Barry J. Naughton - The Chinese Economy: Adaptation and Growth

THE CHINESE ECONOMY
SECOND EDITION

Adaptation and Growth

The MIT Press

Cambridge, Massachusetts

London, England

For the past 35 years, China has been the best-performing economy in the world. Chinas gross domestic product (GDP) has grown faster for longer than that of any other economy in history. Furthermore, the Chinese economy is now huge, comparable in size and global impact only to that of the United States. China is now a driver of the world economy, in part because it has benefited enormously from the wave of globalization that has washed over the world in the past three decades.

How has China achieved this extraordinary economic success? China is not an obvious candidate for prosperity, in the way that the United States and other lucky countries are. China has faced development problems that todays rich countries never had to face. Bringing its massive population out of poverty required China to overcome daunting geographic and resource limitations. China entered its rapid growth period far behind technologically and without the institutional framework and rule of law that rich countries had developed over centuries to support their sophisticated market economies. Yet China dismantled the socialist command system, created a dynamic market economy, and vaulted into the ranks of upper-middle-income economies. China has forged its own development strategy in a way that no country has ever done before, independent of the simplistic prescriptions of some brands of orthodox economics. Today, after more than three decades of extraordinary success, China must adapt its strategy to dramatically changed conditions that point to significantly slower growth. A newly middle-class society demands new goods and services, a better environment, and more robust social policies. Can policy-makers deliver? Do they have the will to overhaul their approach to development, given the success it has brought them thus far? How big is the danger that hidden vulnerabilities will bring Chinas miraculous growth to a screeching halt? The Chinese economy continues to display both unmatched dynamism and unrivaled complexity.

It is useful to think of economic development as made up of two fundamental processes: structural change and institutional transformation. Structural change refers to real changes in the distribution of resources and activity. At the macro-structural level, the most fundamental change is the movement of labor and capital out of agriculture into the cities, and indeed China has transformed into a primarily urban industry and service-oriented economy over the past 35 years. Institutional transformation refers to changes in the organizations, information, and incentives that guide economic decision-makers. Governments, businesses, and households respond to the rules of the game in pursuing their objectives. China has undergone a dramatic institutional transformation from a command economy to a predominantly market economy. Both structural change and institutional transformation are sources of productivity improvement and income growth, and thus of economic development.

The objective of this book is to trace these broad processes of structural change and institutional transformation through the most important areas of the economy. From 1978 through 2010, both structural change and institutional transformation had their maximum possible effect on economic growth: the result was the extraordinary period we label the miracle growth period. Today, China has advanced to upper-middle-income status, and there is less opportunity for structural and institutional changes to drive growth: the miracle growth period is over. However, China still has robust growth potential, and medium-rapid growth over the coming decades will drive substantial catch-up and improvement in Chinese standards of living.

Structural change displays some common patterns in all growing economies. Although China has some distinctive features, Chinas industrialization can be easily situated in common structural processes. But structural change, as we shall see, is not just a macro phenomenon, but also an intermediate, or meso phenomenon, affecting specific sub-sectors, and also incorporating changes in demographic and technological structure. Institutional change by contrast, evolves from a specific context, and Chinese institutions are utterly distinctive. As a result, institutional change plays out in China in even more complex ways, in an incentive environment quite different from that in most economies. The objective of this volume, then, is to make Chinas ascent comprehensible by integrating the specific realities of China today with the broad patterns of structural and institutional change. Throughout, we hope to convey both the sources of strength and the challenges and vulnerabilities that have confronted China, including those overcome in the past and those that still face China today.