The great rejuvenation of China
Table of Contents
Section 2: Deepen supply-side structural reform
Promoting supply-side structural reform is a major innovation to adapt to and lead the new normal of economic development, an active choice to adapt to the new situation of comprehensive national strength competition after the international financial crisis, and an inevitable requirement for promoting the high-quality development of China’s economy. Comrade Xi Jinping first proposed “supply-side structural reform” at the 11th meeting of the Central Financial and Economic Leading Group in early November 2015, pointing out that “while appropriately expanding aggregate demand, efforts should be made to strengthen supply-side structural reform and focus on improving the quality and efficiency of the supply system.”, enhance the momentum of sustained economic growth, and promote the overall leap in the level of social productivity in China.”1
- adhere to the supply-side structural reform as the main line
Adhering to the supply-side structural reform as the main line is the general trend and the situation. Economic development has entered a new normal, the main contradiction of China’s economic development has been transformed into structural problems, the main aspect of the contradiction is on the supply side, mainly manifested in the supply structure can not adapt to the change of demand structure. At this time, demand policies that focus on solving the problem of short-cycle economic fluctuations will not only be difficult to deal with the structural problems that arise in the long-term cycle, but may also further exacerbate structural imbalances, resulting in increased debt, overcapacity, and even declining growth. Whether it is the United States after World War II or the major economies after the 2008 international financial crisis, they basically adopt Keynesian demand management policies to stimulate the economy, and their economic growth is prone to decline again after a short-term recovery, or even stagflation. Therefore, we must adjust economic development policies, exert efforts from the supply side, and promote supply-side structural reform. The so-called supply-side structural reform
“That is, starting from improving the quality of supply, we should use reform methods to promote structural adjustment, correct distortions in factor allocation, expand effective supply, improve the adaptability and flexibility of the supply structure to changes in demand, improve total factor productivity, better meet the needs of the broad masses of the people, and promote sustained and healthy economic and social development." 1 To accurately grasp the profound connotation of supply-side structural reform, it is necessary to grasp the three key points of “supply-side”, “structure” and “reform.”
“Supply side” means that the main contradiction of economic operation is on the supply side. Supply and demand are two fundamental aspects of the intrinsic relationship of the market economy. Supply management and demand management are two basic methods of macro-management of the operation of the market economy, with the aim of maintaining the basic balance between total social supply and total social demand in terms of total volume and structure, so as to promote sustained and healthy economic development. In actual economic operation, if the main contradiction appears on the supply side, the macroeconomic management method is mainly supply management; if the main contradiction appears on the demand side, the macroeconomic management method is mainly based on demand management. On January 18, 2016, Comrade Xi Jinping pointed out in his speech at the seminar for major leading cadres at the provincial and ministerial levels to study and implement the spirit of the Fifth Plenary Session of the 18th CPC Central Committee: “Demand- side management focuses on solving aggregate problems and pays attention to short-term regulation, mainly by regulating taxation, fiscal expenditure, monetary credit, etc. to stimulate or suppress demand. In turn, it drives economic growth. Supply-side management focuses on solving structural problems, focusing on stimulating economic growth momentum, mainly improving the quality and efficiency of the supply system by optimizing factor allocation and adjusting the production structure, and then promoting economic growth. 2 In recent years, with the changes in the contradiction between supply and demand in China’s macroeconomic operation, the main contradiction is on the supply side, and macroeconomic management needs to change from focusing on demand management to focusing on supply management. “Structural” means that the contradiction on the supply side is mainly “structure” rather than “aggregate.” Comrade Xi Jinping pointed out: “Although the prominent contradictions and problems facing China’s economic operation have cyclical and aggregate factors, the root cause is major structural imbalances. ”3
To solve the structural imbalance, we must find ways and formulate policies from the supply side and structural reform, use reform methods to promote structural adjustment, reduce ineffective and low-end supply, expand effective and medium-to-high-end supply, and enhance the adaptability and flexibility of the supply structure to changes in demand. To this end, Comrade Xi Jinping pointed out: “The three words ‘structural’ are very important, and it is okay to refer to ‘supply-side reform’, but we must not forget the three words ‘structural’.“1
“Reform” means that the way to solve the structural contradictions on the supply side is to deepen reform. The fundamental reason for the supply-side and structural problems in economic operation is that there are institutional obstacles, the decisive role of the market in the allocation of resources is insufficient, and the government intervenes too much. To solve these problems, we must rely on reform and innovation. On the one hand, it is necessary to give play to the decisive role of the market in the allocation of resources, actively and steadily promote market-oriented reform in terms of breadth and depth, greatly reduce the government’s direct allocation of resources, let the market play a full role in all areas that can play a role, and promote the allocation of resources to maximize benefits and optimize efficiency; on the other hand, the market plays a decisive role in the allocation of resources, not all of them. China practices a socialist market economic system, and we must still persistently bring into play the superiority of our socialist system and give play to the positive role of the party and government. It is necessary to effectively transform the functions of the government, clearly define the boundary between the government and the market, and let the government play a role in maintaining macroeconomic stability, strengthening and optimizing public services, ensuring fair competition, strengthening market supervision, maintaining market order, promoting sustainable development, promoting common prosperity, and making up for market failures. It is necessary to deepen the reform of the administrative system, innovate administrative management methods, optimize the way the government plays its role, reduce administrative orders, rely more on market means and legal means, and on the basis of respecting market laws, use reform to stimulate market vitality, use policies to guide market expectations, use planning to clarify the direction of investment, and use the rule of law to regulate market behavior. To promote supply-side structural reform, we must grasp three basic requirements: First, the ultimate goal is to meet demand. It is necessary to deeply study market changes, understand actual needs and potential needs, and better meet the needs of the people for a better life in the liberation and development of social productive forces. Second, the main direction of attack is to improve the quality of supply. It is necessary to reduce ineffective supply, expand effective supply, focus on improving the quality of the entire supply system, and improve the adaptability of the supply structure to the demand structure.
Third, the fundamental way is to deepen reform. It is necessary to improve the institutional mechanism in which the market plays a decisive role in the allocation of resources, deepen the reform of the administrative management system, break the monopoly, build a more perfect market- oriented allocation system and mechanism for factors, and make the price mechanism truly guide the allocation of resources. At the same time, it is necessary to strengthen incentives and encourage innovation, enhance the endogenous power of micro subjects, improve profitability, improve labor productivity, improve total factor productivity, and increase potential growth rate. To deepen supply-side structural reform, the general requirement is the eight-character policy of “consolidation, strengthening, upgrading and smoothing.” It is necessary to consolidate the achievements of “three to one reduction and one supplement”, promote more industries with excess capacity to speed up the liquidation, reduce all kinds of business costs in the whole society, and increase the intensity of making up for shortcomings in infrastructure and other fields. It is necessary to enhance the vitality of micro-subjects, give play to the subjective initiative of enterprises and entrepreneurs, establish fair, open and transparent market rules and a business environment based on the rule of law, promote positive incentives and survival of the fittest, and develop more high- quality enterprises. It is necessary to improve the level of the industrial chain, pay attention to the use of technological innovation and scale effects to form new competitive advantages, and cultivate and develop new industrial clusters. It is necessary to smooth the national economic cycle, accelerate the construction of a unified, open, competitive and orderly modern market system, improve the ability of the financial system to serve the real economy, and form a virtuous circle of domestic market and production subjects, economic growth and employment expansion, and finance and real economy.
- supply-side structural reform is different from the supply-side school
Soon after the supply-side structural reform was proposed, some people equated it with the Western supply-side school. To this end, Comrade Xi Jinping clearly pointed out: “First of all, I want to make it clear that the supply-side structural reform we are talking about is not the same thing as the supply- side school of Western economics, and we cannot regard the supply-side structural reform as a copy of the Western supply-side school, and we must prevent some people from using their explanations to promote ’neoliberalism’ and take the opportunity to create negative public opinion.“1 The Western supply-side school is an economic theory produced in response to the “stagflation” problem in the United States and other Western countries in the 70s of the 20th century. The supply- side school believes that stagflation is completely the cumulative effect of the long-term implementation of Keynesian demand management policies, so in terms of policy propositions, one is to reduce taxes, especially marginal tax rates, and the other is to reduce government intervention.
The theory and policy propositions of the supply-side school were valued by then US President Reagan, and became the basis for the Reagan administration’s policy formulation in the 80s of the 20th century, forming the so-called “Reagan economics.”
The supply-side structural reform is the product of combining the basic principles of Marxist political economy with China’s practice. In the Introduction to the Critique of Political Economy, Marx analyzed the dialectical relationship between the four links of production, distribution, exchange and consumption in the process of social reproduction, and discussed the appropriate proportional relationship between the two categories in Capital, Volume 2, Part 3, “Reproduction and Circulation of Total Social Capital.” The balance between supply and demand in quantity and structure is deeply analyzed. These ideas have important guiding significance for China’s supply- side structural reform. The main differences between supply-side structural reform and Western supply-side schools are: First, the theoretical basis is different. The theoretical basis of supply-side structural reform is Marxist political economy and Xi Jinping’s socialist economic thought with Chinese characteristics for a new era. The supply-side theory is based on neoliberalism based on “market omnipotence” and “Say’s law.” Therefore, unlike the laissez-faire ideology of the supply-side school that opposes government intervention, supply-side structural reform implements economic policies in accordance with the idea of “combining the market and the government” to “make the market play a decisive role in the allocation of resources and better play the role of the government”, emphasizing the dialectical unity of supply and demand. Second, policy instruments are different. In addition to the supply-side school’s tax cuts as an important part of its policy platform, the Reagan administration also implemented measures such as accelerated depreciation and investment tax credits to stimulate investment, while advocating deregulation, balanced budgets, and lower inflation. The supply-side structural reform is to use reform methods to promote structural adjustment, reduce ineffective and low-end supply, expand effective and medium-to-high-end supply, enhance the adaptability and flexibility of the supply structure to changes in demand, and improve total factor productivity. Tax reduction is only one of the contents of supply-side structural reform, in addition to tax reduction, supply-side structural reform emphasizes the adjustment of the supply structure through reform, the implementation of “three to one reduction and one supplement”, while more use of market-oriented, rule-of-law means, in the “consolidation, Strengthen, upgrade and smooth “efforts to improve the quality of the supply system. Third, the reform goals are different. The goal of supply-side reforms was not only to get out of the “stagflation” dilemma of the time, but also to return to the laissez-faire market economy tradition advocated by classical economics, and to change the government intervention in the economy over the past few decades to achieve long-term economic growth and prosperity.
Although the ultimate goal of supply-side structural reform is also to achieve long-term economic growth and prosperity, the specific goals are very different from those of the supply-side school. The goal of supply-side structural reform is by no means to implement a laissez-faire market economy, not to get rid of the problem of “stagflation”, but to focus on improving the quality and efficiency of the supply system, enhancing the momentum of sustained economic growth, promoting the overall leap in China’s social productivity level, and making China’s supply capacity better meet the growing needs of the people for a better life.