Yao Yang says "new quality productive forces" means improving total factor productivity (TFP)

I hope the respected PKU economist is right.

Yao Yang, Professor, and Director of the China Center for Economic Research, Peking University wrote in the Beijing Daily on May 27 that China’s relatively new buzzword 新质生产力 “new quality productive forces,” in his understanding, equals a call for enhancing total factor productivity.

For China watchers, what the “new quality productive forces” means is one of the hottest ongoing discussions. My two cents would be that the answer is developing and to understand the process of its development you can start with this book

I’ve repeatedly recommended the book by Professor Jinghan Zeng of Lancaster University, including in my recent interview with The Wire China.

The book discusses Chinese foreign policy concepts, but the approach most certainly applies to domestic ones as well.

Prof. Zeng wrote

The process of filling those ideas with meanings often occurred in a subsequent and incremental manner. Their introduction and subsequent development follow a “soft” opening approach…

As such, the introduction of a key foreign policy concept often stimulates an (semi-)open academic and policy discussion within China. During this process, the Chinese academic and policy community gradually fill those concepts with concrete meanings.

While this process allows the state to make use of intellectual power, it invites the participation of a large number of actors who often bring complexity. The vague nature of Chinese foreign policy concepts means that they are open to interpretation. This allows Chinese academics and policy actors to load those concepts with meanings in their preferred ways. This often produces a variety of narratives that sometimes conflict with each other. In some cases, this phenomenon will be intensified when a foreign policy concept involves substantial economic interests, in which various political and economic actors will actively participate in this process to seek influence.

Only by understanding what a new concept means is actually a process, can you appreciate, for example, why Moutai and Wuliangye, China’s two most well-known liquors, rushed to declare they also are “new quality productive forces” at the beginning of this year.

Before moving on to a translation of Yao Yang’s accessible article, here is a favor for a friend: The THINC Fellowship Program and Global Public Opinion Research Center at Renmin University of China are conducting an anonymized online Survey on Digital Economy and Lifestyle on Qualtrics, a U.S. platform.

新质生产力照亮未来中国经济

New quality productive forces illuminate the future of China’s economy

by Yao Yang

Developing new quality productive forces means improving production efficiency, which is what economists refer to as total factor productivity.

On January 31, 2024, General Secretary Xi Jinping emphasized during the eleventh collective study session of the Political Bureau [of the 20th Central Committee of the Communist Party of China], "Developing new quality productive forces is an intrinsic requirement and important focus for promoting high-quality development. We must continue to prioritize innovation and accelerate the development of new quality productive forces." "High-quality development requires new theories over productive forces for guidance, and new quality productive forces have already emerged in practice, demonstrating strong momentum and support for high-quality development. We need to summarize and conceptualize these forces theoretically to guide new development practices. In essence, new quality productive forces are characterized by high technology, high efficiency, and high quality, aligning with the advanced productivity status of new development concepts. They are driven by revolutionary technological breakthroughs, innovative allocation of production factors, and deep industrial transformation and upgrading. The core features include a significant increase in total factor productivity, with innovation as the defining characteristic, quality as the key, and advanced productivity as the essence."

Accelerating the development of new quality productive forces is a crucial angle for economic work at all levels of government in the current and future periods. How should we understand new quality productive forces? In my view, new quality productive forces aim to increase total factor productivity. This concept might sound awkward, so what is total factor productivity? We know that for a business or a country to produce, labor and capital must be invested. Increasing labor results in higher output, and so is capital.

However, there's another aspect, usually intangible and unseen: the improvement in efficiency. Economists refer to this as total factor productivity, which includes efficiency gains beyond mere increases in labor and capital. Developing new quality productive forces means enhancing production efficiency, or as economists call it, total factor productivity.

China has now reached a stage where economic growth is driven by technological research and development and innovation

Why introduce the concept of new quality productive forces now? To understand this, we should review China's economic growth over the past twenty years. Before 2010, China's economic growth was mainly driven by increasing labor and capital. A large influx of labor moved from rural areas to cities, integrating into the global economy. In 1978, at the beginning of the reform and opening-up period, China's urbanization rate was less than 20%. Today, it has exceeded 65%. This means that over the past forty years, 40% to 50% of the population has moved to cities, adding at least two to three hundred million workers to the urban workforce. In other words, two to three hundred million laborers have migrated from rural areas to cities, participating in the global economic circulation. As everyone knows, before 2010, China's economic growth was primarily driven by exports. With such a large workforce engaged in the global economy, China’s production naturally increased.

In parallel, China's capital accumulation rate increased, with savings rates rising. Thus, before 2010, economic growth was primarily driven by labor and capital increases. After 2010, China's economy entered a period of adjustment involving several aspects:

1. Economic structure adjustments, eliminating excess and polluting capacities, and fostering new production such as industries like electric vehicles.

2. Shifting from an export-oriented growth model to one driven by domestic consumption, with consumption's share in the economy rising significantly since 2010.

3. Promoting technological progress to transition from extensive production methods to technology-driven production.

This context underscores the need for new quality productive forces, as China now fully relies on technological R&D and innovation for economic growth. Economic growth theory indicates that a nation's growth progresses from labor expansion and capital accumulation to technology-driven growth. China's population is declining, the working-age population has been decreasing for several years, and the marginal benefits of capital accumulation are diminishing. Hence, increasing the rate of technological progress is crucial, forming the basis for introducing new quality productive forces.

How does China develop new quality productive forces? Is it possible to identify specific industries as new quality productive forces while others are not? I believe not. If my understanding is correct that the goal of new quality productive forces is to increase total factor productivity, then all industries can develop new quality productive forces.

For example, take our apparel industry, which is a very traditional sector. However, within this industry, a company like Shein has emerged. Most people understand Shein as a cross-border e-commerce platform, but in reality, it involves a series of apparel production processes in China. Previously, China didn't know where to start with developing Industry 4.0, but we suddenly realized that we had already achieved Industry 4.0 in the apparel sector through flexible production. Shein's current valuation of $60 billion is closely related to its flexible production. I believe that flexible production is a process that increases total factor productivity, which exemplifies new quality productive forces.

Another example is platform enterprises. Some might think that platform enterprises are outdated as we have entered the AI era. However, I believe the platform economy remains one of the pillar industries in China and can significantly contribute to the enhancement of new quality productive forces.

First, it provides a platform for the physical economy. Nowadays, many physical economy sectors rely on platform enterprises to reduce costs. Seven or eight years ago, we were still discussing how high logistics costs were, sometimes accounting for 30% to 40% of sales revenue. Today, we no longer talk about such high logistics costs, which is closely related to the development of the platform economy. Without the platform economy, the reduction in logistics costs would not have been possible.

Second, the platform economy itself generates a lot of technology. My personal understanding is that one core competitive element of the platform economy is its algorithm. These algorithms do not require much capital; they only need our brains. China has abundant human resources, and platform enterprises heavily rely on algorithms. Therefore, the development of the platform economy promotes the optimization of algorithms, which in turn raises the demands for fundamental research in mathematics statistics, etc. creating a whole ecosystem.

The talents in the field of algorithms are largely trained and nurtured by the platform economy and can later engage in other fields. I believe this role should not be overlooked.

Third, the platform economy has significant network effects that should not be underestimated. Today, almost everyone's life relies on the platform economy, which economists refer to as network effects. When everyone uses the platform economy, costs are reduced. Over the past decade or so, as China's platform economy developed rapidly, the pace of innovation also quickened, indicating that the platform economy plays a crucial role in promoting national innovation.

Laying a Solid Foundation for China's Future Economy

Looking ahead, I estimate that our potential growth rate may remain around 5.5% in the coming years, with capital accumulation still accounting for the majority at around 3.6%. However, as we move forward, the economic growth driven by capital accumulation will decrease, eventually converging to a state where per capita income growth relies entirely on technological progress.

China has an advantage over other countries in that we have long-term planning. Thus, from today, by promoting the development of new quality productive forces, we aim to lay a solid foundation for China's future economy. This is the significance of introducing new quality productive forces today.

Again, if you have a few minutes, here is the anonymized online Survey on Digital Economy and Lifestyle on Qualtrics, a U.S. platform by the THINC Fellowship Program and Global Public Opinion Research Center at Renmin University of China.

And read my recent interview in The Wire China.