The Trend of Economic Complexity in China: Based on Input-output tables from 1987 to 2007

1. 
   Change of China’s economic complexity
   

However, we also noticed that during 1987 to 2007, change of China’s economic complexity has shown characteristics of stages. The indication is that during 1987 and 1992, the tendency of economic complexity was obvious, complexity index (CI) raised 14.3%, from 2.69 in 1987 to 3.07 in 1992 while from 1992 to 2002, raising tendency of economic complexity was comparatively slow, especially during 1997 and 2002, economic complexity was even decreasing, complexity index (CI) dropped 1.95%, from 3.16 in 1997 to 3.10 in 2002; however, after 2002, economic complexity was rapidly raising again, complexity index (CI) raised 17.03%, from 3.10 in 2002 to 3.63 in 2007.

The reason of from 1992 to 2002, raising tendency of China’s economic complexity was comparatively slow, especially during 1997 and 2002, economic complexity was even decreasing, was that China was going through a remarkable structure reformation, especially annexation and reorganization of state-owned enterprises. The Party's Fourteenth National Congress report clearly brought forward that the goal of our economy system reformation was to establish socialistic market economy system. After that, China’s economy system reforming steps were evidently faster. The Party's Fifteenth National Congress report in 1997 again clearly suggested that state-owned economy should implement strategic transformation, make progress while prepare to retreat, grasp “large” and let go of “tiny”, make achievements while remain stable; it also suggested to fasten the steps of annexation and reorganization of state-owned enterprises, which brought state-owned enterprises reformation into a crucial stage- a large amount of state-owned enterprises were annexed and reorganized, or went bankrupt or impoverished, which caused a large decrease of state-owned enterprises. There were 113800 state-owned enterprises all over China in 1995, yet by 2002, there were only 41100, 76900 (65.1%) were shut down. Large amount of state-owned enterprises being annexed and reorganized changed the interior division of labor of economy system, economic activities were functionally reorganized- from chain manufacturing within multiple enterprises to only within one enterprise, some market trading economic activities between enterprises were turned into trades inside the enterprise. Therefore, industrial relationship between departments changed, average propagations lengths of mutual impact between industries has decreased and economic complexity decreased.

However, after 2002, state-owned enterprises reformation in China entered a new stage. The Party's Sixteenth National Congress report in 2002 brought forward a requirement of establishing new state-owned capital management system. In October 2003, the Third Plenary Session of the Party's Sixteenth National Central Committee passed “Decisions from the Central Committee of the Communist Party of China to Perfect Socialistic Market Economy System” in which it suggested to establish a modern property right system with clear attribution, explicit authority and responsibility, strict protection and unhindered circulation. It was clear that China’s state-owned enterprises reformation focus has changed from annexation and reorganization to establishment of modern property right system. Meanwhile, the world economy stepped into a fast growing period after 2002, plus China’s exportation strategy, China has further established its position of being the center of the world’s manufacturing industry. China’s economy grew rapidly and economic scope grew bigger. Between 2003 and 2007, China’s economy growing speed reached 11.24%. Under the background of fast growing economy and developed countries’ industries quickly moving to China, the interior division of labor of China’s economy was deepened, industry chains were expanded and economic complexity increased.

2. Positions of Each Industry Among the Industry Chain

According to formula (14) and (15), we have calculated and measured the average propagations lengths of each industry with capital and need change having impact on other industries from both forward and backward angles (chart 2). From the results in chart 2 shows that FA value of agriculture, energy exploitation and metallic/nonmetallic extraction industry were higher than BA value of those industries. In 2007, FA value of agriculture was 4.003 while BA value was 3.115; FA value of energy exploitation industry was 4.553 while BA value was 3.273; FA value of metallic/nonmetallic extraction industry was 4.557 while BA value was 3.192. This shows that capital change of these industries caused evidently higher average propagations lengths of having impact on other industries than need change, therefore, from the angle of industry chain, these industries were at the front of the industry chain, were fundamental industries, raise of capital of these industries would have wider impact on other industries. However, BA value of wholesale and retail trades, finance and insurance and transportation and postal service industry were higher than FA value of those industries. In 2007, FA value of wholesale and retail trades industry was 3.098 while BA value was 3.319; FA value of finance and insurance industry was 3.255 while BA value was 3.717; FA value of transportation and postal service industry was 3.103 while BA value was 3.764; FA value of real estate and social service industry was 3.153 while BA value was 3.587. This shows that need change of these industries caused evidently higher average propagations lengths of having impact on other industries than capital change, therefore, from the angle of industry chain, these industries were at the end of the industry chain, raise of need of these industries would have wider impact on other industries.

We also took FA and BA value change of each industry into consideration. Chart 2 shows that during 1987 and 2007, FA and BA value of all industries has raised, which means that during this period, change (capital change or need change) of industries in China caused apparent increase of average propagations lengths towards other industries, which brought tighter connection between industries, higher extent of relevance among industries and more expanded industry chain. This matches the foregoing results of analysis of China’s economic complexity change. But if we specifically observe the range of FA and BA value change, we can find out that during 1987 and 2007, speed of raising FA value of metallic/nonmetallic extraction, energy exploitation, petroleum and coal gas processing and power and water production industry was the most obvious- 60.419%, 50.662%, 49.318% and 53.325%, which means capital change of these industries had caused an obvious raise of average propagations lengths to other industries, the fundamental position these industries have had been strengthened. Speed of raising BA value of wholesale and retail trades, real estate and social service and transportation and postal service industry was the most obvious-45.379%, 52.964% and 41.770%, which means need change of these industries had caused an obvious raise of average propagations lengths to other industries, these industries would have a wider backward drawing impact on other industries.

Chart 2 FA and BA value change of each industry in China

According to foregoing deduced economic complexity index, we further measured economic complexity and change of some provinces (chart 3). Results from chart 3 shows that during 1987 and 2007, economic complexity of the 10 provinces (Hebei, Liaoning, Shanghai, Jiangsu, Zhejiang, Jiangxi, Hunan, Guangdong, Shanxi and Xinjiang) we measured was increasing evidently, which means during this period, the interior division of labor in these provinces was further deepened, extent of industrial relevance was strengthened and industry chain was expanded, which also matches the foregoing analysis of the whole country. However, if we specifically observe the economic complexity and change of each province, we can find two obvious distinctions.

By observing the complexity index value, we can see that economic complexity of coastal provinces and regions in China is in general higher than mid-west provinces and regions, yet economic complexity differences also exist among coastal provinces and regions. In 1987, Shanghai, Jiangsu and Zhejiang had the highest economic complexity with complexity indexes: 3.202, 3.111 and 3.012 while complexity index of Hebei was only 2.530. In 2007, Guangdong, Zhejiang, Jiangsu and Shanghai had the highest economic complexity with complexity indexes: 4.020, 3.865, 3.830 and 3.520 while complexity index of Hebei was 3.175. In 2007, Hunan, Jiangxi, Shanxi and Xinjiang had comparatively even lower economic complexity indexes: 3.081, 3.022, 2.937 and 2.856.

By observing the change of complexity index value, we can see that rise of economic complexity of east coastal areas (except for Shanghai), compared to mid-west provinces and regions, as more obvious. Between 1987 and 2007, economic complexity of Guangdong, Hebei, Zhejiang and Jiangsu had respectively increased 42.3%, 25.509%, 28.326% and 23.129% while Shanghai only 9.946%; economic complexity of Jiangxi, Hunan, Shanxi and Xinjiang had respectively increased 16.123%, 15.965%, 18.374% and 18.321% between 1987 and 2007.

Economic complexity and change of China’s different regions bearing aforesaid characteristics has a lot to do with our economy development strategies. Since the reformation and open policy, Chinese government has abandoned the importation substitution strategy under closed planning economy circumstance, clearly brought forward a coastal extroverted type of developing strategy. The basic logic of this strategy is: only if we open for the outside world comprehensively, can we develop our economy based on a world-level of economy, learn from the best practical experiences, apply advanced and suitable technology, form and give scope to China’s comparative advantages in international work division and cooperation and gradually shorten the gap between China and developed countries. However, restrained by lack of domestic deposits, shortage of human resources and geographic conditions at the time, it was impossible for China to employ comprehensive balanced developing strategies; only under the conditions of existence of developing gaps between different regions, by letting coastal regions develop first to drive the whole economic situation, can we implement unbalanced from-spot-to-scale developing strategy (Liu He, 2011). China’s extroverted type of developing strategy matches the fastening of globalization, so that China’s economy can develop rapidly. But at the same time, because of the unbalanced developing strategy, plus the geographic advantages, southeast regions enjoy apparent advantages of transportation capitals on ocean, air and land. Combing relatively superior policy conditions with geographic advantages made economic activities in southeast China started to gather rapidly in the 80s of 20^th century.

In mid-west area of China, not only economy development was comparatively slow, problems such as single industrial structure, shorter industry chain, industries depending on mining and natural resources also existed. For instance, in 2008, mining industry in west area reached an industrial added value of 384,233,000,000, which was 22.6% of the whole west area industrial added value and 12% higher than the whole country; natural resources industry reached 402,092,000,000, which was 23.6% of the whole west area industrial added value and 20% higher than the whole country; power, coal gas and water production and supply industry reached 188,306,000,000, which was 11.1% of the whole west area industrial added value and 8% higher than the whole country.

Pushed by the extroverted type and unbalanced developing strategy, China’s economic activities were speeding up towards the east coastal regions. In east coastal provinces and areas, interior industrial work division system deepened, industrial relevance strengthened and industry chain expanded, so that economic complexity raised while in mid-west areas, manufacturing industries gather and develop slowly with single industrial structures and shorter industry chain, so that the economic complexity index was apparently lower than east coastal areas and raising slowly (economic complexity raise in Shanghai was comparatively slow because its economic activities gathering extent raises relatively slowly, especially recently some economic activities were moved out² ).