Dameisha Forum/Forum Opinions/Exploring the Market of Ideas and Researching the Fundamentals in China’s Long-term Development
Exploring the Market of Ideas and Researching the Fundamentals in China’s Long-term Development
Author： Source： Date：2017-09-01
I want to thank Chairman Siping Zhang for his kind invitation. Because of other arrangements, I can’t attend this meeting in person, but I still want to say something to express my expectations to this Forum.
When participating in China Economic Forum (CEF) in Yesanpo last month, I used three phrases to express my expectations. Today, I think I can give the same phrases to Dameisha China Innovation Forum. They are “exploring the market of ideas”, “researching the fundamentals” and “exploring the long-term development path for the country”.
Why do I use these phrases? Because I have a feeling that people of vision in the government, the industries and the academics of China do have made great contributions to the reform and development of our country over the past years. But there is also a very visible weakness, which is that they have paid relatively more attention to the surface and phenomenal part of problems, but failed to address the problems’ coresand regularities, namely, the fundamentals.
Consequently, the results of our discussion and our contribution to the national development are limited to some countermeasures proposed on a case-by-case basis, and a lack of deep, sound and scientific bases would adversely affect the accuracy and effectiveness of our proposals. For the same reason, we are often satisfied with a smattering of knowledge when conducting research. In many cases when there is a new problem, though the essentials remain unchanged, the concrete methods and policies we propose to address it tend to be superficial rather than in-depth, as a result of inadequacy of insight into the nature behind the problem. Frequently, when the phenomenal part of a problem has changed but the core has not, we mistake the problem for a new one and work out new measures to respond to it, which leads to a “loop” of thinking. Generally a problem presents in different appearances every time; we come up with a brand-new measure to address the same problem every time, that is, every time a problem arises, we start from scratch to find out new countermeasures, instead of building up from past experience. In this way, we can’t, like in a relay race, get closer to the finishing line (the truth) step by step, or work out better solutions every time we come across essentially identical problems.
At China Economic Forum, I used an example to support the “loop” argument. The example is about the need to shift the extensive economic growth pattern, a problem that has persisted and troubled us for decades. Obviously, we have detours in this area, and progress seemed to be insufficient. Today, I want to cite another example, a problem that has been heatedly discussed these days, namely, whether our industrial policies are effective. In fact, we have already discussed this question for more than twenty years. The point is that we have failed to go into depth of the question step by step; instead, we have been looping in circles and staying at the surface of the problem. This reduces the effectiveness of our research work and undermines the effort to explore sustainable development paths for China.
The topic of industrial policies seemed to be quite new in the early 1980s, not just in China but also in a considerable number of countries. China borrowed industrial policy from Japan, who started to implement a set of industrial policies as early as in 1970s. It could be said that in Japan industrial policies played a positive role during the early post-WWII period and during the 60s and 70s when Japan experienced fast economic growth.
In the 1980s, after the oil crisis in particular, many western countries became much concerned about Japan’s industrial policies. Moreover, some people believed that Japan’s fast growth then was mainly due to its extremely successful industrial policies backed by the government, more specifically, by the Ministry of International Trade and Industry.
China first looked at industrial policy issue in March 1987, when some researchers of the Development Research Center of the State Council, where I work for, wrote a report, An Initial Research on the Industrial Policies of China. In the report they proposed that China should adopt industrial policies similar to those Japan adopted in the early post-WWII period and throughout the fast growing period, namely, the period from 1946 to 1970. This set of industrial policies was characterized by an integrated and coordinated use of various policies, including price, foreign exchange, fiscal, taxation and foreign trade policies, in order to promote the production, investment, R&D and incorporation in some industries while containing similar activities in some other industries. It was said that these measures could help establish an industry structure that optimizes the allocation of resources and sharpen the competitive edge of enterprises.
The State Council and Chinese leaders then replied to that report very soon and approved the proposal of the Development Research Center. The report was forwarded to the State Commission for Restructuring the Economic System, the State Planning Commission and the group drafting the report for the 13th National Congress of the Communist Party of China. Since then, introducing industrial policies was not only a hot topic, but also a very important mission that had to be carried out by the macroeconomic departments of the central government. Moreover, it was clearly a very important part of the concrete measures taken to implement the overarching slogan put forward during the 13th National Congress of the CPC, i.e., “the operating mechanism of the socialist commodity economy is for the state to regulate market and for the market to guide enterprises”.
However, what we failed to notice is that the industrial policies adopted by Japan in the early post-WWII period and in the later fast growing period, had been reflected on in Japan itself as early as in the 70s. In the early 1980s in particular, a group of economists headed by Professor Komiya Ryutaro of the University of Tokyo were well organized to make a comprehensive summary of the Japan’s industrial policies, particularly their theoretical foundation, formulation, achievements and weaknesses in the process of implementation. After two years’ work, they compiled a research report and released it in 1984.
The report was different from its predecessors that placed the emphasis of the industrial policies of Japan on political considerations and historical facts; instead, it made a comprehensive review and criticism of the theoretical foundation, actual content and empirical effect of the industrial policies from the modern economics’ point of view, and arrived at an important conclusion.
As the French-American economist Philippe Aghion said, in the 20th century and after the WWII in particular, some developing countries implemented industrial policies to promote their advantaged industries or to protect their local traditional industries from competitors in the developed countries. During the 1980s, however, such industrial policies have become notorious in that they obstructed progress [阻碍了进城？]and allowed government to choose winners and even to choose losers arbitrarily and therefore increased the risk of government being taken hostage by the enormous interest groups. Philippe Aghion estimated that the industrial policies adopted by Japan during the early post-WWII period and the fast growing period have already been reduced to infamy in the 1980s. The report written by Komiya Ryutaro was exactly a comprehensive summary of both experience and lessons of the Japan’s industrial policies during the periods aforesaid. It criticized the industrial policies of Japan from the perspective of modern economics.
Chinese people, like many at the Development Research Center of the State Council, had annual academic and policy-related exchanges with the Japanese economists at that time. We were divided into two camps, one for the industrial policies of Japan and the other against it；both camps had close ties with the Japanese economists. Director Ma Hong (so pronounced) [(音)]of the Development Research Center then heard about Komiya Ryutaro’s book in 1985 and thought highly of it. After negotiating with Komiya, he asked the Institute of Japanese StudiesinChinese Academy of Social Sciences to translatethe bookinto Chinese and subsequently published it in 1988.
However, Chinese researchers, except a few, did not go into depth of Komiya Ryutaro’s book. Even if they did read the book, like I did at that time, they did not appear to have really understood thelessons taught and detailed analyses made by Komiya Ryutaro in his book. More often than not, they tended to acceptideas of the Japanese, like officials of the Ministry of International Trade and Industry, orsome of our friends who supported the industrial policies of Japan, but the ideas of Japanese officials and the Chinese friends abovementioned had a main weakness; that is, they failed to make theoretical explanations.Take the slogan“we must prevent excessive competition” as an example. What is “excessive competition”? What does it mean in economics? Why do we have to curb excessive competition? They didn’t answer these questions theoretically; instead, they just make some introduction to the concrete measures against excessive competition.
It is therefore justifiable to say that we were not critical enoughand lacked the theoretical foundationwhen accepting the experience of Japan. This naturally led to somemistakes in practice later. By the end of the 20th century, the Chinese government went further in using the industrial policies. In the early 21st century when there was an overheated economy and the resulting overcapacity, the Chinese government had to resort to administrative measures to redress the distorted industry structure. Gradually, a policy systemarose, highlightingthe practice of“supporting some industries while curbing some others through assistance or incentives” or “assisting some while controlling some others”. The policy system uses various administrative means and control measures to adjust the industry structure. They even issued catalogues regularly that divided industries into three types, supporting some types whilesuppressing others.
In international forums or the world’s economic arena, industrial policies have already undergone many developments. As shown in the book of Komiya Ryutaro, industrial policies were seen as necessary indeed, but when? They are necessary when the market fails; then industrial policies can be used to address the market failure. In fact, translators of Komiya Ryutaro’s book made analyses and came to the conclusion that the Ministry of International Trade and Industry and other government agencies of Japan often went beyondthe excepted scope of application of the industry policies in theimplementation process.
Take “the need to achieve industry structure supererogation[要实现产业结构的高度化]” for instance. What does “industry structure supererogation” mean? What are the criteria of evaluation? Komiya Ryutaro said that such criteria are quite ambiguous in economic theories and that, more often than not, a good industry structure is the one expected by the public and the government agencies. In the end, price, foreign trade, foreign exchange and fiscal measuresare used to ensure the establishment ofthe expected industry structure. There are two possible outcomes in doing so; either the policy encounters market resistance and fails to be put in place, or the expected structureis eventually in place but at a huge cost. As proved by plenty of data, the industries that have really prospered in Japan were not the ones whose establishment and development were required by the Japanese Ministry of International Trade and Industry and other government organizations, but the ones that emerged because of market competition and entrepreneurs’pursuit.
In the 1980s, fewpeople, including Japanese themselves, insisted on continuing the industrial policies used during the early post-WWII period and the fast growth period. Some people call such policies “selective industrialpolicies”. In the international forums and in Japan itself, as emphasized by Komiya Ryutaro in his book, it was suggested that good industrial policies should be able to identify industry failures correctly and then take right actions to address them. Of course, there is also the question of how to trade off the pros and cons of market failure and government failure. It is not true that whenever there is a market failure, there is government intervention, for the government fails, too, sometimes. At such point, a measure that combines the two must be taken to deal with the question.
Other researchers went even further than Komiya Ryutaro who stressed the need to “redress market failure”; they placed the emphasis on how to enhance competition through industrial policies. That is to say, the ability to step up competition and prevent monopoly from harming economic development became an important part of a good industrial policy.
In this regard, it can be said that there have been many important achievements over the past years. The 2014 Nobel Prize for economics was awarded to the French economist Jean Tirole, who created the theoryof industrial organization. The first and foremost part of the theory of industrial organization is to use public polices to control market failure, enhance competition and regulate “market power” prevailing in the currentmarket competition. As stated in Tirole’s speech at the Nobel Prize awarding ceremony, entitled Market Failure and Public Policies, all economists recognized that the greatest advantage of market economy lies in its ability to ensure optimal allocation of resources and maximization of efficiency through competition, but perfect competition is almost non-existent, so public policies, namely industrial policies, is needed to control market failure and restrain market power. In brief, public policies aim exactly at preventing and controlling market failure, achieve the purpose of intensifying competition.
Philippe Aghion is also a new star in the field of industrial organization, to which he has made many contributions. According to him, a well-managed industrial policy, especially one that helps to promote competition, can foster productivitygrowth; in the absence of industrial policies, however, highly innovative businesses may elect to operate in different industries to prevent fierce competition between similar products , giving rise to a relatively high level of industry concentration.
On the other hand, industrial policies that encourage enterprises to operate in the same industry, as well as tax credits or other tax benefits, can help enterprises to set lower goals in terms of profit and thus strengthen their motives to make innovations. Both competition and well-designed industrial policies can hence generate innovation and promote growth of productivity. In this regard, competition and industry policies are complementary to each other.
That is to say, theoretical research has already made greatprogress, but regrettably, we neglectedto research into fundamental things and failed to keep up with the times， owing to the absence of a mindset to compare different theories. Recently, I have been reading some articles discussing industrial policies. A considerable number of the articles I read are concerned aboutJapanese industrial policies adopted in the early post-WWII period and the fast growing period, namely, the “selective industrial policies” or “vertical industry policies”, no matter whether or not they support promoting economic growth through industrial policies. The Japanese industrial policies advocated that government should first choose some industries and then use a set of means of control to support some and suppress others, the same as the whatChinese called “protecting some while controlling some others”. Such industrial policies are futile and even detrimental; this is no longer a disputed question. What peoplediscuss today is the industrial policies of another kind, namely, the “well-designed industrial policies” as Aghion said. What principles can we use to work out well-designed industry policies then? There are many concrete issues involved in this question and there have already been many literatures out there.Few of our discussions, however, involve this question, which put us at a great disadvantage.
So in order to identify a steady and sustainable path of development for China, we must research into fundamental problemsand putmost ofour attention and energyinto such research while keeping a close eye on the reality. We are expected to put forward a variety of opinionswith the support of a good theoretical structure. Moreover, we are expected to engage in a “relay race”, in which we compete with each other in delivering research results, which willget us closer to the truth and make our measures increasinglyeffective.
Fairly speaking, some of our recent propositions succeed in keeping up with the times. For example, there is a very important proposition in a paper on price reforms issued by the Central Committee of the CPC and the State Council in October of last year. It “requires that more efforts be made to establish a coordinative mechanism between the competition policies and the industry and investment policies in order to establish the fundamental role of competition policy”. That is to say, amongvarious economic policies or government packages, the state should give “competition policy” the fundamental role. In my opinion, an overall trend of the economic research aroundthe world is the shift in the selection of fundamental policy, from industrial policies to competition policies, or say, in the Chinese proposition, “to establish the fundamental role of competition policies”.
This is a very important proposition. But perhaps because we have somewhat kept a distance from, or say, overlooked the research findingsof international economists over the past decades, domestic response to this important decision of the Central Committee and the State Council, as I saw it, was not very strong. Nevertheless, by June this year, the State Council has begun to take steps according to the proposition in the decision concerning prices. It issued the Opinions on Establishing a Fair Competition Review System in Developing the Market System. In this paper, the State Council mandated that a fair competition review should be conducted with respect to any newly formulated policies and newly established systems, and subsequently also with respect to any existing policies and systems. All policies and systems that obstruct fair competition shall be revised accordingly. This is a very important and also a key step in our efforts to construct a market system.
Thedevelopment reflects the results of international research on the relationship between industrial policies and competition policies. However, to put this development into practice in future requires Chinese economists to keep up with the timesand make their contribution by basing their concrete policy proposals on more scientific analyses.
As I said just now, only by researching fundamental problems can we make effective proposals. How can we make progress in researching fundamental problems, then? There is the questionaboutexploiting the capital market. As early as in the 1980s, we have heard about this topicfrom lectures of Eastern Europeanreformist economists . They left us with an impressive and reflective proposition, that is, “free and earnest discussion is a basic condition precedent for successful reforms”, because only through free and practical discussion can we form correct understanding, correct opinions and correct guidelines and policies.
Back to these days, we need to mention Coase, a winner of the Nobel Prize. At the age of 100, he made a video speech at a financial and economic forum held in Beijing in 2011. Already 100-years-old, he insisted on delivering a speech through video, because he had some very important thingsto say to China. So what did he say? He said that todayChina is faced with an important challenge, which is the lack of a market for ideas, and that this is the cause of the many problems and crises facing Chinese economy. Development of a market of ideas will make the Chinese economy driven by knowledge more and therefore more sustainable. More importantly, interactingwith and integrating intothe diverse modern world outside China help China torevitalize herself and to reshape her rich cultural traditions; and one day, China will become a global center for commodity production and idea creation.
Some people among you may have the chance toseethat someday. All in all, by exploiting the market of idea, researching fundamental problems and exploring the long-term development path for China, we may seewhat Coasedescribed about China in the future!
This is the end of my speech. Thank you!
Wu Jinglian is the research fellow at Development Research Center of the State Council
Speech delivered at the opening plenary of the 3rd Dameisha Forum. Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
When participating in China Economic Forum (CEF) in Yesanpo last month, I used three phrases to express my expectations. Today, I think I can give the same phrases to Dameisha China Innovation Forum. They are “exploring the market of ideas”, “researching the fundamentals” and “exploring the long-term development path for the country”.
Why do I use these phrases? Because I have a feeling that people of vision in the government, the industries and the academics of China do have made great contributions to the reform and development of our country over the past years. But there is also a very visible weakness, which is that they have paid relatively more attention to the surface and phenomenal part of problems, but failed to address the problems’ coresand regularities, namely, the fundamentals.
Consequently, the results of our discussion and our contribution to the national development are limited to some countermeasures proposed on a case-by-case basis, and a lack of deep, sound and scientific bases would adversely affect the accuracy and effectiveness of our proposals. For the same reason, we are often satisfied with a smattering of knowledge when conducting research. In many cases when there is a new problem, though the essentials remain unchanged, the concrete methods and policies we propose to address it tend to be superficial rather than in-depth, as a result of inadequacy of insight into the nature behind the problem. Frequently, when the phenomenal part of a problem has changed but the core has not, we mistake the problem for a new one and work out new measures to respond to it, which leads to a “loop” of thinking. Generally a problem presents in different appearances every time; we come up with a brand-new measure to address the same problem every time, that is, every time a problem arises, we start from scratch to find out new countermeasures, instead of building up from past experience. In this way, we can’t, like in a relay race, get closer to the finishing line (the truth) step by step, or work out better solutions every time we come across essentially identical problems.
At China Economic Forum, I used an example to support the “loop” argument. The example is about the need to shift the extensive economic growth pattern, a problem that has persisted and troubled us for decades. Obviously, we have detours in this area, and progress seemed to be insufficient. Today, I want to cite another example, a problem that has been heatedly discussed these days, namely, whether our industrial policies are effective. In fact, we have already discussed this question for more than twenty years. The point is that we have failed to go into depth of the question step by step; instead, we have been looping in circles and staying at the surface of the problem. This reduces the effectiveness of our research work and undermines the effort to explore sustainable development paths for China.
The topic of industrial policies seemed to be quite new in the early 1980s, not just in China but also in a considerable number of countries. China borrowed industrial policy from Japan, who started to implement a set of industrial policies as early as in 1970s. It could be said that in Japan industrial policies played a positive role during the early post-WWII period and during the 60s and 70s when Japan experienced fast economic growth.
In the 1980s, after the oil crisis in particular, many western countries became much concerned about Japan’s industrial policies. Moreover, some people believed that Japan’s fast growth then was mainly due to its extremely successful industrial policies backed by the government, more specifically, by the Ministry of International Trade and Industry.
China first looked at industrial policy issue in March 1987, when some researchers of the Development Research Center of the State Council, where I work for, wrote a report, An Initial Research on the Industrial Policies of China. In the report they proposed that China should adopt industrial policies similar to those Japan adopted in the early post-WWII period and throughout the fast growing period, namely, the period from 1946 to 1970. This set of industrial policies was characterized by an integrated and coordinated use of various policies, including price, foreign exchange, fiscal, taxation and foreign trade policies, in order to promote the production, investment, R&D and incorporation in some industries while containing similar activities in some other industries. It was said that these measures could help establish an industry structure that optimizes the allocation of resources and sharpen the competitive edge of enterprises.
The State Council and Chinese leaders then replied to that report very soon and approved the proposal of the Development Research Center. The report was forwarded to the State Commission for Restructuring the Economic System, the State Planning Commission and the group drafting the report for the 13th National Congress of the Communist Party of China. Since then, introducing industrial policies was not only a hot topic, but also a very important mission that had to be carried out by the macroeconomic departments of the central government. Moreover, it was clearly a very important part of the concrete measures taken to implement the overarching slogan put forward during the 13th National Congress of the CPC, i.e., “the operating mechanism of the socialist commodity economy is for the state to regulate market and for the market to guide enterprises”.
However, what we failed to notice is that the industrial policies adopted by Japan in the early post-WWII period and in the later fast growing period, had been reflected on in Japan itself as early as in the 70s. In the early 1980s in particular, a group of economists headed by Professor Komiya Ryutaro of the University of Tokyo were well organized to make a comprehensive summary of the Japan’s industrial policies, particularly their theoretical foundation, formulation, achievements and weaknesses in the process of implementation. After two years’ work, they compiled a research report and released it in 1984.
The report was different from its predecessors that placed the emphasis of the industrial policies of Japan on political considerations and historical facts; instead, it made a comprehensive review and criticism of the theoretical foundation, actual content and empirical effect of the industrial policies from the modern economics’ point of view, and arrived at an important conclusion.
As the French-American economist Philippe Aghion said, in the 20th century and after the WWII in particular, some developing countries implemented industrial policies to promote their advantaged industries or to protect their local traditional industries from competitors in the developed countries. During the 1980s, however, such industrial policies have become notorious in that they obstructed progress [阻碍了进城？]and allowed government to choose winners and even to choose losers arbitrarily and therefore increased the risk of government being taken hostage by the enormous interest groups. Philippe Aghion estimated that the industrial policies adopted by Japan during the early post-WWII period and the fast growing period have already been reduced to infamy in the 1980s. The report written by Komiya Ryutaro was exactly a comprehensive summary of both experience and lessons of the Japan’s industrial policies during the periods aforesaid. It criticized the industrial policies of Japan from the perspective of modern economics.
Chinese people, like many at the Development Research Center of the State Council, had annual academic and policy-related exchanges with the Japanese economists at that time. We were divided into two camps, one for the industrial policies of Japan and the other against it；both camps had close ties with the Japanese economists. Director Ma Hong (so pronounced) [(音)]of the Development Research Center then heard about Komiya Ryutaro’s book in 1985 and thought highly of it. After negotiating with Komiya, he asked the Institute of Japanese StudiesinChinese Academy of Social Sciences to translatethe bookinto Chinese and subsequently published it in 1988.
However, Chinese researchers, except a few, did not go into depth of Komiya Ryutaro’s book. Even if they did read the book, like I did at that time, they did not appear to have really understood thelessons taught and detailed analyses made by Komiya Ryutaro in his book. More often than not, they tended to acceptideas of the Japanese, like officials of the Ministry of International Trade and Industry, orsome of our friends who supported the industrial policies of Japan, but the ideas of Japanese officials and the Chinese friends abovementioned had a main weakness; that is, they failed to make theoretical explanations.Take the slogan“we must prevent excessive competition” as an example. What is “excessive competition”? What does it mean in economics? Why do we have to curb excessive competition? They didn’t answer these questions theoretically; instead, they just make some introduction to the concrete measures against excessive competition.
It is therefore justifiable to say that we were not critical enoughand lacked the theoretical foundationwhen accepting the experience of Japan. This naturally led to somemistakes in practice later. By the end of the 20th century, the Chinese government went further in using the industrial policies. In the early 21st century when there was an overheated economy and the resulting overcapacity, the Chinese government had to resort to administrative measures to redress the distorted industry structure. Gradually, a policy systemarose, highlightingthe practice of“supporting some industries while curbing some others through assistance or incentives” or “assisting some while controlling some others”. The policy system uses various administrative means and control measures to adjust the industry structure. They even issued catalogues regularly that divided industries into three types, supporting some types whilesuppressing others.
In international forums or the world’s economic arena, industrial policies have already undergone many developments. As shown in the book of Komiya Ryutaro, industrial policies were seen as necessary indeed, but when? They are necessary when the market fails; then industrial policies can be used to address the market failure. In fact, translators of Komiya Ryutaro’s book made analyses and came to the conclusion that the Ministry of International Trade and Industry and other government agencies of Japan often went beyondthe excepted scope of application of the industry policies in theimplementation process.
Take “the need to achieve industry structure supererogation[要实现产业结构的高度化]” for instance. What does “industry structure supererogation” mean? What are the criteria of evaluation? Komiya Ryutaro said that such criteria are quite ambiguous in economic theories and that, more often than not, a good industry structure is the one expected by the public and the government agencies. In the end, price, foreign trade, foreign exchange and fiscal measuresare used to ensure the establishment ofthe expected industry structure. There are two possible outcomes in doing so; either the policy encounters market resistance and fails to be put in place, or the expected structureis eventually in place but at a huge cost. As proved by plenty of data, the industries that have really prospered in Japan were not the ones whose establishment and development were required by the Japanese Ministry of International Trade and Industry and other government organizations, but the ones that emerged because of market competition and entrepreneurs’pursuit.
In the 1980s, fewpeople, including Japanese themselves, insisted on continuing the industrial policies used during the early post-WWII period and the fast growth period. Some people call such policies “selective industrialpolicies”. In the international forums and in Japan itself, as emphasized by Komiya Ryutaro in his book, it was suggested that good industrial policies should be able to identify industry failures correctly and then take right actions to address them. Of course, there is also the question of how to trade off the pros and cons of market failure and government failure. It is not true that whenever there is a market failure, there is government intervention, for the government fails, too, sometimes. At such point, a measure that combines the two must be taken to deal with the question.
Other researchers went even further than Komiya Ryutaro who stressed the need to “redress market failure”; they placed the emphasis on how to enhance competition through industrial policies. That is to say, the ability to step up competition and prevent monopoly from harming economic development became an important part of a good industrial policy.
In this regard, it can be said that there have been many important achievements over the past years. The 2014 Nobel Prize for economics was awarded to the French economist Jean Tirole, who created the theoryof industrial organization. The first and foremost part of the theory of industrial organization is to use public polices to control market failure, enhance competition and regulate “market power” prevailing in the currentmarket competition. As stated in Tirole’s speech at the Nobel Prize awarding ceremony, entitled Market Failure and Public Policies, all economists recognized that the greatest advantage of market economy lies in its ability to ensure optimal allocation of resources and maximization of efficiency through competition, but perfect competition is almost non-existent, so public policies, namely industrial policies, is needed to control market failure and restrain market power. In brief, public policies aim exactly at preventing and controlling market failure, achieve the purpose of intensifying competition.
Philippe Aghion is also a new star in the field of industrial organization, to which he has made many contributions. According to him, a well-managed industrial policy, especially one that helps to promote competition, can foster productivitygrowth; in the absence of industrial policies, however, highly innovative businesses may elect to operate in different industries to prevent fierce competition between similar products , giving rise to a relatively high level of industry concentration.
On the other hand, industrial policies that encourage enterprises to operate in the same industry, as well as tax credits or other tax benefits, can help enterprises to set lower goals in terms of profit and thus strengthen their motives to make innovations. Both competition and well-designed industrial policies can hence generate innovation and promote growth of productivity. In this regard, competition and industry policies are complementary to each other.
That is to say, theoretical research has already made greatprogress, but regrettably, we neglectedto research into fundamental things and failed to keep up with the times， owing to the absence of a mindset to compare different theories. Recently, I have been reading some articles discussing industrial policies. A considerable number of the articles I read are concerned aboutJapanese industrial policies adopted in the early post-WWII period and the fast growing period, namely, the “selective industrial policies” or “vertical industry policies”, no matter whether or not they support promoting economic growth through industrial policies. The Japanese industrial policies advocated that government should first choose some industries and then use a set of means of control to support some and suppress others, the same as the whatChinese called “protecting some while controlling some others”. Such industrial policies are futile and even detrimental; this is no longer a disputed question. What peoplediscuss today is the industrial policies of another kind, namely, the “well-designed industrial policies” as Aghion said. What principles can we use to work out well-designed industry policies then? There are many concrete issues involved in this question and there have already been many literatures out there.Few of our discussions, however, involve this question, which put us at a great disadvantage.
So in order to identify a steady and sustainable path of development for China, we must research into fundamental problemsand putmost ofour attention and energyinto such research while keeping a close eye on the reality. We are expected to put forward a variety of opinionswith the support of a good theoretical structure. Moreover, we are expected to engage in a “relay race”, in which we compete with each other in delivering research results, which willget us closer to the truth and make our measures increasinglyeffective.
Fairly speaking, some of our recent propositions succeed in keeping up with the times. For example, there is a very important proposition in a paper on price reforms issued by the Central Committee of the CPC and the State Council in October of last year. It “requires that more efforts be made to establish a coordinative mechanism between the competition policies and the industry and investment policies in order to establish the fundamental role of competition policy”. That is to say, amongvarious economic policies or government packages, the state should give “competition policy” the fundamental role. In my opinion, an overall trend of the economic research aroundthe world is the shift in the selection of fundamental policy, from industrial policies to competition policies, or say, in the Chinese proposition, “to establish the fundamental role of competition policies”.
This is a very important proposition. But perhaps because we have somewhat kept a distance from, or say, overlooked the research findingsof international economists over the past decades, domestic response to this important decision of the Central Committee and the State Council, as I saw it, was not very strong. Nevertheless, by June this year, the State Council has begun to take steps according to the proposition in the decision concerning prices. It issued the Opinions on Establishing a Fair Competition Review System in Developing the Market System. In this paper, the State Council mandated that a fair competition review should be conducted with respect to any newly formulated policies and newly established systems, and subsequently also with respect to any existing policies and systems. All policies and systems that obstruct fair competition shall be revised accordingly. This is a very important and also a key step in our efforts to construct a market system.
Thedevelopment reflects the results of international research on the relationship between industrial policies and competition policies. However, to put this development into practice in future requires Chinese economists to keep up with the timesand make their contribution by basing their concrete policy proposals on more scientific analyses.
As I said just now, only by researching fundamental problems can we make effective proposals. How can we make progress in researching fundamental problems, then? There is the questionaboutexploiting the capital market. As early as in the 1980s, we have heard about this topicfrom lectures of Eastern Europeanreformist economists . They left us with an impressive and reflective proposition, that is, “free and earnest discussion is a basic condition precedent for successful reforms”, because only through free and practical discussion can we form correct understanding, correct opinions and correct guidelines and policies.
Back to these days, we need to mention Coase, a winner of the Nobel Prize. At the age of 100, he made a video speech at a financial and economic forum held in Beijing in 2011. Already 100-years-old, he insisted on delivering a speech through video, because he had some very important thingsto say to China. So what did he say? He said that todayChina is faced with an important challenge, which is the lack of a market for ideas, and that this is the cause of the many problems and crises facing Chinese economy. Development of a market of ideas will make the Chinese economy driven by knowledge more and therefore more sustainable. More importantly, interactingwith and integrating intothe diverse modern world outside China help China torevitalize herself and to reshape her rich cultural traditions; and one day, China will become a global center for commodity production and idea creation.
Some people among you may have the chance toseethat someday. All in all, by exploiting the market of idea, researching fundamental problems and exploring the long-term development path for China, we may seewhat Coasedescribed about China in the future!
This is the end of my speech. Thank you!
Wu Jinglian is the research fellow at Development Research Center of the State Council
Speech delivered at the opening plenary of the 3rd Dameisha Forum. Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
