MAKING SENSE OF CHINA’S ECONOMIC TRANSFORMATION
Dic Lo
Department of Economics, SOAS, University of London,
and, School of Economics, Renmin University of China,
E-mail: diclo@soas.ac.uk
and
Yu Zhang
School of Economics, Renmin University of China
laoaozhang@yahoo.com.cn
July 2009
Address for correspondence: Dr Dic Lo, Department of Economics, School of Oriental and
African Studies, University of London, Thornhaugh Street, Russell Square, London WC1H
0XG, U.K.
We wish to thank the following persons for their constructive, critical comments on earlier
versions of this paper: Perry Anderson, Ron Baiman, Andrea Boltho, Robert Brenner, Ben
Fine, Mehrene Larudee, Victor Lippit, Jie Meng, Shaianne Osterreich, Alfredo Saad-Filho,
and Susan Watkins. Thanks are also due to Guicai Li and Fuhai Hong for research assistance.
We are solely responsible for the views expressed in the paper, and any errors or mistakes that
remain. The completion of this paper received financial supports from the 9-8-5 Research
Funding Program of the Renmin University of China (project entitled “Technological
Innovation and China’s Economic Growth”), which is gratefully acknowledged.
Making Sense of China’s Economic Transformation
ABSTRACT
China’s sustained rapid economic growth in the post-1978 reform era, which is also the era of
capitalist globalization, is of worldwide importance. This growth experience has been based
mainly on China’s internal dynamics. In the first half of the era, economic growth was driven
by improvement in both allocative efficiency and productive efficiency. From the early 1990s
until the present time, however, economic growth has been increasingly based on dynamic
increasing returns associated with a growth path that is characterized by capital deepening. In
both periods, the growth paths and their associated institutional frameworks appear to
contradict principles of the free market economy – the mainstream doctrines of globalization.
In the form of an analytical overview, this paper seeks to explain and interpret the dynamics
and developmental implications of China’s economic transformation. The analytics draws on
a range of relevant economic theories including Marxian theory of capital accumulation, PostKeynesian theory of demand determination, and Schumpeterian theory of innovation. It is
posited that these alternative theoretical perspectives offer better insights than mainstream
neoclassical economics in explaining and interpreting China’s economic transformation.
Keywords: China, globalization, late development, transition
JEL classification: O14, O53, P36
1
1. Introduction: Globalization Meets the “China Paradox”
Viewed from the perspective of worldwide economic development in the era of globalization,
i.e., the three decades since the late 1970s, China’s performance could be regarded as unique.
The country has survived well three waves of catastrophes that beset the non-Western world
over this period: first, the “lost decades of development” in most parts of the developing
world in the 1980s and 1990s, second, the systemic crisis in countries of the former Soviet
bloc between the mid-1980s and the end of the century, and, finally, the financial and
economic crisis that devastated most parts of East Asia in the closing years of the century. As
of early 2009, it appeared that China was once again in a relatively strong position – relative
to most parts of the world – in coping with the recession that emanated from the advanced
capitalist countries and engulfed the world economy as a whole.
The latest crisis since 2008 aside, for the developing world, what the afore-mentioned
three catastrophes indicate is the transition of economic development from the Golden Age of
the 1950s-1970s to an era of prolonged stagnation in the 1980s and 1990s. Along with the
general stagnation, there was also a trend of uneven development, i.e., growing disparity
among major regions of the developing world. Prior to the 1980s, the growth performance of
most regions was respectable, while that of the newly industrializing economies (represented
by South Korea and Taiwan in East Asia, and Brazil and Mexico in Latin America) could be
considered as encouraging. And the record of countries of the former Soviet bloc was in no
sense far behind the best performers.
1
A totally different picture emerged in the stagnation
era, however. As can be seen from Table 1, the real growth rate of per capita income for all
low-income and middle-income economies was a mere 1.3% per annum in the 1980s, and
1.8% in the 1990s. The same rate for low-income economies alone actually fell sharply, from
the already low level of 2.0% per annum in the previous decades to 1.2% in the 1990s. Thus,
especially when the growing disparity across regions is taken into account, it is no
exaggeration to call the 1980s-1990s the “lost decades of development”. This is even more so
for countries of the former Soviet bloc (the category “Europe and Central Asia” of low- and
middle-income economies in Table 1), where the average annual growth rate of per capita
income in the 1990s was -1.7%.
[Table 1]
Entering the new century, the developing world seems to finally witness economic
rebound. Between 2000 and 2007, the growth of per capita real GDP for all low- and middleincome economies reached a hefty average annual rate of 4.5%. This was more than double
the average rate of the 1980s and 1990s. It also reversed the trend of growing divergence
between the income levels of developing and developed economies. For both low-income and
middle-income economies, the growth record in 2000-2007 was even substantially better than
2
that of the Golden Age decades of the 1960s and 1970s. All these encouraging symptoms
notwithstanding, however, there is still an enormous uncertainty as to whether the recent
growth performance reflects a long-term trend or merely a recovery from the lost decades of
the 1980s-1990s. The world-wide recession since 2008 does tend to give rise to pessimism
rather than optimism.
Against this background of disappointments in world development, China’s sustained
rapid economic growth throughout the three decades since the late 1970s, over and above its
respectable record in the previous decades, is rather unique. As can be seen from Table 1, the
country’s per capita income grew at an average rate of 8.8% per annum in the 1980s and 9.3%
in the 1990s, far exceeding the rest of the developing world. This comparison that is strongly
in favor of China has continued in the new century, even though other parts of the developing
world have experienced the indicated substantial growth rebound. In the first seven years of
the twenty-first century, the growth of China’s per capita real GDP reached an average annual
rate of 9.0%, still far exceeding the record of 4.5% for all low- and middle-income economies
combined. 2
This contrast in growth record is not only phenomenal but also paradoxical. China’s
economic institutions and policies have long been dismissed by the orthodox establishment of
the world – represented by the Washington establishment and its associated doctrines known
as the Washington Consensus – as seriously deviating from the free market economy. They
have been deemed akin to the crisis-causing factors of the three groups of economies
indicated in the beginning of this paper. The fact that the authorities of the European Union,
Japan, and the United States of America have sternly refused to grant their recognition of
“market economy” status to China testifies to this dismissive attitude. 3
China’s economic performance has also appeared to be paradoxical for many in the
critical, left-wing scholarship. It is widely perceived that, rather than fundamentally deviating
from principles of the market, China has actually followed through capitalist transformation.
Indeed, it is posited that China has followed the extreme form of capitalist transformation –
namely, neoliberalization. Given that writers in this camp have tended to hold the view that
capitalism can never deliver development on a world-significant scale, they have been obliged
to deny that China’s sustained rapid economic growth is a real development. In particular,
they have often argued that the growth performance has been mainly based on the “superexploitation” of Chinese labor, as well as on “under-cutting” the world working class as a
whole. 4 But, whether or not this argument has its validity, there still remains the paradox to
be resolved: that China’s economic performance, after all, is truly phenomenal in the context
of persistent stagnation throughout the developing world.
The objective of this paper is mainly to take on the orthodox, market-fundamentalist
discourse on China, while also attempting to engage with the critical scholarship. The paper
3
seeks to construct an analytical account for explaining and interpreting the dynamics and
developmental implications of China’s economic transformation. The analytics draws on a
range of relevant theories including Marxian theory of capital accumulation, Post-Keynesian
theory of demand determination, and Schumpeterian theory of innovation. It is posited that
these alternative theoretical perspectives offer better insights than mainstream neoclassical
economics – as well as the existing critical scholarship – in explaining and interpreting
China’s economic transformation. The paper is organized in five sections, of which this
introduction is the first. Section two reviews the central propositions of the orthodox
discourse on China. Section three highlights the main stylized facts of China’s economic
growth process and offers some relevant theoretical considerations. On that basis, section four
analyzes the dynamics of Chinese economic growth. Section five integrates the growth
dynamics with the evolution of institutional reforms. Section six concludes the paper.
2. China and the Transition Orthodoxy
Is the Chinese experience of economic transformation really a paradox for the orthodox
doctrines of globalization? In particular, does the experience fundamentally undermine the
validity of the orthodox doctrines on systemic change and economic development? Attempts
to interpret the Chinese experience in a way that is consistent with the so-called transition
orthodoxy – also known as “market fundamentalism in transition” (IMF 2000) or “the
transition doctrine of the Washington consensus” (Stiglitz 1999) – have coalesced around the
following two propositions:
First, concerning institutions – that China’s reformed economic institutions have been
a mix of market-conforming and market-supplanting elements, that its developmental
achievements have been ascribable to the conforming elements while the accumulated
problems have been ascribable to the supplanting elements, and that the problems have
tended to outweigh the achievements as Chinese economic transformation proceeds
from the allegedly easy phase to the difficult phase; and
Second, concerning development – that differences in country-specific factors, most
importantly the different levels of industrialization, have largely explained the contrast
between China’s sustained rapid growth and the depression in countries of the former
Soviet bloc, and that this contrast is largely unrelated to differences in the strategies of
systemic transformation. 5
4
The main thrust of Proposition One is the principles of individualistic property rights.
Ultimately, the so-called market-supplanting elements refer to widely observable institutional
arrangements that violate the principles: discrete government intervention in economic affairs
(the state-business relationship), soft budget constraints (the finance-industry relationship),
and rigid employment and compensation systems (the worker-enterprise relationship). The
negation of these arrangements is necessary for justifying the orthodox policy prescriptions of
mass privatization, and of subjecting ownership to market trading via liberalization of the
regimes of domestic and international finance. It is asserted time and again that, should the
market-supplanting elements continue to exist, the future prospects for the Chinese economy
are at best uncertain and more likely crisis-prone. The only way to avoid this looming crisis is
to “complete the transition to the market”, as speedy as possible. 6
Leaving aside its detailed arguments to be discussed later in the paper, at the overall
level, Proposition One does not fare well with the reality. Early on, Martin Weitzman (1993,
p.549) observed: “According to almost any version of standard mainstream property rights
theory, what has been described as the ‘East European model’ basically represents the correct
approach to transformation, while what we are calling the ‘Chinese model’ should represent a
far-out recipe for economic disaster… The central paradox is the enormous success of the
Chinese model in practice, contrasted with the sputtering, tentative, comparatively
unsuccessful experience with the East European model.” Almost ten years later, in reviewing
the persistent contrast between “East Asian transition economies” (i.e., China and Vietnam)
and transition economies in Europe and the Commonwealth of Independent States (i.e.,
countries of the former Soviet bloc), Stanley Fischer (2001) made a similar comment: “Most
indicators suggest that progress of structural reform in East Asia has been relatively modest,
yet output performance has been far superior to even the best reformers in Europe and the
CIS.” The Chinese experience appears to indicate that adherence to the principles of
individualistic property rights is neither necessary nor sufficient for generating sustained rapid
economic growth, indeed for avoiding economic disaster.
Proposition Two is thus needed for the transition orthodoxy. The World Bank (1996,
p.5), in its first systematic report on the economics of transition, frames such a question for
itself to answer: “Do differences in transition policies and outcomes reflect different reform
strategies, or do they reflect primarily country-specific factors such as history, the level of
development, or, just as important, the impact of political changes taking place at the same
time?”. Proposition Two is the answer. Its implied message is that the transformation
experiences of China and countries of the former Soviet bloc are not really comparable, but,
insofar as there is a limited scope of comparability, the comparison tends to support rather
than undermine the transition orthodoxy. Because of the incomparability, the World Bank
(2002) simply excluded China in its second systematic report on the economics of transition.
5
The IMF (2000) and the OECD (2005), meanwhile, still bothered to insist on the assertion
concerning the implication of the limited scope of comparability. They endorsed what Sachs
and Woo (1994) had argued early on: that, unlike countries of the former Soviet bloc, China
was just fortunate to be with a low level of industrialization in the beginning of its reform – it
has thus been able to generate economic growth via labor transfer from the rural-agricultural
sector to industry, whilst postponing the needed, unavoidably painful reforms.
What underpins both of the two orthodox propositions is the belief that economic
development as dictated by the principles of the market – and the actual working of the world
market – is somehow easy, natural or normal. This is the notion of the “natural path of
development”, the ultimate promise of globalization. But the notion is in no sense
uncontroversial. Joseph Stiglitz, at the time when he was chief economist of the World Bank,
spent great efforts to try to direct the orthodox establishment away from this belief. Regarding
the economics of transition, Stiglitz (1999) argued that China has faced a task of economic
transformation that is far more difficult than that faced by countries of the former Soviet bloc.
This is because China’s task encompasses both systemic reform and economic development,
rather than systemic reform alone. This judgment suggests that economic development is by
no means a natural or easy process.
Stiglitz’s judgment appears to fare far better with the reality than the transition
orthodoxy. China’s growth performance stands in contrast to not only countries of the former
Soviet bloc but also most parts of the developing world. The actual record of world
development under globalization, as depicted above with reference to Table 1, has been very
dismal. Meanwhile, the initial condition of China’s economic transformation is not simply
one of under-industrialization. In 1980, industrial value-added accounted for an astonishingly
high proportion of 44% of China’s GDP. This is lower than the Soviet Union (54%), on a par
with Brazil (44%), but higher than South Korea (40%) and India (24%) in the same year (data
from World Bank, World Development Report 1982). The fact that, despite starting with one
of the highest industry-to-GDP ratios in the world, China has been able to maintain very rapid
industrial growth throughout the reform era, and with it to absorb labor transferred from the
rural-agricultural sector, clearly should not be taken for granted.
3. Stylized Facts and Theoretical Considerations
China’s sustained rapid economic growth since the late 1970s is a world-phenomenal event,
not only in terms of the rate of growth but also in terms of its structural-institutional
attributes. Discernibly, there are three crucial attributes with this process: first,
industrialization has persistently been the immediate driving force of economic growth,
second, there was a switch in the early 1990s from labor-intensive growth to capital-
6
deepening growth, and, third, the growth path also switched from consumption-led to
investment-led between the two halves of the reform era. The analysis of the dynamics and
conditions of these three attributes is key to the understanding of China’s overall economic
transformation.
The immediate dynamics behind Chinese economic growth over the reform era is
clearly a process of rapid industrialization. Between 1978 and 2007, the average annual
growth rate of real GDP and per-worker real GDP was 9.8% and 7.5%, respectively. In the
same period, the average annual real growth rate of industrial value-added and per-worker
industrial value-added was 11.6% and 9.2%, respectively. Both the output and productivity
growth rates of industry substantially exceed those of the economy as a whole, on average by
almost two percentage points per annum. Figure 1 shows the evolution of labor productivity
of Chinese industry relative to the rest of the economy, both in nominal and real terms. The
curve representing relative labor productivity at constant prices has persistently exceeded that
representing the indicator at current prices. This indicates a transfer of productivity gains in
industry to the rest of the economy via changes in relative prices, thereby propelling overall
economic growth. The fact that the gap between the two curves has tended to widen over time,
moreover, implies that the pace of productivity transfer has tended to accelerate.
[Figure 1]
The transition from labor-intensive growth to capital-deepening growth is also clearly
evident. As can be seen from the data in Table 2, between 1978 and 1992, economic growth,
along with productivity improvement, was associated with fast growth of labor employment.
The average annual growth rate of employment actually exceeded that of the labor force.
Improvement in productivity has accelerated after 1992, on average by more than three
percentage points per annum over the record of the previous period. But, this has been
achieved along with the slow down in employment growth. The growth of employment since
then has lagged behind that of the labor force, on average by 0.08 percentage points per
annum.
[Table 2]
The transition from consumption-led to investment-led growth is equally apparent.
Figure 2 charts out the composition of Chinese GDP by expenditures. It can be seen that, of
the aggregate expenditures, consumption accounted for a substantially bigger share in the first
half of the reform era (1978-1992) than in the second half (1993-2007), on average by more
than ten percentage points. The opposite was true for the evolution of the share of aggregate
expenditures accounted for by investment. It is only in recent years, since 2005, that the third
component, net export, has accounted for a significant – and very rapidly rising – share of
aggregate expenditures.
[Figure 2]
7
To account for these attributes of Chinese economic growth requires a theoretical
perspective of transformational growth – that is, seeing growth as a process of change rather
than simply as a process of expansion. Succinctly, the analysis needs to clarify the structuralinstitutional arrangements that underlie the growth process (the productivity regime), and the
condition that facilitates the working of these arrangements (the demand regime). It is the
interaction between these two aspects that form a particular economic growth path, such as
those that prevailed in China in the two sub-periods of the reform era.
The orthodox notion of the “natural path of development” is not helpful in this regard.
It does have a theory of growth as a process of change, in the form of the so-called stages
approach to comparative advantage. The essential idea is that the optimal path of structural
change of an economy will emerge automatically, if the international specialization of the
economy follows its shifting (endowment-determined) comparative advantage over time. This
theory is insufficient for, by taking a black-box view on production and assuming that the best
practices of production are automatically accessible to all producers, it is of little help for
clarifying the productivity regime. The theory could even be misleading, in the sense that it
simply assumes away the need to clarify the demand regime – the world market, in particular,
is assumed to provide whatever demand condition that is needed for economic growth. 7
The literature on transformational growth has actually been dominated by the work of
Nicholas Kaldor, or the tradition associated with him. And there are good reasons for this, as
the general observations or stylized facts of industry-led economic growth known as the
“Kaldor-Verdoorn Laws” are almost universally accepted by development economists. The
essential idea of this tradition is that the interaction between the productivity regime and the
demand regime, particularly within the manufacturing sector, is typically one of circular and
cumulative causation. An industry-led growth path is thus necessarily a disequilibrating
process that would not converge to a predictable steady state. 8
Kaldor himself, and the broader tradition of Post-Keynesian economics, do have welldeveloped theories on the determination of the composition and growth of aggregate demand.
Yet, for studying a particular growth process in reality, the Post-Keynesian tradition might
need to be complemented by further theories on the specific character of the productivity
regime as well as the specific mechanism through which the productivity regime interacts
with the demand regime. The Schumpeterian theory of innovation might be helpful for the
former task, while the Marxian theory of capital accumulation might be helpful for the latter
task. The next two sections seek to analyze China’s economic transformation by drawing on
these three theoretical traditions and contrasting them with the orthodox theory. 9
4. The Dynamics and Conditions of Economic Growth
8
Consider the economic growth path in the first half of the reform era, 1978-1992. As
indicated above, this was a process of labor-intensive, industry- and consumption-led growth.
The downward movement of the incremental capital-output ratio (ICOR) of the economy in
this period, shown in Figure 3, suggests that there was a continuous process of substitution of
labor for capital in production. The growth process was associated with massive transfer of
labor from the rural-agricultural sector to industry, where the latter sector was characterized
by a much higher productivity level and much faster productivity growth. Now, was this
process simply a validation of the neoclassical theory of relative scarcities and, therefore, the
orthodox notion of the “natural path of development”? This question can be approached by
examining both the prevailing productivity and demand regimes.
[Figure 3]
Insofar as the orthodox notion does explain the sources of productivity growth, it
must be with serious qualifications. In the institutional dimension, as will be looked at in the
next section, throughout the first half of the reform era the Chinese economy was almost
entirely composed of public firms, i.e., state-owned and collectively-owned enterprises. The
orthodox notion envisages that the “natural path of development” would occur in the context
of a market economy, but it is not clear whether this judgment could remain valid if the
economy is in fact dominated by public firms.
In the structural dimension, the sources of productivity growth were also far more
complex than improvement in allocative efficiency alone, as envisaged in the orthodox notion.
It can be argued that of equal importance in accounting for the productivity growth was
improvement in productive efficiency, which was associated with the explosive growth of a
wide range of mass-production, “new” consumer durables.
10
These goods were mainly
products of the broad machinery sector, i.e., the mechanical and electronics industries. Thus,
between 1978 and 1992, the share of gross output value of Chinese industry accounted for by
the machinery sector registered a massive increase: from 26% to 27% if measured at current
prices, and from 26% to 33% if measured at constant prices of the base year 1978. 11 In terms
of technical and economic characteristics, the production of these goods was characterized by
rapid technical change, extensive backward and forward linkages, and high income elasticities
of demand. Yet, the industries did not clearly accord with the principle of relative scarcities: it
can be verified that, according to the customary criterion of relative labor productivity, the
machinery sector in China during this period could not be classified as labor-intensive while
the electronics industry could only be classified as capital-intensive. In a significant measure,
therefore, the direction of structural change in Chinese industry in the first half of the reform
era appeared to contradict the expectations of the orthodox notion. 12
Meanwhile, the demand regime also cannot be considered as a trivial issue. Recall
that China’s rapid industrial growth has been achieved in the context of starting in the late
9
1970s with one of the highest industry-to-GDP ratios in the world. On the world scale during
this period, a main factor that impeded late industrialization came precisely from demand-side
constraints.
13
There must exist some peculiarities in China in the first half of the reform era
such that the accelerating pace of industrialization found its necessary demand conditions.
The crux appeared to be the “consumption revolution” that was felt by the entire urban
population: between 1981 and 1992, for example, the ownership per 100 households in urban
China of color television receivers increased from 0.59 to 74.87, that of washing machines
increased from 6.31 to 83.41, and that of household refrigerators increased from 0.22 to 52.60.
It was the existence of domestic mass consumption which sustained the explosive growth of
the industries of mass-production, new consumer durables. Conversely, it can be argued that
Chinese economic growth in this period was based on a nexus of causal relationships of the
following form: consumption induced investment and overall demand expansion, thus making
it possible to absorb transferred labor from agriculture and to improve industrial productivity
via dynamic increasing returns. There seemed to exist a virtuous circle between consumption
and production, and between industry and the economy.
The dynamics of Chinese economic growth in the 1978-1992 period as characterized
above presupposes the existence of two necessary conditions. First, the process of structural
change involved both an expansion of the share of industry in the economy and the leading
role of a wide range of mass-production industries. The former aspect corresponds to the
trend of labor transfer from agriculture to industry, and hence improving allocative efficiency,
while the latter aspect corresponds to the “Kaldor-Verdoorn Laws” of improving industrial
productivity via dynamics increasing returns. Second, there must exist an egalitarian pattern
of income distribution which underpinned mass-consumption, thereby inducing investment
and overall demand expansion. Income distribution covers the total of both money and nonmoney incomes for Chinese people, particularly for urban residents in the first half of the
reform era. The degree of egalitarianism is thus difficult to gauge by conventional measures
of income distribution such as the Gini index. Perhaps a more appropriate measure would be
the indicator life expectancy at birth, which in some ways reflects the combined effect of all
indicators of social development. It is well-known that, on this measure, China’s performance
in the late 1970s was very close to the average of all middle-income economies in the world,
even though it was a low-income economy. By the early years of the twenty-first century,
China’s performance in this indicator remained very close to the average of all middle-income
economies, despite the fact that its economic growth in the preceding two decades had far
outstripped the rest of the developing world. It seems reasonable to argue that a social
development performance that substantially exceeds the average of economies of comparable
income levels must be due to a higher-than-average degree of egalitarianism in income
distribution. On this basis, it seems appropriate to assert that, for the main part of the reform
10
era, China’s pattern of income distribution tended to be egalitarian by international standard –
although it is also true that egalitarianism tended to wither along with market reforms. 14
Turning to the economic growth path in the second half of the reform era, 1993-2007,
its capital-deepening nature is most clearly indicated by the upward movement of the ICOR
during this period. This direction of change appears to violate the principle of relative
scarcities – particularly in view of the fact that, as indicated above with reference to Table 2,
employment growth has tended to lag behind that of the labor force. The growth process has
actually been associated with the further, and continually very fast, expansion of the broad
machinery sector: by 2007, its share in the gross output value of Chinese industry as a whole
remained at 26% if measured at current prices, but increased to 40% if measured at constant
prices of the base year 1978. Just like what happened pre-1993, the machinery sector has
continued to play a leading role in Chinese industrialization, both in terms of its faster pace of
growth and the transfer of its productivity gains to the rest of Chinese industry via changes in
relative prices. It appears that the driving force behind Chinese economic growth post-1993,
which has been associated with a pace of productivity growth that is much faster than the
previous period (see Table 2), has been improvement in productive efficiency alone. The
capital-deepening growth path, while deviating fundamentally from the “natural path of
development”, has actually been impressively efficient.
But the demand regime has changed, evident in the decreasing share of consumption
in aggregate expenditures. The explanation of the sluggish growth of consumption in China is
complex and controversial, but one point seems clear: that it has been in a significant measure
due to the continuous worsening of income distribution. Albeit not a adequate measure, the
Gini index does broadly indicate this worsening trend. In 1978, the value of the Gini index in
China was 0.16 for urban households and 0.21 for rural households, both being rather low in
international comparison. By 1992, the value increased to a moderate level of 0.25 for urban
households and a high level of 0.31 for rural households. By the year 2000, the value rose to
high levels for both set of households: 0.32 urban, 0.35 rural.
15
In this context, the change in
output-mix associated with the expansion of the machinery sector has no longer been mainly
based on the growth of consumer durables. In line with the rising ICOR in production,
Chinese economic growth since the early 1990s has tended to follow what is known in the
literature as the Feldman-Mahalanobis model – i.e., a growth path that is based on “producing
investment goods for producing investment goods”. Conceptually, can such a growth path be
efficient, and sustainable?
In the theoretical literature and especially in the tradition of Marxian economics, the
justification for the Feldman-Mahalanobis model is that the machinery sector is particularly
responsible for the generation and diffusion of technological change. The development of the
sector is considered to be necessary for promoting dynamic increasing returns, and hence
11
productivity growth, in the economy as a whole. The sources of increasing returns, as
emphasized by the Kaldorian theory of circular and cumulative causation, are the interaction
between the appropriate productivity and demand regimes. These take the form of learning by
doing, induced investment for technological upgrading, and the deepening of the division of
labor in the economy – the effects of “(productivity-improving) innovative activities”, in short.
The contribution of the Schumpeterian theory of innovation, in this connection, is its focus on
the capability of the institutions involved in generating innovative activities. Specifically,
institutional attributes that are consistent with innovative activities of these three forms entail
the requirement of rigidities, i.e., long-term-oriented relationships among major stakeholders
of the business system. Such attributes are antithetical to the logic of allocative efficiency,
which requires flexibilities particularly the free movements of finance in its profit pursuits.
Thus, there exists a trade-off between the required institutions for productive efficiency and
those for allocative efficiency. This argument underpins an insightful framework for
analyzing the institutional attributes of China’s productivity regimes, which will be carried
out in the next section. 16
What about the sustainability of the post-1993 economic growth path? Conceptually,
in both Marxian and Post-Keynesian economics, demand expansion is normally determined
by two sets of factors, exogenous and endogenous. Exogenous factors refer to the pattern of
income distribution and that of consumption, and underpinning these patterns the historyspecific political and cultural conditions. Endogenous factors refer to the specificity of the
economic growth path in question. For a growth path based on “producing investment goods
for producing investment goods”, Marxian economics suggests that its sustainability on the
demand side hinges on the pace of product innovations. It is through product innovations that
the variety of investment goods could continuously expand, and that the law of diminishing
demand for the output-mix would not set in. 17 The sources and pace of product innovations in
Chinese economic growth particularly in the post-1993 period are an important issue wanting
scholarly studies. Nevertheless, one point seems clear: in addition to domestic generation, an
important source of product innovations is from continuous, large scale importing of foreign
technology. This is a continuation, but on much larger scales, of the situation in the first half
of the reform era, where the expansion of the industries of new consumer durables (which
were new to China) required the import and assimilation of foreign technology.
Before closing this section on Chinese economic growth, it is necessary to have a
brief discussion on the importance of the external dynamics, i.e., the role of foreign trade and
inward foreign direct investment. For, in the existing literature, much importance has been
attached to this. A popular story from the application of the notion of the “natural path of
development” states that Chinese economic growth throughout the reform era has followed a
path of labor-intensive, export-oriented industrialization based on its endowment-determined
12
comparative advantage. If it is further posited that the export sector is precisely China’s
market-conforming sector, then, once again, the two orthodox propositions described earlier
in section two appear to be preserved. This completes the story of a market-determined,
natural-cum-desirable development experience. Paradoxically, at the descriptive level, this
view appears to be shared by the mainstream of the critical scholarship. The thesis of “undercutting” implies that cheap labor, claimed to be created by repressive politics, have been the
underpinning of Chinese economic growth. To complete the story of an undesirable
experience of (under)development, the thesis of “super-exploitation” further implies that
cheap labor is not just slow wage growth relative to productivity growth but rather persistent
low wage levels relative to competitor economies. 18
Has Chinese export expansion been mainly based on cheap labor? Answering this
question is crucial to the assessment of both the orthodox and critical stories. This need not
require a comprehensive study of the evolution of the composition of Chinese exports. One
counter indicator might suffice: in 2007, mechanical and electronic products accounted for
61% of the total of China’s manufacturing exports (and electronic products alone accounted
for 40%). As indicated earlier, relative to Chinese industry as a whole, the machinery sector
cannot be classified as labor-intensive while the electronics industry can only be classified as
capital-intensive. A further, related indicator concerns the proportion of high-tech products in
manufacturing exports. In 2006, the ratio was 30% for China, which is higher than Brazil
(12%), Russia (9%) and the average of all middle-income economies (20%), and is close to
South Korea (32%). Compared with China, these economies are with higher levels of per
capita income, and hence lower degrees of “labor abundance” or “capital shortage”. It is thus
seriously flawed to explain the expansion of Chinese exports in terms of cheap labor, i.e., its
“given” comparative advantage. 19
Has Chinese economic growth been mainly based on improvement in allocative
efficiency realized via the external dynamics? As depicted above, the growth process has been
actually mainly based on the improvement in productive efficiency, particularly since the
early 1990s. The contribution of the external sector has been mainly in terms of technology
transfer, which was essential for sustaining the economic growth path both in the first and
second half of the reform era. It is this contribution – at high costs, though – which suggests
that increasing openness, or integration into the world market, after all, is a necessary
condition for successful late development.
20
Even so, the Chinese experience indicates that
this contribution of the external sector is nothing automatic or natural. It rather requires the
existence of the particular internal dynamics of economic growth for the contribution to
materialize.
5. Institutions in Chinese Economic Transformation
13
The logical starting point in the nexus of causal relationships underpinning Chinese economic
growth in the first half of the reform era, as depicted in the preceding section, was the
existence of an egalitarian pattern of income distribution. This pattern was, in turn, based on
China’s specific political economy. For a major part of the reform era but especially in the
first half, the economy was dominated by public ownership, and within the publicly-owned
sector egalitarianism in distribution was the norm. In 1992, state-owned enterprises (SOEs)
and collectively-owned enterprises combined to account for 86% of the output of Chinese
industry as a whole. By the turn of the century, the share still remained at 64%, with the rest
being accounted for by the catch-all category of enterprises of “other ownership types” which
include private firms and various types of joint-ownership firms. Even for shareholding firms
that are not formally state-controlled, a significant proportion (mainly those listed in the stock
market) are actually with state agents as the ultimate owner-controller.
It is thus possible to turn back to view the orthodox establishment’s Proposition One
on China, concerning the nature and attributes of its reformed economic institutions (see
beginning of section two), in different light. What it considers as market-supplanting elements
of the Chinese economy are precisely the egalitarian systemic features, particularly those of
SOEs. The observation is widely agreed upon: that the institutions of SOEs have significantly
deviated from principles of the market economy, notably individualistic property rights.
Conceptually, in the relevant literature, China’s enterprise reform has generally been
portrayed as a process of the state attempting to induce entrepreneurial activities by the
management. But, this process has occurred in a broader context where various stakeholders
of enterprises – local governments, workers, local communities, the banks and other business
partners – have been involved to form a web of checks and balances governing the operation
and development of enterprises. This systemic feature is visible not only in SOEs but also in
enterprises of other types of public ownership, including the renowned collectively-owned
township and village enterprises (TVEs). 21
The crucial question, however, is: what are the developmental implications of this
rigidity-infused, long-term-oriented systemic feature of Chinese public firms? It was alluded
to, in the beginning of this section, that this feature has its advantage of underpinning the
egalitarian pattern of income distribution and therefore mass consumption. But, has it also
resulted in gross inefficiency of enterprises at the micro level – as the orthodox establishment
has persistently maintained?
The assertion about China’s allegedly ailing state sector has been so popular in the
media that it seems trivial to answer this question. But, in the scholarly rather than journalistic
literature, the assertion has in fact been a matter of debate. The debate first centers around the
assessment of productivity change of SOEs in the reform era. Because of the very different
14
estimation results of total factor productivity growth in SOEs obtained by large number of
different studies, and because an objective criterion is lacking to resolve the difference, the
orthodox assertion has been far from the dominant view on the matter. Even the World Bank
(1996, p.23) has to adopt a concessive tone by stating: “(China’s state sector) remains a drag
on the economy during the reform era – even though its efficiency may be improving.”
Hence, and in connection with the 1997-98 East Asian financial crisis, the orthodox
establishment has shifted to base its assertion on the financial performance of SOEs. It is
claimed that the trend of declining enterprise profitability, together with the rising ratio of
non-performing loans of state banks, are symptoms of the same ill: the gross inefficiency of
SOEs. It is further claimed that this must be treated as a matter of urgency, as otherwise an
East Asian-type crisis is most likely to occur in China. 22
Compared with the orthodox Proposition Two (on development) dissected in section
four, this Proposition One (on institutions) does not fare better with reality. At one level, it is
a gross exaggeration to assert that the nexus of SOEs, state banks and the state itself as a
whole has ever been on the verge of a financial collapse. The fact that the Chinese economy
performed well during and after the 1997-98 East Asian crisis flies in the face of this
assertion. To the extent that the nexus has indeed accumulated financial problems, this is
largely a result of the fiscal difficulty of the state rather than enterprise inefficiency. For, over
the reform era, SOEs have paid all the social costs that should have been the responsibility of
state finance. They have paid income taxes at much higher rates than other enterprises, while
also facing serious under-capitalization from the state-owner. At another level, the observed
decline of enterprise profitability reflects more a macroeconomic issue than microeconomic
inefficiency. As can be seen from Figure 4, the pre-tax profit rate of SOEs has in fact been
very close to the average of all enterprises: slightly higher in the 1980s and slightly lower in
the 1990s, while both exhibiting a tendency of secular decline up until 1998, and of
substantial rebound post-1998. Noting that China’s accounting system has tended to
underestimate depreciation, and hence to overestimate the capital stock of SOEs which are in
general much older than non-SOEs, it could be argued that the profit rate of SOEs is likely to
have been higher than industrial average in most years of the reform era. 23
[Figure 4]
Figure 4 also shows that, throughout the reform era, the pre-tax profit rate of largescale enterprises has been higher than the industrial average. It can be verified that the same
applies to the comparison of other performance indicators, such as output and productivity
growth. Given that the vast majority of large-scale enterprises are in fact SOEs –they have
formed the core of China’s state sector – it appears that the orthodox Proposition One cannot
be farther from the reality. What is more reasonable, therefore, is to see how this seemingly
paradoxical reality could be made sense of. What kind of advantage can be generated by the
15
systemic feature of SOEs, which appears to have more than compensated for the (allocative)
efficiency loss that is deemed unavoidable from the standpoint of orthodox economic theory?
It has been noted that the reformed Chinese enterprise system has been infused with
rigidities, especially with an emphasis on maintaining a long-term relationship with major
stakeholders. This is akin to the canonical East Asian, or Japanese, system, and there are welldeveloped theories to explain the economic advantage and disadvantage of systemic features
of this kind. Succinctly, in the context of steadily growing market demand, industrial firms
that are infused with rigidities and long-term orientation are especially capable of improving
productivity via various kinds of dynamic efficiency, particularly through collective learning.
In contrast, in the context of stagnant or contracting demand, firms of this kind have difficulty
in adjustment and hence tend to be out-competed by flexible, market-conforming and shortterm-oriented firms. 24
The above theoretical argument appears to be reasonable for explaining the fact that,
with respect to the indicator of industrial profitability, China’s SOEs out-competed non-SOEs
in the demand-expanding 1980s (and again in 2004-2007) but were out-competed in the
demand-stagnant 1990s (Figure 4). Conversely, such an explanation also pushes to the
forefront the most prominent feature of the Chinese “model” of economic transformation
especially in the first half of the reform era. This, namely, is the basically appropriate match
between mass consumption at the macro level and the long-term-oriented behavior of
enterprises at the micro level, and, behind this, that between the egalitarian income
distribution and the systemic feature of enterprises being accountable to major stakeholders.
The significance of this match is no less than the sustained rapid economic growth itself. It
offers the opportunity for China to embark on a path of late development that takes a strongly
socialist character. But, there are also serious constraints on such a pattern of economic
transformation. The introduction of market practices might be necessary for the formation of
micro-level incentives for economic development, but market reforms in the strict sense – i.e.,
in applying principles of individualistic property rights – are bound to disrupt the indicated
match between the macro environment and the micro institutions. On the macro side, such
reforms tend to reduce workers’ income and threaten their job security, thereby undermine
egalitarian income distribution and mass consumption. On the micro side, such reforms tend
to threaten the loyalty or long-term commitment of major stakeholders (again, workers in
particular) to the firm, thus undermine the scope for productivity-improving innovative
activities.
The 1995-97 nationwide downsizing drive in state industry is especially crucial in
this regard. Initiated by the state leadership with an objective of transforming large and
medium SOEs into modern corporations and small SOEs into shareholding cooperatives, the
drive was seized upon by many local governments to simply sell off state assets while
16
unilaterally defecting on the state’s obligation for the job security of workers (and passing the
liabilities of the sold enterprises onto state banks and ultimately to the central government).
The crux of the matter is that, in the context of the demand-stagnant 1990s, SOEs had
difficulty in utilizing the relative efficiency attributes of their rigidity-infused, long-termoriented institutions to generate dynamic increasing returns. They were thus ill-equipped for
competing with the more market-oriented private and collective firms, as well as Western
transnational corporations which began to enter China on a massive scale from the early
1990s onwards. The downsizing drive launched by local governments, in the form of mass
lay-off, further worsened the situation.
Consequently, unemployment surged, consumption expansion slowed down further
and investment growth also stagnated. Together with the worsening external environment
caused by the East Asian crisis, all these plunged China into serious difficulties in the closing
years of the century. A state of deflation persisted at the macro level. Worsening financial
performance of industrial enterprises and state banks was the norm at the micro level. It was
only with a significant policy reversal that economic growth was sustained in the crisis-prone
period of 1998-2002. This policy reversal took the form of the state leadership shifting from
the stance of pushing forward the marketization drive to forcefully implement a range of
market-supplanting policies. These policies included Keynesian-type fiscal stimuli, welfarestate measures, policies to revitalize SOEs and state banks, and a cautious approach to further
liberalization of the regime of external finance. 25
The policy reversal in 1998-2002 did not result in the resumption of the previous
pattern of economic transformation, however. What has emerged is a new pattern that exhibits
strong resemblance to the canonical East Asian model of economic institutions and growth.
At one level, the path of industrialization characterized by capital deepening has become
firmly established, with the pace of capital deepening tending to accelerate. This is largely
due to the fact that consumption expansion has continued to be sluggish, and its leading role
has been taken over by investment – hence the characteristic of “producing investment goods
for producing investment goods”. At another level, consistent with capital deepening and
economic growth based on increasing returns is the rapid expansion of large-scale enterprises:
their value-added share in Chinese industry as a whole increased from 27% in 1998 to 36% in
2002. This is somewhat ironical, as it occurred in a period when, on the world scale and
particularly from the orthodox establishment, there was widespread criticism of the East
Asian model of capital-deepening industrialization carried out by large-scale business
conglomerates – the model dismissively termed as “crony capitalism”.
This new pattern of economic transformation is clearly different from that of the first
half of the reform era. There is no trace of an appropriate match between egalitarian income
distribution and a systemic feature of enterprises being accountable to major stakeholders.
17
True that, along with capital deepening and the indicated policy reversal, there has been a a
phenomenal revival of the state sector. The value-added share of SOEs in Chinese industry
increased from 33% in 1998 to 35% in 2002 and further to 37% in 2004, amid the rebound of
their profit rate to once again surpass the industrial average. Yet, in an institutional sense, this
revival has been more than outweighed by the massive decrease in the employment share of
SOEs in Chinese industry: it decreased from 38% in 1998 to 15% in 2007. And this reflects
the broader trend of shrinking employment share of the public sector in the Chinese society as
a whole. Of the total of urban employment, the combined share of state-owned and
collectively-owned units decreased from 76% in 1995 to 41% in 2000 and further down to
24% in 2007. In the rural areas, the employment share of township and village enterprises has
continued to grow (though at a substantially slower pace than that of the first half of the
reform era), but these enterprises have mostly been transformed from collective ownership to
private ownership. Surely, a society where the main part of labor employment is with the
private sector is very remote from socialist goals.
6. Conclusions
Because of its worldwide importance and its seemingly anomalous nature, China’s economic
transformation in the era of globalization has presented a formidable task for scholars to make
sense of. The central message of this paper is that any attempt to taking up this task needs to
start with stylized facts of the reality, rather than “first principles” or “fundamental theorems”
of economic theories. For analyzing the dynamics of China’s sustained rapid economic
growth, the paper takes as its starting point the observation that the process has undergone a
transition from labor-intensive, consumption-led to capital-deepening, investment-led
industrialization. The paper then argues that to explain the strength and limitation of this
dynamics it requires a broad theoretical perspective of transformational growth – a synthesis
of Marxian theory of capital accumulation, Post-Keynesian theory of demand determination,
and Schumpeterian theory of innovation. It is also from this perspective that attempts are
made to explain the direction of evolution of the overall process of economic transformation.
The focus is on the appropriate match, or otherwise, between the growth dynamics and the
concurrent institutional reforms.
Such an analytical approach, while argued in the preceding sections as being more
convincing than the existing orthodox as well as critical studies, certainly has limitations.
Throughout the paper, we have left untouched a dimension that is conceivably of enormous
importance in China’s economic transformation: namely, politics. But, politics has been at the
heart of the relevant literature. The critical scholarship’s thesis of “super-exploitation” claims
that repressive politics has been the most important factor in explaining China’s experience of
18
economic growth and reforms. The transition orthodoxy likewise claims that the contrast
between China and countries of the former Soviet bloc has been in a significant measure
explained by politics (see, e.g., the statement by the World Bank quoted in section two).
From the perspective of transformational growth, the inquiry into the role of politics
in China’s economic transformation comes down to answering the following question: if the
pattern of economic transformation in the first half of the reform era proved very successful,
in terms of economic growth and social development, why was it abandoned in the early
1990s? Why did the Chinese state unfailingly pursue the policies of rapid marketization in the
1990s? An adequate answer to these questions would require analyzing such fundamental
issues as the changing social formation and class relations – defined, to be rigorous, in the
Marxian sense in relation to the prevailing “modes of production” – in China, as well as the
changing relationship between China (“socialism in one country”) and the capitalist world.
These issues are really too big to be dealt with in this paper.
Nevertheless, it might be possible to attempt a less deep-going answer to the indicated
questions by looking at the “agents”, rather than “structures”, in China’s social formation.
Recall that what has most fundamentally undermined the depicted pattern of economic
transformation is the 1995-97 enterprise downsizing or privatization drive (together with the
process of financial liberalization in 1993-95). From these developments, it could be posited
that, to an extent, the Chinese state authorities have been captured by the newly emerged
financial interests in the economy. By extension, it can be said that the power relations in the
Chinese society has been to some extent dominated by agents of accumulating speculative
capital. Yet, the fact that the Chinese state leadership turned to adopt the wide range of
market-supplanting policies in the 1998-2002 period suggests that the indicated capture and
dominance are far from absolute or unconstrained.
More generally, the character of the new pattern of economic transformation that has
emerged since the late 1990s implies that the Chinese state, while lessening its socialist
commitments, has turned to strengthening developmental concerns (to retain control over the
“commanding heights” of the economy and thereby to direct the path of overall development)
rather than to embracing the free market doctrines in toto. Entering the new century, there are
signs that the state leadership has even attempted to reinstate the importance of socialist
concerns in the actual process of economic transformation – as is evident in the slogan of
“constructing a harmonious society” and the policies associated with this slogan. All these
suggest that, in the face of the unfavorable world environment for late development under
globalization, Chinese political economy on the whole is unlikely to be subdued by the logic
of speculative financial capital, domestic or international. In line with the East Asian model of
development, China is likely to stick to the logic of production (industrialization) rather than
that of exchange (the “natural path of economic development”) in the foreseeable future.
19
Notes:
1. For the analysis of major trends of world development in the Golden Age, including the
outstanding performance of the newly industrializing economies and countries of the
former Soviet bloc, see Gordon (1988). For an analytical overview of the worldwide
developmental crisis and uneven development after the Golden Age, see Singh (1992).
Weeks (2001) gives a more theoretical treatment. Lo (2001) notes the structural features of
the world economy that have been highlighted in the relevant literature as possible causes
of the crisis, while Lo (2007) furthers the same proposition by taking into consideration
of recent trends in world development. Easterly (2001) notes the almost total ignorance of
the worldwide developmental crisis in the mainstream literature.
2. Unless otherwise indicated all statistical data in this paper are from issues of China
Statistical Yearbook. The quality of China’s statistical data has invited suspicions, but, in
the scholarly literature, even the foremost skeptics accept that the actual performance of
long-term economic growth is not significantly different from that indicated by official
data (Rawski 2002). Because China is both a developing country undergoing very rapid
structural changes, and a “transition economy” experiencing the marketization and
monetization of assets and economic activities, statistical accuracy is inevitably a serious
problem. Nevertheless, as Naughton (2007, ch.6) notes, official data remain the most
reliable data in existence. Scholars have also raised concerns on the possibility of official
falsification of data, not by the central government but by local authorities of various
levels (Rawski 2002). In a response to such concerns, Xu Xianchun (2001), a leading
researcher with the National Bureau of Statistics, contends that the Bureau has developed
an increasingly sophisticated system to verify the reliability of data reported by lowerlevel authorities, and has accordingly made the necessary adjustments.
3. “China calls on EU to recognize full market economy status”, Xinhua, 4 June 2008,
http://news.xinhuanet.com/english/2008-06/04/content_8308052.htm;
“China
hopes
Japan to recognize its market economy status as early as possible”, Xinhua, 3 December
2007,
http://news.xinhuanet.com/english/2007-12/03/content_7190838.htm;
“China
expresses bilateral trade concerns to U.S. in economic dialogue”, Xinhua, 5 December
2008,
http://news.xinhuanet.com/english/2008-12/05/content_10458000.htm.
For
a
scholarly review of the issues concerning China’s quest for the recognition of its market
economy status from its main trading partners, see Green (2004).
4. See Hart-Landsberg and Burkett (2004), Harvey (2005), and Li (2008). Arrighi (2007),
with his favorable views on Chinese economic transformation not only in achieving real
development domestically but also in promoting a more equal international economic
20
order, clearly appears to be the exception rather than the norm in the circles of left-wing,
critical scholars.
5. See IMF (2000), OECD (2005), and World Bank (2002), all containing main elements of
these two propositions. For Proposition One, see also Lardy (1998) and Steinfeld (2000).
For Proposition Two, the pioneer work is Sachs and Woo (1994).
6. Examples of such claims abound, see, e.g., The Economist 24th-30th October 1998, pp.1516 and pp.23-28, together with the citations listed in the previous endnote.
7. The notion of the “natural path of development” coined in the form of the stages approach
to comparative advantage is most fully presented in the World Bank’s 1987 World
Development Report, which is, in turn, based on the previous work by economists
associated with the Washington establishment, such as Bela Balassa and Anne Krueger.
The following statement by Balassa (1981, p.22) is a good summary of the essential idea
of the stages approach: “the process is exemplified by Japan that shifted from unskilledlabor intensive exports to skill-intensive and to physical-capital intensive exports and is
increasingly expanding its technology-intensive exports.” See Lo (1995) for a review, and
critique, of this body of work.
8. The “Kaldor-Verdoorn Laws” are of the following forms: first, economic development is
often associated with the process of industrialization, in the form of an increasing share of
employment of resources and production of output by industry in the economy; second,
there exists a positive relationship between output and productivity growth within the
industrial sector; and, third, there also exists a positive relationship between industrial
growth on the one hand, and the output or productivity growth of the rest of the economy
on the other hand (Kaldor 1966; McCombie and Thirlwall 1994). The interpretation of
these observations by Kaldor and associates has been a matter of debate, but the stylized
facts themselves have been largely a consensus in the literature (Syrquin 1994).
9. Toner (1999, ch.6) summarizes the Kaldorian theory of economic growth. Nell (1998) is a
seminal work in the broader Post-Keynesian tradition on transformational growth, while
Boyer and Petit (1991) provides a schematic account of the tradition. Lo and Smyth
(2004) review the even broader literature of transformational growth, which also
encompasses relevant theories from the Schumpeterian and Marxian traditions. Kaldor
(1957) is the classic in Post-Keynesian theories of the determination of the composition
and growth of aggregate demand.
10. The explosive growth of mass-production “new” consumer durables in China in the first
half of the reform era is best indicated by the following examples: between 1978 and
1992, the annual output of color television receivers increased from merely 3800 units to
more than 13 million units, that of household washing machines increased from 400 units
to more than seven million units, and that of household refrigerators increased from
21
28,000 units to almost five million units. The same pace of growth was evident in a wide
range of similar products, so much so that they collectively signified a “consumption
revolution” that was felt by the entire urban population in China. Within several years in
the middle of the 1980s, China emerged from almost nowhere to become the biggest
manufacturer in the world of many of these products. For a detailed study of the
achievements and problems of these developments, see Lo (1997).
11. Figures cover the formal sector of Chinese industry: “township-and-above independently
accounting industrial enterprises” before 1998 and “all state-owned industrial enterprises
plus non-state-owned above-scale (of five million yuan in sales revenue) industrial
enterprises” from 1998. Hence, figures pre- and post-1998 are not strictly comparable but
are only indicative of the trend of evolution. Official statistics of the machinery sector are
available from issues of China Machinery Industry Yearbook, which, however, reports the
share of gross output of the machinery sector in Chinese industry mostly in various baseyear constant prices. The figures reported here are reconstruction using the ex-factor price
indices of all industries and of the machinery industry as deflators.
12. Relative labor productivity is defined as the per worker value-added of the industry in
question relative to the average of the manufacturing sector as a whole. Traditionally, in
the literature of trade analysis, a value of 0.9 and below for this measure suggests that the
industry is labor-intensive, while a value of unity or above suggests that it is a capitalintensive industry. For the period between 1980 and 1992, the value of the measure for
China’s broad machinery sector averaged to around 0.91, while that for the electronics
industry alone averaged to around 1.25 (Lo and Chan, 1998).
13. Singh (1992) analyzes the slowdown in late industrialization with an emphasis on the
worsened demand conditions after the Golden Age. Taylor and Rada (2003) provides a
more recent analysis along the same line of arguments.
14. Life expectancy at birth in some ways reflects the combined effect of all indicators of
social development because “it summarizes the impact of health and nutrition on the
human organism” (Naughton 2007, p.222). In 1980, the indicator was 66.8 years for
China and 65.6 years for all middle-income economies. By 2000, the figures increased to
70.3 years and 69.1 years, respectively (World Bank data cited in Li 2008, p.34). Li (2008)
provides an elaborate assessment of China’s performance in various social development
indicators – particularly life expectancy at birth – and reaches the same judgment as this
paper.
15. Data from Li Shi et. al. (2000) and Renmin Ribao (People’s Daily) 9th July 2002.
16. Fransman (1986) provides perhaps the most thorough and incisive review of the literature
on the Feldman-Mahalanobis model and related growth theories. For further elaborations
in relation to theories of transformational growth, see the citations in footnote 9.
22
17. Meng (2004) provides a reformulation of the relevant theories, particularly on the role of
product innovations in the debates surrounding Rosa Luxemburg’s theory of capital
accumulation and Ernest Mandel’s theory of the long waves in capitalist development.
18. For the orthodox view, see World Bank (1996, ch.9), and Lardy (2002). For the view of
the mainstream of the critical scholarship, see Hart-Landsberg and Burkett (2004) and
Harvey (2005, ch.5). But note the different view of Arrighi (2007) and Glyn (2006), both
appear to hold the thesis of “under-cutting” but not “super-exploitation”. Conceptually,
even if it is true that Chinese labor has been under-cutting the world working class as a
whole, this is not necessarily the result of Chinese wage being persistently depressed to
levels below those of competitor countries. An equally plausible underpinning of undercutting would be faster productivity growth of Chinese labor. The contentious issue then
is not about super-exploitation as the basis of economic growth, but rather about the
division of the fruits of productivity improvement.
19. Lo and Chan (1998) analyze the implications of China’s massive expansion in the export
of mechanical and electronic products since the mid-1980s, and argue that these exports
have largely leapfrogged over the country’s “given” comparative advantage. Yoshitomi
(1996) gives a similar assessment: “China has revealed comparative advantage vis-à-vis
ASEAN countries in capital- and technology-intensive products despite a similar
development stage and even lower per-capita income. China’s comparative advantage in
labor-intensive and natural resource-based products is essentially in relation to advanced
countries and NIEs [newly industrializing economies], not ASEAN countries. However, it
is also interesting to note that over the past ten years, China has been gaining comparative
advantage relative to NIEs (in a broad range of technology- and capital-intensive
industries).” See Rodrik (2006) for a more recent study that arrives at the same conclusion,
and the more skeptical view of Naughton (2007, ch.16).
20. This is a main theme of what can be called the “capability theory of late development”
(Amsden 1989; Wade 1990), where the argument is that late development requires the
creation of sophisticated production capabilities – and technology import is needed for the
creation. Scholars that apply this theory to study Chinese industrialization have concluded
that what is required for successful late development is not just production capabilities as
such but rather the building up of an indigenous “national system of innovation” (Lu 2000;
Lazonick 2003). In line with our discussion on collective learning, a complementary
“capability theory of business institutions” (Aoki 1990; Best 1990) might be needed for
the study of the Chinese experience. More on this in the next section.
21. It is a consensus in the scholarly literature that the degree of egalitarianism in income
distribution was extremely high by international standards in both urban and rural China
in the first half of the reform era, and that this was mainly due to the nature and role of the
23
“socialist system” (Naughton 2007, ch.9). The perception of an exceedingly high degree
of egalitarianism was also a common sense underpinning all the policy efforts to promote
market reforms particularly at the enterprise level – with the 1995-97 mass privatization
drive as the culmination (see below). In contrast to the general focus on its distributive
function, the productive function of Chinese public firms has rarely been noticed. Lo
(1999) and Smyth (1998) are among the exceptions, which analyze the productive
attributes of the institutions of China’s SOEs and TVEs, respectively. Both studies
observe that the reformed enterprise system – whether SOEs or TVEs – has exhibited the
kind of institutional rigidities and long-term orientation that are akin to the canonical
Japanese system, and argue that this system has embodied the kind of relative efficiency
attributes detailed below.
22. Representative of the orthodox view on productivity growth are the works by Woo et al.
(1994a, 1994b). Representative of the dissident view are the works by Jefferson et al.
(1992, 1996). Along the orthodox line, the most articulate analysis of the financial aspect
of Chinese enterprise performance is Lardy (1998).
23. Lo (1999) gives an assessment of the performance of SOEs, particularly large-scale
enterprises, that is in line with the arguments presented here. Cheng and Lo (2002)
contend that, even without taking into account of social burdens, the financial
performance of SOEs has been at least comparable to the rest of Chinese industry while
that of large-scale SOEs has been much better.
24. Aoki (1990) provides a schematic, theoretical exposition on the relative efficiency
attributes of the (both stylized) Japanese firm vis-à-vis the American firm. Lo and Smyth
(2004), in a similar vein, synthesize a range of theories on technological paradigms,
growth paths and economic institutions to investigate the relative efficiency attributes of
different economic systems.
25. Lau (1999) provides a detailed analysis of the 1995-97 enterprise downsizing and
privatization drive. Lo (2001) and Lo (2007) analyzes the significance, short term and
long term, respectively, of the policy reversal in 1998-2002.
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Table 1. China’s economic growth in international comparison
1960-1970
1970-1980
1980-1990
1990-2000
2000-2007
China
2.9
3.7
8.8
9.3
9.0
India
1.1
2.3
3.6
4.2
6.0
South Korea
6.0
8.4
7.7
4.7
4.2
Brazil
2.6
6.5
0.7
1.3
1.7
USSR/Russia
4.0
4.7
1.3
-4.7
7.0
Low-income economies
2.0
1.8
2.2
1.2
3.9
Middle-income economies
3.5
2.1
1.2
2.2
4.8
1.3
1.8
4.5
East Asia and Pacific
5.9
5.7
7.7
Europe and Central Asia
1.2
-1.7
5.8
Latin America and Caribbean
-0.3
1.7
1.9
Middle East and North Africa
-1.1
0.7
2.7
3.4
3.7
5.5
Sub-Saharan Africa
-1.3
-0.1
2.4
High-income economies
2.7
2.2
1.7
Low- and middle-income economies
South Asia
Sources: World Bank, World Development Report and World Development Indicators, various years.
Note:
Figures are average annual real growth rate of per capita GDP (%).
29
Figure 1. Relative labor productivity of industry
8.00
7.00
(Yi/Li)/(Yn/Ln)
(Yi*/Li)/(Yn*/Ln)
6.00
5.00
4.00
3.00
2.00
1.00
0.00
2006
2002
1998
1994
1990
1986
1982
1978
Notes: Y = GDP and its components at current prices, with *denoting data at 1978 constant prices. L =
total labor employment. The subscripts i and n denotes the secondary sector (i.e., industry plus
construction) and the rest of the Chinese economy, respectively.
Sources: Chinese National Bureau of Statistics, China Statistical Yearbook, various issues.
30
Table 2. Average annual growth rates (%) of real GDP, employment and labor force
(a)
(b)
(c)
Real GDP
Employment
Labor Force
9.82
2.27
1978-1992
9.39
1992-2007
10.16
1978-2007
(a)-(b)
(b)-(c)
2.30
7.55
-0.03
3.63
3.60
5.76
0.03
1.02
1.10
9.15
-0.08
Sources: Chinese National Bureau of Statistics, China Statistical Yearbook 2008.
31
Figure 2. Composition of GDP by expenditures
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
2006
2002
I
1998
1994
1990
1986
1982
1978
C
NX
Sources: Chinese National Bureau of Statistics, China Statistical Yearbook, various issues.
Note: C = final consumption; I = investment; NX = net export of goods and services.
32
Figure 3. Incremental capital-output ratio (5-year moving averages)
4.5
4.0
(dK/dY)*
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2005
2000
1995
1990
1985
1980
Sources: Chinese National Bureau of Statistics, China Statistical Abstract 2007.
Notes: Incremental Capital-Output Ratio = dK/dY, where dK = total fixed-asset investment,
dY = GDP of current year minus GDP of last year.
33
Figure 4. Pre-tax profit rates of Chinese industrial enterprises
30.00%
A
B
25.00%
C
20.00%
15.00%
10.00%
5.00%
0.00%
2006
2002
1998
1994
1990
1986
1982
1978
Notes: A = All industrial enterprises (i.e., township-and-above independently accounting industrial
enterprises for 1997 and before, and all state-owned plus above-scale non-state-owned
industrial enterprises from 1998). B = state-owned industrial enterprises (including statecontrolled industrial enterprises from 1996). C = large-scale industrial enterprises (data before
and after 2003 are not fully comparable because of changes in statistical coverage).
Sources: Chinese National Bureau of Statistics, China Statistical Yearbook and China Statistical
Abstract, various issues.
34