The plight of China's current industrial structure: from a new perspective of industrial structure upgrading

Introduction. «Deindustrialization» should be simply the natural outcome of successful economic development and is generally associated with rising living standards. It refers to after the substantial increase in the productivity of the manufacturing sector, the decline in the price of manufacturing products will lead various production factors to flow from the manufacturing sector to the service sector, and finally realizes the transformation to a service-based economy [1]. Premature deindustrialization means countries are running out of industrialization opportunities sooner and at much lower levels of income compared to the experience of early industrializers [2]. Excessive deindustrialization refers to that after the process of deindustrialization, while the proportion of the service sector has increased significantly, especially the virtual economy; the manufacturing sector has shown the phenomenon of industrial hollowing [3]. The development history of Southeast Asian countries has suggested premature deindustrialization can lead damage to economy. The re-industrialization strategy of developed countries has also confirmed that excessive deindustrialization is bad for economic growth too. Sustainable economic growth is grounded in the upgrading in the industrial structure. As a result, the scale expansion of the service sector is not the only factor that should be considered when determining whether or not a country's industrial structure is developed. At a specific time, a country's optimal industrial structure would be the one that corresponds to its speed of economic growth and its employment composition [4]. Therefore, the indicator, the value of which is calculated out utilizing the ratio of the share of service sector to the share of manufacturing sector, is one-sided. To judge whether the present industrial structure in the country at a specific time is the optimal industrial structure, this research proposes a different indicator: the production mode. The term «mode of production» is firstly put forward by Marx, which has the same connotation with the term «economic base» and «the economic structure» [5]. The term «production mode» is defined as the connection that exists among the production relations and the productivity, which serve as the economic foundation of society [6]. In academics, «production mode», «economic base», «economic structure», and «industrial structure» have similar meanings and are used interchangeably in the literature. In this research, it is assumed that an advanced production mode implies that the production in the society is efficient, that is to say, the output generated by per unit of production factors is great. In turn, the greater output generated by per unit of production factors reflects a more sophisticated industrial organization. As a result, an advanced production mode implies a sophisticated industrial organization (industrial structure).

This research demonstrates that the output elasticity of capital, denoted by the variable a, in the Cobb-Douglas production function ( y = K ^a L ^1-a ), can provide insight into the scale of the industrial sector, the composition of employment, and the speed of economic growth simultaneously. A higher value of a suggests a lower dependence on labor in production, which favors capital-intensive industries like high-end manufacturing and producer services at the expense of labor-intensive industries such as agriculture, which suffers a drop as a result. Moreover, if capital and labor are fixed, then the higher the value of a, the greater the overall social production ( y = (^ ). The greater the overall social production, the more optimistic we can be about the future of economic growth. Hence, the indicator a is a more all-encompassing indicator in comparison with the other indicators utilizing the ratio of the share of service sector to the share of manufacturing sector to judge the industrial structure, since it takes into account not only industrial scale enlargement and the composition of employment but also economic growth.

This study indicates that at a specific period, if the capital and labor are given, there is an optimal value of a. When a is the optimal value, it also indicates that capital input and labor input match with each other in the production process, thus maximizing total social output. Otherwise, premature deindustrialization and excessive deindustrialization are all the symptoms of the mismatch between labor input and capital input, so social total output could not achieve the maximum. As shown in previous research, the industrial structure should be consistent with the stage of economic development [7]. Based on mathematical model, this study goes further and examines the industrial structure in China from the perspectives of the scale expansion of each industrial sector, the economic growth and employment composition. This study indicates that China’s industrial structure shows a trend of «premature deindustrialization».

Theoretical model analysis. In this research, it is hypothesized that there is a small economy. The production factors only consist of capital and labor in the national economy. At a given time t, the labor and capital in the economy is specified. As a result, the structure of production factors, name is, the combination of capital and labor can be presented in the following way:

k = p ke ( e,+« ) . (1)

This study will confirm why к scales from e to +^ later. Through modification of the Cobb-Douglas production function, the following results are possible:

y = f ( x ) = x ^a , x = p a e ( 0,1 ) , x e ( e, +w ) . (2)

Because when the market reaches the equilibrium, the demand is equal with supply. This study assumes x will be in the same scale with k. In this context, x represents the demand for the structure of production factors. For each value of a in the interval (0,1), name to say, given Va e (0,1) , based on the theory that when resources are optimally allocated, the price is equivalent to marginal yield, the price of the per unit combination of labor and capital will be got:

r = ax ^a-1 . (3)

Under the premise that the price is equivalent to marginal yield, the demand for the structure of production factors at a specific time is concluded as:

x= t ap .             (4)

This research claims that a, which reflects the output elasticity of capital is changeable, as opposed to existing literatures that reckon a is fixed. A bigger value a implies the industrial structure is more developed. To explore the correlation between the demand for the structure of production factors and industrial structure, with the first derivative of x with regard a, the following is obtained:

= p) ¹-* [ -J— + -J- In ( ^a )l >0 . (5)

da Гг/ L(1-a)a   (1-a) ²    \r/J ' '

Based on the formula (5), if r < -J=a > there will be

>0. Due to a e (0,1),it can yield —— >1. In ac-$a                                                e a cordance of a e (0,1)andx e (e, +и), there will be 0 < r = axa-1 <1. As a result, in light of 0 < r = axa-1 < 1and -^ > 1, it will conclude:r < -^ and ^ > 0.

e“—                  e~    8a

What this means is that as production mode improves, the need for x grows.

The formula (6) can be derived when the combination of labour and capital reaches the point of supply and demand equilibrium:

x= ( a ) '^-1 =k .               (6)

The equilibrium price of the per unit combination of labour and capital, which is subject to the restriction of supply, can be calculated out as follows, using formula (6).

r = ak ^{a 1} .                   (7)

maxv = R ( a ) — C ( a ) = k ^a x (1 — a) . (12) 0

Based on the first order condition:

Calculate the derivative of r with respect to k ：

a ^∗ = 1

1 lnk ^.

= -a ( 1 — a ) k ^{a 2} < 0 .

Based on a e (0,1) , it will be |^ <0 . It demonstrates that, for a particular production mode, the decrease in the equilibrium price will occur, when the supply of the combination of capital and labor is more abundant.

Calculate the derivative of r with respect to a ：

= k ^a“¹ ( 1 + lnk ) >0 . (9) da

Base on k > e , it will be, ^ >0 . It demonstrates that, for a particular combination of capital and labor, the increase in the equilibrium price will occur, when the industrial structure is more developed. Consequently, within the restrictions that the combination of capital and labor in the economy is specified, the choice of production mode (the value of a) will affect the equilibrium price of the combination of capital and labor, which in turn will affect the cost of production.

As a result, if specified the combination of labor and capital, the costs of the various production modes will be distinct from one another. The way to calculate the cost of production mode is as follows:

C ( a ) = rk = ak ^a . (10)

Similarly, various production modes with various advantages will generate different social total output, the total social output generated by a specific production mode can be presented in the following manner:

R(a) = k ^a . (11)

In order to maximize profits while adhering to the constraints imposed by the given structure of production factors, the most effective mode of production is as follows:

As a result of the fact that marginal yield is positive in the Cobb-Douglas production function, the value of a is supposed to be positive too. In light of a > 0 , there will be: k > e .

Based on the above reasoning, for a certain period, assuming that the combination of capital and labor in the economy are fixed, we may figure out the optimal value of a. When a is at its best, it means that the arrangement of labor force is ideal, capital and labor input are in balance in the production process, and the overall societal output achieve the peak. This means a is a better indicator in measurement of the industrial structure. Social total output would not be able to get maximum if there was a mismatch between labor input and capital input, which would lead to premature or excessive deindustrialization.

The plight of China's current industrial structure. The theoretical model suggests that the size of the industrial sector, the arrangement of labor force (employment composition), and economic growth are all relevant in determining the level of industrial structure. As a result, this research utilizes GDP per capita as a proxy for the country's level of economic growth and the percentage of labor in agriculture to reflect the arrangement of labor force, name is, employment composition. According to Chenery and Syrquin, the process of industrialization can be broken down into three stages: the pre-industrialization stage, the industrialization stage, and the post-industrialization stage. Moreover, the industrialization stage is further broken down into three substages: the early stage, the middle stage, and the late stage [8]. Based on this categorization approach and employing typical criterion established by Zhang Hui et al [9], this research examines China's industrial structure from three distinct perspectives: GDP per capita; the contribution to GDP from each industrial sector (agriculture, manufacturing, and service); the percentage of labor in agriculture.

Hie comprehensive analysis of industrial structure level

Indicators	Undeveloped stage	Developing stage			Developed stage
	Pre-industri li zat ion	Early industrialization	Mid industrialization	Late industrialization	Post-industrialization	Digital economy
	Agriculture	Labour-intensive	Capital-intensive	Service-intensive	Technology-intensive	Information-intensive
1. Per capita GDP
(1)1964 dollar	100 - 200	200 - 400	400- 800	800- 1500	1500-2400	>2400
(2)1970 dollar	140 - 280	280 - 560	560- 1120	1120-2100	2100-3360	>3360
(3)2010 dollar	787- 1574	1574 -3147	3147 - 6294	6294- 11802	11802 - 18883	>18883
2 .T1k proportion of each sector in GDP	A>I	A>20andA	A<20,I>S	A<10J>S	A<1D,KS
З.ТЬе proportion of agricultural sector employment	>60	45-60	30-45	10-30	<10

Figure1 – The comprehensive analysis of industrial structure level in China.

Source : compiled by the author in accordance with [8].

Note : A denotes agricultural sector, I denotes manufacturing sector; S denotes service sector

In accordance with the benchmark in Figure 1, in terms of GDP per person, the GDP per person in 2021 is estimated to be $9057, which falls in the interval from 6294 to 11802. This is an evidence that China is seeing explosive growth in the service sector and has reached late industrialization. In terms of the employment composition, in 2021, agriculture accounted for 22.9 % of all jobs in China. This is another evidence that the country has reached late industrialization and has a significant shrink in the agriculture sector. Nevertheless, in terms of industrial scale expansion, when looking at the contribution of each industry to GDP, in 2021, the contribution from the agriculture sector is 7.3 %, the manufacturing sector 39.4 %, and the service sector 53.3 %, respectively [10]. This is evidence that China has reached postindustrialization, which is characterized with fast expansion in technology-intensive industries.

The scale expansion of service sector in China is evolving at a far quicker rate than the transition of employment composition and its current degree of economic growth. It is also an indication of a misalignment between human labor and capital input in the production process. In light of the employment composition and degree of economic growth, the industrial structure in China demonstrates a «prema-ture industrialization» tendency. It indicates that, due to the poor economic development, the service sector comprises mostly of conventional consumer service, whereas producer service industries, which represent cutting-end productivity, make up a minor part. As a direct consequence of this, the overall productivity of the manufacturing sector is higher than that of the service sector overall. Therefore, if a nation at