Wu Jinglian

Research Report No 093, 2004

From April 6-18 and May 27-28, my colleagues and I made a survey in nine counties of Zhejiang Province to study the ways for Zhejiang to create new advantages and make new achievements. We visited 25 enterprises and had extensive discussions with people from all circles. The following are our main conclusions from the survey.

As a region that first broke away from the old system of the planned economy, and with 20 years’ rapid economic growth, Zhejiang has now reached the middle income level with a per capita GDP of over US$2000, and has entered the post-industrialization stage. However, under the new situation, Zhejiang’s economy, which developed on the basis of institutional advantages as well as low-end and low-price labor-intensive products, is facing serious challenges.

At the end of the 20th century, private economies of the coastal areas (especially the provinces of Jiangsu, Guangdong and Fujian) saw accelerated development. These economies had solid industrial and commercial foundations, good basis of external economic relations, and continuous improvements in infrastructure and investment environments. Meanwhile, with gradual emergence of the diversified economic ownership system in the central and western regions, the advantages of the economic system of Zhejiang Province no longer appears unique. Such developments in other regions have led people in Zhejiang to make the warning that the province is "lagging behind Guangdong in speed, Shanghai in quality, Jiangsu in exported-oriented economy, and later-developing provinces in potentials". In addition, the overall integration of the domestic market with the international market and shortages in energy, land and freshwater all contribute to create a grave threat to current production and future development of enterprises in Zhejiang.

To come to a higher stage, Zhejiang economy must improve its overall competitiveness. This includes efforts in three areas: 1. upgrading industries and the economy; 2. advancing from the early primary market economy to the modern market economy; and 3. transforming government functions to establish a government that suits the modern market economy.

I. Major Directions of Industrial Upgrading of Zhejiang Province

Zhejiang’s economy developed through labor-intensive processing industries, whose products are characterized by low end, small added value, low profit, and weak competitiveness. Such products can hardly maintain long-term advantage in face of the increasingly fierce competition in domestic and international markets. That is exactly why the special markets of lightening equipment, clothes and buttons that used to prosper in Wenzhou, the advanced area of Zhejiang Province, have gradually declined. At present, people in the political, academic and enterprise circles have already reached consensus that Zhejiang will not have an optimistic future if it cannot upgrade its industries as soon as possible. However, the problem is what are the right road and direction for Zhejiang to follow in upgrading its industries? Historical experiences of economic development of other countries testify that this is a crucial issue for developing countries to realize their development goals smoothly.

In general, economic development of advanced industrial countries from agricultural to developed industrial economies may be divided into three historical stages, namely the pre-taking off stage, the initial development stage and the modern development stage. In each of the three stages, they basically adopted three different growth methods (changes in growth methods and growth types were summarized first by Samuelson in his textbook Economics, pp1316-1358, Economics (Version 12), China Development Publication House, Beijing, 1992). In the pre-taking off stage, economic development mainly depends on input of natural resources, such as land. The leading industry is agriculture. In the initial development stage, economic development largely relies on the accumulation of physical capital and the increase of physical inputs. The leading industries are heavy industries that consume large resources. (In 1931, German economist W. Hoffman extended this growth method to the middle- and late-stage of industrialization. He thus created the so-called "Hoffman Empirical Theorem", which believes that heavy industries will increasingly take a leading role in the middle- and late-stage of industrialization. However, industrialization of American and European countries did not follow this "theorem" in 20th century.) With this growth method, economic development is largely restricted by resource restraints, and large inputs of physical capital (constant capital) will inevitably lead to economic and social problems such as falling profitability and poverty of the proletarian class. Therefore, during the modern development stage, namely the middle- and late-stage of industrialization, the advanced countries turned to a modernization methods mainly based on the accumulation of human resources (knowledge capacity), technology progress and higher efficiency. During this stage, the engine that pushed economic development was service industry in the early 20th century, and information industries in the late 20th century. Many economists have pointed out that the reason why economic development of East Asian countries in the late 20th century took a zigzagged road is that they were not able to change their early development method of extensive growth to the modern development method of intensive growth.

It seems that Zhejiang is facing such an issue of changing the way and the method of economic development. Based on our knowledge obtained from the survey, the leading opinions in Zhejiang stressed on following the road of the advanced countries in the initial development stage, catch up while not choosing the way of modern development. Many people think that Zhejiang has already entered the industrialization stage, led by heavy industries. They think that the existed manufacturing industries in Zhejiang are "weak", and thus proposed that Zhejiang should develop heavy industries covering basic raw materials, electricity, petrochemicals, smelting, heavy machinery, automobile and shipbuilding industries at very fast speed, so as to "upgrade the industries consisting mainly of light identifying manufacturing to those consisting mainly of heavy manufacturing industries" (Identifying Zhejiang’s Features in the Age of Heavy Industries, Zhejiang Daily, 19 March 2004). Although Zhejiang has a long development history of service industries, and some enterprises have achieved good results in the development of information industry over the past few years, many enterprises are still on the way to develop heavy industries under the guidance of the above opinions. Meanwhile, the extensive development methods of high input, high consumption and low employment have quickly revealed their defects.

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