An analysis of the current situation and changing trends of the industrial structure in China's western region

Updated: 2014-09-12

By Lu Zhongyuan

I. A brief review of industrial growth and restructuring in the western region

The current situation and changing trends of industrial structure in the western region have been closely related to the major strategic layout of the national economy and systematic changes. Since the founding of new China, there have been three periods of major industrial restructuring, which have a decisive impact on the formation and transformations of industries with local comparative advantages.

In the period of the First and Second Five-Year Plans, a policy of inclining to the western region was followed in State investment. An intensive capital input was carried out there according to the guiding principle of "a gradual approach under a centralized layout, with coordinated basic construction and giving top priority to communication". Thus began the industrialization in the western region. Accordingly there appeared an initial shape of a comparatively integrated industrial system and an infrastructure network.

In the period lasting roughly a decade when State investment was focusing on building up "the Third Front"(strategic rear in the remote hinterland in the western part). Local industrial development thus received a powerful push. A number of new industrial centers sprang up in this period. A southwestern industrial base, composing of Sichuan, Yunnan and Guizhou Provinces, came into being. A machinery industrial base located in the western parts of Hubei, Hunan and Henan Provinces appeared. The period also witnessed the birth of a machine tool and bearing industrial base in Hanzhong district and a machine tool, implement and agricultural machinery industrial base in Tianshui district, both in Shaanxi Province. Simultaneously established were the instrument and machine tool manufacturing base in Yingchuan, Ningxia Province, and the machine tool, internal-combustion engine and tractor manufacturing base in Sining, Qinghai Province. In Panzhihua, Sichuan Province, an iron and steel base was born. And a large-scale coal mining and electricity base cropped up in western Guizhou Province. Furthermore, bases of newly emerging, high-tech and sophisticated products sprang up in Chengdu and Xi'an, capitals of Sichuan and Shaanxi Provinces. Ever since then, industrial production capacity in the western region has been playing a decisive role in the national economy with some provinces having a fairly well-equipped industrial system with all necessary departments. In the mean time, in building up "the third front", a large number of talents were assembled. Institutions of higher education and scientific research also mushroomed there.

The period of industrial restructuring there came with reform and opening-up initiated in 1978. Much has been done over the past two decades in readjusting local industrial structure left over from the long-term planned economy and investments originally purposed to prepare for war. Even so, structural problems and contradictions still plagued the vast region. In the shift from planned economy to market economy, some irrational high-cost, low-return projects launched under the planned economy, which used to rely on enormous state financial support, now have to depend on their own. Moreover, the early- start advantages of preferential policy and market competitiveness enjoyed by the eastern region in reform and opening sparked an eastward flow of production factors from other parts of the country. Thus faded the past superiority in factor injection of the west. And a worsening position ensued in growth speed, terms of trade and division of labor.

New and tremendous changes, however, are under way for the region both in the domestic and foreign economic environment and in the driving force for industrial restructuring. Much evidence shows the growing impact of economic globalization on China's reform, opening and modernization. A transition has taken place from seller's market to buyer's market in supply and demand. Economic growth and industrial optimization and upgrading are gathering momentum in the eastern region. The large-scale development strategy for the western region has been launched, thereby broadening and deepening reform and opening, with calls running high for ecological and environmental protection. All this not only has put pressure on the western region for structural adjustment, but also has injected vitality to the region for quickening its steps toward restructuring.

II. Trends and features of the change of industrial structure in the western region since the 1990s

1. The overall picture of the industrial structure in the western region and the three periods of its structural changes

The process of industrial restructuring has evidently quickened in a basically correct direction for most provinces and autonomous regions, and the overall specialization of the industrial structure has been upgraded to varying degrees.

Firstly, local industrial structure is in the process of drastic alterations with an intensity generally higher than that in some provinces and cities in the central and eastern regions. The rank of the co-efficient of changes in industrial structure from 1990 to 1999 (see table 1) runs as follows, 1. Guangxi; 2. Beijing; 3. Qinghai; 4. Hainan; 5. Tianjin; 6. Guangdong; 7. Shaanxi; 8. Chonqing; 9. Jilin, 10; Ningxia; 11. Sichuan; 12. Fujian; 13. Helongjiang; 14. Guizhou; 15. Shangdong; 16. Anhui; 17. Henan; 18. Jiangxi; 19. Inner Mongolia; 20. Shanghai; 21. Shanxi; 22. Hunan; 23. Hubei; 24. Yunnan; 25. Hebei; 26. Liaoning; 27. Gansu; 28. Xinjiang; 29. Zhejiang and 30. Jiangsu. Of the first 15 provinces, seven are in the western region, with the coefficient for Guangxi (the first) and Qinghai (the third) reaching as high as 41.64% and 38.03% respectively, the rest being in the eastern region. Of the other 15 provinces, only four (Inner Mongolia, Yunnan, Gansu and Xinjiang) are located in the western region with the rest in the eastern and central regions. These increasingly drastic structural changes are inevitable for the economically underdeveloped western region to accelerate industrialization, which is in conformity with the general laws of industrialization and modernization. Furthermore, shortages in commodities in China were overcome since the 1990s. Prevailing surplus of production capacity and aggravating structural contradictions are forcing all localities to intensify structural readjustments, thus stimulating transformations of industrial structure in the western region.

si (t) represents the proportion of the "i" sector in the increase in value of the entire industry for "t" years. The coefficient of structural variations "S" equals to the sum of absolute value of the relevant proportions of all the sectors divided by two. If S equals to 100%, it signifies complete structural changes; if the coefficient is 50%, it indicates that only half of the industrial sectors have undergone changes in value increase.

The defining formula for H (degree of specialization) is as follows;

si stands for the same as above, whereas hmax refers to the natural logarithm of sector value. Given the same proportion for all the sectors, the degree of specialization would show zero. Suppose the degree of specialization for only a single sector stands at 100, then the index would be 0 to 100. Thus the bigger the index, the higher the degree of specialization.

Source: Calculated on the aggregate output value at the 1990 constant price of the country's (excluding Tibet) 31 industrial sectors with the figures provided by the Department of Industry and Communications under the National Statistics Bureau.

Secondly, the figures cited above indicate a general rise in specialization in the overall industrial structure of provinces, autonomous regions and municipalities in the western region. Upon calculating the specialization indexes of the aggregate output value of 31 industrial sectors, we found that barring a drop in rank and index of Chongqing and Shaanxi Province and the figures for Tibet are unavailable for the moment, the indexes rose to different extent for the remaining 9 provinces and autonomous regions in the western region, and there were fluctuations in their national ranking, with obvious ascent for Yunnan, Qinghai, Guangxi, Sichuan and Guizhou (see table 1). By sharp contrast, a drop occurred for some provinces or municipalities in the eastern region such as Shanghai and Shandong Province. This gradual improvement in the specialized labor division of the entire industrial structure for most part of the western region indicates the focus on local special features and resultant cooperation and speci alized division of labor. This has somewhat reduced redundancy in construction to pursuit an entire industrial system of its own by each locality in the past. In sum, the direction of structural transformation has been basically correct with marked achievements.

Thirdly, given the specialization level of the entire industrial structure in the course of the three restructurings, the similarity in industrial structure has gradually faded in the country as a whole with the declining trend all the more clear in the western region. Our calculation suggests that from 1992 to 1997 similar coefficients of industrial structure has declined for 18 provinces, autonomous regions and municipalities. With the exception of Inner Mongolia, Chongqing and Tibet whose data are unavailable, the indicators for the remaining 9 provinces and autonomous regions have dropped to varying degrees with the largest margin of 5 and 3.36 percentage points going to Yunnan and Shaanxi Provinces respectively (see table 2). Such a tendency shows that the high degree of similarity in industrial structure of various localities that has long plagued the sound economic development of the country has gradually been ameliorated with the improvement shown more widespread in the western region than in the eastern and central regions. Nevertheless, it should be pointed out that the similarity degree still remains fairly high between the western region and other parts of the country. Up till 1997, except Yunnan and Xinjiang, where the similarity coefficient had declined below 0.90, the relevant indicator for the remaining provinces still stood above 0.93 with that for Sichuan and Ningxia over 0.96. This points to the arduous task of restructuring ahead. By comparison, the similarity coefficient for most provinces in the central and eastern regions still remains above 0.92 with decline registered in fewer provinces than that in the western region. Furthermore, some provinces with already high similarity coefficient even reported a rising trend. This indicates that in the reorganization of national labor division and industrial distribution, readjustment at specialization of industrial structure had not been sufficient in some provinces in the central and eastern regions, thereby ending up in unsatisfactory results.

Xij stands for the proportion of j industrial sector in the i region whereas Xj stands for that of the country as a whole.

Source: Calculated on the added value by industrial sector in the three periods of restructuring in all the provinces, autonomous regions and municipalities. The relevant figures come from The Table of China's Input and Output in 1992 and 1997, (China Statistics Publishing House). The figures for Hainan and Tibet are unavailable.

2. Analysis of industries with local comparable advantages in the western region

In the course of the three phases of industrial restructuring, some industries with certain local comparable advantages came into being for each province, autonomous region or municipality. The case is all the more clear for industries of resource development or processing. Comparable advantages also go to high valued-added sectors in some localities.

After years of large-scale construction in preparation for war and development since reform and opening, improvements to varying degrees have been made in three industrial sector, especially the secondary industry, which was backward in the western region. A foundation has been laid for this sector with some trades having certain local comparable advantages. Meanwhile, the tertiary sector has also sprung up with some trades enjoying advantages. Location quotient, also known as coefficient of comparable advantages, refers to the proportion of the added value of a given trade in a certain area to the national total of that trade or to the national total in general, any trade with its location quotient larger than one shall be regarded as having certain comparative advantages. By using the location quotient as a yardstick, we first analyzed the advantageous industries emerging in three periods of restructuring in 12 provinces in the western region in 1992 and 1997. We find that:

Firstly, for the majority of localities surveyed, advantageous trades are concentrated in the fields of resource development or processing, whereas for a minority of them such advantages are found in sectors with high added value and high tech. In 1997, agriculture can be considered as the sector with local comparable advantages for 10 provinces, autonomous regions and municipalities (except Gansu Province and relevant data of Tibet are unavailable). As for secondary industry, the first two trades in the order of location quotient of the value increase are as follows: As for the secondary industry, the first two trades in the order of location quotient of the value increase are as follows: manufacturing of transport equipment and manufacturing of instrument, meters and other measuring apparatus for Chongqing; electronics and transport equipment manufacturing and food processing for Sichuan Province; plant equipment repairing and coal extraction for Guizhou Province; food processing and plant equipment repairing for Yunnan Province; mining, costrustion materials and nonmetallic mineral products processing for Shaanxi Province; petroleum processing, coking, coal gas, coal products processing, metallurgical and rolling industries for Gansu Province; generation and supply of electricity, steam and hot water, metallurgical and rolling industries for Qinghai Province; coal mining, petroleum processing, coking, coal gas and coal products processing for Ningxia Autonomous Region; petroleum and natural gas development, petroleum processing, coking, coal gas and coal products processing for Xinjiang Autonomous Region; metal and nonmetal mining for Guangxi Autonomous Region; coal mine, metallurgical and rolling industries for Inner Mongolia Autonomous Region. Compared with the situation in 1992, there was no marked change in the number of advantageous trades in the primary and secondary industries, but their rankings of location quotient fluctuated.

Secondly, trades with comparative advantage in the tertiary industry made some progress, yet most of them were run by the administrative agencies. In 1997, trades with comparative advantage in the tertiary industry in the western provinces, autonomous regions and municipalities included finance, insurance, passenger or freight transportation, administrative institution, public utility and services for local residents, culture, education, public health and scientific research undertakings, posts and telecommunications, commerce and catering. Baring Yunnan, Sichuan and Gansu Provinces, the local administrative institutions in the western provinces, autonomous regions and municipalities were trades. Such a phenomenon shows that slow development of the tertiary industry has given prominence to the comparative advantage of the local administrative institution. Having received stable state financial support, the administrative institutions had played a dominant role in the local economic and social life. Such preeminence was not so striking in the central and especially in the eastern region.

Overall, advantageous trades in the western region possess following features: firstly, resource-intensive, such as agriculture and mining; Secondly labor-intensive, such as building industry, plant equipment repairing; Thirdly, the heavy chemical industries of partially resource processing benefiting from rich local mineral resources and hydropower potential as well as priority investment input from the state under planned economy; Fourthly, public utilities including those in the culture, education, public health, science scientific research fields and administrative institution, all closely related to the state support for the region. Besides, in Shaanxi, Chongqing and Sichuan, some newly emerging industries also enjoy certain local comparative advantages, such as equipment manufacturing for transportation, manufacturing of electrical appliances, machinery and apparatus, and manufacturing of electronic and communications equipment.

As the vast western region accounts for over 70% of the country's territory, natural conditions and development stage vary to great extent among provinces. For example, natural conditions and economic structure of Chongqing, Sichuan and Shaanxi are similar to those of the central region. In addition, multi-tier development also exists within provinces. So the features do not necessarily reflect in full differences between and within provinces.

What merits attention here is the dynamic nature of the industries with local comparative advantages. Some may owe their advantages to specific local conditions; others may have just benefited from the past planned economy. More flexibility in the flow of production factors under the development of market economy would surely subject them to selection and elimination by market competition. Changes may occur to current industries with comparable advantages. Only survivors under market competition could be considered as industries with competitive advantages in a specific locality.

3. Characteristics of changes in industrial status and structure of the western region

Overall, the proportion of local industries in the national total has been on the wane with a widening gap in industrialization level with the eastern region.

Since the mid-1990s, with increasingly sluggish market demand both at home and abroad, China's economic growth slowed down. A new round of readjustments thus began. From 1933 to 1999, the growth rate of industry, which accounted for 40% of national GDP, slipped consecutively from 20.1% to 8.5%. In regional terms, there appeared fast growth in the eastern region and low growth in the central and western regions, which was accompanied by a rise for the east and a drop for the western and central regions in their respective proportions to the national aggregate industrial added value1. The proportion for the east rose from 60.32% to 64.54%, that for the central and the west dropped from 26.11% to 23.77% and from 13.55% to 11.68% respectively (see table 3). The backward industries in the western region lagged further behind those of the eastern region, but there was no marked change in its industrial gap with the central region.

In these six years, the proportions of industrial growth rate increased for 15 provinces, of which 9 were in the eastern region. Meanwhile, corresponding proportions decreased for another 15 provinces, of which three were in the central region and nine in the western region. Of 12 provinces and autonomous regions in the western region, the proportions of only three provinces increased, that for Yunnan up from 2.10 to 2.28, for Xinjiang up from 0.99 to 1.19 and Ningxia up from 0.27 to 0.29. A varying degree of decrease occurred to the remaining nine provinces, autonomous regions and municipalities.

Source: Jiang Yuan, The Impact of Changes in Industrial Sectors and Regional Industrial Structure on the Sector Growth Rates of China's Industry, Reference Material for Research, National Bureau of Statistics, No. 104, 2000

From the added value of regional industry in the national total, it can be seen that a general downward tendency occurred to all industrial trades in the western region. A comparison between 1993 and 1998 shows that, in the 40 major industrial trades, only 8 registered a rise in proportion of added value to national total, according to the order of increased margin, they were development of oil and natural gas, mining and dressing of non-ferrous metals, brewing of beverages, tobacco processing, textiles, printing, reproduction of recordings, coking and oil processing, and weapons and ammunition industry. Marked drop was reported for the remaining 32 sectors, of which 17 even posted minus growth with 15 concentrated in manufacturing. In 1990's, the manufacturing in the western region shrieked by a big margin with its proportion to the regional industry plummeting from 71.4% in 1993 to 61.2 % in 1999, decreasing by 10.2 percentage points. By contrast, the relevant ratio of extraction industry climbed from 10.9% to16.2, up 5.3 percentage points. Statistics show that in the 1990s, the status of resource extraction industries kept rising, whereas that of resource processing industry was clearly lagging behind. The transition of industrial structure from resource extraction to resource processing will be a long and arduous task.

4. Characteristics of comprehensive quality of industrial structure in the western region

Though generally low, transformation capacity for some provinces has been on the rise, with a leap forward possible in structural optimization and upgrading.

By transformation capacity, we mean the possibility of and conditions for optimizing and upgrading industrial structure in response to economic growth and market changes. This reflects the potential and comprehensive quality of a specific region. Generally speaking, regions with higher level of economic development and higher comprehensive capability are more powerful in their inherent capacity for driving structural optimization and upgrading and vice versa. By applying the weighted method to eight indicators on both sides of demand and supply of all provinces, autonomous regions and municipalities of the country, we obtained a composite index to analyze and compare the transformation capacity of the industrial structure (see note to table 4). The results indicate that the comprehensive quality of most western region remains rather low with their gap widening with that of the eastern region. Those localities with a transformation capacity higher than the national average were Yunnan, Xinjiang and Ningxia in 1990 and Shaanxi, Yunnan and Xinjiang in 1999, with the rest ranking rather low. On the other hand, of the 14 western provinces, autonomous regions and municipalities, the transformation capacity of four increased to varying degrees, Shaanxi topping with rest with its composite index jumping from 0.99 to 1.38, catapulting from 14th to 4th in national ranking. It is followed by Sichuan from 0.77 to 0.91 and 24th to 20th, Qinghai from 0.91 to 0.98 and 20th to 16th, Guizhou from 0.77 to 078, with its status unchanged (see table 4).

Source: Based on data provided by the Division of Industry and Communications under the National Bureau of Statistics, China statistics yearbooks and statistics yearbooks of provinces, autonomous regions and municipalities.

Note: The composite index of the transformation capacity of industrial structure = supply push ′ demand-pull. Supply push was composed of aggregate capacity + innovation ability + supply elasticity, including six indicators: investment ratio, industrial sales profit/tax ratio, per capita GDP, annual GDP growth, ratio of employees in government-run institutions for R&D, scientific and tech information and documentation (including both natural and social sciences) to the entire population and added value of the secondary industry /GDP. Demand pull covers two indicators -- consumption expenditure of urban and rural residents and the share of non-food spending in their consumption. In calculating the composite index, we referred to the method used by Mr. Wei Wei and others (see Analysis of Regional Comparative Advantages in China, P.267, China Planning Publishing House, 1992), yet with some improvements in indicators and weighted average.

It needs to be noted that the comparison made in the above table is mainly concerned with the relative ranks of the comprehensive quality of the industrial structure of various localities in different years. The decline of such indicator does not necessarily represent an absolute fall or worsening in the potential and economic development of a specific province, nor the stagnation of its industrial structure transformation. Actually, the western region is in the early stage of industrialization when structural changes speed up. The improvement in the transformation capacity of some provinces heralds a leapfrog tendency in the entire western region. More importantly, in the process of large-scale development, gradual improvements are or will surely be taking place in the objective and subjective conditions driving forward industrial restructuring. Along with deepening reform and opening up and accelerating flow of production factors, splitting and regrouping will definitely occur to the pattern of the original regional division of labor. This will bring about new opportunities and severe challenges to the transformation capacity of the industrial structure in the western region and its changing process. However, they can make good use of local comparative advantages and push forward structural optimization and upgrading based upon specialization and marketization, more provinces in the western region will strengthen their capacity for structural transformation in the accelerated process of structural changes, thereby bringing about a virtuous interaction.

Project group: Research of Industrial Restructuring in the Western Region

Group leaders: Li Shantong, Lu Zhongyuan

July 2001