Key Features of China's Economic Miracle
Three features of China's growth have been significant. First is its regional dimension. If China's 30 provinces would be counted as individual economies, the twenty fastest growing economies in the world would have been in China including many of the coastal provinces. Although growth has by no means been confined to these coastal regions, the loss of highly fertile land in them to industrialization is one of the costs to food self-sufficiency as discussed later. Second, there have been large cycles in the rates of growth in the provinces with fluctuations in the rates of inflation, although China has not experienced the runaway inflation of Latin American countries or the FSU (the Former Soviet Union). The third is its impressive productivity growth.
China's growth has been less dependent on the conventional inputs of capital and labor. Only 37 percent of the growth are accounted for by the growth in capital and another 17 percent by increases in the quantity and quality of labor. Nearly half of China's GDP growth--4.3 percent per year is explained by other factors.
Agriculture's performance was even more impressive. The annual rate of agricultural growth averaged 7.4 percent and total factor productivity growth was 6.6 percent during 1978-85 period, i.e., during the period of the household responsibility system. In the 1985-95 period the annual growth rate declined to 5.8 percent, but most of the growth came from additional inputs and investments with total factor productivity growth declining to 1.1 percent (between 1985 and 89). Cereal production hardly increased, and yet nonstaple foods, (livestock, fisheries, vegetables and melons) grew at 9 percent or more after 1985. These slow downs in total factor productivity and the varying rates of agricultural growth raise important issues about future sources of growth of domestic production and trade discussed later in the paper.
China's growth has been driven by four largely internal factors: high savings rates, structural changes, reforms and the special conditions in 1978. China's savings rate averaged 37 percent of GDP between 1978 and 1996, one of the highest savings rates in the world. Although it is a rate consistent with the savings rates of other East Asian economies, it is high even by their standards when China's low per capita income is considered. It is in sharp contrast to the transition economies of Eastern Europe and the FSU, and several industrial countries including the U.S. Besides, the savings rate has remained remarkably stable through the periods of the Great Leap Forward, and the Cultural Revolution, the period of reforms and structural changes. An important success of the Chinese reforms has been that while the savings rate remained high, the sources of savings changed from state enterprises to the household sector. After the reforms, the household savings rates increased from 1 to 21 percent, while prior to reforms virtually all the savings had come from the state enterprises. This shift has been associated with profound changes in the investment patterns related to the process of industrialization and marketization.
Agriculture at the Forefront of Reforms
With an accelerated rate of growth in agricultural production, agriculture's share in the workforce dropped from 71 percent to about 50 percent in twenty years. Once again it took the U.S. 50 years and Japan 60 years to achieve the same rate of decline. Agricultural reforms consisted of increasing procurement prices for grains, allowing farmers to sell above quota production at market prices, lowering grain quotas, increasing grain imports, and expanding private inter-provincial trade. But certainly the most important feature of the reforms has been the household responsibility system, in which collective land was assigned to households for up to fifteen years and local governments took the strong initiative of transferring production decisions and profits from communes to households. Agricultural reforms became the cornerstone of the reforms in the entire economy providing the basis for reform of the industrial structure. Increased rural household incomes increased demand and markets in rural areas, while increased rural savings and investments took advantage of the greater profitability of rural industry. These changes were supported by changes in political philosophy and attitudes leading to reduced government controls, increased contracting of rural enterprises by the urban industry, reduced production restrictions and lower taxes. The combination of reforms resulted in collective enterprises accounting for 36 percent of the industrial output by 1988 which is where it remains today.
Reform of the State Enterprises
The first wave of industrialization was in state enterprises. But after the reforms in 1978, state enterprises have grown relatively little with substantial growth in the collectively owned, township and village enterprises. The third wave of industrialization has been one of privately and individually owned enterprises, supplemented by joint ventures and foreign funded enterprises. Agroprocessing is an important sector in township and village enterprises and the growing private enterprises. Whereas the state owned and collective enterprises constituted 100 percent of the total in 1983, their share had declined to 80 percent by 1995. State enterprises dependent on government subsidies have come under greater pressure after the reforms. They have the freedom to retain a portion of the profits and greater autonomy in the production and investment decisions through the adoption of the management responsibility system. Under the dual track pricing system, enterprises can sell a greater share of the output in the market. Today 95 percent of the output is sold in the market, leading to increased profitability, although lower subsidies, growing competition and tighter credit have also unmasked the vulnerability of many of the state enterprises.
As the workforce moved from agriculture to industry and the service sectors, growth in urban employment has been associated with growing inequality. Today urban incomes are four times rural incomes. Incremental rural urban gaps have been greater in China than in other developing countries stressing the need for continued intensification of agriculture as a way of improving rural incomes. However, China is still more egalitarian than most countries in Latin America and Africa due to the initial egalitarian distribution of income and assets.
Decentralization, Pragmatism and Incrementalism
Sociopolitical stability remains an important consideration in Chinese reforms and this affects the pace of grain market liberalization. Yet the emphasis in reforms has been on decentralization, incrementalism and pragmatism. Agricultural reforms and the following investment by firms, households and local governments were introduced incrementally and involved decentralized authority over capital spending.
A favored approach in China has been the use of "models". Local authorities experiment with policies in specific provinces, prefectures, countries and even firms. If the experiment works, then it becomes a model for others to emulate and is replicated. If the reforms fail, then the cost of failure tends to be contained and limited. Reforms have occasionally been reversed if the government believed that growth was not being served or the stability was jeopardized. This highly decentralized approach to reforms is in sharp contrast to that followed during the periods of the Great Leap Forward and the Cultural Revolution and seems almost to have been a reaction to the previous experience.
Pragmatism and incrementalism have also been behind the government's evolving objectives and means with respect to reforms. New objectives have tended to emerge as the old ones are achieved.
Reform of the Trade System
China's opening to the outside world has meant reform of the trade system. Although agricultural trade reforms have been the last to be introduced, overall trade reforms set the stage for agricultural trade liberalization. Thousands of corporations now trade internationally, and consistent with a decentralized strategy many are sanctioned by local rather than the central government. Tariffs on imports have been reduced and procurement targets for export products, which applied to over 3,000 in 1979, are zero today. Exporters retain a portion of the foreign exchange receipts, with more liberal laws in retention of foreign exchange by individual traders. Realistic exchange rate also has done a great deal to stimulate exports together with liberalization of restrictions on direct foreign investment creating special economic zones. By 1993, more than 9,000 zones had been created, largely in the coastal areas leading to substantial growth of foreign investment by foreign entrepreneurs bringing in new technology, services and increasing competitiveness.
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