Logic Behind 'Out with the Old, In with the New'
I. The New Strategic Information is Encouraging, and the Call for "Upgrading the Old with the New" is Inevitable
On March 12th and 13th, 2024, the State Council issued two documents, "Work Plan for Promoting High-Quality Economic Development through Standard Upgrades" and "Action Plan for Promoting Large-Scale Equipment Renewal and Consumer Goods Replacement with Old for New." The spirit and content of these two documents are closely linked; one can be seen as the principles and planning, while the other is the specific implementation plan, revealing a new significant strategic message for China's economic development in the future. China has entered a stage of high-quality development, and these two documents will help to establish a consensus on this important issue.
High-quality economic development is driven by technological innovation and aims to establish a modern industrial system. When discussing a modern industrial system, people naturally think of emerging industries, especially the eight strategic emerging industries. This is certainly correct; without the rise of emerging industries, there would be no modern industrial system. However, this is not enough; there should also be a modernization upgrade of existing or traditional industries to fully establish a modern industrial system. In fact, the two cores of the eight strategic emerging industries, namely the digital industry and the green industry, are both empowering industries. The "digital+" and "green+" industries are responsible for the digital and green transformation and upgrading of other industries, including both emerging and traditional industries. This means that the success of the digital and green industries depends on whether the other industries they empower have achieved transformation and upgrading. This also indicates that the transformation and upgrading of traditional industries is an indispensable and important aspect of establishing a modern industrial system, and together with the rise of emerging industries, they form the twin pillars of the modern industrial system. Neither pillar can be absent; otherwise, the modern industrial system will be crippled.
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The "Work Plan for Promoting High-Quality Economic Development through Standard Upgrades" clarifies this development strategy, points out the significance of the transformation and upgrading of traditional industries for high-quality economic development, and determines that the current path for the transformation and upgrading of traditional industries is standard upgrades. The "Action Plan for Promoting Large-Scale Equipment Renewal and Consumer Goods Replacement with Old for New" proposes specific action plans for the current stage, clarifying 20 key tasks in 5 areas. Equipment renewal is the replacement of old equipment with new equipment; consumer goods replacement with old for new is the exchange of old products for new products, which are essentially "upgrading the old with the new." The "upgrading the old with the new" strategy thus emerges, pointing out a new path for China's economic development in the future, that is, implementing "upgrading the old with the new" in various industries for equipment or products.
Regarding "upgrading the old with the new," there are several key points worth mentioning. First, since it involves "upgrading the old," it naturally includes traditional industries, indicating the path to regeneration for traditional industries; second, at the same time, "upgrading the new" refers to emerging industries and new products, paving the way for their development; third, the specific objects are equipment and consumer goods, with equipment including machinery, instruments, and equipment, and consumer goods should be durable consumer goods; finally, equipment and consumer goods cover various industries, and "large-scale" emphasizes their extensiveness.
II. "Upgrading the Old with the New" is a Good Remedy for Alleviating Growth Pressure: The Logic of Effectiveness
Regarding economic growth, there are two widely applied economic theories: one is the neoclassical growth theory, and the other is the Keynesian growth theory. Neoclassical growth theory explains economic growth from the supply side, while Keynesian growth theory explains economic growth from the demand side. From this perspective, it seems that supply determines economic growth and demand determines economic growth as two independent and parallel factors.
The problem is that in actual economic operations, the two cannot be independent and parallel. Supply and demand are often referred to as the two ends of the economy, but they should not be considered as two independent components of the economy. Instead, they should be seen as the positive and negative sides or two dimensions of the economy. Supply and demand together constitute the economic cycle, and when both expand simultaneously, there is naturally economic growth.What if both cannot expand simultaneously? This involves what is commonly referred to as the "Barrel Principle" or the "Short Board Theory." The "Barrel Principle," proposed by American management scientist Peter, states that the value of a "barrel" composed of multiple wooden planks lies in the amount of water it can hold. However, the key factor determining the barrel's water capacity is not its longest plank, the "long board," but its shortest plank, the "short board." We can consider supply and demand as the two wooden planks that make up the economic "barrel," and view economic growth as the water held by the "barrel." Therefore, when supply and demand cannot expand at the same time, economic growth is determined by the side that is the "short board." If the "short board" side cannot expand, then no matter how fast the "long board" side expands, it is of no avail. In other words, whether in the short term or the medium to long term, economic growth is determined by the demand side when there is an oversupply, and by the supply side when there is a shortage of supply.
The current issue is that demand, as the "short board," finds it difficult to expand to the level of supply, which is the "long board." In a situation where both consumption and investment demand are stagnant and overall demand expansion is sluggish, how can we stimulate economic growth? Logically, it is clear that we need to create demand and, to achieve a faster balance between supply and demand, reduce supply. "Upgrading and replacing" effectively takes into account both aspects: "replacing" directly creates demand and stimulates economic growth, while "upgrading" reduces supply, making room for "replacing" and opening the door for "demand." It also encourages supply and demand to move towards balance more quickly, creating conditions for future economic growth. The effectiveness of "upgrading and replacing" in stimulating economic growth in our country is significantly higher than in other countries. The reason is that developed economies have more consistent product quality, with less difference in quality between new and old products, making the need, motivation, and marginal effect of "upgrading and replacing" less strong. In contrast, our country is still a developing economy. Although there is an oversupply of products, the distribution of product quality is uneven, and the quality difference between new and old products is significant, making the need, motivation, and marginal effect of "upgrading and replacing" much stronger. Compared with other developing economies, the difference lies in the fact that the quality of new products in these economies is significantly lower than in our country, and therefore the need, motivation, and marginal effect of "upgrading and replacing" are also correspondingly lower than in our country.
Taking automobiles as an example, in our country, there are currently over 16 million passenger cars that meet or are below the "National III" emission standards, with over 7 million of them being more than 15 years old, all of which have reached the stage of "upgrading and replacing." According to estimates by relevant departments, just the upgrading and replacing of cars and home appliances can create a market space of over a trillion scale, equivalent to more than 0.8% of our country's GDP, which is not insignificant.
This means that our country's "upgrading and replacing" has a greater space and higher effectiveness than other countries, creating fundamental conditions for our country's economic growth to continue to outpace that of other nations.
Therefore, "upgrading and replacing" is the right remedy, an effective solution to alleviate the current lack of momentum in our country's economic growth.
III. "Upgrading and replacing" is the necessary path for the sustainable development of our country's economy: The logic of necessity.
"Upgrading and replacing" is not only a good remedy to alleviate the pressure on our country's economic growth at present but also the necessary path for the sustainable development of our country's economy in the future.
Since the reform and opening up in 1978, our country's economy has grown strongly for 46 years, with an average annual growth rate of 9%, more than 5 percentage points higher than the global average level, and the quality of the economy has fundamentally improved.
The fundamental reasons for the high and medium-high speed growth of our country's economy over the past 46 years are: first, the reform and opening up have promoted a significant increase in total factor productivity; second, before the mid-1990s, it was still a shortage economy, so domestic demand was exceptionally strong; third, after joining the WTO in 2001, the external environment significantly improved, and external demand expanded rapidly; fourth, for a long period, a huge demographic dividend was enjoyed. However, these drivers of economic growth are weakening or disappearing. The increase in total factor productivity has historically slowed down; exceptionally strong domestic demand has turned into relatively insufficient domestic demand; the effect of joining the WTO is nearly saturated, and the suppression by the United States has further severely damaged external demand; the demographic dividend is gradually weakening.
In this situation, how can we promote medium-high speed economic growth? Improving total factor productivity is about improving the capacity and quality of supply, and according to the aforementioned "Barrel Principle," the first thing to solve is the problem of insufficient domestic demand.To address the issue of insufficient domestic demand, it is necessary to create internal demand, which means generating consumer demand and fixed asset investment demand. "Renewing the old with the new" is an effective solution to this problem.
It is necessary to re-emphasize that the supply exceeding demand in our country's economy refers to the total supply being greater than the demand. However, if we consider quality, the situation would be significantly different. At present, there is still a considerable amount of old products in our country that are of medium to low quality, with a significant gap from the standards of modernization and the levels of developed countries. For example, the most talked-about topic is the housing of urban residents in our country. According to the data from the seventh national population census, as shown in Figures 1 and 2, the average housing area per urban resident in our country in 2020 was 38.6 square meters, and the housing-to-household ratio (the average number of residential units owned by each household) is estimated to be around 1.1, both of which are close to the standards of developed countries, and can be said to be over-supplied in terms of total quantity. However, it must be seen that, as shown in Figure 3, less than half of the urban residents' housing in our country was commercial housing built after 2000, and the other half is mostly non-commercial housing, most of which was built before 2000. Most of the non-commercial housing involves about 400 million urban residents, including 180 million migrant workers who have moved to cities, and the quality in all aspects is far from the modern housing standards, which will eventually need to be replaced.
Therefore, if our country's consumption and industrial structure are to achieve modernization and catch up with developed countries, a large number of old products and equipment of medium and low quality must be eliminated and replaced with high-quality new products and equipment, which is "renewing the old with the new". If consumers use products that meet modern standards, and enterprises are equipped with modern standards, it can be said that our country's economy has achieved modernization; otherwise, it cannot be considered to have achieved modernization. In other words, from the perspective of improving the quality of the economy, "renewing the old with the new" is also an inevitable path.
IV. "Renewing the old with the new" is naturally justified: the logic of legitimacy
(1) It is not waste, it is a step towards modernization, and it is worth it.
"Renewing the old with the new", according to traditional concepts, is waste and not worth it. The old products can still be used, so why change them? This kind of thrifty thinking was a virtue in the era of product shortage when supply could not meet demand, but in the era of product surplus when supply exceeds demand, it is an old habit that is not worth promoting. Being able to use something does not necessarily mean being satisfied with its use, such as household appliances, many of which have weak functions and often break down, causing annoyance; housing, many of which are old, small in space and lack supporting facilities, causing discomfort; equipment, many of which are outdated and backward, with low production efficiency and poor product quality, and often need maintenance, causing headaches for entrepreneurs.
Therefore, to be satisfied with the use, it is necessary to replace the old with new household appliances, housing, or equipment. After the replacement, if it is used more satisfactorily, it is an upgrade in consumption and industry, it is a step towards modernization, and it is worth it. This is the essence of modernization. Otherwise, how can life and production activities achieve modernization if they continue to use old products or equipment?
(2) Artificially creating demand is needed for stable growth.
"Renewing the old with the new" is indeed artificially creating demand. But this is necessary for stable economic growth and is also the original intention of Keynesianism to stimulate demand to promote economic growth.After the Great Depression of the 1930s, policymakers around the world favored Keynesianism, adopting expansionary fiscal and monetary policies as needed to create demand and maintain economic growth. In fact, there are countless examples of artificially created demand that people have readily accepted and enjoyed. The most typical example is the mobile phone, which releases a new version after a certain period. Each new version features new functions that correspond to new consumer demands. However, these new demands are not initiated by consumers but are stimulated and mobilized by mobile phone companies. That is, mobile phone companies design and create new functions with foresight and then guide consumers to use these new functions through various means. Consumers find the new functions interesting and thus purchase the new version of the phone and consume the new functions. The current trend of installing smart devices in new energy vehicles is also such a case.
Therefore, artificially creating demand is not new but a necessary path for modern economic growth. China's economy has also reached a stage where it needs to create demand by all means to maintain medium-high-speed growth and improve the quality of the economy. Otherwise, the economic growth rate will slide prematurely to the global average, and it will be difficult to fundamentally improve the quality of the economy.
(3) Improving total factor productivity must be implemented through "replacing the old with the new"
On the supply side, the key to the sustainable development of China's economy is to further improve total factor productivity, that is, to make greater progress in scientific and technological innovation, human capital enhancement, economic structure improvement, and market mechanism optimization. However, as mentioned earlier, economic growth requires both the demand and supply sides to move forward and exert effort simultaneously. The improvement of total factor productivity on the supply side does not exclude "replacing the old with the new" on the demand side; not only does it not exclude it, but it complements and supports each other.
This is because the results of the improvement of total factor productivity on the supply side must ultimately be implemented through "replacing the old with the new" on the demand side. For example, the achievements of scientific and technological innovation must be implemented in higher-quality new products. Without "replacing the old with the new," there will be no demand space for new products, and the achievements of scientific and technological innovation will have no market and will not be implemented. The improvement of total factor productivity will also have no practical significance.
Based on the above logic of effectiveness, necessity, and legitimacy, a wave of "replacing the old with the new" should be set off in various regions and industries across the country, just like promoting the development of strategic emerging industries, to consolidate the foundation for China's continued economic development.
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