Where are we heading?

The world economy is experiencing a deep crisis. Arising from U.S. sub-prime mortgage loans, the crisis has ravaged the U.S. financial sector and is having repercussions all over the world. Many scholars believe the current crisis stems from flaws in the financial system and risky “financial innovations.” This view indeed makes sense. When the financial sector, a component of the “virtual economy,” expands and becomes far greater than the real economy, it is like a towering tree with a rampant growth of leaves and branches. Without concurrent growth of its roots, however, the tree will simply catch more wind and collapse, regardless of its thick branches and leafy profusion.

This is a vivid analogy of the “roots” of the world economy, which is the real economy. More than 200 years of industrialization has witnessed four to five long periods marked by the evolution of core industrial technologies. Since the middle and later years of the 20th century, the world has entered into a new growth cycle marked by electronic information communication technologies and the Internet economy. This period is referred to as the “high-tech” age or the “new economy,” which helped end the economic recession of the 1970s that had been caused by an oil crisis and re-embark on the path of robust growth.

But in the period of a brief 20 years, the world economy has been hit by three devastating economic crises. The first is the Asian Financial Crisis of 1997. The second is the burst of bubbles in high-tech industries and “new economy” shares, mainly Internet and bio-company shares, marked by the plunge of the Nasdaq composite indices at the beginning of the 21st century. The third is the widely-feared world economic recession triggered by the U.S. sub-prime crisis we are experiencing now.

Lessons tell us that problems in the operation and commercial pattern of high-tech industries will lead to chaos. This question remains the biggest “mystery” concerning the path of the world economy and China’s economy as well in the coming 10 to 20 years. Failure to unravel this mystery will leave practical problems unanswered: why have high-tech industries undermined confidence and caused the start-up board collapse, and why is there little sign of recovery? Why are traditional industries such as real estate still decisive for economic growth in an era of the new economy, while high-tech companies play a less essential role? Since high-tech industries possess unusual economic features, for instance, their product marginal costs are very low, near zero, how can we ensure that market competition rules and commercial patterns will make them economically viable? High-tech industries also have a nature of “creative destruction,” which is much greater than that of traditional industries; so what on earth does this feature mean in terms of interest conflict and industrial impact during industrial upgrading? How should state policies react?

China’s reform and opening has been carried out against this background. In the short span of 30 years, China has completed the whole process of industrialization and is approaching the level of cutting-edge technologies. Progress, however, also means that China has to face problems. China and the United States, the world’s two economic engines, must answer the question of “where to go.”

As for China, it has to develop both high-tech and quality-enterprises industries, which possess technical and processing superiorities and can maintain high added value on a long-term basis. They will play the same decisive role as innovation and high-tech industries can. We are taught by this round of world economic crisis that the roots of the current world economy are the combination of strong traditional industries and growing high-tech industries. Any innovation, including financial innovation, cannot break away from the real economy.