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date: 24 October 2020

China’s Economic Development

Abstract and Keywords

Chinese real gross domestic product (GDP) grew from US$369 billion in 1978 to US$12.7 trillion in 2017 (in 2017 prices and exchange rate), at almost 10% per annum, making the country the second largest economy in the world, just behind the United States. During the same period, Chinese real GDP per capita grew from US$383 to US$9,137 (2017 prices), at 8.1% per annum.

Chinese economic reform, which began in 1978, consists of two elements—introduction of free markets for goods and services, coupled with conditional producer autonomy, and opening to international trade and direct investment with the rest of the world. In its transition from a centrally planned to a market economy, China employed a “dual-track” approach—with the pre-existing mandatory central plan continuing in force and the establishment of free markets in parallel. In its opening to the world, China set a competitive exchange rate for its currency, made it current account convertible in 1994, and acceded to the World Trade Organisation (WTO) in 2001. In 2005, China became the second largest trading nation in the world, after the United States. Other Chinese policies complementary to its economic reform include the pre-existing low non-agricultural wage and the limit of one-child per couple, introduced in 1979 and phased out in 2016.

The high rate of growth of Chinese real output since 1978 can be largely explained by the high rates of growth of inputs, but there were also other factors at work. Chinese economic growth since 1978 may be attributed as follows: (a) the elimination of the initial economic inefficiency (12.7%), (b) the growth of tangible capital (55.7%) and labor (9.7%) inputs, (c) technical progress (or growth of total factor productivity (TFP)) (8%), and (d) economies of scale (14%).

The Chinese economy also shares many commonalities with other East Asian economies in terms of their development experiences: the lack of natural endowments, the initial conditions (the low real GDP per capita and the existence of surplus agricultural labor), the cultural characteristics (thrift, industry, and high value for education), the economic policies (competitive exchange rate, export promotion, investment in basic infrastructure, and maintenance of macroeconomic stability), and the consistency, predictability, and stability resulting from continuous one-party rule.

Keywords: Chinese economy, economic development, economic growth, economic inefficiency, economic reform, sources of economic growth, transition

Unprecedented Rate and Longevity of Growth

The economic growth of China, since it undertook economic reform and opened its economy to the world 40 years ago, in late 1978, was historically unprecedented in terms of both its speed and longevity. The Chinese economy has been growing without interruption at an average annual real rate of almost 10% over the past four decades, even though it has slowed down to an average rate of growth of around 6.5% in recent years. Chinese gross domestic product (GDP) grew from US$369 billion in 1978 to US$12.7 trillion in 2017 (in 2017 prices and exchange rate), almost 34 times, making the country the second largest economy in the world, with two-thirds of the GDP of the largest economy, the United States.1 What is most remarkable is that during the four decades between 1978 and 2017 there was not a single year of negative rate of growth, despite the many crises that occurred inside and outside of China. In fact, the lowest rate of growth during that period was 3.9% in 1990, in the immediate aftermath of the Tiananmen incident of June 4, 1989.

This is also in great contrast to China’s economic performance in the three decades before the beginning of its economic reform and opening to the world, from 1949 to 1978, during which its annual rate of growth fluctuated unpredictably and wildly, with a high of 22.3% in 1953, the first year of China’s First Five-Year Plan, and a low of −23.7% in 1961, the last year of the great famine of 1959–1961. Even then, the average annual rate of growth during this pre-reform period was a quite respectable 7.2%. This high average annual rate was due in part to the rapid economic recovery after the Communist victory in the Chinese Civil War in 1949. There are also some questions with regard to the reliability of the Chinese economic statistics during the Great Leap Forward period of 1958–1959. If the period of recovery and rehabilitation of 1949–1952 is excluded, the Chinese pre-reform average annual real rate of growth still stood at 6%, higher than those of most developing economies during the same period. The annual levels and rates of growth of Chinese real GDP in 2017 USD from 1949 to 2017 are presented in Figure 1.

China’s Economic Development

Figure 1. Chinese Real GDP and Its Annual Rate of Growth (trillion 2017 USD and %).

Source: National Bureau of Statistics of China, converted to 2017 USD by the author.

The Chinese population has also been growing continuously since 1978. The rate of growth of Chinese real GDP per capita has been lower than the rate of growth of real GDP, but by not quite 2%. Chinese real GDP per capita grew from US$383 in 1978 to US$9,137 in 2017 (in 2017 prices), at an average annual rate of 8.1%, without any interruption, achieving an almost 23-fold increase (see Figure 2). China went from being a very poor country, with a GDP per capita barely above the subsistence level of one USD a day, to being on the verge of a middle-income country (the threshold for a middle-income country is often taken to be an annual GDP per capita of US$12,000), in just a little more than a generation. Even then, China as a country still only ranked below 70th in terms of real GDP per capita in the world. During the pre-reform period of 1949–1978, the average annual rate of growth of Chinese real GDP per capita was 5.2%. This rate would drop to 4% if the recovery and rehabilitation period of 1949–1952 is excluded. The more than doubling of the average annual rate of growth of real GDP per capita since the beginning of economic reform in 1978, from 4 to 8.1%, is mostly attributable to the economic reform and opening that was undertaken, with perhaps around one percentage point attributable to the decline in the rate of growth of the Chinese population as a result of the adoption of the “one-child” policy in 1979 in China, which resulted in lower levels of population and household consumption and hence a higher rate of national saving and investment.

China’s Economic Development

Figure 2. Chinese Real GDP per Capita and Its Annual Rate of Growth (thousand 2017 USD and %).

Source: National Bureau of Statistics of China, converted to 2017 USD by the author.

The Chinese development experience since 1978 has been most unexpectedly and spectacularly successful. At the conclusion of the visit to China by the very first delegation of U.S. economists since the establishment of the People’s Republic of China in 1979, under the auspices of the American Economic Association, each of its 10 members was asked to make a prediction of the future rate of Chinese economic growth. Among the members of the delegation, which included Professors Kenneth J. Arrow and Lawrence R. Klein, both Nobel Laureates in Economic Sciences, the most optimistic prediction was an average annual rate of growth of only 8%; whereas the other predictions were much lower, some as low as 1%. As it turned out, the Chinese economy achieved an average annual real rate of growth of almost 10% between 1978 and 2017.

The questions that naturally arise are: How did China achieve this unprecedentedly high and sustained rate of economic growth? Can Chinese economic growth since 1978 be explained in conventional economic terms? What are the relative contributions of the different sources of growth?

The Initial Economic Conditions

China on the eve of its economic reform in 1978 was a very poor country, with a real GDP per capita of only slightly more than US$1 a day (in 2017 prices). It had few natural resources, scarce arable land, but a huge population, the bulk of which was still in the agricultural sector. Its economy operated under a series of five-year central plans, with mandatory output targets for all enterprises and households. Almost all goods were rationed. Its currency, the Renminbi, had an overvalued exchange rate. International trade was a very low percentage of its GDP, while foreign direct investment, all inbound, was a negligible share of gross fixed investment in China. The country was in the process of trying to recover from the turmoil that resulted from the Great Proletarian Cultural Revolution of 1966–1976.

The Strategies and Policies

The Chinese economic reform that began in late 1978 consisted of two major elements—the introduction of free markets for goods and services in the Chinese economy, coupled with conditional autonomy for the enterprises and households, and the opening of the Chinese economy to international trade and inbound foreign direct investment. It is, however, also useful to review and analyse the economic strategies, policies, and measures employed by China in its process of economic reform and opening to the world since 1978. Choosing economic strategies and policies that were appropriate to the unique Chinese domestic conditions and environment was critical to the success of the country’s economic reform. It also turned out that many Chinese policies and measures were similar to those used in other East Asian economies, beginning with Japan, during the early stages of their economic development.Some pre-existing economic policies were already in place before 1978, and they were not significantly modified under the economic reform. One such policy is the low-wage policy in the non-agricultural sector. Prior to 1978, all workers in the non-agricultural sector were employed, directly and indirectly, by the state, including all the employees of the central and local governments, their affiliated service units, as well as all the state-owned enterprises (SOEs). They were all paid according to the same wage and salary scale. The state could and did unilaterally dictate the wage rate and other conditions of employment. A low-wage policy would minimise aggregate household consumption and maximize the profits of SOEs, which would in turn help to keep the national savings rate high. Moreover, a continuing low entry-level wage rate in the non-agricultural sector would enhance its capacity to absorb the continuing inflow of the surplus labor from the agricultural sector and put it to much higher productivity use in the non-agricultural sector.

A high national savings rate makes it possible to finance the needed domestic investments without having to rely on the more fickle inflows of foreign investments, foreign loans, or foreign aid. In particular, a high domestic savings rate can enable a high domestic investment rate, and to the extent that the savings are under the control of the central government, they can be used to finance investment in basic infrastructure, such as communication and transportation networks, ports and airports, and power plants, which are absolutely essential in the early stage of economic development. For example, in China’s First Five-Year Plan (1953–1957), approximately 55.8% of the total investment was devoted to basic infrastructure. Moreover, with the availability of fresh domestic savings for new investments every year, there is no pressure to restructure or privatise the existing, almost all state-owned, enterprises, which would have been both economically and socially disruptive. It is interesting to note that in neither China, nor the economies of Taiwan and South Korea in earlier times, was there any systemic privatisation of SOEs, as in the former Soviet Union and the formerly socialist Eastern European countries during their transitions from a centrally planned to a market economy. This was possible, in part, because of their respective high domestic savings rates. In the Chinese case, many SOEs eventually became publicly listed companies on stock exchanges in Hong Kong, Shanghai, and Shenzhen. However, in almost all such enterprises, the government has retained a majority stake and management control. There was no privatisation of control. The Chinese government actually wants to use the SOEs as one of its instruments for the control of the economy and for the implementation of social policies, such as environmental preservation and protection and poverty alleviation. Of course, some of these enterprises are natural monopolies and government ownership is certainly a viable arrangement used in many countries.

A policy which was adopted almost concurrently with the beginning of economic reform was the one-child policy, a population planning policy introduced in 1979 and implemented in September 1980. The policy remained in force until the beginning of 2016. It has had a large impact on the population trajectory of China. Without the one-child policy, the Chinese population would have been at least a couple of hundreds of million persons larger today, implying a much higher aggregate household consumption, a lower national savings rate, a greater demand for social services, slower GDP growth, higher unemployment rate, lower real GDP per capita, higher prices for food and other necessities, and much greater damage to the environment. However, the demise of the one-child policy was also timely, perhaps even slightly overdue, as the Chinese working-age population had begun to decline, the Chinese society had begun to age, and the Chinese dependency ratio had begun to rise.

One of the major new economic initiatives adopted by the Chinese government in 1978 was opening the economy to both international trade and inbound foreign direct investment. Machinery, equipment, and raw materials which could not be produced in China at the time would be imported. In order to earn the hard currencies to pay for these imports, China would promote exports as well as inbound foreign direct investment. The promotion of exports required the setting of an internationally competitive exchange rate for the Renminbi, the Chinese currency. From the early 1950s to late 1971, the Renminbi exchange rate stood at a constant 2.46 yuan per USD (see Figure 3). The international trade embargo against China that began with the Korean War was continued even after the fighting ended with an armistice in 1953. There was little international trade between China and the rest of the world, with the exception of the essentially barter trade between China and the former Soviet Union and the formerly socialist Eastern European countries. In the 1960s, even the limited barter trade dwindled because of the then Sino-Soviet dispute. The only country in Europe that had any economic exchange with China was Albania. However, with the secret visit of U.S. Secretary of State Henry Kissinger to China in July 1971, and the visit of U.S. President Richard Nixon in February 1972, international trade between China and the United States and other Western countries began to grow again.

During the 1971–1978 period, the Renminbi exchange rate actually appreciated, reaching its highest level vis-à-vis the USD of 1.46 yuan in 1980, partially driven by capital inflows. Then China began to undertake a series of explicit and implicit devaluations of the Renminbi, with the exchange rate reaching 8.7 yuan per USD at the beginning of 1994, when China unified its multiple exchange rates and adopted current account convertibility for the Renminbi. The Renminbi then appreciated slightly to 8.3 yuan per USD until the East Asian currency crisis of 1997–1998, during which the Renminbi exchange rate held steady and remained unchanged with respect to the USD even as all of the other East Asian currencies, with the exception of the Hong Kong dollar and the Japanese yen, underwent significant devaluations. Then, beginning in mid-2005, because of China’s large and growing current account surplus, the Renminbi began to appreciate significantly. However, this appreciation came to a halt in late 2008 because of the global financial crisis triggered by the collapse of Lehman Brothers in the United States, and did not resume until 2010. Since then, the Renminbi exchange rate has fluctuated within a relatively narrow band between 6 yuan and 7 yuan per USD. The Renminbi no longer follows the USD but appears to be following the value of a trade-weighted basket of the currencies of its major trading-partner countries, the China Foreign Exchange Trade System (CFETS) Index, in effect, keeping its exchange rate approximately constant vis-à-vis the average trading-partner country, and stabilising the average purchasing power of the Renminbi abroad.

China’s Economic Development

Figure 3. Nominal Exchange Rate of the Renminbi since 1957 (yuan per USD, end of month).

Source: International Financial Statistics.

China also applied to join the World Trade Organisation (WTO) as part of its export promotion strategy. It finally acceded to the WTO in 2001, after prolonged negotiations with the United States and other countries. The growth of Chinese international trade since 1978 and especially after its accession to the WTO in 2001, was in great contrast to what happened in the pre-reform period (see Figure 4). As mentioned, in the 1950s and continuing through the 1960s, there was an international trade embargo against China by the United States and the West. There was also the great famine of 1959–1961, the outbreak of the Great Proletarian Cultural Revolution in 1966–1967, and the leadership transitions in 1976,2 all of which were unfavorable to either the economy or international trade. However, since 1978, Chinese international trade has grown almost every year until 2015, except in 1982, and the crisis years of 1998 (the East Asian currency crisis) and 2009 (the global financial crisis). In particular, it grew by leaps and bounds after the country’s accession to the WTO in 2001. In 2005, China became the second largest trading nation in the world, just below the United States, even though the rate of growth of its international trade has slowed down significantly since 2012.

China’s Economic Development

Figure 4. Chinese International Trade in Goods and Its Annual Rate of Growth since 1950 (US$ trillion and %).

Source: National Bureau of Statistics of China.

It is useful to compare and contrast the experience of the Chinese transition from a centrally planned to a market economy (Lau, 2018b). In its transition, China did not adopt the “big bang” approach, used by the former Soviet Union and the formerly socialist Eastern European countries. Instead, it employed the “dual-track” approach, that is, with the existing mandatory central plan continuing in force and the simultaneous establishment of free markets in parallel. Every individual, collective, and enterprise can participate in the free markets provided that it has fulfilled all its obligations under the mandatory central plan. One of the most important consequences of the “dual-track” approach was that no losers were created by the introduction of the free markets, since everyone’s rights (and obligations) under the mandatory central plan continued to be enforced. In fact, a distinguishing characteristic of Chinese economic reform is its emphasis on assuring that there are no losers. Indeed, “reform without losers” is what made Chinese economic reform so successful and the economic transition so smooth. It is the dream of all economic reformers (and politicians) as it minimizes political opposition to and maximises political support for the reform ex ante, as well as maximising political opposition to the reversal of the reform ex post (through the creation of new vested interests). In the jargon of economics, Chinese economic reform was Pareto-improving. Moreover, the “dual-track” approach, with full enforcement of the pre-existing mandatory central plan, can also result in full economic efficiency (Lau, Qian, & Roland, 1997, 2000). As a result, China had a very smooth transition without experiencing any decline in its real GDP in either aggregate or per capita terms or the negative consequences of hyperinflation as almost all of the former Soviet Union and formerly socialist Eastern European countries did.

The Chinese government has also maintained appropriate macroeconomic and exchange rate policies throughout the post-reform period of 1978 to the present. We note that there has been no real recession—the rate of growth has never turned negative. There has also been careful aggregate demand management. Inflation has been kept under control. The Renminbi exchange rate has been basically maintained at a relatively stable level appropriate for its current account conditions since the foreign exchange reform of 1994. In particular, it held steady during the East Asian currency crisis of 1997–1998, facilitating the recovery of the affected East Asian economies. China has had difficult economic problems but they have been reasonably well managed if not completely solved.

However, it would be wrong to think that there was an overall comprehensive blueprint for Chinese economic reform from the very beginning. As Mr. Deng Xiaoping, the late Chinese paramount leader, famously said, the process of Chinese economic reform was like “crossing the river by feeling the stones underneath (摸着石头过河‎).” There was a great deal of uncertainty as to the right path. Trial and error was the norm; pragmatism was the guide; and adaptability would be widely practiced. It was also not at all clear what would be found on the other side of the river. What was clear in 1978 was that staying on the then existing side was not a viable option.

Finally, the Chinese government has shown itself to be willing to experiment with new approaches. Many pilot schemes (试点‎) have been tested first in different localities. If they prove successful, they are extended to the entire country; if not, they are quietly abandoned. The large size of the Chinese economy also makes it uniquely possible to conduct pilot experiments on specific policies in isolation. For example, the introduction of the household responsibility system started with only one village, Xiaogang Village in Anhui Province, with 18 households. When it succeeded, the system was extended to the entire Chinese agricultural sector. When an experiment failed, the new policy would be quietly folded. One notable example of a failed experiment was the introduction of multi-province district branches of the People’s Bank of China, emulating the U.S. Federal Reserve System, with the objective of reducing the potential influence of the provincial officials on the local regulation of money supply and credit. The district branches did not last long and were replaced by individual provincial and municipal branches within a couple of years.

While the Chinese economy is unique and exceptional in many ways, its development experience can be explained and attributed. Having grown rapidly since 1978, it is forecast to continue growing at annual rates of between 5 and 6% going forward. Moreover, its development model has also been adopted and its success replicated in other formerly central-planned economies such as Vietnam, Cambodia, and Laos. The Chinese model for economic reform, which allows a centrally planned economy to make a smooth transition to a market economy, and to grow rapidly, all the while maintaining political control, may also turn out to be potentially suitable for Cuba and North Korea.

Accounting for Chinese Economic Growth

One obvious explanation of a high rate of growth of real output is the high rates of growth of the inputs—tangible capital, labor, and human capital. Their rates of growth have indeed been high for China, both before and after the economic reform of 1978. However, high rates of growth of inputs alone do not always guarantee success in achieving a sustained high rate of growth of real output, in the absence of appropriate facilitating and supporting government economic policies. Many developing economies have had high rates of growth of inputs, but nevertheless have not been able to grow in a sustained and sustainable manner. The economy of the former Soviet Union was such an example.

The establishment of free markets and the introduction of conditional autonomy for producers under the economic reform begun in 1978 obviously had a positive impact by providing incentives to produce additionial output outside the plan after fulfilling the planned targets., The additional output was possible due to the existence of significant initial economic inefficiency or slack. But there were also other factors at work as well in the Chinese economy: for example, the growth of intangible capital such as research and development (R&D) capital, the existence of significant economies of scale and “learning-by-doing” effects (Arrow, 1962), and technical progress [or equivalently, the growth of total factor productivity (TFP)]. What are the relative contributions of these different sources of economic growth since 1978? How much of the Chinese economic growth is due to the growth in inputs, and how much to increases in efficiency (or equivalently technical progress or the growth of TFP)? How much is due to “working harder”? And how much is due to “working smarter”?

In an empirical analysis of the sources of growth of the four East Asian “Newly Industrialised Economies (NIEs)”—Hong Kong, South Korea, Singapore, and Taiwan—during their early stages of economic development (starting from the 1950s and 1960s and ending with 1990), it was found that “the hypothesis that there has been no technical progress during the postwar period cannot be rejected for the four East Asian newly industrialized countries,” even though they all had high average annual real rates of growth of between 7.8 and 8.9% (Kim & Lau, 1994, p. 235,). The growth in their outputs may be mostly attributed to the growth of their inputs, and the overwhelmingly important source of growth turns out to be the accumulation of tangible or physical capital, that is, structures and equipment, accounting for between 68 and 85%, “in contrast to the case of the Group-of-Five industrialized countries—France, Germany, Japan, the United Kingdom and the United States—in which technical progress has played the most important role (Kim & Lau, 1994, p. 264).” Young (1992, 1995) also had comparable findings, as did Hsieh (2002), whose study, however, covers a later period.3

The absence of technical progress in the East Asian NIEs may at first glance seem rather puzzling, as there was significant importation of machinery and equipment into these NIEs from the developed economies of North America and Western Europe, and hence an implied technology transfer, during this period. However, the effects of this transfer did not show up in the measurement of the rates of technical progress, or, equivalently, the growth of TFP, in the four NIEs. Our explanation is that while the technology transfer indeed took place, it was not free and was already fairly and fully priced in the markets and embodied in the cost of the imported machinery and equipment. There was, therefore, no additional returns to be captured or explained in the form of technical progress. The economic growth of the four East Asian NIEs during this period was achieved entirely by working harder, not smarter.

In a follow-up study that includes the Chinese and additional East Asian economies, it has also been found that tangible capital accumulation was the most important source of growth for the East Asian economies, including Japan, accounting for between 55% (Hong Kong) and 116% (Indonesia) of growth in real output, whereas technical progress was the most important source of economic growth for the Group of 5 (G-5) industrialized countries (except Japan), accounting for between 41 and 64% of their economic growth. For the Chinese economy, 92% of the economic growth (up to that time) may be attributed to the growth of tangible capital, 9% to the growth of labor, and -1% to technical progress (Kim & Lau, 1996).

From 1953 to 1978, China was a completely centrally planned economy with mandatory sector-, industry-, enterprise-, village-, and farm-household-specific production targets, and was essentially closed to the rest of the world, except for the Soviet Union and the Eastern European socialist countries before the Sino-Soviet break around 1960. It is well known that there can be significant inefficiencies in centrally planned economies, with the economy operating well within the interior of its set of production possibilities, that is, far away from the frontier. As economic reform and opening proceeded successfully in China, the economy became progressively more efficient, and its point of operation began to move from the interior of the set of production possibilities to its frontier. During this process, in principle, the real output of the economy could be increased without any increase in its inputs. This increase in economic efficiency should show up as measured technical progress or growth in TFP, even in the absence of any expansion of the set of production possibilities or outward movement of its frontier.

How much slack was there in the Chinese economy prior to the beginning of its economic reform in 1978? It was in Xiaogang Village, Anhui Province, that the household contract responsibility system in the Chinese agricultural sector was first introduced, spontaneously, in December 1978, setting in motion the agricultural economic reform, which then spread to the rest of China. Xiaogang Village reported that its total grain output increased from 15,000 kilograms per year before the reform to 90,000 kilograms in 1979, a fivefold increase (The Xiaogang Village Story). Since the economic reform in the Chinese industrial sector did not start until a few years later, in the 1980s, it can be safely assumed that Xiaogang Village had no additional inputs in 1979 beyond what were or could have been available before the reform. This would imply that the slack could be as much as five sixths ((90,000-15,000)–)/90,000)! Without doubting the reliability of the Xiaogang figures, the grain output data of Anhui Province as a whole before and after 1978 cannot support the existence of such a large slack in the entire province. It has been reported that the transition of Chinese agriculture from a collective system to an essentially private individual household system resulted in large gains in efficiency of the order of between 30 and 40% from 1979 to 1985, holding inputs constant (Lau, 1997). It has been estimated (Lau & Zheng, 2017) that the real output of the Chinese economy as a whole in 1978 could have been 50% higher if it were operating efficiently, that is, on the frontier rather than in the interior of its set of production possibilities. This implies that the Chinese economy operated a third of the way from the frontier of its set of production possibilities in 1978, or equivalently, at two-thirds of its production capacity. In other words, even if there were no increases in the production inputs after 1978, Chinese GDP would have been able to increase 50%, from US$369 billion in 1978 to US$554 billion (all in 2017 prices), solely as a result of the economic reform. This seems like a reasonable estimate of the degree of the Chinese economic inefficiency or slack pre-reform.

A more recent study takes a detailed look at the most recently available data on the growth of inputs and outputs in the Chinese economy and attempts to estimate the relative contributions of the different sources of growth since 1978, taking into account the pre-existing economic inefficiency, or equivalently, economic slack (Lau, 2018a). It found that Chinese economic growth since 1978 may be attributed to the following sources: (a) the realization of the potential surplus output from the initial economic inefficiency or slack that existed before the economic reform (12.7%), (b) the growth of tangible capital (55.7%) and labor (9.7%) inputs, (c) technical progress (or equivalently the growth of TFP) (8%), and (d) economies of scale (14%). Thus, the growth of tangible capital is still the most important source of economic growth, and technical progress, or the increase in efficiency, other than the elimination of the initial slack, is still not yet an important source of growth for the Chinese economy. Economies of scale are found to be a more important source of growth than either the elimination of the pre-existing economic efficiency or technical progress.

One also cannot overemphasize the importance of developing basic infrastructure (social overhead capital) such as electric utilities, transportation and communication facilities and links, and industrial parks in the Chinese development experience. Most basic infrastructure requires public investment, in part because it is often a public utility and has a large capital requirement and a long gestation period, and in part because it is frequently development-leading, that is, built in order to stimulate demand that does not yet exist. Moreover, it is also most likely a natural monopoly which requires at a minimum public regulation if not public ownership. In the case of China, enabling easy connectivity within the country through the development of basic infrastructure greatly facilitated the realization of the benefits of the economies of scale inherent in the huge size of its own domestic market. Finally, because of the incompleteness of markets in the real world, it is sometimes necessary for the government to play a role in non-market coordination, especially with regard to changing public expectations which can often be self-fulfilling.

The sudden collapse of Lehman Brothers in the United States in 2008 triggered the global financial crisis. In response to the crisis, which had led to a 50% drop in Chinese export orders from the United States, China launched a 4 trillion-yuan economic stimulus program barely six weeks later, which enabled the Chinese economy to keep growing at an average annual rate of 7.8% in the decade immediately following. The timely economic stimulus program managed to maintain public confidence and positive expectations about the future, thus preventing the Chinese economy from falling into a deep recession. It did lead to other problems subsequently, such as excess production capacity and heavy debt burden. However, it did what was needed at the time.

In the first half of 2015, there was a huge and rapid run-up in the Chinese stock market (see Figure 5). However, the stock market bubble burst in July, followed by an unexpected sudden devaluation of the Renminbi vis-à-vis the USD by approximately 4% in August. Once again there was no panic in China. Indeed, since there was excess manufacturing production capacity in almost every industry in China at the time, aggregate supply was not a constraint. As long as there was aggregate demand, the supply would be forthcoming. The best sources of additional aggregate demand, given the size of the Chinese economy and the existing excess production capacities and surplus of residential housing, would be investment in basic infrastructure and in the provision of public consumption goods such as environmental preservation, protection and restoration, the prevention of climate change, education, healthcare and care for the elderly. This continues to be the case in 2018.

The trade war between China and the United States began to brew in early 2018. While the real impacts would be negative, they would be relatively small and manageable and there should be no need to panic (Lau, 2019). However, it should also be noted that the competition between China and the United States for economic and technological dominance in the world is likely to be a long-running affair. It is hoped that through developing greater mutual economic interdependence between the two countries, the potential conflict between them can be mitigated. It is important to keep the China–United States economic relations win-win for both countries.

China’s Economic Development

Figure 5. The Shanghai Stock Exchange Composite Index.

Source: The Shanghai Stock Exchange.

The Commonalities in East Asian Economic Development

Many commonalities in the development experiences of East Asian economies may be identified. Industrialisation spread from economy to economy in East Asia successively, beginning with Japan, then Hong Kong, then Taiwan, then Singapore and South Korea, and then the Association of Southeast Asian Nations (ASEAN) countries such as Thailand, Malaysia, and Indonesia, and then Mainland China. This pattern was first observed by Professor Kaname Akamatsu (1962), who introduced the metaphor of the “wild-geese-flying pattern” of East Asian economic development, to describe how within East Asia, the initially fast-growing economies, beginning with Japan, would slow down as surplus labor ran out, real wage rates rose, and exports began to be restricted by quota, and a lower-cost economy would take over as the fastest-growing economy.

Chronologically, East Asian industrialization spread from Japan to first Hong Kong in the mid-1950s, and then to Taiwan in the late 1950s, and then to South Korea and Singapore in the 1960s, and then Southeast Asia (Thailand, Malaysia, Indonesia) in the 1970s, and then to Guangdong, Shanghai, Jiangsu, and Zhejiang in China in the 1980s, as China undertook economic reform and opened to the world, beginning in late 1978.

All of these economies share a number of commonalities: the lack of significant natural resource endowments including arable land, initial conditions (such as the low real GDP per capita and the existence of surplus agricultural labor), cultural characteristics (thrift, which results in high national savings rates, industry, and high value for education), economic strategies, policies, and measures (competitive exchange rate, export promotion, investment in basic infrastructure, and maintenance of macroeconomic stability), and the consistency, predictability, and stability of government policies that result from continuous one-party rule. And they have all benefited from economic globalization, with quite a few of them—for example, Japan, Hong Kong, and Singapore—achieving developed economy status. And now is China’s turn to escape the so-called middle-income trap of a real GDP per capita of US$12,000 by, say, 2025.

However, there are also some characteristics that are unique to the Chinese economy. The initial economic slack in the economy, resulting from its legacy as a centrally planned economy, was an advantage that most other East Asian economies did not have. The economies of scale which result from the size of its economy, including its population, and the possibility of significant learning-by-doing effects because of large cumulative real outputs in different industries, are also not found elsewhere, with the exception of India and possibly Indonesia.

The Chinese economy also has the advantage of relative backwardness. It has been able to learn from the experiences of successes and failures of other economies and to leapfrog and bypass stages of development (e.g., the telex machine, the VHS videotape player, the fixed landline telephone, and the personal checking account are all mostly unknown in China). It is also possible for the Chinese economy to have creation without destruction (e.g., the cellphone does not have to compete with the fixed landline phone; online virtual stores like Taobao do not destroy brick and mortar bookstores which do not exist in the first place; internet payment services such as WeChat Pay meet the needs of a population with no prior personal checking accounts). Thus, the adoption of innovation in China has lower costs and higher net benefits than in other more mature economies.

Further Reading

Chow, G. C. (2015). China’s economic and social problems. Singapore: World Scientific.Find this resource:

Eckstein, A., Galenson, W., & Liu, T.-C. (Eds.). (1967). Economic trends in communist China. Chicago, IL: Aldine.Find this resource:

Liu, T.-C., & Yeh, K.-C. (1965). The economy of the Chinese Mainland: National income and economic development, 1933–1959. Princeton, NJ: Princeton University Press.Find this resource:

Lin, J. Y. (2011). Demystifying the Chinese economy. Cambridge, UK: Cambridge University Press.Find this resource:

Naughton, B. (1995). Growing out of the plan: Chinese economic reform, 1978–1993. Cambridge, UK: Cambridge University Press.Find this resource:

Perkins, D. H. (2015). The economic transformation of China. Singapore: World Scientific.Find this resource:

References

Akamatsu, K. (1962). A historical pattern of economic growth in developing countries. Journal of Developing Economies, 1(1), 3–25.Find this resource:

Arrow, K. J. (1962). The economics of learning by doing. Review of Economic Studies, 29(3), 155–173.Find this resource:

Chow, G. C. (2006). China’s economic transformation (2nd ed.). New York, NY: Wiley-Blackwell.Find this resource:

Hsien, C.-T. (2002). What explains the industrial revolution in East Asia? Evidence from the factor markets. American Economic Review, 92(3), 502–526.Find this resource:

Joint Economic Committee of the U.S. Congress. (1968). An economic profile of Mainland China, with a foreword by Senator William Proxmire. New York, NY: Praeger.Find this resource:

Kim, J.-I., & Lau, L. J. (1994). The sources of economic growth of the East Asian newly industrialized countries. Journal of the Japanese and International Economies, 8(3), 235–271.Find this resource:

Kim, J.-I., & Lau, L. J. (1996). The sources of Asian Pacific economic growth. Canadian Journal of Economics. 29, S448–S454.Find this resource:

Lau, L. J. (1997). The role of government in economic development: Some observations from the experience of China, Hong Kong, and Taiwan. In M. Aoki, H.-K. Kim, & M. Okuno-Fujiwara (Eds.), The role of government in East Asian economic development: Comparative institutional analysis (pp. 41–73). Oxford, UK: Clarendon Press.Find this resource:

Lau, L. J. (2018a). The sources of Chinese economic growth since 1978. In M. Guzman (Ed.), Towards a just society: Joseph Stiglitz and 21st century economics (pp. 323–352). New York, NY: Columbia University Press.Find this resource:

Lau, L. J. (2018b). What makes China grow? In P. Pauly (Ed.), Global economic modeling: A volume in honor of Lawrence R. Klein (pp. 182–233). Singapore: World Scientific.Find this resource:

Lau, L. J. (2019). The China–U.S. trade war and future economic relations. Hong Kong: Chinese University of Hong Kong Press.Find this resource:

Lau, L. J., & Park, J.-S. (2007). Sources of East Asian economic growth revisited. Working Paper, Department of Economics, Chinese University of Hong Kong.Find this resource:

Lau, L. J., Qian, Y., & Roland, G. (1997). Pareto-improving economic reforms through dual-track liberalization. Economics Letters, 55(2), 285–292.Find this resource:

Lau, L. J., Qian, Y., & Roland, G. (2000). Reform without losers: An interpretation of China’s dual-track approach to transition. Journal of Political Economy, 108(1), 120–143.Find this resource:

Lau, L. J., & Zheng, H. (2017). How much slack was there in the Chinese economy prior to its economic reform of 1978? China Economic Review, 45, 124–142.Find this resource:

Lin, J. Y. (1988). The household responsibility system in China’s agricultural reform: A theoretical and empirical study. Economic Development and Cultural Change, 36(3), Supplement: Why does Overcrowded, Resource-Poor East Asia Succeed: Lessons for the LDCs?, S199–S224Find this resource:

Lin, J. Y. (2011). Demystifying the Chinese economy. Cambridge, UK: Cambridge University Press.Find this resource:

National Bureau of Statistics of China, China statistical yearbook, various issues.Find this resource:

Naughton, B. (1995). Growing out of the plan: Chinese economic reform, 1978–1993. Cambridge, UK: Cambridge University Press.Find this resource:

Naughton, B. (2007). The Chinese economy: Transitions and growth. Cambridge: MIT Press.Find this resource:

Perkins, D. H. (2015). The economic transformation of China. Singapore: World Scientific.Find this resource:

Wu, H. X. (2015). Accounting for the sources of growth in the Chinese economy. Research Institute of Economy, Trade and Industry (RIETI) Discussion Papers No. 15-E-048, Tokyo.Find this resource:

Young, A. (1992). A tale of two cities: Factor accumulation and technical change in Hong Kong and Singapore. In O. J. Blanchard & S. Fischer (Eds.), National Bureau of Economic Research macroeconomics annual (pp. 13–54). Cambridge: MIT Press.Find this resource:

Young, A. (1995). The tyranny of numbers: Confronting the statistical realities of the East Asian growth experience. Quarterly Journal of Economics, 110(3), 641–680.Find this resource:

Notes:

(1.) The figures presented here are based on a time series of Chinese real GDP in 2017 prices constructed using data from the National Bureau of Statistics of China and converted to USD at the average yuan/USD exchange rate in 2017.

(2.) In 1976, first Zhou Enlai, the Premier of the State Council, and then Mao Zedong, the Chairman of the Communist Party of China, passed away.

(3.) In unpublished research, Lau and Park (2007) also found positive technical progress for the East Asian NIEs in the period after 1990.