The Chinese Economic Miracle
Liberal Arts 101
Dr. Peter Ibbott
Associate Professor of Economics
King’s University College at the
University of Western Ontario
October 2, 2012
• “China 2030: Building a Modern, Harmonious, and
Creative High-Income Society”
published by the World Bank and available at
• “Supersized cities: China’s 13 megalopolises “
published by the Economist and available at
Shanghai: Bund
Shanghai: Pudong
The Chinese Economic Miracle
Q: What preceded the Chinese Economic Miracle?
• 1949-58: Mao consolidates power and encourages families
to have more children. Introduces China’s first five year
plan, adopting the Soviet model in which large state
monopoly firms pursued heavy industrial development.
• 1958-61: The second five year plan abandoned the soviet
industrial model by focusing on rural development. Under
“The Great Leap Forward” small rural agricultural
collectives were merged into large, rural “People’s
Communes” in order to better exploit the gains from the
division of labor. The peoples communes were tasked with:
– Banning all private holdings/gardens
– Introducing new farming techniques that would turn China into
a grain exporter
– Accelerating the construction of state infrastructure,
– Increasing steel production by using backyard furnaces.
The Chinese Economic Miracle
Q: What preceded the Chinese Economic Miracle?
• 1962: The result was the “Great Chinese Famine”.
Estimates of up to 45 million died of starvation,
while 200 million suffered from serious
malnutrition. During this time China exported
grain.Mao is forced by the party to abandon
change direction and Deng Xiaoping and others
take over economic planning.
• 1966: Mao introduces the Cultural Revolution
and uses it to purge Deng Xiaoping and other
leaders of the CPC who had earlier opposed him.
The Chinese Economic Miracle
Q: What started the Chinese Economic Miracle?
• Mao dies in 1976, Gang of Four arrested
• Deng Xiaoping seizes power from Mao's
anointed successor Hua Guofeng
• In 1978 Deng introduces significant economic
reforms aimed at introducing market socialism
The Chinese Economic Miracle
Stage 1 (1978-84)
• De-collectivization of agriculture, and the
introduction of the “household responsibility
system”. Farmers are granted long term leases
and allowed to privately farm and sell their
produce in new private markets.
• Special Economic Zones were created that
permitted foreign investment and encouraged
local entrepreneurs to start up businesses.
• But: most industry remained state-owned.
The Chinese Economic Miracle
Stage 2 (late 1980’s to 2010)
• the privatization and contracting out of much
state-owned industry
• lifting of price controls, protectionist policies, and
• But: state monopolies in sectors such as banking
and petroleum remained.
• But: The conservative Hu Jintao
Administration more heavily regulated and
controlled the economy after 2005, reversing
some reforms.
The Chinese Economic Miracle
Impact of 1978 Economic Reforms
• Agricultural output growth dramatically accelerated to
8.2% a year, agricultural prices fell, meat and vegetable
production rose dramatically.
• Overall the reforms unleashed economic growth that is
unprecedented in human history
– GDP Growth rate of 9.5% a year
– China's economy became the second largest after
the United States.
– More than 500 million people lifted out of poverty
– Now the world’s largest exporter and manufacturer
– In transition from middle-income to high-income status.
China and India Compared
2011 Nominal GDP in US$ billions (Source: IMF)
Basic Education
• 1950: 20% over age 15 are literate
• 2007: 93.3% over age 15 are literate while
99% of 15-24 year olds are literate
• 2009, PISA (Program for International Student
Assessment) international rankings of 15 year
olds placed Shanghai students first in the
world in mathematics, science and literacy
• 1949: Average Life Expectancy of 35 years
• 2012: Average Life Expectancy of 74.8 years
• But life expectancy would be much higher if
respiratory illnesses (cigarettes, air pollution)
could be reduced, water quality improved and
food safety increased.
• Improvements to public health should provide
huge gains in life expectancy.
Q: In what ways has China’s economic
miracle failed to improve society?
• Pollution
• Corruption
• Consumerism
– Endless pursuit of status goods
– Rising Search for spiritual alternative (Christianity
is growing very fast)
– Vice (drugs, gambling, prostitution) is a rising
– Congestion
100-km Chinese traffic jam enters Day 9
Last Updated: Monday, August 23, 2010 | 1:43 PM ET
CBC News
External Links
Xinhua: Highway jam enters its 9th day, spans 100km
(Note: CBC does not endorse and is not responsible for the content of external sites - links will open in new window)
(David Gray/Reuters)
A nine-day traffic jam in China is now more than 100 kilometres long and could last for
weeks, state media reported Monday. Thousands of trucks en route to Beijing from Huai'an
in the southeast have been backed up since Aug. 14, making the National Expressway 100
impassable, Xinhua News reported. A spokesman for the Beijing Traffic Management
Bureau reportedly told China's Global Times newspaper that the backup was due to
"insufficient traffic capacity … caused by maintenance construction.“ The construction is
scheduled to last until Sept. 13.Stranded drivers appear to have few options when it comes
to dealing with the jam. At least some drivers have complained that roadside vendors have
increased their prices to take advantage of the traffic jam. One truck driver said he bought
instant noodles from one vendor for four times the original price.
Nanjing Road: Shanghai
Q: In what ways has China’s economic
miracle failed to improve society?
• Failure to introduce meaningful political and legal
– Tiananmen Square Protests of 1989
– Internet and press are subject to heavy handed censorship
– Courts and police are corrupt and serve interests of the
– Despite this, the government is having difficulty resisting
• Failure to introduce national history curriculum in Hong Kong
• Need for legal reform to sustain investment
• Inequality
– Chinese market socialism has failed to deliver distributive
Gini-coefficient of national income
distribution around the world
Culture does not determine inequality.
Canada: Gini = 32.1
Korea: Gini = 31.4
Taiwan: Gini = 34.2
Peoples Republic of China: Gini = 41.5
Hong Kong: 53.3
Politics matters!!!
• One child policy introduced in 1978
• Less impact on growth than is commonly believed and
has caused a number of unintended consequences of
enormous importance:
– Increased the proportion of males to females
– Encouraged the state to use its power to violently
intervene in the most important decisions made by
ordinary families.
– Has caused China to have a rapidly aging population which
will soon increase the dependency ratio and further
weaken the already weak social safety net
– Will put increasing pressure on the health care industry
and further reduce access to primary health care for most
ordinary Chinese families.
Population and Population Growth Rate
Population and Population Growth Rate
2 AD: 86,000,000
1000: 87,000,000
1500: 110,000,000
1800: 260,000,000
1900: 400,000,000
1950: 546,815,000
1982: 1,008,065,000 (reaches 1 billion)
2010: 1,337,825,000 (almost 1 in 5 people live in China)
2020: 1,387,792,000
2030: 1,393,076,000
2040: 1,360,906,000
2050: 1,295,604,000
Where do all these people live?
Population Density
Where do all these people live?
Rural-urban migration has dramatically reshaped China:
• Urban growth was slow rising from According to the 1953 and 1982
censuses, the urban population as a percentage of total population
increased from 13.3 in the 1953 census to 20.6 percent in the 1982
• From 1982 to 1986, the urban population increased dramatically to
37 percent of the total population as rural agricultural workers left
the land in the largest rural urban-migration in human history.
• By 2000 this had risen to 50% of the total population (650 million)
• Between 2010 and 2025 an additional 300 million people are
expected to leave the countryside and move to the cities taking the
urban population to 75%.
Rural urban migration has caused the rise of super-megalopolises
• Guangzhou: ≈ 41 million
• Beijing-Tianjin : ≈ 30 million
• Shanghai: ≈ 25 million
What do all these people want?
• Middle class lifestyle:
– Car (already world’s largest automobile market)
– TV, Internet, Music, Movies, Mobile phones
– Consumer goods
• Global brands are coveted
– Status recreational activities
– Quality Education in the Arts and Science
– Home ownership
Can this continue?
Even if growth moderates, China is likely to
become a high-income economy and the
world’s largest economy before 2030.
Notwithstanding this rosy outlook, per
capita income is still a fraction of the
average in advanced economies.
Two questions:
1. Can China’s growth rate still be among the highest in the
world even if it slows from its current pace?
2. Can it maintain this rapid growth with little disruption to
the world, the environment, and the fabric of its own
The World Bank report answers both questions in the
affirmative, i.e., by 2030, China has the potential to be a
modern, harmonious, and creative high-income society.
Achievable but neither certain nor easy.
What are the risks and challenges?
1. Internal Risks and Challenges
• depletable resources
• demand-pull and supply-push inflation
• demography, aging population
• pace of human capital accumulation
2. External Risks and Challenges
• global economic slowdown
• high resource prices
• new emerging competitors
What does China need to do?
Implement a NEW long term strategy for the next
phase of development. The 12th Five Year Plan an
excellent place to start. The IMF Report recommends
that China seek to implement policies that:
1. Complete the transition to a market economy
2. Accelerate the pace of open innovation
3. Go green
4. Expand Individual Opportunities and Improve
Social Services
5. Fiscal Reform
6. Become a responsible Global Player
1. Complete the transition to a market
• Implement structural reforms,
• Strengthen the foundations for a market-based economy,
• Redefine the role of government its relationship to markets and the private
• Reform and restructuring state enterprises, developing the private sector,
• Promote competition,
• Provide more intangible public goods and services like systems, rules,
• Introduce modern corporate governance practices, e.g., separating ownership
from management
Financial sector reform:
Allow commercializing the banking system,
Allow interest rates to be set by market forces,
Deepening the capital market,
Developing the legal and supervisory
infrastructure to ensure financial stability,
• Build the credible foundations for the
internationalization of China’s financial sector.
Labor market reform:
• Ensure workers can move in response to market
• Introduce measures to increase labor force
participation rates, and
• Use social security instruments (pensions, health,
and unemployment insurance).
Land reform:
• Increase efficiency of land use,
• Reform policies for acquisition of rural land for
urban use, and
• Reduce local government dependency on landrelated revenues.
2. Accelerating the pace of open innovation
Needed: An open innovation system that fosters both
Product and Process innovation
How? Increasing Chinese domestic R&D
1. By participating in global R&D
2. By establishing a research and development
infrastructure via:
a) increase the technical and cognitive skills of
university graduates,
b) build a few world-class research universities with
strong links to industry, and
c) foster research parks, innovative cities.
3. Go green
Why ?
Increased efficiency,
Improve the level of well-being,
Sustain comparative advantage,
Achieve and sustain economies of scale, and
Sustain rapid growth.
How ?
Public education and awareness,
market incentives,
Public investments,
Industrial policy, and
Institutional development.
4. Expand Individual Opportunities and
Improve Social Services
• Expand opportunities and promote social security,
• Facilitate equal access to jobs, finance, quality social
services, and portable social security,
• Help households manage employment, health, and agerelated risks,
• Increase labor mobility,
• Manage the large rural-urban differences in access to jobs,
key public services, and social protection.
4. Expand Individual Opportunities and
Improve Social Services
• Deliver more and better quality public services to underserved rural areas and migrant,
• Restructure social security systems to ensure secure social
safety nets
• Mobilize all segments of society, public and private,
government and social organizations, to share
responsibilities in financing, delivering and monitoring the
delivery of social services.
5. Fiscal Reform
Three key dimensions:
1. Mobilize additional fiscal resources to meet rising
budgetary demands,
2. Reallocate spending toward social and
environmental objectives
3. Ensure that budgetary resources available at
different levels of government.
Note: fiscal reform as an essential prerequisite for
many of the other reforms
6. Becoming a Global Player
1. Seek mutually beneficial relations with the world,
2. Use multilateral institutions and frameworks and open regionalism,
3. Intensify trade, investment, and financial links with the global
4. Seize the benefit from further specialization, and diversification,
5. Integrate into the global financial system, which will involve opening
the capital account,
6. Take steps toward internationalizing the RMB as a global reserve
7. Help shape the global governance agenda such as:
climate change,
global financial stability,
effective international aid structure,
development in poor nations.
Substantial hurdles ahead:
• The risk of a hard landing in the short term,
• Challenges posed by an ageing and shrinking
• Rising inequality,
• Environmental stresses, and
• External imbalances and shocks.