The past 30 years has witnessed a remarkable take-off of the Chinese economy. In 2010, China surpassed Japan as the world's second largest economy. Meanwhile, the country replaced Germany to become the world's largest exporter.
The past 30 years has witnessed a remarkable take-off of the Chinese economy. In 2010, China surpassed Japan as the world's second largest economy. Meanwhile, the country replaced Germany to become the world's largest exporter.
The economic miracle has sparked a worldwide debate about the development model of China. Many economists attribute the success to China's unique economic and political systems—it has a powerful government and a controlled national economy, so it is more able to formulate and implement strategies in the best of national interests.
In my opinion, the so-called "China model" is only one of the reasons for the country's economic prosperity. Before the reform and opening up started in 1978, the country was still struggling with acute poverty despite a powerful government.
The significant changes started to happen in late 1970s, and accelerated after 1994 when the country pushed forward reforms of enterprises, market systems and the macroeconomic management of the government. In the late 1990s, the Chinese Government decided to adjust the state-owned economy and provide more opportunities for private entrepreneurs to start up their own businesses.
The establishment of market systems was a strong boost to productivity and laid a solid foundation for vibrant economic growth in the 1990s in the following ways:
First, it allowed some room for private businesses. Since mid-1980s, the government has been relaxing restrictions for private investors to enter some state-controlled sectors. In 1997 the Chinese leadership recognized that the non-state economy is an indispensable part of the socialist market economy.
Entrepreneurship swept through the country. By the end of 1990s, there were more than 30 million privately owned enterprises across the nation. The thriving private economy became a driving force for China's development.
Second, it strengthens utilization of human and material resources. Under the past planned economic system, the government mobilized social resources and forced investments to promote industrialization, which actually impeded overall economic efficiency and the pace of industrialization and urbanization.
But when market-oriented economic systems were established, factors of production (FOP), including land, labor and capital, started flowing from less-efficient sectors to highly-efficient ones.
For example, the enormous rural surplus labor force—around 250 million people, have migrated into cities in the past three decades. Meanwhile, around 70,000 square km of rural land, equal to the area of Ireland, have been used for urban construction.
The FOP shift led to an increase in total factor production (TFP), injecting fresh steam into the economy. (TFP is the portion of output not explained by the amount of input used in production. As such, its level is determined by how efficiently and intensely the input is utilized in production.)
Third, the opening-up policy stimulated export growth, making up for the weakness of domestic consumption and propping up the high growth of the Chinese economy.
China's consumption remained lackluster in comparison to expanding investments. But this investment-dependent growth model is not sustainable.
In the 1990s, China made vigorous efforts to spur exports to developed countries where consumers kept low savings rates. The surging net exports compensated for tepid domestic demand and helped maintain rapid economic growth.
Fourth, the opening-up policy allowed China to introduce advanced foreign equipment and technologies. This helped China to quickly catch up with developed countries in terms of technological prowess and provided firm support to the economy.
All those facts prove that reform and opening up was the real secret to China's economic success.
Undoubtedly, China has made significant progress in the past 30 years, but efforts are still needed to press ahead with market-oriented reforms.
China's market economic systems remain far from perfect because state sectors still play a dominant role in resource allocation, as reflected in the following aspects:
First, although the state-owned sectors account for a minority proportion of the gross national product, it controls the commanding heights of the national economy. State-owned enterprises have been monopolizing key industries such as oil, telecommunications, railways and finance.
Second, government at all levels has the power over land use and capital arrangement.
Third, the rule of law is yet to be established. Government officials frequently intervene in economic activities including project approval, market entrance and price controls.
In the early days of the reform and opening up, Chinese policymakers tended to develop the "authoritarian developmentalism" regime adopted by Japan, South Korea and Singapore. Under this regime, governments conduct macro-controls through industry policies and "window guidance" to commercial banks, instead of directly giving orders to enterprises.
But China's situation is different. The country's current economic system has evolved from the "state syndicate," characterized by a powerful government directly managing the economy and artery industries.
As a result, China's economic system contains elements of both market economy and controlled economy, and it may evolve in either way. The government may relax controls over microeconomic activities and instead strengthen functions as a market supervisor. But it is also likely that the government will further tighten its grip over the markets and consolidate monopolies of state-owned sectors. To prevent that from happening, China needs to deepen political reforms and create a transparent and fair market environment.
At present, it is imperative for China to promote both economic and political reforms. On the one hand, the country needs to transform the controlled economy to a more liberalized and market-driven one. On the other hand, it is necessary to reduce government intervention and build an economy ruled by law instead of administrative orders.
China's economic and social development, heavily reliant on government regulation and resource input, is unsustainable, and will sooner or later result in some unintended consequences.
First, the present growth model cannot be sustained. The government mobilized a lot of social resources and introduced overseas advanced technologies to maintain rapid growth. But that growth is costly and short-lived.
China is reaching the Lewis turning point, where rural surplus labor starts disappearing. Moreover, the resource-intensive growth model brought about resource depletion, incurred damage to the environment and led to many intractable problems, such as lackluster consumption, income stagnation and a widening income gap.
Since 1994, buoyant net exports have been propelling China's economic prosperity. Enterprises in coastal regions also introduced foreign technologies and employed low-wage workers to make low-end products. But after more than 10 years of export euphoria, problems are popping up, including static technological progress and low industrial efficiency. The macro-economy is also struggling with excess liquidity, asset bubbles and simmering inflation.
All those problems are sounding an alarm—economic and social catastrophe will be inevitable if China cannot remove systemic barriers and rebalance the economy toward more sustainable growth.
Second, since the power of resource allocation is in the hands of government officials, corruption is becoming a more serious problem in the country. Worse still, corruption and the yawning rich-poor divide may sow the seeds of social unrest.
Between 1988 and 1998, debates heated up among Chinese economists about intensifying corruption. They called for efforts of market-oriented reform, to avoid the so-called "Asian Drama." The Swedish Nobel Laureate economist Karl Gunnar Myrdal published a book titled Asian Drama in 1968, in which he warned that Asia's economic prospects are overshadowed by inefficiencies, corruption and waste caused by excessive reliance on administrative controls.
Public criticism of the government's inaction to push forward market-oriented reform is growing. The critics are justified, and policymakers must make clear the direction of strengthening government functions. Should the government aim to build a better market environment or control the market, or even replace the market? The direction will decide whether the government would positively or negatively impact the country's development.
That is also why the ongoing debates about the "China model" mean a lot for the country's future.