Justin Yifu Lin on China‘s "dual circulation," "new development paradigm," "high-quality development," etc.
The senior Chinese economist and govt advisor says comparative advantages remain the key.
In the first and second parts published in Pekingnology earlier, Lin shared his thoughts on the "profound changes unseen in a century" and the “Chinese path to modernization,” two major CPC theoretical developments in recent years.
It’s not easy to understand Party speak, and I hope the more relatable accounts by the former Senior Vice President and Chief Economist of the World Bank (2008-2012) will help you get closer to how Beijing thinks about China and the world.
The text is sourced from the 新经济学家 New Economist WeChat blog, and Lin has been contacted by me before this translation. - Zichen
Justin Yifu LIN is Dean of Institute of New Structural Economics, Dean of Institute of South-South Cooperation and Development and Professor and Honorary Dean of National School of Development at Peking University. He was the Senior Vice President and Chief Economist of the World Bank, 2008-2012. Prior to this, Mr. Lin served for 15 years as Founding Director and Professor of the China Centre for Economic Research (CCER) at Peking University. He is Councillor of the State Council and a member of the Standing Committee, Chinese People’s Political Consultation Conference.
Lin was continuing from his thoughts on the CPC’s five self-identified characteristics of the “Chinese path to modernization”
It is the modernization of a huge population.
It is the modernization of common prosperity for all.
It is the modernization of material and cultural-ethical advancement.
It is the modernization of harmony between humanity and nature.
It is the modernization of peaceful development.
These five characteristics are indeed commendable, but the crucial question is how to achieve them. In this regard, I've proposed guidance based on Marxist historical materialism and dialectical materialism, using modern economic methods to summarize China's unique development experience. This is encapsulated in the concept of New Structural Economics. In essence, the most critical aspect is to liberate the market during the development process, based on a realistic assessment of the existing material conditions and the resources of various regions, including capital, labor, and natural resources. These conditions, which are determined by the material advantages described by Marx, can then be translated into comparative advantages.
With the combined efforts of an effective market and an active government, we can transform these comparative advantages from potential to reality and establish them as a competitive edge in each region. If this approach is implemented, the goals of the Chinese path to modernization can be simultaneously achieved.
First, let's talk about China's vastness, with 9.6 million square kilometers and a population of 1.4 billion. Different regions have varying wealth and resource conditions. For instance, the eastern coastal regions have experienced rapid development, accumulated more capital, and have a large population but fewer natural resources. In contrast, the central regions have favorable conditions for agricultural production, relatively less capital, and lower income levels.
The western regions are characterized by vast land with fewer people but abundant natural resources. When viewed from a materialistic perspective, these regions have different endowments that lead to different comparative advantages. For example, in regions with relatively more capital, the industries that are particularly advantageous are those that are capital-intensive. In areas with a comparative advantage in natural resources, the primary industries will typically be those that rely on relatively dense natural resources. In regions where agricultural resources are favorable, their comparative advantage naturally lies in industries that require more land. Irrespective of the current conditions, each region, if it follows the principles of emancipating the mind, and seeking truth from facts, will always have some comparative advantage.
Comparative advantage, while sometimes abstract in economic terms, essentially means that you should excel in what you can do well with your existing resources. Then, by promoting the industries with comparative advantages and creating an environment of an effective market and a proactive government, you can help entrepreneurs grow and strengthen these industries, making them competitive in both domestic and international markets.
And this is precisely what Marxism emphasizes: emancipating the mind and seeking truth from facts. You consider your current conditions, what you have, and what you can do well based on what you possess. Then, you work on making it bigger and stronger. If this approach is followed, every region can develop, regardless of its current conditions, as there is always something it can do well. This is the first point.
The second point is that if you develop according to comparative advantages, firstly, every region can develop rapidly when following their comparative advantages and become competitive in the market, which is efficient and crucial. Looking at the national level, in comparison to developed countries, China's per capita GDP is currently around $12,000 when calculated at market exchange rates, while the United States has already reached $70,000. We have roughly one-sixth of their per capita income. Developed countries have high income levels and abundant per capita capital. Of course, we now have more capital than before the reform and opening up, but our capital per capita is relatively less. The industries where we have a comparative advantage are those that require more labor and less capital.
If we develop the industries where we have comparative advantages, the most important aspect is that they create employment opportunities. These industries require a larger workforce, which can generate more job opportunities. Why are job opportunities important? Let's take a look at the biggest difference between people with high and low incomes. Those with lower incomes, the poorer population, primarily rely on labor employment for their income, while the wealthier individuals earn more from their capital investments. When we develop according to comparative advantages, we enable these lower-income individuals to be fully employed, allowing them to share the outcome of economic development. Furthermore, the economy becomes highly competitive, leading to rapid development and the accumulation of capital.
Then capital will shift from being relatively scarce to being relatively abundant. Conversely, this will lead labor to transition from being relatively abundant to relatively scarce, leading to a rapid increase in wage growth. For example, in the 1980s, when comparing labor resources to capital, capital was relatively low, and there was a relatively high labor supply. Hiring a domestic helper or nanny in the 1980s might have cost around 20 to 40 RMB. By the 1990s, the cost of hiring such services had increased to around 200 RMB. Today, hiring a domestic helper in Beijing could cost several thousand yuan per month, possibly even exceeding ten thousand yuan (which is equivalent to over $ 1,367.3), as labor has become relatively scarce, resulting in rapid wage increases.
Wealthy individuals generate most of their income from capital returns. The measurement of capital returns is typically done through interest rates. Overall, interest rates have been declining, albeit not at a rapid pace. For example, comparing the 1980s and 1990s, interest rates have been decreasing. In the 1980s, wages were around 30 to 40 yuan, and interest rates were between 6% and 7%. Nowadays, wages have increased to several thousand yuan, but interest rates have dropped to around 4% or 5%. This has led to a significant depreciation in the value of the assets owned by wealthy individuals.
So, think about it – in such a situation, the assets owned by poorer individuals tend to appreciate relatively, while the assets owned by the wealthy depreciate significantly. Under these circumstances, income distribution can become more equitable. By emphasizing comparative advantage in development, the economy can grow rapidly. Government finances and tax revenues can increase substantially, and when focusing on comparative advantage in development, as analyzed by the New Structural Economics, these businesses do not require protection because they have their own competitiveness and can thrive through their own management.
The government should provide protection only to industries in regions that lack comparative advantages. If regions can develop industries without government intervention, government finances and tax revenues can be primarily allocated to redistribution, thereby addressing inherent and regional disparities.
This approach allows the government to allocate more funds to education and workforce development, facilitating shared prosperity during periods of rapid economic growth. In the past, the focus was typically on efficiency in primary distribution and fairness in redistribution. However, I recall that around the Eleventh Five-Year Plan, there was a shift towards simultaneously achieving fairness and efficiency in primary distribution, with a greater emphasis on fairness in secondary distribution.
Actually, this idea was initially proposed by me, and I substantiated it through extensive empirical research. In fact, when we look at international data, we can observe that the more countries develop according to their comparative advantages, the lower their Gini coefficients, which indicates more equitable income distribution.
I've also conducted extensive research using intra-provincial data within China, and similarly, provinces that develop in accordance with their local comparative advantages tend to have lower Gini coefficients and more equitable income distribution. For instance, if we consider Zhejiang as a model for achieving common prosperity, you can see that its development aligns well with the concept of comparative advantage. So, to achieve common prosperity for everyone, it essentially comes down to the first principle, which is the need to develop based on the comparative advantages of each region. This approach enables us to attain both efficiency and fairness in the initial distribution because it's efficiency that leads to prosperity, which, in turn, promotes fairness. In secondary distribution, we can address any inherent inequalities.
Furthermore, when we develop the economy based on comparative advantages, economic growth accelerates, and material standards of living improve. If we can achieve common prosperity, it has a positive impact on our spiritual well-being. As the Chinese saying goes, "Only when the granary is full will people learn etiquette; only when people are well-fed and clothed will they know honor and shame." When people's income levels increase, they tend to place more importance on etiquette and honor. Conversely, in times of poverty, the focus often shifts away from these values due to the struggle for survival. Therefore, to promote the harmonious development of material well-being and cultural-ethical standards, it is imperative that everyone achieves common prosperity, and this can only be accomplished by developing in accordance with comparative advantages.
The third and fourth aspects, if developed according to comparative advantages, will also lead to harmony between humans and nature. Because, as everyone becomes prosperous and increasingly affluent, in such circumstances, our expectations for a better life will rise. The aspiration for a better life was put forward in the 19th National Congress. We also need a better living environment and improved ecological conditions. From the perspective of families, there is a pursuit of ecological civilization. The government should prioritize the people, and when the people aspire for policies, the government will pay more attention to ecological concerns.
From a business perspective, when the government introduces policies related to ecological conservation and environmental protection, businesses may or may not be willing to comply. If businesses are struggling to survive, their enthusiasm for implementing these eco-friendly policies may be low. When they do make efforts, it's often superficial. They might only follow the rules when government environmental inspectors are present, but as soon as the inspectors leave, they may resort to polluting practices. In most cases, this behavior is due to the fact that these businesses lack a competitive advantage and struggle to make a profit.
Conversely, if businesses have a competitive advantage and possess the necessary capabilities, their enthusiasm for implementing environmental protection measures is usually high. From the government's perspective, they need to balance the interests of the general population and the economic development of local regions. In cases where businesses lack the ability to comply with environmental regulations, the government might need to provide protection and subsidies.
In such situations, the government may have mixed feelings when enforcing environmental policies. If they were to strictly enforce these policies, it could lead to the closure of many businesses, which would result in increased local unemployment, reduced tax revenue, and various social issues. Therefore, the government might not wholeheartedly enforce these policies. I have conducted extensive research on this matter and have found that industries that align with their comparative advantages tend to exhibit stronger commitment to environmental protection measures.
Simultaneously, in regions where development aligns more closely with their comparative advantages, the local government's commitment to environmental protection is typically stronger. This underscores the importance of achieving harmony between people and nature, and the fundamental prerequisite for this is that regions should develop according to their comparative advantages. When all regions and industries develop in alignment with their comparative advantages, it naturally leads to a path of peaceful development.
So, by developing according to comparative advantages, industries that have these advantages can thrive and capture both domestic and international markets. Conversely, for industries where domestic production costs are high and not in line with comparative advantages, it's essential to utilize international resources. This approach necessitates the full utilization of both domestic and international markets and resources, creating a globalized and open economic framework for development.
As we progress in this development process and open up our markets, we provide access to our markets for other countries worldwide. When each region develops according to its comparative advantages, mutual and beneficial trade becomes possible. Unlike Western-style modernization, which often involves colonization and exploitation, our path is rooted in globalization and mutually beneficial trade, fostering a path of peaceful development. This underscores the significant differences between the Chinese and Western paths to modernization.
However, if we follow the Chinese path to modernization, adhering to the Marxist principle of materialism, and developing based on the material foundations and comparative advantages of each region, we can simultaneously achieve balanced regional development. This approach ensures that people across the nation can achieve common prosperity, promoting harmony between humans and nature, and fostering a harmonious development of material well-being and cultural-ethical standards. This way, our development can be characterized by coordinated development of both material and cultural aspects, achieving common prosperity for all.
High-quality development is the top priority in the construction of a socialist modernization nation, and it remains the focal point of our efforts. Of course, we must first understand what constitutes high-quality development. The 20th National Congress of the CPC report primarily emphasizes two aspects of high-quality development. First, it requires the complete, accurate, and comprehensive implementation of the new development philosophy. Second, it involves expediting the establishment of a new "dual circulation" development paradigm with domestic economic circulation as the mainstay while international economic cycle remains its extension and supplement. These two aspects represent the significant components of the new development philosophy.
We all know that the new development philosophy has five dimensions: innovation, coordination, green, openness, and sharing. Implementing the new development philosophy must be done comprehensively, accurately, and completely, posing a challenge to our officials.
If we only focus on the speed of economic growth, each region still knows how to proceed. However, when we talk about the five dimensions of the new development philosophy, what often happens? People tend to forget or neglect some aspects.
So, after the General Secretary introduced the new development philosophy, it was observed that in the process of implementation, various regions frequently sacrificed one dimension for another. For example, in the name of green development, they might sacrifice coordination, and for the sake of coordination, they may sacrifice greenness, openness, or sharing. Therefore, it was emphasized that it must be implemented comprehensively, accurately, and completely. All these five dimensions are excellent, but the real challenge lies in how to do it comprehensively, accurately, and completely.
But upon closer examination, the five seemingly separate dimensions are, in fact, unified. We understand that innovation is the primary driving force because the new development philosophy is centered around progress. To achieve development, productivity levels must continually improve, and to accomplish that, there must be ongoing technological and industrial innovation.
Existing technological innovation is a form of innovation, and industrial upgrading is another form of innovation. When innovation serves as the primary driving force, what principles must be followed? Again, the principle of comparative advantage. If you want to use overseas new technology, it must align with the local factor endowment structure that determines its comparative advantage. When entering a new industry, this new sector must also align with the comparative advantage determined by the local factor endowment structure. If you can do this, then other aspects can essentially be achieved.
This point is crucial in our understanding because traditionally, we generally consider more advanced technology and industries as better. However, in reality, for development, the industries you invest in must be competitive in the market. If they lack competitiveness, they may require protection and subsidies. If protection and subsidies are needed, it's less likely for them to open up because if they open up without competitiveness, they risk failure. Here's an example: in the 1980s, our automobile industry was relatively backward. To improve the level of our automobile industry, we began using joint ventures to exchange market access for technology.
I believe you may recall that our first joint venture with a foreign company in the automobile industry was between Wuhan Er Qi/2nd Automobile and Citroën, a French automaker. This joint venture produced the Fukang car. In the 1980s, this was the first foreign joint venture for automobile products. The Fukang car was required to use the exact same technology as in France, and what was that technology? It was a fully automated technology. Because French labor was expensive, they largely used robots to replace workers in the production process. In terms of labor productivity, it was very high because the entire factory had very few workers. At that time, we believed that higher labor productivity was better. So, our requirement was that the entire production process and production rights from France must be brought to China intact.
Many of you may have a strong impression of this. At that time, the Fukang car was considered to have good quality, but the cooperation with France was very challenging, and it accumulated losses. The production line for Fukang required an investment of over 20 billion RMB in the 1980s, and I believe if we adjust for inflation to today, it would be at least over 200 billion RMB ($ 27.3 billion). With such a large investment in the production line, the costs would become very high.
While it is true that at that time, the protective tariffs for domestic cars in our country was 210%. The price of a car sold in China was three times that in France. Even at this threefold price, with such a significant capital investment, it was still not profitable. What was the purpose of France coming to China for a joint venture production? It was for making money. If it doesn't make money, they would be unhappy and withdraw. In the 1990s, we started a joint venture with Honda in Guangzhou to produce the Accord, and this joint venture was relatively successful and harmonious.
So, we know that the Fukang car had a 1.6-liter engine, while the Accord had a 2.0-liter engine. Fukang was considered an economy car, and the Accord was a mid-range car. Why did the joint venture with Honda in Guangzhou to produce the Accord go very smoothly and profitably? It's because they made money. Why could they make money? Their production line only cost around 2 billion RMB ($ 273.5 million). Normally, the Accord is in a higher tier compared to Fukang, and if you were to build the same fully automated production line in Japan, the investment might be not just 20 billion but possibly over 100 billion RMB.
However, in reality, labor is cheaper in China, so there are many areas where labor can replace robots. When I visited the Accord factory, I saw a large number of workers. In our current market, we are competing based on the total cost. Since the Accord uses a lot of cheap labor instead of expensive capital, their production costs are low, and they can make money by being competitive in this regard.
So, I want to emphasize here that when you consider a car like the Accord, its technology is, of course, more advanced compared to the technology used in older Guangzhou-made or Shanghai-branded cars. However, the choice of technology should be determined by combining the comparative advantage of local factors and endowments to decide what kind of technology is most suitable for the situation.
This technology is certainly innovative compared to the past, but this innovation, as the first driving force, must be combined with the local comparative advantage. If you enter a place where you have a comparative advantage, you'll have competitiveness, and you can make money. Only by aligning with comparative advantages can you drive economic development. Protecting and subsidizing industries can not promote economic development. The new development philosophy must raise productivity and stimulate economic growth.
If you engage in technological innovation and industrial upgrading based on comparative advantages, you'll be competitive, and economic development will be faster. With faster economic development, the government's fiscal revenue will increase significantly. Moreover, with higher fiscal revenue, you can support industries that are competitive and don't require protection and subsidies. This revenue can then be used to address deficiencies, reduce the urban-rural gap, narrow regional disparities, and invest in areas like education that need improvement during our economic development. This is the essence of coordination.
If the industry you're developing lacks a comparative advantage, even if technological innovation is considered the primary driving force, the government won't have the capacity to coordinate because coordination requires money. However, if the industries developed align with comparative advantages, income levels will rise quickly, increasing the demand for environmental and green development. The government should respond to the people's demands by formulating environmental policies. Businesses that align with comparative advantages will have the capacity to implement these environmental policies. Conversely, unprofitable businesses will merely make superficial efforts toward environmental protection. Therefore, for green development to take place, the prerequisite is that development in various regions must align with their respective comparative advantages.
In this context, families, governments, and businesses all have the motivation and capability to pursue green development. Regarding openness, development according to comparative advantages means that if we have such advantages, we can develop industries that can occupy both domestic and international markets. If we lack such advantages, we'll need to rely more on international resources, thus ensuring the full utilization of both domestic and international markets and resources for development.
If you don't develop according to comparative advantages, and businesses lack the self-capacity to survive, you can't truly open up. Therefore, openness should also align with comparative advantages. If you develop according to your comparative advantages, it can create employment opportunities most effectively and enable more people to enjoy the benefits of development.
On the other hand, if you don't develop based on your comparative advantages, low-income groups won't be able to achieve full employment. How can you promote sharing in such a scenario? So, in this context, complete and accurate implementation of the new development philosophy is crucial. The key is to understand that it is a development concept, aimed at increasing productivity levels, enhancing competitiveness, and fostering innovation.
And when it comes to innovation, it's essential to tailor the new technologies to the specific comparative advantages of each region. You should make the best use of the relatively abundant resources in that area. For example, if you have a rich labor force, you should focus on labor-intensive technologies. If you can do this, you can effectively achieve innovative, coordinated, green, open and shared development simultaneously.
Now, how can you accelerate the dual circulation where domestic and overseas markets reinforce each other, with the domestic market as the mainstay? This is another challenge for officials because they have to work towards two goals. When you give them one goal, they usually know how to approach it. However, when you present multiple objectives to be achieved simultaneously, they can often be perplexed. Especially when we introduced the concept of the new development paradigm, emphasizing the domestic circulation as the mainstay, it garnered significant attention both domestically and internationally.
In the past, our development strategy focused on making full use of both domestic and international markets and resources. At that time, it was commonly believed that China had an outward-oriented economy. However, when fostering a new pattern of development focused on the domestic economy was proposed, many people thought that China was abandoning its previous outward-oriented development approach and adopting an inward-oriented one. China has always been the world's largest trading nation, and a change in China's development approach not only affects China but also has a global impact. As I mentioned earlier, trade is mutually beneficial and win-win. In such a scenario, the benefits received by small economies are greater than those received by large economies.
Currently, we are the largest trading partner with over 120 countries worldwide. With another 70 to 80 countries, we are the second-largest trading partner. Apart from the United States, where our economic indicators are roughly equivalent, the third-largest economy, Japan, is only one-third the size of ours. Therefore, it benefits more in trade. So, if China were to shift towards a more inward development approach, it wouldn't just impact China but the entire world.
In this situation, I think we need to ask why we should propose a new development paradigm and how to implement it. These are the questions that everyone must consider.
Firstly, when we discuss the introduction of the "dual circulation" development strategy with domestic circulation as the main focus, we need to consider if this is our chosen development approach. We should delve into the reasons why the General Secretary started talking about this in March 2020 and why the Political Bureau passed it in May. I believe short-term factors played a role. In 2020, the COVID-19 pandemic emerged, and China was among the first to effectively control it. After the initial outbreak in early 2020, we managed to contain it in about a quarter, and by the second quarter, our production and daily life had largely returned to normal. While COVID-19 posed a global challenge, we effectively controlled it domestically. In contrast, Europe, the United States, and other countries struggled to control the pandemic, leading to significant disruptions in both developed and emerging nations. International trade experienced a sharp contraction. Although our production and daily life normalized in the second quarter, foreign demand, aside from the high demand for pandemic control products like masks, decreased significantly. As our production increased and foreign demand decreased, there was a need to rely more on the domestic market to absorb the surplus. This is one of the reasons.
However, I don't consider this to be the primary reason because the new development paradigm is a long-term policy, and I am skeptical that the COVID-19 pandemic is the main driver. Another factor that people might mention is the U.S. decoupling from us, which will undoubtedly impact trade in this situation. However, the U.S. is only decoupling from us in certain high-tech products. Even if the U.S. were to completely cut off the supply of these products, we would still need to rely on domestic sources for them. Yet, for the vast majority of other products, where we have a comparative advantage, it's essential for us to continue participating in the international market. We won't isolate ourselves. Regarding some high-tech products, the U.S. may decouple, but many of these products are also manufactured by Germany, South Korea, and Japan. Unlike the U.S., which is trying to maintain dominance and competing with China, European companies and governments have incentives to continue trading with China, right? In these circumstances, as long as we have a market, and if these countries want to sell those products, it will still be more cost-effective than producing them ourselves. Therefore, I believe that geopolitics is not the primary reason.
In this context, what is the primary reason? I believe that our emphasis on the domestic market as the mainstay essentially reflects fundamental economic principles. These principles are centered around the scale of modern economies. In modern manufacturing, economies of scale play a crucial role. The larger the scale of the domestic market, the higher the proportion of domestic consumption. Simultaneously, we acknowledge the increasing role of the service sector in modern economies. Many components within the service sector are essentially non-tradable. Consequently, as the proportion of the service sector within an economy grows, the share of domestic circulation also increases. How can this be explained?
We used to describe ourselves as having an export-oriented economy. The year with the highest proportion of exports in our economy was 2006, accounting for 35.4% of the Gross Domestic Product (GDP), slightly higher than one-third. However, by 2019, the year before the General Secretary proposed the new development paradigm, the proportion of exports had reduced from 35.4% to 17.4%, marking a 50% reduction.
By 2019, 82.6% of our GDP came from domestic consumption, and exports accounted for 17.4%. The 82.6% was clearly the dominant factor. So, what caused this change? On one hand, it's due to the economic scale. Nowadays, manufacturing has a significant economy of scale. If the economic scale is larger, the domestic market can absorb more. If the economic scale is smaller, the proportion that can be absorbed domestically will be lower. We can compare 2019 with other countries.
In 2019, Singapore's proportion of exports to its GDP was 104.9%. In our highest year, 2006, it was only 35.4%, which is less than one-third. Why? Singapore is a small nation, and the goods it produces domestically and can consume domestically are very limited. Its exports can be a higher proportion of its GDP because it imports raw materials, manufactures goods domestically, and then sells them abroad, and that part also counts as export value. So, its export proportion can be higher than its domestic GDP. Therefore, it's more than three times ours, mainly because it is a small economy, while we are a large economy.
Furthermore, the service sector is extremely important. For instance, in 2019, the size of the US economy was roughly comparable to ours, but the US exports accounted for only 7.6% of its GDP, while ours was 17.4% in the same year. The key difference is that the US has a service sector that makes up around 80% of its GDP, and many parts of the service sector are non-tradable. Non-tradable components in the denominator of the GDP proportion can reduce the tradable base, hence the US has only 7.6%.
Looking at it from this perspective, in 2006, our exports accounted for 35.4% of GDP, and by 2019, it had decreased to 17.4%, the year before we introduced the "dual circulation" strategy as the primary focus. The reason for this change is that in 2006, our per capita GDP was $2,099, and our share of the global economy was 5.3%. By 2019, our per capita GDP had increased to $10,098, and our share of the global economy had reached 16.4%. So, our market size had become three times that of 2006. On a larger economic scale, the level of domestic consumption had increased.
In 2006, the service sector accounted for 41.8% of GDP. By 2019, the proportion of the service sector in our GDP had increased to 53.6%. On one hand, the expansion of the economic scale and the improvement of domestic consumption capacity, along with the increased share of the service sector and non-tradable components, resulted in our export proportion and foreign circulation decreasing from 35.4% to 17.4%. By 2019, the proportion of domestic circulation had reached 82.6%.
Considering these two trends, it is clear that as China's economy continues to develop, our global share will increase, and our market size will continue to grow.
Similarly, as income levels increase with economic development in the future, the proportion of exports will likely decrease, going from 17.4% of GDP in 2019 to 15%, 12%, or even 10% [in the future]. The proportion of domestic circulation will correspondingly increase from 82.6% in 2019 to 85%, 90%, and beyond. This means that the share of domestic circulation in GDP will further increase in the future.
Since this is a natural law of economic development, why did General Secretary Xi Jinping make this statement? I believe this statement was made to help us better understand our current economic situation. Historically, we often characterized China as an export-oriented economy. However, given the unprecedented changes of the century and the mounting external pressures, particularly the increasing pressure from the United States and various policies aimed at decoupling from China, it is crucial to recognize our present economic reality. In this context, a continued heavy reliance on exports could expose us to substantial impacts from external pressures, potentially eroding confidence.
If we recognize that China has a primarily domestic-oriented economy with over 80% of its economic activity relying on domestic circulation, we can use a specific analogy: China is like a massive aircraft carrier. Regardless of how strong the external winds may be, we are capable of steering our ship and moving forward. Conversely, if China were a smaller economy, international turbulence could significantly affect its stable development. I believe that the main reason General Secretary Xi Jinping introduced the concept of making domestic circulation the mainstay in 2020 is to align with the natural laws of economic development and help us understand that we are indeed a major economic player. Therefore, our economic activities are primarily domestic in nature. As long as we do our domestic work effectively, regardless of external challenges, we can navigate and overcome them.
Understanding that domestic circulation is the mianstay, the concept of fully utilizing both domestic and international markets and resources remains crucial. It's still very important because, in order for the proportion of domestic circulation to continue to increase, the prerequisite is that the Chinese economy must continue to develop. As China's economy keeps growing, our influence on the global stage will also continue to rise.
If China's economy continues to develop and income levels rise, the share of the service sector will further increase. As our income expands and the service sector's share continues to grow, we can ensure that the proportion of domestic circulation continues to rise.
If China's economy continues to develop and income levels rise, the share of the services sector will further increase. As our economy continues to expand and the services sector's share increases, we can ensure that the proportion of domestic circulation continues to rise. So, in this context, constructing a domestic circulation as the primary focus means accelerating development. When you accelerate development, the proportion of domestic circulation will also rise faster. As for how to develop the economy, a comprehensive interpretation through the lens of new structural economics is often the best approach. This involves following our comparative advantages because when you develop according to your comparative advantages, you can achieve a balance between equity and efficiency in the initial distribution, which is crucial for rapid development.
Of course, with rapid development, our global share will increase quickly, the share of the service sector will rise rapidly, and the proportion of domestic circulation will increase at a faster pace. However, developing according to comparative advantages means that we should focus on developing the areas where we have a comparative advantage and turning them into competitive advantages. Even though our domestic market is large, the international market is still larger when compared.
For example, in 2019, our economy accounted for 16.4% of the world's share. This means that our domestic market size represents 16.4% of the global market. While being the largest single market, we must also consider that the rest of the world constitutes 83.6% of the global market. In this scenario, for products in markets where we have a comparative advantage, we should not only target the domestic market but also aim to capture a significant portion of the 83.6% global market. Hence, it's essential to fully utilize both domestic and international markets.
Furthermore, some of our industries do not align with comparative advantages. For instance, natural resources and high-tech industries. Natural resources are land-intensive, and we are a country relatively short on land resources. Relying solely on domestic natural resources would result in high costs. High-tech products are also characterized by intense capital and technology requirements. With a per capita GDP of $12,000, even if we surpass the threshold of $13,000 to become a high-income country in the future, we will still have a significant gap compared to the capital and technology resources of the United States and Europe.
So in capital-intensive industries, they have a comparative advantage, which means they are more competitive than us. In this situation, importing is always more viable than relying on domestic ecosystems. In such circumstances, we must strive to keep our development costs low and maintain high quality. For industries where we lack a comparative advantage, we should import whenever possible. Therefore, we should fully utilize both domestic and international markets. Of course, we are currently facing an unprecedented global transformation, and for some industries and products where we lack a comparative advantage, especially in high-tech products, if they are not sold to us by foreign countries, then we have no choice but to produce them ourselves. This is indeed the case.
However, we need to carefully analyze which high-tech products foreign countries may not sell to us. As mentioned earlier, these high-tech products generally require substantial research and development investments to achieve breakthroughs. Once breakthroughs are made, from a business perspective, there is a preference for having the largest possible market. For the majority of high-tech products, China represents the largest market. Except for a few that might be exclusively owned by the United States, other countries would want to access the Chinese market for their own interests. Due to political reasons, the U.S. might hesitate to provide certain products to China. However, if other countries like Germany, Japan, South Korea, or Switzerland have high-tech products that we need, as long as we continue to develop rapidly and keep our market open, they would be willing to introduce them to us to meet their own needs. When it comes to policies concerning these potentially restricted products, I believe the thinking of Huawei founder Ren Zhengfei is the most practical.
Huawei is the first company that the United States targeted for investment restrictions, particularly prohibiting Qualcomm from selling its products to Huawei. What is Huawei's policy regarding this? They essentially track and examine all the foreign high-tech products they import.
Under Huawei's policy of mass production, the rule is simple: as long as buying is cheaper than producing it themselves, they should buy. Only when others refuse to sell to them, and they have been tracking and have accumulated the necessary technology, would they consider producing it themselves. Even if they have the capability and technology accumulated, if buying is cheaper than producing, they will still opt to buy. So, in summary, making full use of both domestic and international markets and resources with this open policy is still the right approach.
So, General Secretary Xi Jinping emphasized the need to establish a new development paradigm featuring dual circulation, in which domestic and overseas markets reinforce each other, with the domestic market as the mainstay. The concept of domestic and international dual circulation mutually reinforcing each other signifies openness. When we make use of both domestic and international market resources and leverage our large domestic market to facilitate rapid development, we can effectively overcome the United States' attempts to decouple from China.
For other countries, such as Germany and France, as long as China's market remains open and its economy continues to grow rapidly, they will want to utilize China's market for their own development, job creation, and so on. In this situation, the United States' efforts to decouple from China cannot be realized.
So, to fully and accurately implement the new development philosophy, the key is for China to develop based on its comparative advantages. In this context, if we aim to navigate the profound changes unseen in a century successfully, China should strive for rapid development. Particularly, for our per capita GDP to reach 50% of that of the United States, as of 2019, our per capita GDP was only 22.6% of that of the United States. To go from 22.6% to 50%, we need to develop more rapidly relative to the United States.
To implement the new development philosophy comprehensively, and to realize the new development paradigm, we must develop according to our comparative advantages. In this scenario, we need to research whether we can develop more rapidly based on our comparative advantages and when we can narrow the gap with the United States to reach 50% of their per capita GDP.