ACCEPT | Economic Lessons Learned from China's Forty Years of Reform and Opening Up

Category: ACCEPT Featured Studies

Research Team:

David Daokui LI, Gangming YUAN, Hongling WANG, Aobo Ke LI, Zhangkai HUANG, Meixin GUO, Bing LI, Lin LU, Lin FU, Ming FENG, Xiang XU, Jinjian SHI, Xingye Jin, Shaobo LONG,  Hongyu ZHAO,  Sijia HU, Dapeng CHEN, Yusha LI, Di ZHOU, Chi ZHANG, Yifan CHEN, Xushuo WANG, Peng ZHOU, He ZHANG, Kangyi LIU, Kun LANG  

Abstract:

　　In the report, we first show that the past 40 years of China's economic reform and opening up represents the greatest magnitude of economic growth in history. In addition, the 40 years of China's rapid growth is unique in comparison with other episodes of rapid economic growth, including the British Industrial Revolution; the US economic emergence following the Civil War; the Japanese economic growth after the Meiji restoration and German unification; and the Four Tigers. The most unique aspect of China's economic growth is that it began under extremely tight government political control. Because of the uniqueness of the Chinese experience, we argue that China’s rapid growth serves as an invaluable laboratory to understand the relationship between the government and the economy.

Based on field trips, extensive and intensive interviews and literature surveys, we argue that there are five general lessons for a rapid growing economy from China's economic reform and opening up, all in the area of the relationship between the government and the economy. First, the local governments need to be incentivized to help rapid entry and development of enterprises. Second, local governments need to be incentivized to help rapid land conversion from agricultural to non-agricultural. Third, financial deepening is vital; that is, inducing households to hold more and more financial assets in local currency. Financial deepening is essential to convert savings into investments. This requires financial stability, which is crucial. Fourth, the learning through opening up is the key to endogenous economic growth. The fundamental benefit of opening up is learning rather than enjoying comparative advantage. Comparative advantage alone may often trap the economy in a low level of development. The fifth and final lesson from China is that the central government must proactively manage the macroeconomy. The rationale is that enterprises compete with each other in games of industrial organization. Therefore, we often find too many enterprises entering the same industry and then becoming reluctant to exit from a crowded industry. In order to resolve this problem, proactive measures including market-oriented means, administrative orders and reform measures should be implemented.

Overall, the main lesson from China's past 40 years of reform and opening up is that proper incentives and behavior of the government, local and central, are important for economic growth. China has been conducting reforms in this regard and as a result, the government more or less has been playing the role of a helping hand regarding economic growth, although China's economic system is far from perfect and many reforms are still needed.

Outcome:改革开放40年经济学总结.pdf