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Justin Yifu Lin: Urban Competitiveness and Sustainable Developments

Dec 07-2013   



Selection from Caijing Magazine

Following the Growth Identification and Facilitation Framework by New Structural Economics, the government will not make the mistake of “inappropriate intervention” when playing a positive and effective role in helping the enterprises for industrial upgrading and transformations, and a city will be constantly upgraded along with the continuous technical innovations and industrial upgrading.　

China implemented the reform and open-up policy in 1979, and it has achieved miraculous economic developments during the past 33 years with annual growth of 9.8%. In 1979, the per capital income for China was only 182 USDs, lower than one third of the average figure of African countries at that time. By 2012, the number grew to 6,100 USDs, thus driving China’s income to upper middle level. In this process, China’s urbanization also witnessed great improvements, with an urban population of only 170 million at the beginning of the reform and open-up and 710 million by 2012, accompanied by an urbanization growth rate of 52.6% by 2012 from 17.9% of 1978, with one percent increase each year.

Last year, in the 18th National Congress of CPC proposed that the road of industrialization, informationization, urbanization and agricultural modernization be taken for the future developments of China. In this thesis, we briefly discuss the relationship between economic developments and urbanization and the relationship between urban competitiveness and urban sustainable developments.

Economic developments and urbanization

At the beginning of the reform and open-up, China's income level was very low, so was the level of urbanization. In 2012, China became a country with an upper middle income level, possessing an urbanization rate of over 50%. From the global perspective, according to statistical index of the World Bank, in 2012, the average urbanization rate for low-income countries was 28.3%, and 48.3% for middle-income countries, an approximately 20% gap, while the average urbanization rate for high-income countries reached 77.6%, a 30% increase in contrast. At the same time, the urbanization rates for U.K, U.S. and Japan had climbed to 80%, 83% and 92% respectively.

Why the urbanization rate will continue to grow along with increasing income level? The reason is that at a low-income stage, agriculture is the dominant industrial form and the labour force is combined with land, which results in remarkably decentralized production and consequently decentralized population in the rural areas. With the economic developments and technical innovations, the industrial structure is gradually transformed into manufacturing and then services in the post-industrial era; consequently, the economy of scale for production grows bigger and bigger, and links for production process become more and more. Economic activities and relatively centralized population help to decrease the transaction fees generated in production and exchanges. Meanwhile, centralized population also creates favourable environment for the exchange of knowledge and opinions and the collision of thoughts, thus pushing technical innovations and industrial transformations & upgrading. Therefore, population will be gradually concentrated to urban area as the economy develops, in this view: urbanization is the result of economy developments of one country and one society.

In the 18th National Congress of CPC, the target of doubling the 2010’s per capital income by 2020 was proposed. The per capital income for China in 2010 was 4,400 USDs, so the doubled target is 8,800 USDs. To achieve this goal, the annual economic growth rate should reach 7.7% for the first ten years between 2010 and 2020, far higher compared to those of developed countries in Europe and America. If the target is reached, RMB will still be appreciated, which means the per capital income will come to 12,700 USDs (calculated in current USDs) in 2020.　　

Based on the statistical indexes of the World Bank, when a nation’s per capital income reaches 12,700 USDs, it can be deemed as high-income country. In the 18th National Congress of CPC, the idea of making China a modern socialist country that is prosperous, strong, democratic, culturally advanced and harmonious by 2049, the 100th birthday of China, was also raised 　

According to my estimations, even the annual growth rate for GDP during 2020-2049 will only be 5% and the growth rate for per capital income 4.5%; by 2049 the average income level for China will reach between 40,000 and 50,000 USDs. Based on this growth trend, the urbanization rate in the future 10 or 20 years will still be maintained at the previous rate, with annual increase of 1 percent. After reaching 75%, the urbanization rate will gradually move to 80% or higher.　　

Urban Competitiveness and Sustainable Developments

In the rapid developments of urbanization, not only the number of cities will be increased, but also the urban population. Based on the situations of several big cities of China, the population of Beijing in 1949 was 4.2 million, and it grew to 19.61 million by the Sixth National Population Census in 2010; Shanghai’s population was 5.2 million by 1949, but 23.47 million by 2010; Guangzhou's population experienced a surge from 1.05 million in 1949 to 12.7 million by 2010, respectively 3.7 fold, 3.5 fold and 11.1 fold growths. However, there are cities of some countries which have gone through rises and then declines; take the city of Detroit of the United States as an example, its population for 1990 was 0.280 million, and it grew to 1.85 million by 1950, a 5.6 fold increase, which was very similar to the developments trend of big cities of China. But in 2010, the population of Detroit decreased almost by two thirds, plummeting from the original 1.85 million to the current 0.71 million.

Why has population in some cities grown along with economical developments, but has decreased in some times as time goes by? In my opinion, one important rule is the “remote people come to country with more fortune” in the “Chapter Mumin” by Guan Zhong. Man struggles upwards and water flows downhill, and it works for the country, and also the city. If the economy of one city is well-developed, the income level for its residents will grow continuously and living will be improved; therefore, people will flock into this city. In contrast, if the economy of one city moves in a sluggish way or even falls into recession, the resident income will not grow or even decrease, pushing people out of this city.

The premise for continuous improvements of resident income level is improving labour productivity, whose base is industrial upgrading and technical innovations. If the products and services provided by this city are competitive in the international and domestic markets, the city will attract more and more people to assemble there, and the developments of industry and technology is in virtuous circle and the urban development can be sustainable; otherwise, it will shrink.

Taking also Detroit as an example: it is the central city for American mobile manufacturing industry, and it used to be the automobile capital of the world. Mobile manufacturing industry started to emerge at the beginning of 20th century, and several big US auto-makers, such as Ford, GM and Chrysler, set their headquarters in Detroit. During the process when American auto industry experienced prosperous developments and led the world, Detroit had high urban competitiveness and rapid economic growth, which meant more job opportunities and concentrating population. However, in the wake of the 1980s, the auto industries of Japan, Germany and Korea expanded their competitiveness in the international markets, and the competitive advantage for Detroit’s auto industry was gradually squeezed and lost; what is more, Detroit did not carry out industrial upgrading and transformations, which resulted in the competitiveness decrease for the whole city and the shut-downs of some supporting enterprises. With fewer job opportunities and a higher unemployment rate, coupled with the decreasing government tax revenues and public service level, Detroit was losing its enticements to talents and its economic developments got into a vicious cycle; therefore, the urban population kept shrinking. Even though the sustainable urban developments are determined by many factors, the key is a competitive economy, which requires technical innovations, industrial upgrading and transformations, only in this way will the resident income level be improved and will a city be able to maintain sustainable developments.

New Structural Economics and Urban Competitiveness

How should the city conduct technical innovations and industrial upgrading and transformations so as to enhance competitiveness?　　

When I came back from the World Bank, I proposed the New Structural Economics, which is the third thought trend in developing economics. In the New Structural Economics, I emphasized that one country, one economy, including cities, should stay competitive in industrial transformations and upgrading, and its industry should match the comparative advantage determined by its own factor endowment structure; in this way, the factor production cost will be lowered. At the same time, if the high transaction fees formed by the imperfection of the transportation, power and other infrastructures, finance, laws and other soft institutional environment related to the production and sales in this industry, it may be competitive in the domestic and international markets.　

At the same time, another emphasis in the New Structural Economics is that an effective market and a capable government are two preconditions for the favourable economic developments. Only in effective market can the relative price for each factor reflect the relative demand for each factor so as to guide the enterprises to select industry based on comparative advantages; only capable government can play the role of guidance according to the trend in the competitive market environment and help the enterprises to improve related software and hardware base configuration in the industrial upgrading so as to lower transaction cost.

New Structural Economics proposes the Growth Identification and Facilitation Framework for the positive and effective role played by the government in the industrial upgrading.　　

First of all, when transforming and upgrading the industry, the government should select industries with potential comparative advantages in the locality before it can play a positive role. How to select an industry with potential comparative advantage? The New Structural Economics has summarized one empirical rule from the experience of some successful countries and regions, that is to find one domestic or foreign economy with current income level more than double or triple the local income level and with favourable developments over the past 20 or 30 years, and this economy's industry may be the local one with potential comparative advantages. Why this may be the case? Because the comparative advantage is found by comparisons, and if one economy can maintain a high growth speed for 20 or 30 years, all industries in this economy should basically match its comparative advantage, for only those matching the comparative advantages can form competitive advantages. In about 20 or 30 years’ rapid developments, the capital accumulation and wage increases would be fast, and the industries originally endowed with competitive advantages will lose their competitiveness due to wage increases; therefore, upgrading to industry with more capital intensity is needed. If the difference between the local income level and that of this economy is insignificant, it means insignificant differences in the comparative advantage. When the industry of the reference economy gradually loses its competitiveness, and the local wage level is still lower than that of this economy, this will mean the lower factor production cost compared to that in the reference economy and the possibility of competition and share gaining supported by lower production cost. This is the first step, i.e. to find the reference economy and a group of industries with potential comparative advantages.　

Secondly, the government should survey the local situation and check if any private enterprises have already entered these industries; if yes, why have the local enterprises failed to gain the competiveness like those in the reference economy because theoretically the lower wage level means advantage in production costs. High transaction fees are the reason for the failure of the industry of lower-income economy to compete with industry of the reference industry. And the cause of high transaction fees may be imperfect infrastructure, operation environment or financial supports. The government then should guide and help the enterprises to overcome the limits of high transaction fees cost.

Thirdly, if there are no local private enterprises in this industry, the local government can positively attract investments from the reference economy, and attract those enterprises which are about to lose competitiveness due to increasing wage levels and help them to revitalize using the local advantage of wage costs. So, why have those enterprises not invested here? Is it because of unfamiliarity with the local situation or imperfect local infrastructure, operation environment and finance support, or low government efficiency? The government should remove these limits for investment attraction so as to create new point of growth for the local economy.

Fourthly, with the rapid developments of science and technology and the constant emerging of new products and new industries, these new industries may also be lacked in the reference economy. If the local entrepreneurs find such opportunities and enter the industries and show profitable prospects, the local government should also analyze the limits for the further developments of these enterprises.

Those limits can be insufficient human capital, underdeveloped transportation infrastructure, or unfavourable operation environment which should be then improved by the government in order to spread the single spark into a prairie fire.

Fifthly, the industry upgrades as the economy develops. During the industrial upgrading, the infrastructure and operating environment should be continuously perfected so as to lower the transaction fees. If the government of one country or one economy is capable of providing all infrastructures and operation environment needed for various industries, it will be the best. However, the inevitable limits for economical developments are limited resources, including the funds, time and capability of the government.

In this case, setting up local industrial park or development zone in which these infrastructure and operation environment are well provided so as to attract investment at home and abroad, in this way, the limited resource can fully play its role in stimulating the economical developments. This kind of developments way also help the forming of industrial cluster and further lower the transaction fees.　

Sixthly, the economic developments are also the process of continuous technology innovations and industrial upgrading. One pioneering enterprise or the “first enterprise to try eating a tomato” is needed for technological innovations and industrial upgrading. A pioneering enterprise may end up in failures and suffer the failure costs, and make other follow-up enterprises to know the locality is not ready for such industries. If a pioneering enterprise succeeds, other enterprises will know the comparative advantages in this industry and the competition will be increased, and the pioneering enterprise will not profit from monopoly.

Therefore, the pioneering enterprises, no matter succeeding or failing, will provide useful information for the society. However, the profits from success and loss for failure are asymmetric. Therefore, the government should provide certain incentives, including tax preferences and loan supports to encourage these pioneering enterprises.

Following the Growth Identification and Facilitation Framework by New Structural Economics, the government will not make the mistake of “inappropriate intervention” when playing positive and effective role in helping the enterprises for industrial upgrading and transformations, and along with the continuous technical innovations and industrial upgrading, the city will stay competitive in the competitive markets and obtain sustainable developments, thus avoiding the situation of Detroit.

The above is just a brief discussion of urban sustainable developments in the respect of urban competitiveness; the urban sustainable developments are also determined by such factors as the environment, social reliability and harmony. But the economy is the base for everything; therefore, a competitive economy will create favourable conditions for solving other factors influencing the urban sustainable developments. I hope the above discussion will help cities to contribute to the scientific developments by enhancing urban competitiveness and urban sustainable developments, and help to contribute to the two “centenary goals” and the Chinese Dream of great rejuvenation of the Chinese nation raised in the 18th National Congress of CPC.

 

Justin Yifu Lin: Urban Competitiveness and Sustainable Developments

Dec 07-2013   



Selection from Caijing Magazine

Following the Growth Identification and Facilitation Framework by New Structural Economics, the government will not make the mistake of “inappropriate intervention” when playing a positive and effective role in helping the enterprises for industrial upgrading and transformations, and a city will be constantly upgraded along with the continuous technical innovations and industrial upgrading.　

China implemented the reform and open-up policy in 1979, and it has achieved miraculous economic developments during the past 33 years with annual growth of 9.8%. In 1979, the per capital income for China was only 182 USDs, lower than one third of the average figure of African countries at that time. By 2012, the number grew to 6,100 USDs, thus driving China’s income to upper middle level. In this process, China’s urbanization also witnessed great improvements, with an urban population of only 170 million at the beginning of the reform and open-up and 710 million by 2012, accompanied by an urbanization growth rate of 52.6% by 2012 from 17.9% of 1978, with one percent increase each year.

Last year, in the 18th National Congress of CPC proposed that the road of industrialization, informationization, urbanization and agricultural modernization be taken for the future developments of China. In this thesis, we briefly discuss the relationship between economic developments and urbanization and the relationship between urban competitiveness and urban sustainable developments.

Economic developments and urbanization

At the beginning of the reform and open-up, China's income level was very low, so was the level of urbanization. In 2012, China became a country with an upper middle income level, possessing an urbanization rate of over 50%. From the global perspective, according to statistical index of the World Bank, in 2012, the average urbanization rate for low-income countries was 28.3%, and 48.3% for middle-income countries, an approximately 20% gap, while the average urbanization rate for high-income countries reached 77.6%, a 30% increase in contrast. At the same time, the urbanization rates for U.K, U.S. and Japan had climbed to 80%, 83% and 92% respectively.

Why the urbanization rate will continue to grow along with increasing income level? The reason is that at a low-income stage, agriculture is the dominant industrial form and the labour force is combined with land, which results in remarkably decentralized production and consequently decentralized population in the rural areas. With the economic developments and technical innovations, the industrial structure is gradually transformed into manufacturing and then services in the post-industrial era; consequently, the economy of scale for production grows bigger and bigger, and links for production process become more and more. Economic activities and relatively centralized population help to decrease the transaction fees generated in production and exchanges. Meanwhile, centralized population also creates favourable environment for the exchange of knowledge and opinions and the collision of thoughts, thus pushing technical innovations and industrial transformations & upgrading. Therefore, population will be gradually concentrated to urban area as the economy develops, in this view: urbanization is the result of economy developments of one country and one society.

In the 18th National Congress of CPC, the target of doubling the 2010’s per capital income by 2020 was proposed. The per capital income for China in 2010 was 4,400 USDs, so the doubled target is 8,800 USDs. To achieve this goal, the annual economic growth rate should reach 7.7% for the first ten years between 2010 and 2020, far higher compared to those of developed countries in Europe and America. If the target is reached, RMB will still be appreciated, which means the per capital income will come to 12,700 USDs (calculated in current USDs) in 2020.　　

Based on the statistical indexes of the World Bank, when a nation’s per capital income reaches 12,700 USDs, it can be deemed as high-income country. In the 18th National Congress of CPC, the idea of making China a modern socialist country that is prosperous, strong, democratic, culturally advanced and harmonious by 2049, the 100th birthday of China, was also raised 　

According to my estimations, even the annual growth rate for GDP during 2020-2049 will only be 5% and the growth rate for per capital income 4.5%; by 2049 the average income level for China will reach between 40,000 and 50,000 USDs. Based on this growth trend, the urbanization rate in the future 10 or 20 years will still be maintained at the previous rate, with annual increase of 1 percent. After reaching 75%, the urbanization rate will gradually move to 80% or higher.　　

Urban Competitiveness and Sustainable Developments

In the rapid developments of urbanization, not only the number of cities will be increased, but also the urban population. Based on the situations of several big cities of China, the population of Beijing in 1949 was 4.2 million, and it grew to 19.61 million by the Sixth National Population Census in 2010; Shanghai’s population was 5.2 million by 1949, but 23.47 million by 2010; Guangzhou's population experienced a surge from 1.05 million in 1949 to 12.7 million by 2010, respectively 3.7 fold, 3.5 fold and 11.1 fold growths. However, there are cities of some countries which have gone through rises and then declines; take the city of Detroit of the United States as an example, its population for 1990 was 0.280 million, and it grew to 1.85 million by 1950, a 5.6 fold increase, which was very similar to the developments trend of big cities of China. But in 2010, the population of Detroit decreased almost by two thirds, plummeting from the original 1.85 million to the current 0.71 million.

Why has population in some cities grown along with economical developments, but has decreased in some times as time goes by? In my opinion, one important rule is the “remote people come to country with more fortune” in the “Chapter Mumin” by Guan Zhong. Man struggles upwards and water flows downhill, and it works for the country, and also the city. If the economy of one city is well-developed, the income level for its residents will grow continuously and living will be improved; therefore, people will flock into this city. In contrast, if the economy of one city moves in a sluggish way or even falls into recession, the resident income will not grow or even decrease, pushing people out of this city.

The premise for continuous improvements of resident income level is improving labour productivity, whose base is industrial upgrading and technical innovations. If the products and services provided by this city are competitive in the international and domestic markets, the city will attract more and more people to assemble there, and the developments of industry and technology is in virtuous circle and the urban development can be sustainable; otherwise, it will shrink.

Taking also Detroit as an example: it is the central city for American mobile manufacturing industry, and it used to be the automobile capital of the world. Mobile manufacturing industry started to emerge at the beginning of 20th century, and several big US auto-makers, such as Ford, GM and Chrysler, set their headquarters in Detroit. During the process when American auto industry experienced prosperous developments and led the world, Detroit had high urban competitiveness and rapid economic growth, which meant more job opportunities and concentrating population. However, in the wake of the 1980s, the auto industries of Japan, Germany and Korea expanded their competitiveness in the international markets, and the competitive advantage for Detroit’s auto industry was gradually squeezed and lost; what is more, Detroit did not carry out industrial upgrading and transformations, which resulted in the competitiveness decrease for the whole city and the shut-downs of some supporting enterprises. With fewer job opportunities and a higher unemployment rate, coupled with the decreasing government tax revenues and public service level, Detroit was losing its enticements to talents and its economic developments got into a vicious cycle; therefore, the urban population kept shrinking. Even though the sustainable urban developments are determined by many factors, the key is a competitive economy, which requires technical innovations, industrial upgrading and transformations, only in this way will the resident income level be improved and will a city be able to maintain sustainable developments.

New Structural Economics and Urban Competitiveness

How should the city conduct technical innovations and industrial upgrading and transformations so as to enhance competitiveness?　　

When I came back from the World Bank, I proposed the New Structural Economics, which is the third thought trend in developing economics. In the New Structural Economics, I emphasized that one country, one economy, including cities, should stay competitive in industrial transformations and upgrading, and its industry should match the comparative advantage determined by its own factor endowment structure; in this way, the factor production cost will be lowered. At the same time, if the high transaction fees formed by the imperfection of the transportation, power and other infrastructures, finance, laws and other soft institutional environment related to the production and sales in this industry, it may be competitive in the domestic and international markets.　

At the same time, another emphasis in the New Structural Economics is that an effective market and a capable government are two preconditions for the favourable economic developments. Only in effective market can the relative price for each factor reflect the relative demand for each factor so as to guide the enterprises to select industry based on comparative advantages; only capable government can play the role of guidance according to the trend in the competitive market environment and help the enterprises to improve related software and hardware base configuration in the industrial upgrading so as to lower transaction cost.

New Structural Economics proposes the Growth Identification and Facilitation Framework for the positive and effective role played by the government in the industrial upgrading.　　

First of all, when transforming and upgrading the industry, the government should select industries with potential comparative advantages in the locality before it can play a positive role. How to select an industry with potential comparative advantage? The New Structural Economics has summarized one empirical rule from the experience of some successful countries and regions, that is to find one domestic or foreign economy with current income level more than double or triple the local income level and with favourable developments over the past 20 or 30 years, and this economy's industry may be the local one with potential comparative advantages. Why this may be the case? Because the comparative advantage is found by comparisons, and if one economy can maintain a high growth speed for 20 or 30 years, all industries in this economy should basically match its comparative advantage, for only those matching the comparative advantages can form competitive advantages. In about 20 or 30 years’ rapid developments, the capital accumulation and wage increases would be fast, and the industries originally endowed with competitive advantages will lose their competitiveness due to wage increases; therefore, upgrading to industry with more capital intensity is needed. If the difference between the local income level and that of this economy is insignificant, it means insignificant differences in the comparative advantage. When the industry of the reference economy gradually loses its competitiveness, and the local wage level is still lower than that of this economy, this will mean the lower factor production cost compared to that in the reference economy and the possibility of competition and share gaining supported by lower production cost. This is the first step, i.e. to find the reference economy and a group of industries with potential comparative advantages.　

Secondly, the government should survey the local situation and check if any private enterprises have already entered these industries; if yes, why have the local enterprises failed to gain the competiveness like those in the reference economy because theoretically the lower wage level means advantage in production costs. High transaction fees are the reason for the failure of the industry of lower-income economy to compete with industry of the reference industry. And the cause of high transaction fees may be imperfect infrastructure, operation environment or financial supports. The government then should guide and help the enterprises to overcome the limits of high transaction fees cost.

Thirdly, if there are no local private enterprises in this industry, the local government can positively attract investments from the reference economy, and attract those enterprises which are about to lose competitiveness due to increasing wage levels and help them to revitalize using the local advantage of wage costs. So, why have those enterprises not invested here? Is it because of unfamiliarity with the local situation or imperfect local infrastructure, operation environment and finance support, or low government efficiency? The government should remove these limits for investment attraction so as to create new point of growth for the local economy.

Fourthly, with the rapid developments of science and technology and the constant emerging of new products and new industries, these new industries may also be lacked in the reference economy. If the local entrepreneurs find such opportunities and enter the industries and show profitable prospects, the local government should also analyze the limits for the further developments of these enterprises.

Those limits can be insufficient human capital, underdeveloped transportation infrastructure, or unfavourable operation environment which should be then improved by the government in order to spread the single spark into a prairie fire.

Fifthly, the industry upgrades as the economy develops. During the industrial upgrading, the infrastructure and operating environment should be continuously perfected so as to lower the transaction fees. If the government of one country or one economy is capable of providing all infrastructures and operation environment needed for various industries, it will be the best. However, the inevitable limits for economical developments are limited resources, including the funds, time and capability of the government.

In this case, setting up local industrial park or development zone in which these infrastructure and operation environment are well provided so as to attract investment at home and abroad, in this way, the limited resource can fully play its role in stimulating the economical developments. This kind of developments way also help the forming of industrial cluster and further lower the transaction fees.　

Sixthly, the economic developments are also the process of continuous technology innovations and industrial upgrading. One pioneering enterprise or the “first enterprise to try eating a tomato” is needed for technological innovations and industrial upgrading. A pioneering enterprise may end up in failures and suffer the failure costs, and make other follow-up enterprises to know the locality is not ready for such industries. If a pioneering enterprise succeeds, other enterprises will know the comparative advantages in this industry and the competition will be increased, and the pioneering enterprise will not profit from monopoly.

Therefore, the pioneering enterprises, no matter succeeding or failing, will provide useful information for the society. However, the profits from success and loss for failure are asymmetric. Therefore, the government should provide certain incentives, including tax preferences and loan supports to encourage these pioneering enterprises.

Following the Growth Identification and Facilitation Framework by New Structural Economics, the government will not make the mistake of “inappropriate intervention” when playing positive and effective role in helping the enterprises for industrial upgrading and transformations, and along with the continuous technical innovations and industrial upgrading, the city will stay competitive in the competitive markets and obtain sustainable developments, thus avoiding the situation of Detroit.

The above is just a brief discussion of urban sustainable developments in the respect of urban competitiveness; the urban sustainable developments are also determined by such factors as the environment, social reliability and harmony. But the economy is the base for everything; therefore, a competitive economy will create favourable conditions for solving other factors influencing the urban sustainable developments. I hope the above discussion will help cities to contribute to the scientific developments by enhancing urban competitiveness and urban sustainable developments, and help to contribute to the two “centenary goals” and the Chinese Dream of great rejuvenation of the Chinese nation raised in the 18th National Congress of CPC.