China’s Economic Development

Abstract

Chinese real gross domestic product (GDP) grew from US$369 billion in 1978 to US$12.7 trillion in 2017 (in 2017 prices and exchange rate), at almost 10% per annum, making the country the second largest economy in the world, just behind the United States. During the same period, Chinese real GDP per capita grew from US$383 to US$9,137 (2017 prices), at 8.1% per annum. Chinese economic reform, which began in 1978, consists of two elements—introduction of free markets for goods and services, coupled with conditional producer autonomy, and opening to international trade and direct investment with the rest of the world. In its transition from a centrally planned to a market economy, China employed a “dual-track” approach—with the pre-existing mandatory central plan continuing in force and the establishment of free markets in parallel. In its opening to the world, China set a competitive exchange rate for its currency, made it current account convertible in 1994, and acceded to the World Trade Organisation (WTO) in 2001. In 2005, China became the second largest trading nation in the world, after the United States. Other Chinese policies complementary to its economic reform include the pre-existing low non-agricultural wage and the limit of one-child per couple, introduced in 1979 and phased out in 2016. The high rate of growth of Chinese real output since 1978 can be largely explained by the high rates of growth of inputs, but there were also other factors at work. Chinese economic growth since 1978 may be attributed as follows: (a) the elimination of the initial economic inefficiency (12.7%), (b) the growth of tangible capital (55.7%) and labor (9.7%) inputs, (c) technical progress (or growth of total factor productivity (TFP)) (8%), and (d) economies of scale (14%). The Chinese economy also shares many commonalities with other East Asian economies in terms of their development experiences: the lack of natural endowments, the initial conditions (the low real GDP per capita and the existence of surplus agricultural labor), the cultural characteristics (thrift, industry, and high value for education), the economic policies (competitive exchange rate, export promotion, investment in basic infrastructure, and maintenance of macroeconomic stability), and the consistency, predictability, and stability resulting from continuous one-party rule.