A New Industrial Order
Image Credit: Dmitry Perstin

A New Industrial Order

 
 

My first post as the resident economics commentator for China Power comes at an opportune time: China has just released a draft version of its strategic emerging industries development plan (we can call it the ‘SEIDP’), which will form part of its 12th Five-Year Plan. The SEIDP—which covers industries such as new energy, environment, new materials, next-generation IT, and aerospace—represents perhaps the most coherent blueprint for state capitalism in recent memory. And, for the rest of the world, it offers a glimpse at a future of head-to-head competition with rising Chinese firms that enjoy the strong support of coordinated industrial policy and domestic institutions.

As policy, the SEIDP is too utilitarian to be considered part of the Beijing Consensus. At its heart though, to borrow Ian Bremmer’s definition of state capitalism, is the use of the power of markets for political gain. That’s not to imply that China’s leaders are inattentive to social needs. Indeed the opposite is true. But the framework for the plan confirms that the circular relationship between the control of economic resources, socio-economic development, and the preservation of the existing political order will continue through at least 2020.

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This sort of grand policymaking, however, isn’t without its costs or risks. One concern is quite fundamental: mobilizing resources in support of policy goals comes at a high price in the form of inefficient investment and excess capacity in many industrial sectors. The drafters of the SEIDP are clearly aware of this, and will attempt to improve their mixed record in controlling the expansionist tendencies of provincial economic planners. If their efforts aren’t successful, the total level of funding related to the SEIDP at all levels of government over the next five years could easily run into the RMB 10-15 trillion range.  

Another by-product of this sort of industrial policy is a highly skewed distribution of national income. Recent years of industrial development in China have shown that concentrations of resources on both a geographic and sector basis are self-reinforcing: the big get bigger, and the rich get richer. And central government efforts to correct the above problem associated with overcapacity through consolidation can serve to exacerbate economic disparities. These disparities are also often referred to as ‘structural imbalances’: a falling proportion of national income accruing to households, an increasingly inequitable distribution of household income, and the rising dominance of state-owned enterprise at the expense of private entrepreneurial activity. It’s not a popular position to take in Beijing these days, but bolder academic commentators have begun warning about the potential concentration of investment and output that will take place if the SEIDP’s goals are achieved without corresponding policies to balance out these worrying trends.

To be fair, the SEIDP authors call for a vibrant small and medium enterprise sector, to complement the large multinational firms the plan hopes to cultivate. But the experience in sectors such as telecommunications services, energy, and non-automotive transport shows how difficult it has been for firms in China to innovate or develop past a certain scale when they run the risk of being stepped on by mammoth state-owned monopolies.

A third concern is the question of competition, including market access for foreign players. Domestic media reports are a little coy in their language on this issue, but what’s clear is that the government is intent on preventing excessive competition, especially that caused by regional and local governments who support investment in capacity—much of it lower end—that is too far outside planned parameters. What is unknown is the extent to which various levels of government will protect substantial investments in new industries. For outside participants, domestic and foreign alike, this could ultimately mean reduced access. Future regulatory arrangements and actions will illuminate the government’s position.

Some view an industrial blueprint like the SEIDP as a blow to globalization. For China, though, its goals for domestic industrial development are, first and foremost, related to national economic security. This perspective contrasts strongly with the view from more market-based systems, where over time corporations have redistributed production and supply chains to reflect shifting geographic realities, and the term ‘market access’ has something of a moral ring to it. Chinese firms in these sectors are, on the other hand, just ‘emerging’, and the Chinese government is likely to address potential disagreements with foreign firms and governments over the SEIDP in a far different way than it would efforts to reform, say, the international financial architecture. This could well be a manifestation of what we call ‘face changing diplomacy’: sometimes you meet strong China, sometimes you meet weak China, and who you meet determines the dimensions of the box for negotiations.

It’s by no means guaranteed that China’s growth model will be as successful in the coming thirty years as it has been in the past thirty. If it is, however, the ideological clash between China’s brand of state capitalism and the principles of more market-based economies will fundamentally alter the role and relevance of the multilateral institutions charged with mitigating systemic frictions.

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