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Second thoughts on industrial upgrade

By Zhu Qiwen (China Daily)
Updated: 2009-07-06 07:45

Replacing low-end manufacturing with more advanced industries has been the mantra for years as China pursued a sustainable growth model.

But now, the worst global financial crisis in decades has propelled Chinese people to rethink the ongoing industrialization.

At the 2009 China Economic Forum over the weekend, economists suggested that industrial upgrade was not all about jumping into so-called high-tech or modern industries. Instead, Chinese enterprises should focus on climbing up the value chain within their own sectors.

"There is no such a thing as sunset industry in this country," said Jin Bei, director of Institute of Industrial Economics under the Chinese Academy of Social Sciences. "China's industrial upgrade means not only moving from low-end industries to high-end ones. More importantly, it means improvement within industries and manufacturing superior 'Made-in-China' products."

Over the past three decades, China has successfully capitalized on its comparative advantage of a huge supply of cheap but relatively skilled labor to rise as a global manufacturing power.

Yet, the rising cost of labor, resources and environment in recent years has considerably bitten into domestic manufacturers' paper-thin profits. Hence, even before the global recession hit Chinese exporters hard, some local governments have tried to discard labour-intensive manufacturers and replace them with higher-value industry and services.

Such an ambition in itself is not that undesirable. On the contrary, it tallies well with China's long-term pursuit of energy-saving, environment-friendly and sustainable growth. The problem is that it cannot go against the Chinese reality: that some of the better-developed areas need an industrial makeover more urgently than others.

The low-value businesses of many Chinese manufacturers may be of little help in sharpening the country's international competitiveness. But they are valuable in providing jobs for the world's largest population and helping to speed up the country's urbanization and industrialization.

This is particularly true in the time of crisis. Tentative signs, so far this year, are that many manufacturers of low-end products appear to be holding up better than those producing higher-value exports.

A more serious consequence of a blind faith in industrial upgrade is that it may give rise to misconceptions about industrial restructuring.

"While financial bubbles in developed countries wreaked havoc on the world economy, misleading ideas about the financial sector are spreading into countries like China," pointed out Fan Gang, a prominent economist and member of the central bank's monetary policy committee.

Some people think that the financial industry can bring about quick money. Some even believe that only third-class people will engage in manufacturing while first-class people do finance.

Such a mentality explains why even county-level governments in the country are talking about building a financial centre within their jurisdiction, and why some others have fixed their eyes on the share of the service sector in local economies regardless of real demand.

"It is time for us to review those policies that depress low-end manufacturing," urged Fan.

With a per capita GDP of about $3,000, it seems normal for China to have a bigger manufacturing sector.

China's industrial output expanded 8.9 percent in May from a year earlier, the highest monthly growth rate since last October. Such accelerated industrial expansion has given a huge boost to recovery.

Certainly, the country's industrial upgrade strategy needs to be re-examined from more than such a short-term perspective.

China should ensure openness in accelerating industrial development, said Liu Shijing, vice director of the Development Research Centre of the State Council. For instance, the country has given top priority to what is narrowly defined as "independent innovation".

Should we not regard all innovative activities that are good for the country's technical progress and industrial upgrade as independent innovation, asked Liu.

Why not, when even such a global recession cannot reverse the trend of globalization. After all, China's industrial upgrade is no longer a domestic issue. It is already a key part of globalized production.