By Wei Jigang, Zhao Changwen

Research Report Vol.20 No.3, 2018

The industrial policy represents the government’s intervention by way of guidance, encouragement, support, coordination, promotion or restriction in the industries, enterprises and factors to achieve a certain purpose like economic growth, structural optimization, competitiveness improvement, resource allocation efficiency improvement or sustainable development. As China faces development circumstances, strategic goals and major tasks quite different from before in the new historical period, how to adjust the industrial policy to ensure the market plays a decisive role in resource allocation and enable the government to better play its role so as to promote quality development, build China into an industrial power and build up the modern economic system is a big issue worth study.

I. Attributes of the Industrial Policy as seen in the Practice in Different Countries

A country’s development entails the organic combination of the market and government forces and requires to strike a balance between the imperfect market and the government yet to be improved further. The industrial policy is exactly an important instrument to achieve such combination and balance. The industrial policy has multiple attributes since it not only functions to avoid market failures, but also represents a means to pursue the national strategy, develop the competitive edge and ensure industrial security.

Actually it is a common practice to develop the industrial policy according to a country’s real situations. Even in the developed market economies, the industrial policy has never exited the historical stage. The US and European countries implement industrial policies through the means of law, science and technology, finance and anti-monopoly. For example, such policies as the Obama Administration’s re-industrialization strategy and national innovation strategy and the Trump Administration’s America-first trade policy are intended to promote the development of America’s manufacturing industry and increase the international competitiveness of American industries.

The catch-up economies, by drawing on the experience of the leading developed countries, leverages industrial policies to catch up with other countries in key industry development, to protect the fledging industries and promote industrial upgrading. As the market system and market mechanism of the economies in transition are under construction and improvement, the government adopts industrial policies to shore up the market mechanism.

Due to the differences in the economic system, government management, social structure, development strategy, development phase and industrial emphasis, the industrial policy differs greatly from country to country in terms of the goal, scope, focus of endeavor, policy tool and performance delivered. In general, the countries which adjust their industrial policies according to changing situations register good performance; if otherwise, the performance is unsatisfactory.

II. Strategically Speaking, China Generally Achieves Success in Industrial Policy but at a High Cost

China is one of the countries in the world which extensively apply industrial policies in a deep-going way. During the era of planned economy, China established a comprehensive centralized planned economic system in which the government planning determined what to produce and circulate and who shall do the production and circulation as well as the quantity of products involved. To address the backward industrial development as soon as possible, China drew lessons from the Soviet Union, implemented the government-led industrialization strategy and the unbalanced development mode, all-roundly allocated factor resources by planning, pooled strengths of the whole nation and tilted various resources and factors to key industries and key enterprises. As thus a complete industrial system was set up to realize the catch-up goals.

With the gradual establishment and continuous improvement of the socialist market economic system since the start of reform and opening up, the market allocates resources across an increasing scope and the market mechanism’s function is continuously reinforced. At the same time, the Chinese governments brings the role of the industrial policy into full play regarding restructuring, scale expansion, industrial upgrading and internationalization. The industrial policy gradually turned from planning-dominated to programming-dominated, from direct to indirect intervention, and used the combo of economic, legal and administrative means. The achievements in industrial development over the past four decades show that strategically the basic goals of the industrial policy have been achieved. But tactically, there persist such problems as the inadequate policy system, improper government intervention, sectorial interest solidification, and wide space for policy rent-seeking, failure to coordinate division of labor among localities, low efficiency in resource allocation and severe redundant construction. Additionally, the industrial policy doesn’t play a satisfying role in promoting the structural optimization and upgrading. Coordination is lacking between the industrial policy and related policies, and conflicts occur between some industrial policies and the WTO rules. Such problems evoke doubt upon the industrial policies, and a handful of countries even go as far as to criticize China’s industrial policy for undermining fairness and competition.

In general, we should have a systematic and dialectical understanding of the industrial policy. The market mechanism can’t be denied based on the effect of the industrial policy and on the other way round the industrial policy can’t be denied due to the problems in practice. Actually these are exactly the logical point of departure to improve the industrial policy in the new era.

III. Thoughts and Framework on China’s Industrial Policy Improvement in the New Era

1. Basic thoughts

In the new era the industrial policy should be geared to the goal of building a competitive industrial nation, with the focus laid on improving the business environment. Based on the structural arrangement of certain industries, fields and objects, the factors impeding industrial development should be removed to enhance the industries’ capabilities for innovation, international competition and sustainable development and boost the resource allocation efficiency and the social welfare level.

The industrial policy adjustment should follow the principles of centering on national development strategy, remedying market failures, strengthening functional policies and improving selective policies while taking into account policy coordination so as to achieve win-win internationalization, as indicated by Figure 1.

Centering on national development strategy. The industrial policy should be guided by such strategic goals as building a modern economic system, and propelling the industries to become strong and pursue quality development.

Remedying market failures. The industrial policy should address market failures and hedge against the negative effect of the market mechanism. The market functions should be fostered and improved to get organically combined with market forces.

Strengthening functional industrial policies. A sound environment conducive to industrial development should be created to encourage innovation and entrepreneurship, improve the factors and public service support for industrial development and regulate the behavior of market entities.

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