Download Introduction (Barry Naughton)

Introduction
(Barry Naughton)
From Transition to Development
1. Key Characteristics of Chinese
Economy
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A rapidly growing, large, developing economy.
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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).
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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).
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Still, a developing country.
Key Characteristics of Chinese
Economy (cont’d)
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Diverse (complicated) economy.
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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
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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.
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Protracted transition from a rural to urban society
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“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.
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Traditional-, socialist-, modern-, market- elements.
2. The Distance Traveled
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China underwent a difficult development
process since PRC was founded in 1949.
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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”.
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<cf: Other transition economies
Based on a unique gradual reform policy.
Living standard improved substantially for most people.
3. Dual transition with different
progress
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The key challenge was “market transition” until
the recent past.
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Transition toward a market economy progressed
substantially for the last 30 years.
The key challenge is becoming the “development”.
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Development has always been the key challenge.
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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.
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Explained by the combination of three factors.
1) Structural Factors
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Growth due to rapid growth of inputs, such as
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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
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Showed market is the superior way to organize
economic transactions (to state plan).
Not support “market fundamentalism”.
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“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.
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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.
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Facilitated by the ‘globalization’ and commercial ties
with overseas Chinese (HK. Taiwan, etc).
5. Becoming a “normal” economy
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Pre-reform Chinese economy was very peculiar.
1) Peculiar Institutions: an outlier among developing
countries.
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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.
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Due to vast size, diversity, rapid growth, complex legacy
of the past, etc.
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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.
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Economic data are limited and not credible, although
improved in their quantity and quality.
6. China to the Future
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Two contrasting views on Chinese economy.
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Over-estimation vs. Under-estimation.
Overestimation
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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)
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Underestimation
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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.
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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.
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Need to understand key challenges faced by China.