Demystifying the Chinese Economy
Nov 04-2013
By Professor Justin Yifu Lin
On a serenity Saturday evening at the Peking University Wanzhong Building of the National School of Development, a capacity of about 200 seats filled with BiMBA MBA students waited anxiously for the former World Bank Chief Economist Professor Lin Yifu to deliver his speech on the topic of Demystifying the Chinese Economy. The speech also marks the opening of a lecture series about China’s development which is specially designed for MBA students to understand China better.
The two highlights of the topics are the dynamic growth that China has achieved since 1979 and the attributes to sustain China economic growth. In order to provide an analytical answer on whether China is able to sustain the economic growth, Professor Lin emphasized on the important of understanding the reason how China differed from other countries in coping with challenges between 1979 and now to achieve dynamic economic growth.
China has been through an economic transition development started in 1979 from social planning economy to a market economy. Since then the economic growth has been maintained at around 9.8% for the past 33 years. Miracle is the word to use for a country that has been through decade of poverty and with the world largest population to be able to maintain this growth rate for such a long time. Despite the prediction that China economy would crash, China economy continued to maintain dynamic growth and achieved middle income country. This growth rate has changed the fate of many Chinese people with great opportunity.
The Chinese leadership of the 1980s Deng Xiao Ping who spearheaded the China economic reform set to achieve double income growth in 20 years and this would mean an economic growth at 7.2 % per year. However, the actual achievement has been 9.8% which far exceeded the conservative target. Prof. Lin went on to elaborate the phenomenon of growth rate that it had taken 1400 years for a growth rate of 0.5% in advance country in the west before the 18th century. It took 70 years to reach 1% growth rate in the mid-19th century. It has taken only 35 years from since then to reach 2% growth now. A faster growth rate in a shorter time is possible due to industrial revolution. Industrial revolution encouraged technology advancement and labor intensive opportunity. China has nevertheless been through an industrial revolution in the 1980s onwards which formed the basis of the economic growth.
To accelerate into the high income region, there are two approaches for developing country to either invent or imitate the new technology or product. Imitation will shorten the learning curve on a proven outcome, a lower cost option in various aspects and a faster rate for industrial upgrade. This has been proven through after the Second World War that 13 developing countries adopted this approach from developed countries and achieved around 7% growth for 25 years. And China is one of the thirteen that is why China is able to achieve high economic growth rate.
In the industrial revolution, imitation could never last forever and there should be continuous technology advancement through invention. The innovation should lead the industrial upgrading from manufacturing to invention. Establishment of research and development, and protection of intellectual property form the path to high income region. The high standards of research & development to invent advance technology or product will increase the standard of labor skills which in turn increase the labor income. The high technology industries achieved competitive advantage which created high income with surplus and in-turn lead to industrial upgrade and better technologies.
China has done exceptionally well to achieve stability and strong economic growth as compared to other countries that have adopted similar strategy as a result of privatization, marketization, liberalization and government intervention. In order to maintain a stable and strong economic country, heavy industrialization and big enterprises which have turns private from state own have to continue to receive government subsidy and protection. The dual trick approach to achieve dynamic growth and sustainable has been the key reason of China success in stability and strong economic growth. The dual trick approach eliminated the issues on corruption and income disparity.
In understanding the drivers for China economic growth you will be able to provide an objective prediction on how long China is able to sustain the current economic growth. According to Professor Lin, he predicted China will maintain the economic growth of around 8% for the next 20 years. The theoretical reason for Professor Lin prediction is based on the understanding of the nature of growth for example, continuous technology innovation and industrial upgrade. The observation from the 13 developing countries growth at 7% for 25 years after the Second World War has contributed to this prediction. The high growth will depend on how long the heavy industrial will last in China. The historian and economist Angus Matheson made an estimation in 2008 China would achieve 21% per capita income in comparison to the United States. Similar estimation were made for high economy performer countries like Japan in 1951 to sustain 9.3% growth rate for 20 years, Korea in 1977 to sustain 7.6% growth rate for 20 years, Taiwan in 1975 sustain 8.3% and Singapore from 1967 sustain 8.6% growth rate for 20 years. Taking the average from 7.6% to 9.3%, China growth rate of 8% is reasonable.
In order to sustain the 8% growth rate something must be done. China economic must complete the transition from dual track economic into well functional economic to reduce corruption and improve the income distribution through elimination of distortion. China must continue to be in the competitive advantages by development of advance technology and innovation. With this growth rate by 2020 China will be the biggest economy in the world and by then the graduate from BiMBA will be much valuable.
Professor Lin will launch a new book Demystifying the Chinese Economy which covers the above topics in greater details.
