How to interpret China's fast growth since 1978
The past twenty-five years has been a remarkable period. Back then, China set itself the goal of redoubling its GDP in 20 years, which translates into an annual growth rate of 7 per cent on average. At that time, in the world few believed that would come true, because more than eighty per cent of...12 09 2003 | Read
By Justin Yifu Lin
I like history, because the present is closely related to the past. To study China's future, we need to understand its past first. Certainly it would take a lot of time to examine the distant history. Now, I'd like to talk about a recent past: the past twenty-five years, and recent five years.
Here is a little story I experienced.
In 1987, when I returned to Beijing after obtaining a Doctor's degree in economies, I was the first to have obtained a PhD in social sciences from abroad and returned to China to work. At the time, to encourage people to get back to China, the government offered a special policy of allowing us to bring a car exempt from tax. At the time, the customs duty imposed on a car was as high as 215 per cent. I brought a car back. When registering it with the transportation authorities in Beijing, I was told that mine was the second private-owned car in this city. Yet last year, in Beijing alone, the number of cars totaled 2 million, 1.5 million of which were private ones.
The past twenty-five years has been a remarkable period. Back then, China set itself the goal of redoubling its GDP in 20 years, which translates into an annual growth rate of 7 per cent on average. At that time, in the world few believed that would come true, because more than eighty per cent of the China's population was farmers, many of whom were illiterate.
With a very low starting point, such a large agricultural country has been growing at an annual rate of seven per cent for more than twenty years on end. This is a feat never seen before in human history! From 1978 to 2002, China registered an annual average economic growth rate of 9.3 per cent; its economic scale increased 8.5 times; the speed of growth and the actual scale it reached far exceeded the goals set in 1978.
A simple index for measuring the openness of a country's economy is the rate of trade dependence. In 1978, China's rate of trade dependence was merely 9.5 per cent. Yet in 25 years, its foreign trade grew by 30 times. In 2002, its rate of dependence on foreign trade hit 50 per cent, a figure never seen among economic giants before. As a trade power, Japan's rate of dependence on foreign trade is a modest 17 per cent; the figure for the United States, also a trade giant, is only 22 per cent.
In the meantime, the Chinese's living standard improved considerably, and this country also made immense contribution to neighboring economies. For example, when East Asia was attacked by a financial crisis in 1997 and 1998, China introduced a policy of not depreciating its currency, and it really delivered the goods, making remarkable contribution to the East Asia economies' riding over the crisis and restoring stability and growth.
In recent years, some people in overseas economic circles and media raised doubts over the high figures of China's economic growth. Since 1999 and 2000, there has been such a view that China's economic growth rate may be false.
This view was first put forward by Thomas G. Rawski, a scholar on the studies of Chinese economy with the University of Pittsburgh, and then got much hyped in the media. Afterwards, a prestigious scholar from MIT also wrote an article, arguing that China's economic growth rate, especially after 1998, is not 7.8 per cent, but two per cent at most. And some even think it is negative growth.
So why is there so much doubt about China's economic growth in recent few years? One important reason is that two new economic phenomena have emerged since 1998 in this country, and the economic phenomena were not experienced by developed countries during their rapid economic growth era.
What are the two economic phenomena? One is inflation accompanying rapid economic growth; the other is reduction in energy consumption amid rapid economic growth.
So why did China's energy consumption drop in 1997, 1998 and 1999 despite robust economic growth?
My older brother started a midsize cement plant in Yangzhou[a city located in Jiangsu Province, China], which has an annual output of some 400,000 tons. Before his plant was started, there were three small cement plants in the area. Using very old traditional technique, the three vertical kiln plants had a total output of 180,000 tons. The new plant produces 400,000 tons of cement annually, while its energy consumption is merely 70 per cent of the three plants' total.
Thus, after my brother's plant was completed and put into production, the other three plants shut down. While the output increased by over 200 percent, energy consumption dropped to 70 per cent of the previous level. Such stories have very common in China since 1996 and 1997. The output increases by a large margin and fuels the economy. In the process of restructuring, energy consumption has seen negative growth.
In the past, China's economy was an economy of shortage. Many things were not available; as long as they were produced, they would be sold out. As a result, in the 1980s, a special phenomenon appeared in China's economy, called"township enterprises". Started by farmers, such enterprises were characterized by low inputs, technology capability, and the quality of products. At the time, however, it was the premier avenue through which farmers got rich. Under the economy of shortage, township enterprises required small investments and low technology capability, and yet their products could be sold out in spite of low quality.
In the middle and late 1990s, the fast growth in investment resulted in overcapacity, a big portion of which was newly added production forces. Foreign-invested enterprises and private enterprises, which offered quality products, took up a major proportion in the new production forces. When overcapacity occurs, it means that some enterprises must withdraw from production. Naturally, due to their poor quality and low technology capability, township enterprises were the first to have gone bankrupt and been kicked out. Consequently, economic growth has experienced structural changes, shedding energy consumption.
Such subtle yet profound changes easily escape the attention of foreign scholars studying the Chinese economy. As a result, they do not understand why other countries would suffer from negative economic growth in times of deflation while China has experienced rapid growth at all, and that while other countries' rapid economic growth is accompanied by swelling energy consumption the story is the opposite for China. This is because they do not know that China is characterized by a transitional economy. The rapid economic growth that China has seen in the past twenty-five years and in the five years since 1998 is absolutely real.
Justin Yifu Lin is Professor, Director of CCER(China Center for Economic Research at Peking University). His above article was compiled by Economic Daily's Xu Lijing.
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