Resurgent China

China has been experiencing very fast economic growth for three decades now. As a result, China’s per capita income has increased almost ten-fold from $224 in 1978 to $2,055 in 2007.¹ Surpassing other G-8 countries, China has become the second largest economy in the world in Purchasing Power Parity (PPP) terms, and she is already the world’s top exporter country. This fast economic growth has been associated with fundamental changes in China’s institutions. From a centrally planned economy and very egalitarian society, China has become by and large a market-based economy and an unequal society. China has also become more integrated with the rest of the world.

China is the most populous country in the world, with its population passing the 1.3 billion mark on January 6, 2006. Population is one of the decisive factors shaping the pattern of China’s economic growth. On the one hand, the huge population has provided China a massive labor force, making China the “factory of the world.” On the other hand, the gigantic population also puts great pressure on China with regard to employment, social welfare, natural resource, and environment.

The reforms of the last 25 years have made China an increasingly urbanised society, and the process of urbanisation will accelerate in the coming years. For the time being, however, China remains a predominantly rural society. Some 745 million people — 57 percent of the total population — are officially registered as rural.¹ Two-thirds of total employment takes place in the countryside,² and agriculture alone still accounts for almost 45 percent of all jobs.³ These are formidable numbers. No assessment of China’s future economic and social development can fail to take close account of the challenges posed by this “rural bias” and its implications for government economic and social policies.

China has realized “high economic growth” since the introduction of reform and “opening up” policy in 1979. We define “high economic growth” as real economic (GDP) growth rate of 6 percent or more, sustained for more than three years. This chapter has the following three objectives. The first is to analyze China’s economic performance since 1979 by comparing it with earlier economic growth experiences of Japan, Taiwan, and Korea, which also realized high economic growth during the latter half of the twentieth century. In this regard, the focus will be on the main players and factors that caused the high economic growth. In particular, we will consider the question of how long China’s high growth will continue, and whether or not the length of China’s high growth period can match that of Taiwan and Korea. The second objective of the chapter is to identify the emerging contradictions that China faces. Failure to resolve these contradictions in a timely manner will lead to social and political difficulties, which in turn may put an end to China’s high growth period. Third, the chapter will discuss the new economic issues that China is likely to face in the coming decade. Finally, the chapter will combine the analysis of emerging contradictions with discussion of new issues in order to point to steps and policies that are necessary for China to maintain its high economic growth and attain healthy economic development.

This chapter examines China’s industrialization in the light of the Lewis growth model. Even casual observation suggests that the Chinese economy has many of the features that the Lewis model tries to capture. Yet, while the Lewis model has been applied to study industrialization of other countries, surprisingly little, if any, effort has been made in this respect with regard to China.¹ This chapter is an attempt to fill this void.

It is well known that China’s economy has grown very rapidly in recent years, though there is some controversy over precisely how fast economic growth has been. For example, the new (revised) series on Gross Domestic Product (GDP) suggest that between 1993 and 2004, China’s per capita GDP increased 4.1 times in nominal terms and 2.7 times in real terms (Tables 6.1, 6.2).¹ The old national estimates suggest a somewhat slower increase, 3.6-fold and 2.3-fold, respectively, but the old region-based estimates indicate a more rapid increase for the nation, 4.4-fold and 3.0-fold, respectively. The new national series is probably the most accurate because it incorporates new data and estimation techniques.

The Chinese central government has tried to establish the internal division of labor between regions based on their comparative advantages and to deepen the economic interdependency among them. For instance, during the nineth Five Year Plan period, China launched the construction of seven major economic regions. By enhancing various kinds of inter-regional economic cooperation within each area, they tried to accelerate the economic integration of regions. In addition, they also aimed at building rational economic relationships between the areas based on comparative advantages of each area (Fan and Lu, 2001). Subsequently, since the beginning of the Western Development Program, large amounts of investments have been directed to the construction of infrastructures in interior areas. This program is expected to greatly enhance China’s inter-regional economic linkages (Huang and Wei, 2001). We can find out from these examples that attaining spatially more integrated market economy and establishing spatial division of labor based on regional comparative advantages have been important policy objectives of the Chinese authorities.

Fiscal decentralization is an important element that fostered the success of China’s reforms towards a market economy. If economics is all about incentives, then understanding how fiscal reforms provided incentives for local authorities and economic entities to stimulate economic growth is essential to understanding China’s economic success. There is no dispute about the positive impacts of fiscal reforms on China’s recent economic growth. However, there are many concerns about the negative impacts of fiscal decentralization, such as corruption and the imbalance of regional development. Among these negative effects, local protectionism seems to be one of the most prominent problems associated with fiscal decentralization and has been widely commented on and studied. General consensus recognizes the seriousness of local protectionism in China and its damaging effect on economic efficiency, but tends to neglect the dynamics of the relationship between local protectionism and market forces.

After more than a quarter of a century of the transition process beginning in the late 1970s, China is now probably one of the most competitive market economies in the world. In many industries in the country, you can witness an overwhelming number of firms engaging in throat-cutting types of competition. Growth in demand invites building-up of new capacities and almost endless new entries, which often lead profitability down to extreme lows. While the government occasionally tries in vain to control new investment in or entries into those sectors, this “excessive” competition as is often alleged, eventually turns out to be the very driving force of the industrial development.

Since the launch of market-oriented reforms in 1979, in a range of a quarter of a century, China has successfully completed two transitions: One is the transition from a low-income under-developed economy featured by poverty and isolation to a middle-income, newly industrialized, and booming economic giant that has changed world economic landscape. The other transition is institutional: the economic system has evolved from an inward-looking, centrally planned socialist command economy to a predominantly market-based one with considerable openness to trade and foreign investment.

Whether or not Total Factor Productivity (TFP) growth is playing a significant role in China’s recent economic growth is an important issue from several points of view. The first concerns sustainability of growth. As emphasized by Young (1995), Krugman (1994), and others, growth driven by input accumulation may soon hit the limits of diminishing returns and prove not sustainable. By contrast, growth driven primarily by productivity growth may be more sustainable. Second, findings regarding relative contribution of input accumulation and productivity can be useful in formulating policies necessary to confront rising regional inequality that has now become a well recognized problem in China. A finding showing the importance of TFP growth may indicate that mere channeling of investment into lagging provinces may not ensure their faster growth unless the investment is associated with productivity growth.

China is a country rich in natural resources. However, due to its large population size, the per capita availability of many essential natural resources is much less than the corresponding world average. For instance, China’s per capita availability of water, arable land, and mineral resources is only 28, 32, and 50 percent of the corresponding global levels. As the result of her remarkable economic growth, China’s consumption of natural resources has increased very rapidly over the last few decades. Among 45 major natural resources that are essential for industrial development, one quarter has already been in shortage of supply. The shortage of key natural resources is viewed as one of the critical constraints on China’s future economic growth.

Economic growth creates wealth, employment, and also effluents. In China, as in other rapidly industrializing economies, pollution poses serious challenges to both citizens and governments. High growth rates, high population density, and China’s long history of intense human pressure on the land magnify environmental hazards. It is therefore no surprise that Chinese episodes now join the Donora Pennsylvania air inversion of 1948, the smoke emergencies of the 1950s in London, New York City, and Belgium’s Meuse Valley, multiple conflagrations on Cleveland’s Cuyahoga River, and Japan’s Minamata disease in the annals of environmental disasters associated with industrial growth.