The proposal by the Central Committee of the CPC on formulating the 14th Five-Year Plan emphasizes the significant proposition of maintaining a stable proportion of manufacturing value-added to GDP. Why does China propose to maintain basic stability in the manufacturing proportion of the manufacturing industry?

Western deindustrialization

After taking the lead in embarking on a path of industrialization over the past 200 years, Western countries are now seeing signs of “deindustrialization.” Western countries went through three main stages.

The first stage was the period of industrial growth (from the 1760s to the 1860s), characterized by the development of steam engines, spinning machines and other technology. Cotton textile, coal, iron smelting, and railways emerged, ushering in the “steam age.” During this time, countries like the UK, France, Germany, and the US underwent industrial revolutions, with the UK establishing global dominance due to its edge in the cotton textile industry.

The second stage, from the 1860s to the 1970s, was the period of industrial maturity. During this time, the widespread use of electricity and internal combustion engines ushered in the “electrical age.” The US emerged as an industrial superpower, establishing its position as a global hegemon.

The third stage, called “deindustrialization,” refers to the period from the 1970s to 2008, and was characterized by the decline and deterioration of a country’s manufacturing industry, in which it once enjoyed a competitive edge. During this phase, traditional industries were challenged by high-tech industries.

In many Western countries, the main achievements of the first industrial revolution, such as clothing and coal mining, either ceased operations relocated elsewhere. The major industries formed during the second industrial revolution, such as steel, experienced a severe decline in competitiveness. The monopolistic positions of aircraft and automobile manufacturing were seriously shaken, and the leading positions of high-tech industries such as computers, semiconductors, AI, and new energy faced challenges.

Currently, the proportion of manufacturing value-added to GDP in Western countries is very low, mostly below 20%. In contrast, the service sector, including finance, insurance, consulting, etc., accounts for over 80% of the economy. The trajectory of “deindustrialization” in Western countries has become an undeniable reality, with severe consequences. These consequences include the loss of competitive advantage in domestic manufacturing, a decline in technological innovation capabilities, a significant disconnect between the real and virtual economies, a continuous increase in unemployment rates, widening income disparities, mounting government debt, expanding trade deficits, and frequent financial crises. As a result, their economies have become trapped in prolonged states of stagnation.

Understanding deindustrialization

“Deindustrialization” has drawn wide attention in academia, and scholars have studied its causes and consequences, generating multiple viewpoints. Some argue that as labor productivity in the industrial sector improves, demand for manufactured goods remains stable or even increases, leading to a reduction in the manufacturing labor force and driving the process of “deindustrialization.” Others believe that international competition in industrial finished products forces domestic companies to adopt more efficient production methods, leading to a decrease in the manufacturing labor force and causing the “deindustrialization” effect. Some attribute “deindustrialization” to the outbound foreign direct investment by multinational corporations, which promotes the transfer of manufacturing overseas, resulting in industrial hollowing-out. Another perspective suggests that a country’s abundance of natural resources may lead to an overreliance on resource exploitation and trade, while neglecting or even excluding the development of the manufacturing sector, thus leading to “deindustrialization.” These viewpoints ultimately align on the notion that, once a mature stage of industrialization is reached, a decrease in the proportion of manufacturing and an increase in the proportion of the service industry become inevitable trends. As a result, the concept of “deindustrialization” is widely regarded as a prevailing rule or tendency.

In fact, these viewpoints contain a serious methodological error - neglecting the influence of production relations on changes in the proportion of manufacturing. They mistakenly treat the specific economic laws that occur under capitalist conditions as general laws of industrial evolution. From the perspective of Marxist political economy, “deindustrialization” is the result of the contradictory movement between productive forces and production relations, and it must be understood from the perspective of the contradictory movement between productive forces and production relations under capitalism. “Deindustrialization” is therefore not an inherent law of the manufacturing sector’s evolution; instead, it is a systemic law determined by the inherent contradictions within capitalism, with objective necessity.

First, under capitalism, the contradiction between the expansion of production scale and the shrinking demand from laborers with the ability to pay exacerbates real-world problems. This forces capital to leave the manufacturing sector and move into non-manufacturing fields or relocate overseas, leading to “deindustrialization.”

Second, under capitalism, with technological progress, an increasing number of workers are replaced by more advanced machines, forming a surplus labor force, and are forced to engage in service work. Thus, the scale of the service industry grows relative to the manufacturing industry.

Third, under capitalism, as the organic composition of capital increases, labor-intensive manufacturing industries with low organic compositions face elimination. While driving the process of “deindustrialization,” this leads to the erosion of the domestic manufacturing system’s integrity and a continuous reduction in its scale.

Fourth, under capitalism, the profit-driven motive of capital leads to the continuous expansion of outbound foreign direct investment. The expansion of outbound foreign direct investment inevitably results in a sharp decline in domestic manufacturing investment, leading to industrial hollowing-out and, consequently, driving “deindustrialization.” Furthermore, under capitalism, after the elimination of traditional manufacturing industries, the supply gap of essential goods is mainly filled through foreign trade, leading to a continuous expansion of trade deficits. This indicates that increasing trade deficits is not the cause of “deindustrialization” but rather a consequence of it.

In conclusion, a capitalist market economy is established on the foundation of capitalist private ownership and wage labor. Industrialization occurs entirely under the impetus of capital, with the driving force behind changes in the proportion of manufacturing being capital itself. Manufacturing, fundamentally, serves as a means for capital to seek maximum profit. When manufacturing fails to generate substantial profits for capital, it inevitably faces ruthless elimination by capital. In other words, the downward trend in the proportion of manufacturing is not because manufacturing is outdated but rather because it cannot bring sufficient profits to capital, leading to its elimination or relocation to other countries. “Deindustrialization” is determined by the contradictory movement between capitalist productive forces and production relations and is an inevitable trend in Western countries.

High-quality development

Since the 18th National Congress of the CPC, General Secretary Xi Jinping has profoundly understood the unprecedented changes in the world and the characteristics of China’s economic development stages. He highlighted the significance of high-quality development in the manufacturing industry, making it a top priority for China’s economic advancement. Building a strong, modernized, socialist country and developing and strengthening the real economy are both closely tied to the development of the manufacturing industry.

Hence, it is key to ensure the stability of the manufacturing sector’s proportion in the overall economy. While China continues to hold its position as a prominent manufacturing nation, the proportion of manufacturing has experienced a decline over time. In 2012, the manufacturing sector accounted for 31.5% of the economy, but by 2022, it had decreased to 27.7%, representing a 3.8% decline. This shift is primarily due to the rapid growth of the service sector, both in life-oriented and production-oriented services, leading to a significant increase in its contribution to the overall value added, thus reducing the relative proportion of manufacturing.

This change is different from the “deindustrialization” seen in some countries, where manufacturing suffered severe contraction and relocated overseas. We also need to be aware of the risk factors for “deindustrialization.” For instance, a period of significant social capital inflow into the real estate sector can lead to a housing bubble risk and severely constrain the development of the real economy, particularly the manufacturing sector. Financial disconnection from the real economy, self-circulation, and self-inflation of the financial sector can result in imbalanced capital allocation and create difficulties in obtaining loans and high loan costs for small and medium-sized enterprises. Moreover, internal issues within the manufacturing industry, such as insufficient high-end production capacity, surplus low-end production capacity, and mismatched supply structure and quality with high-quality demand which can hinder high-quality development in the manufacturing industry. If left unaddressed, these risks may lead to the phenomena of “shifting from the real to the virtual” and “deindustrialization,” further reducing the proportion of manufacturing in the economy.

Going forward

Determining the appropriate level for the proportion of manufacturing is a matter of careful consideration. Considering the strong correlation between the manufacturing industry and economic development, it is essential to establish a target for macroeconomic governance and industrial policy regulation. In China’s case, it is advisable to maintain the proportion of manufacturing at a minimum level of around 30%.

First, we must adhere to the basic socialist economic system. This involves upholding the dominant role of public ownership, promoting the common development of various forms of ownership, preserving the principle of distribution according to work as the mainstay while allowing for various distribution methods, and combining the decisive role of the market in resource allocation with the active role of the government. It is essential to regulate and supervise the business operations of all market entities, ensuring that the individual interests of market entities align with the common interests of society, and effectively avoiding various risk factors that could lead to “deindustrialization.”

Second, we must accelerate advanced manufacturing. While traditional manufacturing remains a crucial component, the digital economy era necessitates the promotion of high-quality development within the manufacturing sector. This entails accelerating advanced manufacturing and facilitating the intelligent and digital transformation of traditional manufacturing processes.

Third, we must develop strategic emerging industries. In recent years, China has witnessed significant progress in these sectors. Industries such as new energy vehicles, industrial robots, and smartphones have emerged as global leaders. To maintain our current leading position, it is crucial that we continue to bolster and refine these industries.

Fourth, we must enhance the basic capabilities of the manufacturing industry and modernize the industrial chain. In terms of enhancing the industrial base capabilities, our focus should be on fortifying key core technologies and achieving breakthroughs in crucial product engineering.

Fifth, we must enhance the effectiveness of financial services for the real economy. We need to accelerate financial system reform, optimize the financing structure, and improve the financial institution system, market system, and product system to provide higher quality and more efficient financial services to the real economy. Financial institutions should be encouraged to allocate more resources to key sectors of the manufacturing industry, such as high-tech manufacturing and strategic emerging industries, to better meet the financial service demands of high-quality development in the manufacturing sector.

Sixth, we must promote the orderly transfer of manufacturing within the country. Uncontrolled outflow of manufacturing is a driver of “deindustrialization.” Promoting the orderly transfer of industries within the country and optimizing the regional industrial chain layout can help mitigate industrial security risks.

He Zili is a professor from the Department of Economics at Nankai University.