present cycle of contraction.

China’s economy has up to now not broken away from the features of the binary economy with the income of rural households amounting to about 40 percent of that of the urban households, leaving their consumption structures at different levels. At the present stage, most of the urban households basically have enough to eat and dress well, and have sufficient daily use articles. They are on the transition stage to enjoy higher living standards and transport facilities. In this period, the expansion of consumption is achieved through the upgrading of consumption structure. The upgrading of urban household consumption structure will bring along the growth of a group of new related industries and the upgrading of the industrial structure and raise the gross output of economic activities. Greater overall economic size will spur the farmers to shift to non-agricultural sectors, cities and townships and increase their income level. Bigger farmer income will produce consumption demand at low levels, which will provide market for a great number of existing enterprises of manufacture. This will in turn boost the income of urban households, leading the entire national economy to a virtue cycle of expansion. This is the basic logical connection in our complex economic cycle at the present stage and the most important “structural problem”. Viewed from this perspective, the breakthrough point of the present cycle of economic contraction lies in the early launching and nurturing of new growth areas with the promotion of the upgrading of the consumption structure of urban households in mind. For this purpose, the following points should be clarified.

First, viewed from a short time (such as a calendar year), the overall social demand consists of investment, consumption and net export. But viewed from a longer period of time, the ultimate real demand can only be consumption. The present cycle of economic contraction stems from problems in this final ring, that is, consumption. It will not be possible to expect a noticeable improvement in the economic condition if we make efforts in other intermediate rings while steering away from consumption.

Second, expanding consumption calls for increasing the income of the low-income urban stratum and farmers by employing redistribution methods like transfer payment. But the primary way to raise the income of these people depends on the creation of new employment and investment opportunities, particularly high-income jobs and investment opportunities (for instance, encouraging farmers to work in cities). This will rely on the upgrading of the industrial structure and the process of accelerated urbanization which is prompted by the upgrading of consumption structure. Now, the leading driving force for the upgrading of the consumption structure is composed of urban households who enjoy middle income level and above. In the whole country, they come from areas with a per capita GDP of over U.S.$ 1,500. If the early stage reform favored some people and areas to get rich first, then now it is necessary to encourage those who have become rich first to spend money to upgrade the consumption structure.

Third, emphasizing the upgrading of consumption structure does not denote encouragement of consumption only, but also involves institutional and policy problems at deeper levels, like income distribution, social security, finance and taxation, market opening and nurturing. The upgrading of consumption structure will be hard to materialize if these problems remain unsolved.

Fourth, macro policies are necessary all the time, but their role is quite limited in upgrading the consumption structure (in particular, the monetary policies designed to bring about effects to the whole situation). While maintaining tolerant and easy macro policies, stress should be put on policy adjustment and system reform to remove the hindrance to upgrading consumption structure.

In one word, in emphasizing the boosting of domestic demand, focus should be laid on consumption demand. On the consumption demand, stress should be given to upgrading the consumption structure of the urban households. To achieve this end, we should concentrate on solving the related institutional and policy problems and launch and nurture a number of new growth areas. This is the key link, by which we will find the leading force for expanding domestic demand, readily solve other headaches and enable the entire national economy to cast off the contraction cycle.

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