This article is written by Li Wei, President of the Development Research Center of the State Council (DRC), and it is published on Economic Daily, page 13, on Jan 22, 2015.

In the new normal of economic growth, China needs to scientifically analyze the condition changes facing China’s economic development inside and outside China as well as the new opportunities and challenges caused by the changes for the development. It is necessary to grasp the new trends in the new economic stage, push forward reform and innovation, and transform powers for economic development to create a new situation for economic and social development at a new historical starting point.

2015 will be an extraordinary year for three reasons. First, President Xi Jinping’s scientific discourse that China’s economy is entering a new normal phase will be adopted as a general idea when we formulate development strategies, plans and policies in the new period. Second, 2015 is not only the last year of the 12th Five-Year Plan (2011-2015), but also the year in which the new Five-Year Plan (2016-2020) is formulated. It is of great significance as a link between the past and the future. Third, 2015 is also essential to laying a good foundation to complete the task of comprehensively deepened reform in 2020.

To do a good job in 2015, a very important prerequisite is to comprehend and follow the logic of “understanding the new normal, adapting to the new normal, and leading the new normal” for China’s economic development at present and in the future. The new normal of economic growth is an inevitable phase as China’s economy evolves into a higher stage with more complicated division of labor and more reasonable structure. To realize the evolution, current stage tasks in the economic reform need to be finished, structural adjustment and transformation in the development mode need to make substantial progress, and the new powers for economic growth need to take form. These are three signs that mark the evolution has finished.

I’d like to talk about some of my understandings focusing on accelerating the cultivation of new powers for economic growth through innovation in a new normal of economic growth.

Adapting to and leading a new normal must be based on a scientific understanding of the new normal

President Xi Jinping gave a systematic analysis of the economy’s new normal at the Central Economic Working Meeting held last month and summarized the trend changes brought by a new normal. This is the starting point where we can have an understanding of the new normal. Only with a profound understanding about these changes, can we understand, adapt to and lead the new normal in a scientific way. I believe that to increase the understanding of it, it is necessary to scientifically analyze the internal and external changes facing China’s economic development, along with the new opportunities and challenges, as well as the new requirements for development in the new stage.

The most remarkable change in external environment is the profound adjustment of the world development pattern. As globalization develops and China’s status and influence rise in the world economy, China’s development is increasingly impacted by the international development pattern. Generally speaking, the world development pattern has some adjustments in the following aspects.

First, the world economic growth pattern has been changing dramatically. With the impact of the international financial crisis, major economies in the world have adopted various measures to boost economic growth. But the prospects for economic growth are still dim so far, and there is no sign of an up-trend. Some statistics show that both developed economies and developing countries will encounter profound, complicated and intertwined structural contradictions that can’t be addressed in a short period of time and require deep system reform. As long as these contradictions are not completely addressed, the global economic pattern will still be unstable and turbulent. The economic and trade growth will hardly recover to the level before the crisis.

Second, the world pattern of division is taking new shape. To catch up with developed countries, developing countries are accelerating industrialization. While influenced by the international crisis, developed economies have also carried out a reindustrialization strategy, resulting in an even more complex relationship between the division of developed and developing countries. In addition, as technologies advance in transportation and communication, competition in the low-end production areas becomes fiercer, so that the division of the global value chain is more favorable to developed countries that sit at the end of value chains. Some statistics show that earnings from global investment of multinational corporations have continued to increase over the past few years, with major developed countries as the biggest beneficiary of globalization.

Third, the global economic pattern is becoming increasingly complex. Since there are no breakthroughs being made in the new round of WTO negotiation, various kinds of regional cooperative initiatives and systems have been established consistently that deepen regional cooperation; make world economic governance more complicated, changeable and uncertain; and to some extent, have an impact on international trade development.

Looking at the internal environment in China, the newest and biggest difference is that the country’s development is confronted with some unprecedented constraints.

First, the contradiction between insufficient development at an absolute level and the unexpected arrival of an aging society has become apparent. Second, there is a sharp conflict between insufficient scientific and technological innovation capacity and an urgent demand for transformation and development. Third, there is an obvious contradiction between the large income gap and the mass desire for equity and justice.

Apart from above external and internal changes, the new round of technological revolution across the world will have a far-reaching influence on China’s development in the future. History shows that all technological revolutions have had an important impact on production models, consumption patterns and even the human development process. A new round of technological revolution focused on 3D printing, distributed energy resources and the Internet of Things is going to take place. As the results of the new and last round of technological revolution combine together, they will greatly affect the current patterns of production, commodity circulation, consumption and communication. New opportunities will appear, while man will encounter huge challenges in industrial development, economic management and social governance.

So, these environment and condition changes create higher demands for development in the new period. It calls for equal attention to the growth of material wealth and the progress of society, social wealth and its creation, the growth rate and its intensity, economic efficiency and social equity, and modern development and development space for our descendants. Only by developing in such ways can we make the best use of things, highlight social equity and fairness, and march in line with the right direction of social progress.

Adapting to and leading a new normal must accelerate fostering new powers for economic growth

Facing the new environment, opportunities, challenges and requirements in the economy’s new normal, it is essential to fully understand that development is of overriding importance and is key to solving all problems of the country. China has to constantly promote development to avoid falling into the middle-income trap and to maintain China’s independent status in the world.

First, a certain rate of growth is inevitable for China entering a new stage. After more than 60 years of development, especially in reform and opening-up for the past three decades, China has turned into a middle income country from a low-income country. But its modernization is not finished yet. In 2013, China’s per capita GDP was about $7,000, accounting for only one-eighth of the US and representing a large gap between that of Chile, Turkey and Brazil. It ranked just around 80th across the world. To realize the great rejuvenation of the Chinese nation and construct a modern and strong country whose people are rich, China has to maintain sustainable, fast and stable economic growth for the following reasons.

Second, economic growth in the new normal has to depend on new driving forces. There are different perspectives on powers for economic growth, for example market demand, factor inputs or the allocations of resources. Looking at economic growth in terms of market demand, the old economic growth powers were characterized by heavily relying on investment and export with consumption not given full play. The new powers give domestic demand, especially consumption demand, full play in economic growth. Viewed from the perspective of factor inputs, old powers focused on investment, resources, and a large and extensive increase of labor, but there was not enough technological progress. The new factor inputs are an efficient and intensive use of capital, resources and labor in combination with the increasingly important role of technological advancement. If taking allocations of resources into consideration, the old powers for economic growth come from resource transfer among sectors and regions to improve allocation efficiency, but new powers depend more on optimal resource allocation in sectors and regions.

Only with these new powers for China’s economic growth, can the country have a chance to face the challenges of the global long-term economic downturn, create more social wealth with less resources and labor, deal with an aging population, break environmental constraints to development, balance the interests of all levels of society, create a support environment for sustainable development, meet people’s expectations for development in a new normal of slower but quality growth and push China’s social progress forward.

Adapting to and leading a new normal must take innovation as a fundamental way to foster new powers for economic growth

The key to adapting to a new normal lies in forming new powers for economic growth that calls for innovation. China needs product innovation and new markets, making domestic demand, especially consumption demand, play a bigger role in economic growth. It needs innovation in forms of production organization and in production process for higher efficiency of resource utilization. It needs innovation in systems to improve efficiency of resource allocation. Technological innovation, for sure, is the most important as it is the foundation for all other innovation. Innovation is a complicated and systematic process. It requires a well-planned direction, clear awareness of key innovative areas, utilization of various resources, and a favorable environment.

First, efforts should be made to promote technological innovation. China has a late-mover advantage to learn experiences from developed countries in terms of traditional technology as an approaching modern country, but it is also confined to making some inventions in fringe areas due to late-starter disadvantages. As for some new technological areas such as addictive manufacturing, digital robots, distributed energy resources, smart power grids, the Internet of Things and new materials, China is almost at the same starting line with developed countries, which means China has the chance to be at the forefront and even play a leading role in innovation. The country needs to allocate its innovative resources as a whole and look for major innovation breakthroughs in such new technologies.

Second, efforts should be made to promote innovation in the way production is organized as its adjustment and optimization will generate an important impact on economic and social development. Adjusting the way of production organization will help cut production costs and improve efficiency when technological conditions remain unchanged. Taking the popular Internet of Things as an example, it will not produce maximum social and economic effects until it is combined with innovation in the way of production organization. Changes in demand will call for reform in the way production is organized. Since household income is rising, people now have more demand for customized and individual production. For China, two things should be borne in mind when it comes to adjusting production organization: first, apply results of new technological revolution so as to optimize the process of large-scale and intensive production; and second, adapt to the trend of an increasingly diversified demand in the market to develop small-sized and customized production.

Third, stress should be laid on encouraging innovation in business models. Business is indispensable to social reproduction. So business innovation will affect not only business itself but also consumption and production. In other words, it will help expand the existing market to create new demand and in the meantime lower the cost of production and make production better suited to consumption. Fruits of the new round of technological revolution, especially the development of Internet and Internet of Things technologies, have created and will continue creating chances for innovation in business.

Fourth, domestic and overseas resources should be comprehensively utilized. The new round of technological revolution is more difficult, complicated and influential than any of its predecessors. So any nation, big, small, developing or developed, will find it hard to shoulder the burden all by itself. With many years of efforts, China has accumulated rich resources for innovation. But it should not close its doors. Instead, it should learn from their successes and lessons, expand the scope of innovation, enrich its connotations and better utilize global resources.

Fifth, the pace should be sped up to build an innovation-friendly environment. An innovation-friendly environment is composed of different elements, including the four major pillars of government, universities, research institutes and companies. Their roles are different and cannot be replaced. To build an innovation-friendly environment starts with handling relations among the four. Meanwhile, China’s policies and systems about innovation should be improved to invest limited resources in fields of strategic importance that will decide its long-term development. The most important things are, as arranged at the Third Plenary Session of the 18th CPC Central Committee, to “enable the market to play a decisive role in resource allocation while the government does what it is supposed to do”. Efforts should be made to promote reform in various fields, especially technological innovation, to mobilize the public for innovation.

History, especially since the Industrial Revolution, shows that a country’s development will develop from one state into another as a result of technological advance as well as internal and external changes. A new normal is the result of development in the past and meanwhile decides the direction of development in the future. However, the new normal is not the sole determinant; strategic and policy choices also matter.