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Neosupply economics began to advocate supply-side reform in 2012, and the following year, it started to exert a positive impact on relevant economic policies and reform thought. In 2015, the Central Committee of the Communist Party of China (CPC) and the State Council officially initiated supply-side structural reform. In December 2018, the Central Economic Working Conference made it clear that the principal contradiction in China's current economic development is the structural mismatch resulting from the supply side failing to evolve in step with demand. As a result, China will continue to make supply-side structural reform the main task of its economic policy and push forward various economic reforms.
What is supply-side reform? Why does the Chinese Government put so much emphasis on it? What does it consist of?
First, China's economic growth has slowed down since 2012, after over three decades of rapid growth. In the face of this situation, China's decision makers didn't take the old path of stimulating the economy through monetary and fiscal policies. Instead, they paid attention to issues such as the supply conditions of production factors, the market's supply pattern and the supply structure of products and services, hoping to realize quality economic growth through reforms of these longstanding and deep-seated problems.
Second, in essence, supply-side reform is not simply one or two reform measures, but a set of economic principles and reform concepts based on China's specific economic development stage. All industries and regions should come up with their own reform measures based on these principles and ideas. However, if they don't fully grasp the theories and instead implement them perfunctorily, supply-side reform will turn into dogmatism and hurt China's economy.
It is because of its special features that supply-side reform is misunderstood both inside and outside of China to some degree. Thus, it needs to be explained in a comprehensive way. Nationally, due to a lack of understanding of the supply-side reform theory, some provinces used direct administrative intervention to meet preset targets instead of letting the market decide when to reduce excess capacity, contradicting the reform's original intention. Globally, there is hardly any comprehensive or systematic explanation of the economic thought and policies behind the reform. Many foreign scholars and political figures confuse China's neosupply economics with the U.S. supply-side economics of the 1980s. They regard supply-side reform as the derivative of Reaganomics, named for former President Ronald Reagan, which is actually not the case.
In fact, after over 30 years of high-speed growth, the marginal effect of policies for stimulating total demand has diminished, while the reduction of the growth dividend from the supply side has become more apparent. First, seen from the institutional conditions of growth, with the basic completion of the company system reform, the establishment of product and factor markets and China's integration into the world market, dividends created by the company system reform have declined. Second, the supply conditions of production factors have undergone tremendous change in China, which means dividends from the population, land and large savings have decreased. Third, after the third industrial revolution, the foreign technology dividend has been shrinking. This is the basic economic background of China's supply-side reform.
Against such a backdrop, as China transforms from a planned economy to a market economy and from an aging supply structure to a new one, it should pay more attention to lowering the costs of production factor supply, raising supply efficiency and improving institutions and conditions for market-oriented development for the purpose of making full use of the results of the third industrial revolution. By summarizing and learning from the successful practices of the past 40 years, China can push forward the development of a new supply structure.
In the process of going from a planned economy to a market economy, the country is inevitably facing many administrative intervention and institutional constraints that are left over from the planned economic system. Those barriers limit product and service supplies, or production factor supply. The strategic significance of deepening supply-side reform is to lift such constraints and nurture new supplies to enhance the ability to create new demand for products, services and production factors.
The research priorities of development economics are to study how to transition from an economy based on agriculture to one based on industry, and from a rural to an urban economy. This is similar to what China experienced over the past four decades and China's development practices may have taken some theoretical guidance from development economics. But today, in the face of prominent problems such as excessive capacity in the traditional manufacturing industry and aging supply, China should transform from an economy driven by the traditional manufacturing industry to one dominated by the service industry. Currently, the country is at a critical juncture of transition from an economy with aging supply to one with new supply. How can this goal be achieved? How should China upgrade its supply structure so that it leads to a consumption upgrading? These are urgent questions for supply-side reform.
In conclusion, China's supply-side reform is not a slogan or the Chinese version of Reaganomics. It is a major strategic reform aimed at ensuring stable growth for the next 40 years by deepening institutional reform, improving factor supply conditions and utilizing modern technologies to create new dividends. Meanwhile, it's also a series of reform measures for eliminating old supply, creating new supply and demand, and in a new period, replacing old growth drivers with new ones in a market-oriented manner as the third industrial revolution comes to an end. In this sense, China's neosupply economics and supply-side reform are of significance not only for transforming economies and emerging market economies, but also for mature market economies that want to reduce costs for factor supply and upgrade their supply structure.
Teng Tai
Beijing
January 2019