Creating a flourishing, dynamic and entrepreneurial economy

In a new book, Dynamism: The Values that Drive Innovation, Job Satisfaction, and Economic Growth, Nobel Prize-winning economist Edmund Phelps and his co-authors argued that it's not just technological progress or market efficiency that matters for transformative economic growth. The key is to have an economic and cultural climate that encourages millions of people to experiment with business ideas based on new opportunities－which could be created by new technologies, or by customers with higher incomes, or by new government policies that push market reforms or build new forms of infrastructure.

What's really great is that these dynamic entrepreneurs create opportunities for other dynamic people－not only raising living standards and upgrading industry, but also creating a dynamic society and culture.

While reading reports of the Central Economic Work Conference, which was held in Beijing from Dec 16 to Dec 18, I was struck by how the Chinese government's policy plans seem to be precisely crafted to create a more dynamic economy and society, though that term is not explicitly used.

China will continue its policy of improving the business environment and strengthening the rule of commercial law. This will support the goal of creating a society based on innovation and mass entrepreneurship that is essential to creating a dynamic, innovative economy.

The CEWC also emphasized the need for strong enforcement of anti-monopoly policies. What China wants to avoid is the kind of innovation-stifling monopolies we've seen arise in Silicon Valley over the last 10 years. The valley went from being one of the most entrepreneurial and innovative areas in the history of the world to the home of monopolistic giants that have killed competitors everywhere but China.

The growth of technology companies is important to dynamism, but it is just as important that they not be allowed to stifle competitive markets.

The sharp rise in monopolistic profits has been a big factor in the rise of inequality and in the huge transfer of wealth from workers to capital owners over the past decades in the United States.

The CEWC also included an increased emphasis on "demand-side reform", recognizing that any economy will ultimately be driven by demand from end-users. Tax incentives and improvements in the social safety net will be essential in increasing consumer demand, but the greatest emphasis needs to be on continuing the growth of real wages.

China needs to achieve real sustainable demand that can only be guaranteed by continuing rises in the incomes of average people. It is important to avoid the stagnant wages and debt-fueled consumption seen in the US over the last 40 years.

The sharp drop in innovation that Phelps found in the US and Europe was clearly associated with income inequality and no wage increases for working people.

Speaking at an ambassador's roundtable organized by the Center for China and Globalization in Beijing, Zhu Min, president of the National Institute of Finance at Tsinghua University, said that the 14th Five-Year Plan (2021-25) will include measures to ensure that wages rise faster than GDP.

This is important for social equity, but is also crucial to economic upgrading. Rising wages are the basis of sustainable demand. And, perhaps most importantly, they force companies to upgrade their products and manufacturing processes rather than rely on business models based on cheap labor.

Over the next decade, China's investment will be redirected from roads and railroads, which are already excellent, to 5G, big data, the internet of things, and new energy. IoT investments will strengthen China's manufacturing capabilities, allowing it to remain the workshop of the world while still raising wages and upgrading products.

New energy investments will allow the country to continue the hard but essential task of cleaning up its environment. Investments in advanced electronics and artificial intelligence will allow China to transition to indigenous innovation instead of being a technological follower.

To create a dynamic economy and culture, innovation has to be widespread rather than just concentrated in a few locations or companies. China's emphasis on building first-class roads and telecoms infrastructure throughout the country is proving key to transforming small cities and rural areas.

In more than 5,000 rural villages, the so-called "Taobao villages", entrepreneurs are taking advantage of the new infrastructure to build e-commerce companies that have led to transformative increases in the incomes of village residents and also created a much more optimistic and dynamic culture in those villages.

The book Dynamism identified three different types of innovators who are needed to create a growing, innovative economy.

Some innovators are inventors or scientists who are able to commercialize their new technologies.

Others are merchants and business experts, who improve efficiency by taking advantage of new technological or market opportunities.

The research concludes that the most important innovators combine these approaches by using new business models to push forward the production possibilities available to the economy.

Many of the policies discussed at the CEWC can be seen as ways to promote one or more of these kinds of innovation.

Phelps' 2013 book, Mass Flourishing, which also dealt with how to create a dynamic economy, struck a chord in China. It sold 10 times as many copies in China as it did in his native US and was praised by Premier Li Keqiang.

It seems that China has taken to heart the goal of creating a flourishing, dynamic and entrepreneurial economy.

The writer is vice-president and senior economist at the Center for China and Globalization, a nongovernmental think tank based in Beijing.