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‘Dual circulation’sets course for regional economic development

Author  :  CAO QINGFENG     Source  :    Chinese Social Sciences Today     2021-03-25

In the face of dampening global market demands and increasing uncertainties, China is striving to build a new pattern of “dual circulation” development that smooths domestic circulation and lets domestic and international circulations reinforce each other.

In addition, according to spatial economics, compared to innate factors such as geographical location and natural resource endowments, the increasing returns to scale generated by local market effects are important endogenous driving forces that promote economic spatial agglomeration. 

Against this backdrop, it’s imperative that China explores and unleashes the advantages of its super-large market and technological innovation, to foster new strengths for regional economic growth.

Domestic demand

Over the past 40 years since the reform and opening up, external demand has fueled China’s regional economic growth throughout different stages. From 1978 to 2000, China reaped the comparative advantage of labor factor costs to implement an export-oriented strategy, which started out in developed regions and then expanded to encompass the whole country. By developing processing trade and attracting foreign capital, China actively engaged in the international division of labor, and saw its regional economy growing rapidly.

From China’s accession to the WTO in 2001 to the global financial crisis in 2008, different regions in China were deeply integrated into the global economic system by participating in the global value chain via trade of intermediate goods, ushering China’s regional economy into a phase of unprecedented growth. 

After 2008, due to the negative impact of the global financial crisis, China’s economic development stage shifted and international circulation’s effect on regional economic growth began to decline. At the same time, with the steady climb of China’s economic development, new competitive advantages in areas such as technological innovation and a super-large market further highlighted the role of domestic demand in regional economic growth. In recent years, the external environment—such as anti-globalization, populism, and trade protectionism—has also expedited this process.

External environment

At present, China’s regional economic growth is facing tougher constraints driven by international circulation.

To start with, China’s demographic dividend and the advantage of low labor costs are diminishing. For a long time, the abundant cheap labor force was an important factor cost advantage that supported China’s participation in international circulation. However, this is no longer the case. In 2019, the proportion of people aged 60 and above in China’s total population reached 18.1%. Population aging is severe, and the labor supply has already passed the “Lewis turning point.” 

China participated in the division of labor within global value chains mainly through international industrial transfer with foreign direct investment as the core. Studies have shown that the low intensity of environmental regulation in developing countries could lead to a “pollution sanctuary effect,” which results in heavy polluting industries’ relocation to developing countries.

However, in the context of green development, China has implemented stricter environmental regulation standards for international industrial transfer, shelving the past practice of attracting foreign direct investment at the expense of the ecological environment. 

As a major emerging power, China’s export-oriented strategy is marked by over-reliance on international circulation. This approach is very likely to cause trade frictions, which create new hurdles in China’s external development environment.

More importantly, since developing countries are often trapped at the low end of global value chains, it is difficult for China to effectively narrow the gap in innovation capacities through imitation and technology spillover. China is now facing technological barriers in building cooperation with developed countries. 

In particular, as a result of the China-US trade friction, the United States cut China’s supply of key technologies, such as chips. Yet the sweep of COVID-19 has revealed China’s economic resilience. Instability in the global economy led to the realization that China’s reliance on external demand and foreign technology cannot sustainably secure China’s regional economic growth, and it certainly cannot provide economic security.

Unbalanced, insufficient development

In this light, it is essential for China to optimize the new drivers of regional economic growth. In the transition from an export-driven economic model to one with an emphasis on domestic demand, we need to properly handle the following two issues.

In 2019, China’s overall foreign trade dependence was about 32%, with the foreign trade dependence of Shanghai, Beijing, Guangdong, Tianjin, and Zhejiang and Jiangsu provinces in eastern China standing at more than 40% and the dependence of Dongguan, Suzhou, Shenzhen, and Xiamen on foreign trade exceeding 80%. Redirecting these cities and areas to a new stage of economic growth, one driven more by domestic circulation, poses a challenge to China’s regional development. 

Moreover, under the joint pressure of high-end industrial withdrawal from developed countries and the low-end industrial relocation to other developing countries, coupled with a weakening of external demand and foreign capital outflow, China must prepare itself for major shifts in international trade. To fend off external shocks, China must begin to rely more on its domestic market in the long term.

In the meantime, imbalances in China’s regional economic growth under the “dual circulation” development pattern are complex and diverse. Since the scale factor will play an increasingly important role in regional economic growth, competition in stock resources such as population and industries’ regional focus will be more intense, leading to high quality resources and elements further aggregating toward a few developed regions. In the long run, this will widen the regional gap. 

China’s regional economy will present an overall pattern of an east-west gap and a north-south gap. In addition to existing gaps between eastern provinces and central and western provinces, China’s economic center will move further to the south, due to unfavorable natural geographical conditions, the business environment and economic scale in the north. It is foreseeable that northeast China, Tianjin, and Shandong Province will face greater pressure amid the economic transition.

The inter-city gap will replace the urban-rural gap to become a more prominent issue. In 2019, the urbanization rate of China’s permanent resident population reached 60.6%, signaling that China has entered the middle and later stages of urbanization. The urban-rural gap caused by the dual urban-rural structure in early urbanization stages has started to narrow. However, the transferring dividend of rural surplus labor force is diminishing, meaning that urbanization driven by the transfer of urban and rural labor forces is growing weaker. 

Under the new development pattern, domestic circulation will strengthen urbanization driven by the mobility of inter-city populations. Spatial reconfigurations of stock populations will lead to a simultaneous urban contraction and expansion in Chinese cities, and this will intensify regional disparities between urban and non-urban agglomerations, as well as between central cities and marginal cities within urban agglomerations. Regional disparities will also be more diversified.

New economic drivers

Going forward, the key to reshaping China’s regional economic growth is to provide new momentum from the supply side and the demand side, based on China’s super-large market scale and home market technological innovation advantages, so as to form a high-level dynamic equilibrium with mutual reinforcement of domestic and international circulations.

That said, China should make full use of its super-large market to drive supply-side structural reform. The multi-level and super-large domestic market should be better utilized to optimize domestic industrial chains and value chains, deepen the domestic regional division of labor, enhance stability and competitiveness of industrial chains and value chains through spatial restructuring, and promote the coordinated development of different regions. 

At the same time, we should use increasing returns to scale effects of the super-large market on innovation input, achievement transformation, applications, innovate leading technology frontiers, and foster the innovation-driven development of regional economies.

We should cater to diversified market demand through the integration of online and offline businesses, and marshal new forms and models of consumption to promote rapid iteration of products and technology, so as to breed new growth points for regional economies. 

In terms of technological innovation, efforts must be made to form a new consumption ecosystem, accurately match supply and demand, tap the domestic market’s potential, and increase domestic demand’s contribution to regional economic growth upon facilitating scientific and technological advancements in big data, cloud computing, artificial intelligence, and the Internet of Things.

New technologies could also help to build a high-standard unified domestic market that integrates urban and rural areas across the country, speeds up the construction of new infrastructure, reduces inter-regional transaction costs, and expands the depth and breadth of the home market. 

Finally, the system of socialism with Chinese characteristics provides the fundamental institutional guarantee for progress and development in contemporary China. Therefore, China needs to adopt proactive regional economic policies, and make sure to smooth the transformation of regional economic growth momentum with sound institutional innovation.

 

Cao Qingfeng is from the Modern Economic and Management Institute at the Tianjin University of Finance and Economics.

Editor: Yu Hui

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