HowimpoverishedwasChina40yearsago?Attheexchangeratein1978,China’spercapitaGDPaveragedonlyUS$155.Itisusuallyassumedthatsub-SaharanAfricaisthepoorestplaceintheworld,however,itspercapitaGDPthesameyearaveragedUS$499.China’spercapitaGDPin1978rankedthirdfromthebottomonalistofover200countries.Thiswasthereality40yearsagowhenDengXiaoping–thegrandarchitectofChina’seconomictransformation–proposedpoliciesofreformandopening-up.
AtthebeginningofChina’sreformandopening-upDengXiaopingsetthegoalofquadruplingthegrossannualvalueofindustrialandagriculturaloutputin20years,whichrequiredanaverageannualgrowthof7.2percent.Itwasachievedveryearlyon.However,atthetime,IneverbelievedChinacouldachievesuchahighgrowthrate.
ContributiontotheWorld
I’vebeenveryluckytohaveexperiencedtheChinamiracleoverthelast40years,witnessingfirsthandChina’searth-shatteringtransformation.China’spercapitaGDPin1978,US$155,hasgrowntoUS$8,836in2017,andthecountryisnowclassifiedasanupper-middleincomecountry.Fromamacro-economicperspective,in2009,ChinasurpassedJapantobecomethesecondlargesteconomyintheworld,andin2010,surpassedGermanytobecometheworld’slargestexporter.In2013China’stradesurpassedtheUnitedStatesanditbecamethebiggestgoodstradingnationontheplanet.Throughoutthisprocess,over700millionChinesepeoplehavebeenliftedoutofpoverty.
IservedasseniorvicepresidentandchiefeconomistoftheWorldBank,whichiscommonlyviewedasthetoppositionforeconomistsintheworld.IwastheninthchiefeconomistattheWorldBank,andthosebeforemewereallrenownedeconomistswithamplepoliticalexperience.AmajorreasonwhyIwasqualifiedtoholdsuchapositionwasChina’sdevelopmentandenormouscontributionstoworldpovertyreduction.
IbelievethatChina’sgreatestcontributiontotheworldisitsstableandrapideconomicdevelopment.Overthelast40years,theglobaleconomicsituationhasbeenunstable.Forexample,Asia,thefastestgrowingregionafterWorldWarII,sufferedasuddenfinancialcrisisin1997.Atthetime,manyinternationalobserversbelievedthatAsianeconomieswouldneed10to20yearstoregaintheirformervitality.However,aftertheyear2000,theyhadrecoveredandcontinuedtogrowrapidly.
Whydidtheseeconomiesexceedexpectations?BecausenobodypredictedChina’sresponse.First,asaresponsiblepower,ChinadidnotdevaluetheRenminbi,allowingtheeconomiesaffectedbythefinancialcrisistoavoidaso-calledcompetitivedepreciation–thiswasthemajorreasonbehindthestabilityoftheentireAsianeconomy.Inaddition,atthetimeChinascoredaneightpercentgrowthrate,helpingrevivetheeconomiesofotherAsiancountries.
Theinternationalfinancialcrisisof2008wasthefirstmassivefinancialcrisissinceWorldWarII,andalsothemostsevereglobalfinancialcrisissincetheU.S.stockmarketcrashof1929.Manypeoplethoughtthefalloutfromthiscrisiswouldbefeltforyearstocome.Hereweareadecadelater,andalthoughmanydevelopedcountrieshavenotcompletelyrecovered,mostnationaleconomiesstabilizedin2009or2010,thoughnottofullstrength.ThekeytothisistheChinafactor.
In2009,Chinaintroducedproactivefiscalpoliciesthatrevitalizeditseconomyfromthefirstquarteron–itsrecessionlastedforonlyonequarter(thefourthquarterof2008).UndertheinfluenceoftheChineseeconomy,otheremergingmarketsstartedtorecoverinthesecondquarteroftheyear.Inthedecadesince2008,Chinahascontributedover30percenttotheworld’seconomicgrowth.
Theauthoratthe2015SummerDavosForum.A40-YearEconomicMiracle
Overa40-yeartimespan,Chinamaintainedanaverageannualgrowthof9.6percent,agrowthneverbeforeachievedinhumanhistory.Incomegrowthisnotnearlyassimpleascurrencyvaluation,itisabouttheincreaseofpurchasingpower;itrepresentsrealgrowth.Thesteadyimprovementofproductivityisanecessarypreconditionforrealgrowth.Thisrequirescontinualinnovationinindustrialtechnologiessothateveryworkercanproducemoreandbetterproducts.Thisisthefirstmethodofincreasingincome.Thesecondistocreatenewindustriesthathaveahigheraddedvaluesothatlaborresourcesmovefromlow-added-valuesectorstohigh-added-valuesectorsoftheeconomy,whichisanecessarymechanismformaintaininglong-termincomegrowth.Inotherwords,sci&techadvancementbringseconomicdevelopment.Bothdevelopedanddevelopingcountriesmustadheretotheaforementionedmechanismsinordertomaintainlong-termincomegrowth.
Thereisanimportantdifferencebetweendevelopedanddevelopingcountriesinthisprocess.Theincomelevelofdevelopedcountrieswasconsistentlyhighaftertheindustrialrevolution,meaningthatthequalityoflaborproductivitywasthehighestintheworldandtheirindustrialtechnologieswerealsothebestintheworld.Pushingforwardtechnologicalinnovationandindustrialupgradingisdependentonoriginalinvention,whichisdifficult.Developingcountrieshavea“late-comer’sadvantage”inthisregard,becausetheycantapintotheworld’sexistingadvancedtechnologiesastheirsourceoftechnologicalinnovationandindustrialupgrading.The“late-comer’sadvantage”isaneconomicterm:The“late-comers”havealowerincomelevelandabackwardeconomy,whichisnotgood;however,fromtheperspectiveoftechnologicalinnovationandindustrialupgrading,thosecountriescanimport,imitate,andlearnfromtheinnovationsofothersatlowercostsandrisksassociatedwithoriginalinvention,andthisisthe“advantage.”
Theoreticallyspeaking,sincethecostsandrisksarelower,thespeedofprogresscanbemuchhigher.Practicallyspeaking,by2008,13oftheover200developingeconomiesafterWorldWarIIunderstoodhowtousetechnologyandproductivitygapsassourcesoftechnologicalinnovationandindustrialupgrading,enablingthemtoachieveanaverageannualgrowthofsevenpercentorhigherfor25yearsormore.Thisrateismorethandoublethatofdevelopedcountries.Thiskindofsustaineddevelopmentnarrowedtheirgapwithdevelopedcountries.
Chinawasoneofthese13economies.Sincethekickoffofitsreformandopening-up,itsgrowthratehasbeenoverthreetimesthatofdevelopedcountriesandhassustainedfor40years.ThisisbecauseofChina’s“late-comer’sadvantage.”
China’spreferentialpoliciesforagricultureandfarmershaveeffectivelyboostedagriculturaldevelopmentandfarmers’income.
TheChinaTheory
WhatdoesChina’s40yearsofreformandopeningupgivetotheworld?LookingatthesuccessofChina’seconomy,thereisadefinitelogictoit.Asaneconomist,IhaveadutytoexplaintherationalebehindChina’smiracle.ThisrationaleisnotonlyacontributiontoChina,italsohasgreatsignificanceforprovidingguidancetootherdevelopingcountries.
Untilnow,Ihaveneverseenanydevelopingcountrythrivebyimplementingpoliciesaccordingtothetheoriesofdevelopedcountries.RelyingonChina’s40-yearexperiencewithreformandopening-upandthepracticalsuccessorfailureofChinaandotherdevelopingcountries,wecreateanewtheory,onethatisdifferentfromthetheoreticalstructureofdevelopedcountries.Icallit“newstructuraleconomics.”Thistheoryemphasizesthestructuralnatureofdifferencebetweendevelopedanddevelopingcountries,indicatingthatthisdifferenceproducesdifferencesintheirneedsofindustries,institutionalandfinancialorganizations,andhumanresourcecapital.
Forexample,Ethiopia,oneofthepoorestcountriesinAfrica,hasrecentlybeguntoborrowfromChina’sreformandopening-up,creatingabeneficialenvironmentforeconomicgrowth,andcentralizingitsforcestostartlarge-scaleprojects.Withrudimentaryinfrastructure,ithasestablishedindustrialparksandintroducedimplementingonestopservicestoattractinvestment.Overthelast10years,Ethiopiahasmaintaineda10percentgrowth,andisnowthetopdestinationofforeigninvestmentinAfrica.
ThistheoryappliednotonlytopoorcountriesinAfrica.Polandhasalsoreapedthebenefits.Afewyearsago,Polandwasinabettersituationthansomeofitsneighboringcountries,however,itstillhadnotestablishednewindustries,andhadnowayofcreatingemployment.Therefore,muchofitsworkforcesoughtemploymentabroadinplaceslikeSpain,France,andIreland.In2015,thePolishgovernmentpublisheditsnationaldevelopmentplan.Theoutsideworldwasverynervous,wonderingifPolandwasrevertingtotheeraofplannedeconomy.Theanswerwas“No,”thePolishpeoplesaid,“WearedesigningournationaldevelopmentplanaccordingtoLinYifu’snewstructuraleconomics.”
ItissaidthataftertheOpiumWars,Chineseintellectualshadneverdevelopedtheoriesthatothercountriescoulduseasatheoreticalfoundationforeconomicdevelopment.ThepersonresponsibleforformulatingdevelopmentpolicyinPolandwasthethenVicePrimeMinisterandMinisterofFinanceandDevelopmentMateuszMorawiecki.Hedaredtoimplementaneconomictheoryfromadevelopingcountry.InDecember2017,hebecamePoland’sPrimeMinister,andinJanuary2018ImethimattheDavosForum.Inhisspeech,hetalkedaboutPolandmakingupa10thofthepopulationoftheEU,whileitwascreating70percentoftheemploymentopportunitiesintheregion.Theseresultsareinstantaneousbecausethegovernmentchangeditswayofthinking.Thecountryhasanefficientmarketandacapablegovernmentthatmakestargetedpoliciesforindustriesofcomparativeadvantagestoeffectivelymobilizelocalresources.
China’s40yearreformandopening-uphasbroughtaboutearth-shatteringchanges,butthebiggestaccomplishmentisthebettermentofthequalityoflifeofits1.4billionpeople,anditspotentialtobetterthelivesofevenmorepeopleworldwide.
Today85percentoftheworld’spopulationlivesindevelopingcountries.EvenifChinabecomesahighincomecountryby2025,66percentoftheworld’spopulationwillstillbefromthedevelopingworld.Theysharetheaspirationtoliveagoodlife.Aswehavealreadymentioned,therearenoexamplesofdevelopingcountriessuccessfullyfollowingthepathofdevelopedcountries.Therefore,asadevelopingcountry,Chinacan,basedonitsownsuccesses,providetheoreticalassistancetootherdevelopingcountries.
Thereasonforwhetheratheoryisapplicableornothasnothingtodowiththeinternallogicofthetheory,butratheritisbasedonwhetherthetheory’spreconditionsexist.Theoriesfromdevelopedcountriesarederivedfromtheexperienceofdevelopedcountries;theyallassumecertaineconomicpreconditionsthatdonotexistindevelopingcountries.Moreover,theconditionsofdevelopedcountriesalsochange,andtheoriesfromthesecountriesareincontinualflux,withsomerisingandsomedecliningininfluenceindifferenttimes.Iftheoriesfromdevelopedcountriescannotbeappliedtoallages,thentheycannotbeuseduniformlyacrosstheworld.Therefore,thesepast40yearsofreformandopening-uphaveallowedChinatodevelopatheoryfromitspractice,whichhasnotonlyallowedthecountrytolearnfromitspastandpresenttoguidethefuture,buthasalsoallowedotherdevelopingcountriestorealizethesameprosperityasChina.
LINYIFU(JustinYifuLin)isaprofessoratthePekingUniversity,honorarydeanofitsNationalSchoolofDevelopment,anddirectorofitsCenterforNewStructuralEconomics.