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The Secret of Breaking the “Trap” is the Ability of Innovation

Apr 04-2025   



*This article is by Professor Huang Yiping, Dean of National School of Development, Dean of Institute of South-South Cooperation and Development at Peking University.

 

The key to sustainable "stable growth" is the continuous improvement of total factor productivity reflected at the industry level, i.e. the continuous improvement of enterprise competitiveness and rapid industrial upgrading. Otherwise, the economy will easily fall into the so-called 'middle-income trap' or 'high-income trap'. The secret to breaking the "trap" is the ability to innovate. If China relied on its low-cost advantage to achieve sustainable and high-speed development in the past, now, due to changes in the market environment, especially the increase in production costs, the economic growth model needs to shift from a factor-input type to an innovation-driven type.

 

Why Do We Need to Improve Our Innovation Capability?

China's economy has entered a new stage of development, and there are three changes that deserve attention.

The first is the level of costs. By 2024, China's GDP per capita had reached US$13,400, and while incomes have risen and living standards have improved, costs have also risen.

The second is demographic change. By the end of 2023, the country's elderly population aged 60 and above had reached nearly 300 million, accounting for 21.1% of the total population. By internationally accepted standards, Chinese society has entered the stage of moderate ageing.

The third is the changing international market environment. Trade protection policies have become more prevalent, and barriers to China's outbound exports and investment have become more pronounced.

How can we address these three challenges and maintain sustainable economic growth? The most critical and probably the most prioritized response strategy is to rely on innovation.

 

How Can Innovation-driven Growth Be Achieved?

Innovation is a systemic project for which government must allow the 'invisible hand' of the market to play a full role, and industrial policy is indeed an important driver of innovation. In areas where the market is not working well, industrial policy can help companies enter new industries smoothly. However, industrial policy should not restrict competition and there should be an exit mechanism. It should also not become a means for individuals or companies to make profits.

In addition, the confidence of private enterprises should be protected. Private enterprises contribute more than 70% of China's innovation, so supporting private enterprises is actually supporting innovation.

 

How Can Policies Work to Achieve Sustainable Growth?

Achieving "stable growth" in China requires a combination of macro, sectoral and institutional policies. Macro policies focus on the aggregate level and are mainly used to 'bail out' and make counter-cyclical adjustments. Sectoral policies focus on the structural level. On the one hand, they eliminate risks in some systemically important industries. On the other hand, they cultivate emerging industries and promote the formation of new growth dynamics. Reform policies, on the other hand, focus on the institutional level, aiming to enhance the confidence of economic agents and improve the efficiency of resource allocation.

The mainstays of innovation in China's economy is the private enterprises. The government can support basic research, build infrastructure, maintain market order and let enterprises decide what and how to innovate. What needs to be reassessed and even improved is the practice of industrial policy; an effective industrial policy requires a proper positioning of the relationship between the effective market and the active government.

The Secret of Breaking the “Trap” is the Ability of Innovation

Apr 04-2025   



*This article is by Professor Huang Yiping, Dean of National School of Development, Dean of Institute of South-South Cooperation and Development at Peking University.

 

The key to sustainable "stable growth" is the continuous improvement of total factor productivity reflected at the industry level, i.e. the continuous improvement of enterprise competitiveness and rapid industrial upgrading. Otherwise, the economy will easily fall into the so-called 'middle-income trap' or 'high-income trap'. The secret to breaking the "trap" is the ability to innovate. If China relied on its low-cost advantage to achieve sustainable and high-speed development in the past, now, due to changes in the market environment, especially the increase in production costs, the economic growth model needs to shift from a factor-input type to an innovation-driven type.

 

Why Do We Need to Improve Our Innovation Capability?

China's economy has entered a new stage of development, and there are three changes that deserve attention.

The first is the level of costs. By 2024, China's GDP per capita had reached US$13,400, and while incomes have risen and living standards have improved, costs have also risen.

The second is demographic change. By the end of 2023, the country's elderly population aged 60 and above had reached nearly 300 million, accounting for 21.1% of the total population. By internationally accepted standards, Chinese society has entered the stage of moderate ageing.

The third is the changing international market environment. Trade protection policies have become more prevalent, and barriers to China's outbound exports and investment have become more pronounced.

How can we address these three challenges and maintain sustainable economic growth? The most critical and probably the most prioritized response strategy is to rely on innovation.

 

How Can Innovation-driven Growth Be Achieved?

Innovation is a systemic project for which government must allow the 'invisible hand' of the market to play a full role, and industrial policy is indeed an important driver of innovation. In areas where the market is not working well, industrial policy can help companies enter new industries smoothly. However, industrial policy should not restrict competition and there should be an exit mechanism. It should also not become a means for individuals or companies to make profits.

In addition, the confidence of private enterprises should be protected. Private enterprises contribute more than 70% of China's innovation, so supporting private enterprises is actually supporting innovation.

 

How Can Policies Work to Achieve Sustainable Growth?

Achieving "stable growth" in China requires a combination of macro, sectoral and institutional policies. Macro policies focus on the aggregate level and are mainly used to 'bail out' and make counter-cyclical adjustments. Sectoral policies focus on the structural level. On the one hand, they eliminate risks in some systemically important industries. On the other hand, they cultivate emerging industries and promote the formation of new growth dynamics. Reform policies, on the other hand, focus on the institutional level, aiming to enhance the confidence of economic agents and improve the efficiency of resource allocation.

The mainstays of innovation in China's economy is the private enterprises. The government can support basic research, build infrastructure, maintain market order and let enterprises decide what and how to innovate. What needs to be reassessed and even improved is the practice of industrial policy; an effective industrial policy requires a proper positioning of the relationship between the effective market and the active government.