ACCEPT | Economic Lessons from 70 Years of China's Development

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, Shuyu Wu, 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:

This report distills ten fundamental economic lessons, some being positive and others negative, from the 70 years of economic development of the People's Republic of China, 1949—2019. These lessons revolve around the relationship between the government and the economy, some of which have not been given adequate attention in economics. Learning these lessons is not only essential for China’s own continued economic development but also important for other countries which aspire to emulate China's success.

In analyzing lessons from China's economic performance, we separate the 70-year history of the PRC into the first 30 years and the subsequent 40 years, since they share the same goals and aspirations and yet there are substantial differences in the economic development strategies and systems, as well as mechanisms.

During the first 30 years of the People Republic of China, the country built a system of self-reliant and relatively comprehensive industries, laying the foundation for economic development over the next four decades; however, the improvement in living standard during the first 30 years fell behind those in many other comparable economies.

From the perspective of economics, there are two positive lessons distilled from the first 30 years of development: First, public health, elementary education and infrastructure are the foundations of sustainable future growth and China had great achievements in this regard; Second, as demonstrated by China's success in a few areas of science and technology during the first 30 years, indigenous innovation is possible, but the key to its success lies in learning with open-mindedness from advanced economies, attracting talents with good training in science and technology and efficiently utilizing the skills of such talents.  In addition to these two positive lessons, however, there are three painful lessons that are worthy of learning and remembering. First, the full replacement of the market by the government causes extremely low economic efficiency of economic development. China most got it wrong during the first 30 years. Second, economic development cannot be achieved without providing appropriate incentives to government officials. In the first 30 years, government officials were mostly focusing on political correctness in non-stop political campaigns, mostly ignoring economic performance. Third, the over-centralization of power leads to disasters in strategic decision making, as evidenced by the Great Leap Forward and the Cultural Revolution.

Over the past 40 years, thanks to the Reform and Opening Up, China has created the largest magnitude of economic growth in human history. In our view, China's 40 years of Reform and Opening-up has implied general economic lessons in five areas. First, rapid economic growth happens with rapid establishment and development of new businesses, requiring enthusiastic support of motivated local governments to foster a robust business environment. Second, rapid conversion of the use right of land is a key to economic rapid growth, which means that local governments need to be incentivized to help facilitate the transaction of converting agricultural land into industrial land. Third, the financial deepening as measured by the ratio of financial asset to GDP plays a crucial role in converting household savings into funding for real economic investments, which relies on careful management of a country’s financial stability. Fourth, the fundament impact of opening-up is learning from advanced economies, rather than simply realizing comparative advantages or utilizing foreign funds and technology. A well-managed opening-up process promotes the process of economy-wide learning. Fifth, the rational behavior of micro-economic entities may create violent forces causing massive macroeconomic fluctuation in a rapid growing economy. Therefore, the central government should adopt comprehensive approaches combining market instruments, administrative measures, and reforms programs to proactively mitigate macroeconomic volatility. Market instruments such as interest rate cannot do the job.

The last part of the report is an outlook of the Chinese economy for the next three decades. We expect that by 2025, China will join the ranks of high-income countries according to the classification of the World Bank. Over the next 30 years, the Chinese economy is positioned to continue growing, becoming the world's largest economy. The Chinese economy will likely become a hub of research and development. By 2050, the Chinese economy will likely rank among the world’s most developed economies. At the same time, China's market economic institution will evolve into one with a few distinctive characteristics, serving as a significant alternative to those in the West. However, in order for these to happen, China will have to overcome a few key challenges, such as how to maintain long-lasting momentum for industrial upgrading and high quality economic growth, to push for continued reform of its market institutions, and to play an appropriate leadership role in the changing world.

Keywords: 70 Years of China's economic development, Reform and Opening-up, Government and Economics

Outcome: 新中国70年经济学总结.pdf