China sustained an annual growth rate of gross domestic product (GDP) nearly
10 per cent for more than three decades, spurred by the reforms that paved it's
a way for huge growth potential and created conditions to catch up with other
high-income economies of the world.
The radical drivers of china's growth- a growing labour force with much cheaper
rates as compared to the rest of the world, expansion of manufacturing,
urbanization, expanding exports, accumulation of capital, opening to foreign
investments. From following, policies of other major economies china have now
stepped into the shoes of influencing world's major high-income economies to
follow it's lead. China's economic rise is indeed the most intriguing economic
Before transitioning into a planned market economy in late 1970s china had been
suffering from poverty it's per capita income being US$154 IN 1978 which was
less than one- a third of the average in sub-Saharan African countries.
China has since then changed it's an inward-looking approach to outward-looking
overtaking Japan as the world's second-largest economy and Germany as the
world's largest exporter of merchandise.
Productivity is the focal point of china's growth and it's ability to become a
high-income economy. In future, higher productivity can be achieved through some
comprehensive programs to address the three D's - first
removing distortions improve and enhance market competition and allocation of
resources of the economy. Second, the acceleration of the diffusion of advanced
technology and management practices in China. Lastly, fostering discovery and
nurturing china's innovative capacity.
China's Rapid Growth And Evolving Economy
Prior to the economic reforms and trade liberalization, china followed policies
that kept it's economy very poor, centrally controlled, vastly inefficient and
relatively isolated to other economies of the world. After opening up foreign
trade and investments and implementing free-market reforms in 1979, China has
become one of the fastest-growing economies. This tremendous growth has enabled
china on average to double it's a gross domestic product every eight years and
raised an estimated 800 million people out of poverty.
China has not only become the world's second-largest economy but has also become
the world's largest merchandise manufacturer, holder of foreign exchange
reserves, and the world's largest economy on purchasing power parity basis. This
has resulted in China becoming a merchandising trade partner, the biggest source
of imports and it's a third-largest export market commercial partner of the
United States. China is the U.S's largest.
China is also the largest foreign holder of U.S treasury securities which keeps
U.S interest rates low and also help fund the federal debt. China still has room
for growth and compete with other high-income economies. It's per capita GDP
stands at approximately US$10,000, which is about a fourth of OECD (Organization
for Economic Co-operation and Development) countries. China is still growing
transforming and emerging rapidly.
Economic reforms were often in a gradual fashion, experimental, pragmatic and
taking advantage of local pilots before expanding to new policies. Adoption of
gradual and progressive approach that was based on evidence from local
experiments which is often referred to as “touching stones to cross the river”.
China's remarkable development since the 1970s has had a significant impact on
it's economic and demographic structure. The shift from a predominantly
agricultural and rural economy to an urban-based industrialized one has a key
significance. There has been a noteworthy change in the demographic composition
as well as the more urban population had been getting employed in services and
The centre of gravity in the Chinese economy has rapidly shifted from more
agriculture-oriented to now more industrialized one. In 1960s agriculture
contributed approximately 40 per cent of the GDP followed by 10 per cent in
2011, during this time industry contributed to almost half of the GDP and
service sector had doubled its share in GDP from 20 per cent in 1980s to 40 per
cent in 2011.
However, the service sector in China remains relatively smaller than in other
emerging economies like Brazil, India, South Africa where services contribute
67,55 and 67 per cent respectively to the GDP. In fact, the size to china's
service sector contribution to its GDP is similar to that of much poorer
economies like Cambodia, Vietnam and Ethiopia.
Structural changes can also be seen in manufacturing and service sectors with
manufacturing sector experiencing a rapid shift in four phases.
First, from 1978- 1985 China was still a resource-based economy producing and
exporting resource-based goods such as coal, gasoline and oil.
Followed by fast growth of labour-intensive export from 1986- 1995. Furthermore,
the third phase from1996-2000 in which export from china included electrical
machinery and transport equipment.
Lastly, during the last decade, China has recorded fast export growth in high
technology products IT products, electronic and life science equipment.
Structural changes can be observed in the employment pattern and services sector
as well. Change in the service sector from informal service activities,
state-owned trading marketing and educational/health services to a dynamic more
privately owned and formal sector.
As for the case in employment in 1980 agriculture was a major employer with 70
per cent of the country's workforce engaged in agricultural activities. It's the
ratio the workforce employed in the service and industrial sector was much
smaller but by 2010 and since then there has a significant rise in employment in
the service and industrial sector.
A Rapidly Changing And More Uncertain Global Environment
As china's economy transforms in the dynamic world, it faces new global
challenges and opportunities shaped by two megatrends- technological advancement
and protectionist sentiments. Technological disruptions of industries and
workplace are increasing and becoming predictable and more persistent.
The adoption of digital technologies in manufacturing known as industry 4.0 or
the fourth industrial revolution is expected to remould manufacturing. Big data
analytics, cloud computing and internet of things have expanded the digital
service economy and has modernized business services and operations.
Digital platforms such as rapidly growing e-commerce can reduce the cost of
entering new markets thus promoting entrepreneurship and competition. China has
already made its name and has become a global leader in industries enabled by
digital technologies such as fintech and e-commerce as well and in artificial
Online retail sales have grown rapidly more than 70 times from 2008 to 2018.
From only one per cent online retail sales in 2008 to the share reaching
twenty-four per cent in 2018 making it the highest in the world. China also
faces a more challenging global environment with slow down due to protectionism.
The Productivity Challenge
With the recent slowdown in economic growth, China needs to increase its
productivity to boost its economy. China's economy has long relied on expanding
labour force and high investment level for its economic growth. But these
drivers of the economy are running out of steam.
Productivity growth in china has remained low since the global financial crisis
and has since then remained relatively low. An estimate of china's total factor
productivity was approximately 3.51 per cent in the ten years before the global
financial crisis to 1.55 per cent in the decade post-crisis. Total factor
productivity is used not only to measure economic efficiency but also
Six Strategic Choices
China's policymakers had to make a strategic choice among the various
alternative policies available. This paper identifies six strategic priorities
identified by china:
- Striking the right balance between the three drivers of growth
China's recent policies have put emphasis on the third D, fostering
development and new technologies. Investments in new technologies can have a
big impact in helping the country on the global technological frontier. New
technology fields being less crowded than the established ones it can
provide new technologies to take a leading front. China remains on average,
quite distant from the global technology frontier thus having substantial
room for further potential growth. To take advantage of the further
potential growth china has to pay attention to the first and second D's -
reducing distortion in the allocation of productive resources and promoting
the diffusion and adoption of existing technologies, production process and
management practice. The first and the second Ds are likely to help in
potential growth in the immediate future for some time.
- Reshaping Industrial Policies
China, since it's early years of reforms, has used industrial policies to
accelerate it's the development and catching up with the high-income
economies. China now being at a more advanced stage of development needs to
start considering a new approach to industrial policies. To be effective,
industrial policies need to focus on market failures and to be market
conforming and enhancing.
- Adjusting the balance between state and market
A strategic choice for a state is to be less market interventionist and more
market supportive. However, in china state-owned enterprises (SOEs) are at
the core. Fair competition between SOEs and non-SOEs is important to expose
firms to competitive pressure and thereby encouraging firms to adopt more
select more productive enterprises regardless of their ownership structure.
- Attaining mutually beneficial international trade and investment
relations with global partners
Global trade tensions have bought uncertainty and risks to the global
economy. China being the world's second-largest economy and the world's
largest trader can play a major role in working with global partners to
achieve a mutually beneficial global economic relations. China opposes to
protectionism and advocates open and inclusive economic system,
international partnership and global collaborations.
- Balancing supply-side reforms with demand-side reforms
China needs to rely more on consumption growth and less on investments while
maintaining overall aggregate demand. Retrospectively, domestic household
consumption in china played a relatively small role in driving china's
growth, reflecting it's a high saving rate. But with growing consumption
rate government can accelerate growth by encouraging lower household savings
through reforms and policies
- Preparing for the future impact of technological changes
The Policymakers need to start preparing china's workforce for technological
workplace. New innovations and technologies may result in new employment
opportunities but it might also replace the previous job requirements. Also,
the workforce would have to be more skilled and technically skilled. Share
of labour has declined over the past decade due to technological innovations
therefore China needs to prepare for the future due to this change.
Building Up Human Capital
Being one of the biggest economies and the most populous nation in the world
china faces unique challenges in developing its tremendous human resources.
China has moved forward steadily toward establishing a nationwide policy of
developing human capital and adopting practical measures of implementation since
it's the policy of “ reform and open-door” first being initiated in the late
Policies To Foster And Promote Economic Growth
Low returns on human capital reduce incentives to individuals. Educational and
labour market policy has caused investments to be vested towards physical
capital investments more than human capital. High rates of social returns to
investment can be acquired by taking funds as well as from abroad and funds
raised by enterprises in china and invest in human capital from the new capital
markets being proposed.
Subsidizing can be crucial in encouraging education and job training though it
may not be feasible as it would increase the government's expenditure. But as
compared to other countries china's expenditure on it's gross national product
is far less than as compared to other developing countries. Another way to
foster human capital growth is to cut the less direct cost to government which
would free up labour markets for human capital. Free labour market would act as
the same incentive to operate as increasingly govern capital markets and product
markets in china thereby promoting skill formation. If a person gets a 30-40 per
cent return on human capital investment they would willingly bear the expenses
of schooling and education.
Another policy could be equalization of regional rates of return to human and
physical capital. It has been observed that Chinese policy has favoured certain
regions over the other. It has also been observed for some time now that local
government has been playing a dominant role in education financing. Richer
regions enjoy relatively more funds than the poorer regions. Elimination of
regional disparity would allow economic development.
Recent studies in the united stated, Europe and other countries around the world
have emphasized the value of competition in among school in improving the
performance of educational institutions. A more efficient infrastructure to
promote the formation of human capital by the privatization of institutions and
organizations such as business schools and technological institutions.
Another potential policy can be to promote ties between industries and
universities. A partnership like these have been seen but there is still room
Allocating Resources Judiciously
China's Financial Sector Development
China has made various policies to support investment-led growth. The financial
sector has expanded significantly giving the country some of the world's largest
bank, bond and stock markets. Due to this rapid increase questions have been
raised upon china whether the financial sector has gotten “too big” which might
cause an imbalance between the financial sector and the real sector.
China's financial system remains largely in the banking industry. During the
global financial crisis, china's five largest commercial banks accounted for
most of the assets. But their share had declined to 36.8 per cent at the end of
2017. It is also to be noted that the rate of asset growth of smaller banks was
twice than that of five big banks during 2019-2016. Along with the significant
accumulation of debt in the economy rapid expansion of the financial system has
been observed raising concerns regarding financial vulnerabilities.
Financing Small And Medium Enterprises And Entrepreneurs
In China small and medium enterprises contribute more than 90 per cent of the
firms, employ more than 80 per cent of the total urban workforce and contribute
to more than 60 per cent of the GDP but access to credit is to fewer than 30 per
cent. In recent years authorities have encouraged commercial banks and financial
service providers to lend to small and medium enterprises (SMEs). They will
facilitate differentiated and monetary and credit policies, government guarantee
foods and tax incentives.
Facilitating Free Flow Of Labour
With the expected decline in the working population, china will have to utilize
it's underutilized labour in agriculture, increase in the female labour force
and fully use the working adult labour force. A key improvising aspect for
judicious utilization of labour would be to promote labour mobility allowing
labour to be accessible and available at places where it can be most productive.
Law Reforms Improvising China's Economy
Over decades a large number of scholars and researchers have devoted themselves
to exploring determinants of economic growth and development strategies.
Numerous variables including policy choice, technological development, capital
accumulation and legal system have been studied both on the empirical level and
In addition to and as compared with informal institutions which can operate
efficiently only under certain conditions such as sufficient information, small
scale groups and repeated interactions, legal institutions administered by the
state have exerted a greater influence on the economic performance of the
In 1960s significance of law and economy had been studied extensively in the
disciplines of law and economics. The connection between law and economics have
been observed to a large extend confirmed by various empirical and theoretical
studies. China still shows symptoms of the financially repressed economy such as
managed credit, controlled exchange rate and regulated interest rates. While
most of the countries also had controlled interest rates and credit allocations
at one point they ultimately removed such restrictions in a view to halting
undesirable outcomes such as financial repression.
Labour costs are also distorted by legal and institutional agencies such as
notorious hukou system. As compared with urban residents who have secure jobs,
receive high salaries and are entitled to various social benefits, the migrants
suffer significant discrimination and exploitation in the labor market. There
are some other institutional weaknesses also contributing to discrimination in
income to the migrants for example, “ Chinese labour legislation stipulates
workers individual rights regarding contract wages, working conditions and so
on, it fails to provide them with collective right namely right to organize,
right to strike and right to bargain collectively in a meaningful sense.”
The abuse of workers right is very much prevalent in form of breach of contract,
excessive overtime, horrible working conditions, industrial injuries and abusive
management being among few.
Most of the policy measures implemented have not been directed towards law and
regulations that have caused serious distortions in factor markets. Loopholes in
Chinese policies cannot be corrected without a systematic legal reform.
Alleged Coronavirus Conspiracy
There are a whopping amount of theories circulating regarding china's
culpability in the coronavirus (COVID-19) pandemic. The united states have very
explicitly accused china of being responsible not only for letting it spread
globally but as well as generating it in a laboratory.
On April 30, the office of director national intelligence of the United States
released a statement saying, “it was investigating whether the outbreak began
through contact with an infected animal or if it as a result of an accident at a
laboratory in Wuhan.”
The statement also concurred “that with the wide scientific consensus the
COVID-19 virus was not man-made or genetically modified.” Cut to short the
intelligence seem to have emphasized that even though the virus did originate
from china there was no direct evidence that it had escaped Wuhan's research
In late November word had already gotten off of the mainland that there was a
virus in Wuhan. On December 15th the U.S trade bill was signed phase I. Six
weeks later, the trade truce was signed with an out clause, that said, if there
was any kind of act of God pandemic, then they didn't have to make good on what
they had committed to by from the united states. Within days they announced the
Hence it seems to have already known by the Chinese government that virus was
running around for six weeks before they shut down Wuhan. Which is
ostensibly criminal and should be prosecuted when proved in future. There seems
to be a practical impossibility on the fact that in a city like Wuhan with the
city which is of a similar size of New York 11 million people that there were so
Moreover, major media outlet like Fox news or national public radio (NPR) of the
United States; on both the sides of the aisle came out and reassured to the
United States that it was just the flu. Within 24 hours of the first case being
reported in South Korea, the United States' first case was reported on which it
took no action. While South Korea was testing everybody and shutting down the
entire country the United States did nothing and assured it's citizens that it
was just the flu.
The intelligence agencies of the United States should have known what was going
on in Wuhan .hence it is not just China but a lot of other agencies which should
be held accountable for what has been going on in this pandemic.
From the past three decades, China has been one of the fastest-growing economies
in the world. It had expanded 10 per cent per year in real terms thereby
surpassing Japan as the world's second-largest economy becoming an economic
However there have been concerns over china's growth sustainability otherwise if
not taken care of there might be an economic crisis in the future. China's
leaders and policymakers have though recognized a need for transitioning from
investment-driven growth pattern to a growth pattern which relies rather on
expanding domestic consumption.
The Chinese government has even adopted policies to respond to global climate
change. There is no perplexity in the fact that Chinese policymakers have taken
into notice all the major areas that need reforms and policies. However, it hard
to predict whether such a systematic reform will be adopted before the
opportunity window closes.
- Navin Kumar Jaggi and
- Sejal Khanna