Elsevier

China Economic Review

Volume 62, August 2020, 101505
China Economic Review

From industrial policy to competition policy: A discussion based on two debates

https://doi.org/10.1016/j.chieco.2020.101505Get rights and content

Highlights

  • Selective industrial policies should be used in a prudent manner.

  • China needs competitive neutrality policies more urgently.

  • China is still lagging in marketization reform.

  • Such reform calls for a well-positioned limited government.

Abstract

The effectiveness and fairness of industrial policies are highly controversial topics in the academia both at home and abroad, which involve the basic proposition concerning the relationship of government and market. The governance mode of a well-positioned limited government plays an indispensable role in guiding economic transition and structural change, as well as correcting for market failures. Selective industrial policies are necessary, but they should be used in a prudent manner. Instead, marketization reform that provides the underlying institutional environment is more fundamental and crucial for sustainable economic development. Both theory and practice show that only a limited government can lead to an efficient market and provide effective industrial policies. China still has a long way to go towards a modern economic system, which calls for the transition from the use of industrial policies to the use of competition policies. Especially under the current severe internal and external environment, it is particularly necessary to accurately grasp the basic and fundamental nature of competition policy and the short-term and complementary feature of industrial policy as a reform principle. Only through such marketization reform can the ideal state of a limited government be approached so as to finally establish a modern economic system.

Introduction

China has made great achievements in the past 40 years of its reform and opening up. With a low-level starting point in 1978, it has realized tremendous growth and become one of the world's largest powers. Such achievements cannot be overpraised. However, it still faces many deep-seated problems, which are attributable to delays in the structural, institutional, and growth driver transition, namely, the transition from factor-driven to efficiency-driven and innovation-driven growth. Its growth rate experienced a sustained decline in the past 10 years, the root cause of which mainly lies in the lagging in terms of market institutional reforms rather than external and cyclical factors (Tian, 2019).

The decisive factors of achievements and the causes of problems should be carefully analyzed, rather than generalized. We must address differential factors according to the basic methodology of controlled experiments, rather than putting all factors together. Otherwise, it is impossible to find out the new factors that have driven China's rapid growth and what we have done right in the reform in the past 40 years.

Over the past 70 years, the Chinese government has always been playing a powerful role, in which factors such as strong executive force and state governance ability, social stability, and dominance of state-owned enterprises in the market had already existed before the reform and opening up. When summarizing the reasons or factors for the great achievements in the reform and opening up, we should look for new emerging factors; otherwise, new factors that did contribute to the great achievements might be neglected and retrogression might occur. The stagnation of deep-level market reform, increasing government intervention in the economy in recent years, and the bottleneck in the private economy are manifestations of such problem. Mistakes, misunderstandings and misleading conducts do exist in terms of not only ideology but also practice.

In view of the experience and lessons, I have proposed a research method with “three dimensions and six features” to analyze and solve problems. The three dimensions, namely, “theoretical logic, practical knowledge, and historical perspective”, are indispensable. Without theoretical logical analysis, one may only see the obvious but not the underlying commonality, making it difficult to obtain general conclusions with universal significance. If we simply emphasize the theoretical logic, we are prone to ignore the reality and divorce our discussion from the reality, thus falling into formalism, dogmatism and metaphysics. We must, therefore, test theories or reform measures through “practical knowledge”. Still, only theory and practice are not enough because we should also be alert to short-sightedness, keeping in mind that short-term optimality is not necessarily long-term optimality and the two are often very different. Thus, the vertical and horizontal comparative analysis from a “historical perspective” should be highlighted. Only through the three dimensions can it be possible to ensure that the reform measures embody the “six features” of being “scientific, rigorous, realistic, pertinent, forward-looking, and thought-provoking”.

The reason why I emphasize the research method of “three dimensions and six features” is that many of the policy suggestions and reform measures proposed in China are not scientific or rigorous, which has affected the benign development of a balanced economy and the establishment of a modern economic system. In particular, many industrial policies and related reforms have hindered the market from playing a decisive role, thereby worsening the misallocation of resources (Huang, 2019). Industrial policies do have positive effects and are necessary to any country, but their different functions should be clarified carefully and their use is stage-dependent, which should not be generalized. For China that aims to establish a modern economic system, as highlighted by Huang, Liu, and Tian (2020) based on data-driven policy simulations, greater importance should be attached to the competitive neutrality and ownership neutrality policies recently proposed. Ownership neutrality policy can be seen as a manifestation of competitive neutrality.

This paper focuses on addressing the following two issues. First, how shall we regard the role of industrial policy? Second, why does China need competition policy, especially competitive neutrality policy, more urgently? To do so, I start the discussion by reviewing the two big debates on industrial policy in China.

Section snippets

The two big debates on industrial policy

There have been two major debates on industrial policy in China since the beginning of the 21st century. The first is the debate on the latecomer advantages and disadvantages in 2002. The second is the debate on industrial policy during 2016 and 2017. Both debates have addressed the issue of the proper positioning of a government. I did not participate in the first debate but had a lot of communication with Professor Xiaokai Yang in private. The second debate attracted more attention than the

How to understand the role of industrial policy

When addressing the issue, we need to first clarify the definition. Many debates turn out to be a matter of different understandings of terms. Industrial policy is a very broad concept, and there are great differences in the focus, measures and theoretical basis of industrial policy in different countries. I shall give a general definition of industrial policy below. According to this definition, we can see the advantages, disadvantages and necessity of industrial policy, and when it is

Why does China especially need competition policy?

When it comes to competition policy, there are many different views. In order to reduce ambiguity, it is necessary to give a definition first. In Motta (2003)’s book, Competition Policy: Theory and Practice, competition policy is defined as “the set of policies and laws which ensure that competition in the marketplace is not restricted in such a way as to reduce economic welfare.” In short, it is the sum of policies to protect and promote market competition; that is to say, it aims at

Conclusion

The governance mode of a well-positioned limited government plays an indispensable role in guiding economic transition and structural change, as well as correcting for market failures. Selective industrial policies are necessary, but they should be adopted in an appropriate and prudent manner. Market-oriented reform that provides the basic institutional environment is more crucial for sustainable economic development. The modern economic system basically features a limited government that is

Funding

Financial support from the National Natural Science Foundation of China (NSFC-71850002), the Key Laboratory of Mathematical Economics (SUFE) at Ministry of Education of China and SUFE Theoretical Economics Gaofeng II Discipline Innovation Project (20181110721) is gratefully acknowledged.

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This paper was presented at the 3rd Annual Meeting of the Institute of Urban Development of Nanjing Audit University and the Industrial Organization and Growth Conference in 2019. Thanks to the participants for opinions and suggestions. All the errors are my own.

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