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Introduction (Barry Naughton) From Transition to Development 1. Key Characteristics of Chinese Economy A rapidly growing, large, developing economy. Almost 10% annual growth rate over 1978-2007. The 3rd largest economy in the world, with the GDP of about US$4.2 trillion (2008). Following the U.S.($14.5 trillion) and Japan ($4.6 trillion). The 2nd largest trading nation, with international trade volume of $2.6 trilion (2008) 2nd largest exporter following Germany and 2nd largest importer following the US. Per-capita GDP about $3200 (2008). Still, a developing country. Key Characteristics of Chinese Economy (cont’d) Diverse (complicated) economy. Substantial regional differences (from extreme poverty to relative prosperity). Substantial difference in technology level across sectors (from primitive to ultra-modern). Wide range in organizational models state-owned (controlled) enterprises, diverse private- & mixed ownership- & foreign-invested enterprises What are main causes of these diversities? Vast size and two incomplete transitions. Key Characteristics of Chinese Economy: Two Incomplete Transitions Transition from bureaucratic socialism (‘planned economy’) towards a market economy. Protracted transition from a rural to urban society “system transition” “economic development” Process of modernization (economic growth, combined with industrialization & urbanization). Due to these incomplete (on-going) transitions, diverse elements are mixed up within a country. Traditional-, socialist-, modern-, market- elements. 2. The Distance Traveled China underwent a difficult development process since PRC was founded in 1949. Initial recovery & some growth followed by terrible periods of “GLF” and “Cultural Revolution” with people suffering from famine & political instability. Nobody predicted such remarkable changes, when China started the “reform” policy in late 1970s. From “a poor, isolated, socialist economy” to “a strong market-based, open economy”. <cf: Other transition economies Based on a unique gradual reform policy. Living standard improved substantially for most people. 3. Dual transition with different progress The key challenge was “market transition” until the recent past. Transition toward a market economy progressed substantially for the last 30 years. The key challenge is becoming the “development”. Development has always been the key challenge. China attempted diverse development strategies over time. Market transition has been a new strategy for development. The challenge of development still is severe. Invest in physical & human capital & infrastructure, create effective institutions (banking, etc), protect the poor, etc. 4. China’s Growth Performance Extraordinary economic growth over the past 30 years. Explained by the combination of three factors. 1) Structural Factors Growth due to rapid growth of inputs, such as physical capital (industrial capital and physical infrastructure)- ‘investment’, Labor force (‘demographic dividend’ and rural-urban migration). human capital investment (education, public health). China’s Growth Performance (cont’d) 2) Transitional Factors Successful transition strategy implemented Showed market is the superior way to organize economic transactions (to state plan). Not support “market fundamentalism”. “Gradualist” approach. Other institutions essential, including government coordination correcting mkt failures. Interact with structural factors (mentioned above). China’s Growth Performance (cont’d) 3) Traditional Factors Reap benefits from the revival of some traditional economic relationships. A revisionist view China had a history of highly commercialized and entrepreneurial society. Long history of state operation, rich institutions, familiarity with commercial procedures. The old civilization is reclaiming its past global economic positions. Facilitated by the ‘globalization’ and commercial ties with overseas Chinese (HK. Taiwan, etc). 5. Becoming a “normal” economy Pre-reform Chinese economy was very peculiar. 1) Peculiar Institutions: an outlier among developing countries. Adapted socialist institutions to a poor, rural economy. 2) Showed peculiar patterns of development. Low per-capita GDP, but high industry’s share in GDP (over-industrialized, high energy consumption per GDP). Low urbanization ratio (under-urbanized). Some “achievement” such as high life expectancy. Nowadays, moving closer to “normal” institutions & “normal” pattern of low middle-income economies. Becoming a “normal” economy (cont’d) Although easier to understand the more ‘normal’ Chinese economy than before, still not easy. Due to vast size, diversity, rapid growth, complex legacy of the past, etc. Complicated & peculiar institutions: (eg) “market economy” with diverse distortions, such as substantial stateownership, gov’t regulation, corruption, etc. Low transparency: economic institutions and policy making process are not open to outsiders. Economic data are limited and not credible, although improved in their quantity and quality. 6. China to the Future Two contrasting views on Chinese economy. Over-estimation vs. Under-estimation. Overestimation Regard China as an economic superpower (take it for granted China becoming the strategic rival to the US). Overestimate the achievement & current level of economic development (extrapolating into the future). Overlook formidable challenges & difficulties facing China as a developing country. Pressure of enormous population on limited resource. Shaky institutions, such as inefficient financial sector & weak political system (‘rule of law’). China to the Future (cont’d) Underestimation Look down upon the achievement of the past 30 years & exaggerate the current problems. Underestimate the abilities of Chinese policy makers. Objective perspective is needed. Understand both successes & failures for the last 30 years. Accept that China achieved essential changes needed for continued economic development. China’s ability to mobilize resources & talents for targeted goals promise certain degree of resilience. No guarantee for continued success in the future. Need to understand key challenges faced by China.