China's economic achievements measured by output are exemplary, and its more than three decades of economic liberalization and market-oriented reforms have accelerated the expansion of its economy, making it the world's second-largest in terms of nominal GDP. But economists and policymakers know that China's fast economic growth has largely been quantity-driven. For example, its exports are mainly raw materials and low-end products, its economic success is built mainly on labor-intensive industries, not high technologies, and its economic growth has led to environmental degradation.
Also, China still suffers from low research and development inputs when it comes to technology advancement. And although in 2012 its R&D to GDP ratio was 1.97 percent, much higher than in the 1990s, it still lags behind many developed countries such as Japan and the US. So, the R&D to GDP ratio is a crucial factor behind its lack of competitiveness. There seems to be a correlation between R&D inputs and the Global Competitiveness Index ranking, too. Some top-ranked countries such as Switzerland (1st), the United States (3rd), Finland (4th), Germany (5th) and Japan (6th) have high R&D to GDP ratios, with that of Finland being about 3.5 percent.
The benefits of higher inputs in R&D are obvious. It will not only help generate more output, but also promote innovation, ultimately making a country more competitive. China's low input in R&D, together with its loose management of research funds, have prevented it from building a technology- and innovation-based economy, thus affecting its competitiveness.
China's market regulatory framework, too, needs to be improved to become more favorable to business. The WEF competitiveness report shows that although China's market sub-indexes are improving, "various limiting measures and barriers to entry, along with investment rules, greatly limit competition". And corruption and lack of transparency, among other factors, are weakening the country's institutional framework.
China has made much headway in market-oriented institutional advancement. In the latest move, it has accelerated the streamlining of government approval items to support business. Authorities have removed or transferred to lower-level governments 632 approval items - about one-third of the total - over the past year or so. It means it will be easier for investors to start business projects now.
The country has also intensified its anti-corruption campaign and anti-trust investigations to regulate the business environment. A number of high-profile officials and companies have been netted in the investigations, with FAW-Volkswagen Sales Co being the latest to be pulled up; it was fined 249 million yuan ($40.5 million) on Thursday. These measures are aimed at making the market function better, but their real effects can be felt only after some time. The implementation of the new business-favoring rules and measures at the local level, however, is tricky because some local governments may not dance to the tune of the central authorities owing to the opposition of vested interest groups.
Therefore, central policymakers have no choice but to continue deepening reform and market liberalization to improve China's efficiency and increase its competitiveness.
The author is a senior writer with China Daily. xinzhiming@chinadaily.com.cn
(China Daily 09/13/2014 page5)
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