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‘S-shaped curve’ theory: new driving forces to back up economy

Updated: May 22,2016 5:36 PM Daily

Amid downward pressure, China’s economy is faced with many challenges, but promising development is ahead, according to the “S-shaped curve” economic theory mentioned by Premier Li Keqiang on many occasions.

The theory suggests that new driving forces can prop up new economies and support economic development when older driving forces are weak.

To be more specific, the development of a technology is like the shape of an “S”. In the early stages technology grows slowly, then it grows rapidly before it slows back down again at a certain stage. But this is not the end of the story, as a new “S-shaped curve” will show up under the old one, which means a new technology will emerge and will finally exceed the traditional one. This process will keep creating high waves of technology development, thus driving the development of a “new economy”.

New “S-shaped curve” to drive “new economy”

The “S-shaped curve” theory is a practical guide to China’s economic development as the world’s second-largest economy witnesses dramatic transformation of old and new driving forces.

On the one hand, traditional forces that used to drive China’s economic growth have reached the top of the “S-shaped curve” after 30-plus years’ development since opening-up and reform. So if strategies of “strong stimulation” are applied to maintain high growth like before, the economy will see investment income decline, more “zombie companies”, overcapacity, and technique regression.

In addition, lessons from developed countries further verify the irreversible law that the momentum of traditional driving forces will decline at a certain stage.

On the other hand, when traditional driving forces are weak, new driving forces are needed to boost development of the “new economy”. Currently, traditional economic sectors in China are readjusting but the new technology revolution creates new driving forces to inject dynamism into the economy.

New development indicates that China’s economy is undergoing dramatic change as innovation starts to drive the “new economy”: in 2015, the added value of the tertiary industry took up a great portion of total GDP and consumption has taken over investment and export as the primary driving forces of the economy, accounting for more 60 percent of GDP; emerging industries such as “Internet Plus”, the Internet of Things, cloud computing, and e-commerce are booming; in 2014, high-tech exports surpassed Japan’s, Chinese-manufactured drones, smartphones, and high-speed railways are competitive in the global market, and the number of high-tech enterprises increased to 30,000.

Suggestions on policy-making

The following are suggestions on how to generate new “S-shaped curves” to drive the transformation of new and old driving forces to become the key of China’s economic development.

First, keeping the focus on solving market failure problems during the introduction period of S-shaped curves. According to the S-shaped curve theory, a new technology will suffer from a very slow development at its early stage of introduction and face some uncertain factors and risks, such as failures in research and development and market promotion. Therefore, the government should aid technological innovation at its early introduction stage instead of its fast growth and mature periods. Financial and taxation tools, such as project subsidies and taxation relief, should be used to enhance new technology to enter the growth period as soon as possible.

Second, creating a favorable environment for an innovation-driven new economy. “Express roads” should be bridged for foreign intellectual property to accelerate the development of China’s new economy and for the transformation of scientific and technological achievements from universities, research institutions and State-owned enterprises.

Third, building a favorable environment for innovation-driven entrepreneurship. Efforts should be made to further promote administrative streamlining, commercial system reforms and mass entrepreneurship and innovation. The government should streamline the administrative approval items for new technology to enter the market and also avoid interfering with the development of the new economy. On the other hand, a Generalized System of Preferences (GSP) of innovation-driven entrepreneurship should be established through supply-side structural reform. The government should build a public service platform that is equal to all enterprises and implement GSP to reduce the cost of a business startup in efforts to form a key mechanism that the market decides the success or failure of an enterprise.

The author is Zheng Shiling, deputy director of Institute of Quantitative and Technical Economics, Chinese Academy of Social Sciences.