China economic growth

Factors of China’s Economic Growth: History, Challenge, Turning Points

China’s shift from an agrarian economy to a global superpower in half a century has been a success. It’s hard to believe that China, one of the world’s most powerful nations, was once a poor country. To put in perspective, more than 88% of the population lived on less than $2 per day in the 1970s. Moreover, China only had a GDP of 92.6 billion dollars in 1970, compared to 1.073 trillion in the United States.

The gap between the United States and China has been decreasing, suggesting China’s growth for the past few decades.
As the image suggested, the gap between the United States and China has been decreasing, suggesting China’s growth for the past few decades.

As Eckhard Tolle once said, ” The past has no power over the present moment.” Indeed, China has been regarded as one of the world’s fastest growing economies in the past thirty years. Thus, China is also a significant player in international trade. Take the impact of COVID-19 as an example. China’s shutting of cities in March 2020 triggered the halt of global production, from toys to car parts. Furthermore, its growing GDP and its importance in global trade show China’s omnipresent.


How did China successfully ramp up from one of the poorest countries to the top in just about forty years? What are the secret ingredients to their success? Well, one can’t talk about China’s economic growth without mentioning Mao ZeDong and Deng XiaoPing.

The Great Leap Forward (1958–1962) Which Has Resulted in Tens of Millions of Deaths

On October 1, 1949, Chinese Communist leader Mao Zedong declared the creation of the People’s Republic of China (PRC). However, people under Mao’s dismanagement and distraneous campaigns suffered from 1949 to 1977. For example, China’s Great Leap Forward campaign attempted to transform the country from an agrarian to an industrialised economy. Yet, the plan failed and resulted in an economic collapse and the deaths of tens of millions of people due to famine. Mao’s era came to a halt after his death. Deng XiaoPing emerged as the new leader of China after the death of Mao Zedong. This marked the turning point for China on a new course and changed the contours of global geopolitics.

Chinese agriculture of the past shapes future economic growth
Chinese agriculture of the past shapes future economic growth

1978: The Turning Points that Changed China

On December 13, 1978, Deng delivered a well-spoken speech which dared to speak against the orthodox Maoist approach of the country ever since its establishment. “It is time,” Deng stated, that the members of the Chinese Communist Party “emancipate their minds, use their heads, seek the truth in the facts, and look to the future together.” He criticized that many Party members clung to “book knowledge” and were accustomed to “hang their flag in the wind.” Instead, conservatism and the worship of theories must be overcome in order to make China a “modern and powerful socialist state.”

Chen Yun and Deng Xiaoping at the 3rd Plenary Session of the 11th Central Committee of the Communist Party of China in 1978
Chen Yun and Deng Xiaoping at the 3rd Plenary Session of the 11th Central Committee of the Communist Party of China in 1978

Under Deng’s leadership and the rubric of “reform and opening”, also known as the “opening of China”,  China abandoned past ideological constraints, broke away from Soviet-style economic policies, and embraced policies based on practicality and experience. It established the groundwork for a smooth transition from a planned to a market economy focused on the global market. As a result, China has enjoyed a remarkable period of economic growth since then. As World Bank President Jim Kim noted in November, “China has increased its per capita income 25-fold, and more than 800 million Chinese people lifted themselves out of poverty as a result — more than 70 percent of the total poverty reduction in the world.” Not only has the policy had an impact on the domestic scale, but it has also marked the beginning of a shift in international order.

Productivity is China’s Weapon

Previous research has suggested that China’s capital development carries a major role in its economic development. In other words, the new infrastructure and the new technology have increased China’s output. Though capital development grew by almost 7 percent a year over 1979-94 according to the IMF, the capital-output has hardly changed. In other words, regardless of a big expenditure of capital, the outputs units of capital remains the same. This mentioned lack of capital deepening indicates a limited position for capital. Furthermore, labor has additionally noticed its weight in the economic growth. Thus, while capital development accounted for over 65 percentage of the pre-1978 boom, with labor adding another 17 percent, they only accounted for 58 percent of the post-1978 growth- a slide of almost 25 percent. Productivity has made up the rest.

The high productivity was one of the factors that contributed to this economic miracle in China. China’s production increased at an annual rate of 3.9 percent during 1979-94, compared with 1.1 percent during 1953-78. By the early 1990s, productivity’s share of output growth had exceeded 50%. At the same time, the share contributed by capital formation fell below 33%. The productivity growth is remarkable–During 1960-1989, the U.S. productivity growth rate averaged 0.4%. The reform was crucial in undertaking such a productivity boom.

ver much of the period following the start of reforms in the late 1970s, productivity growth, measured either in terms of labour productivity (i.e. output per worker) or total factor productivity (which accounts for the contribution of capital as well as labour input to output growth), grew rapidly. This was a major driver of the <a href=sustained rise in per capita income during this time period. Because of the investment-intensive nature of Chinese growth, total factor productivity growth has typically lagged behind labour productivity growth.” class=”wp-image-32847″ width=”599″ height=”472″/>
Over much of the period following the start of reforms in the late 1970s, productivity growth, measured either in terms of labour productivity (i.e. output per worker) or total factor productivity (which accounts for the contribution of capital as well as labour input to output growth), grew rapidly. This was a major driver of the sustained rise in per capita income during this time period. Because of the investment-intensive nature of Chinese growth, total factor productivity growth has typically lagged behind labour productivity growth.

How Did China’s Economic Reform Help to Boost its Productivity Rate?

How exactly did China’s economic reforms increase its productivity? Surpringly, rural economics had a significant impact. Before the 1978 reforms, nearly four-fifths of the Chinese population was engaged in agriculture; by 1994, only half had. The reform expanded rural property rights and sparked a race to form small non-farm businesses in rural areas. Family businesses became more efficient after the rural reform, and there was a large labour surplus. As a result, farmers began to establish township enterprises surrounding non-agricultural production, such as consumer goods. Meanwhile, state-owned enterprises, which have to produce products in accord with the government’s place, only produce non-consumer goods. As such, township businesses provided the consumers with goods that the states needed. Initially, the government owned all township businesses, but as the community grew, many self-employed and private businesses emerged. The growth of these businesses filled a market void and broke the state-owned economy’s original monopoly. 

Furthermore, the reform granted enterprise managers more freedom to control their companies. They have more freedom within their businesses, such as setting the price and retaining a portion of profit for future investments. The reform also gave private ownership greater production. As a result of all these unprecedented changes, businesses created jobs and developed products or services. In addition, the resulting rapid growth of rural businesses has attracted tens of millions of people from traditional agriculture to higher value-added manufacturing. These were unprecedented changes which China had never experienced before.

To summarise,  de-collectivization (the process of breaking collective control and requiring individuals to work on land assigned to them) and rising demand of consumer goods have paved the way for China’s transformation towards an industrialized-based economy. 

China’s Open Door Policy Has Also Helped Its Economic Growth

Another indispensable factor explaining China’s growth miracle is constant opening-up, which is equally guided by the principle of gradualism. China has gradually opened itself to the world by introducing different special economic zones(SEZ). Special economic zones are intended to function as zones of rapid economic growth by using tax and business incentives to attract foreign investment and technology. The first special economic zone was created in 1980, in Southeastern China and consisted of small cities such as  Shenzhen, Zhuhai, and Shantou in Guangdong province and Xiamen in Fujian province.

Due to the ease of transportation, the first Special Economic Zone was built along the coast. Maritime transportation accounts for the vast majority of trade. Furthermore, port construction facilitates the collection and distribution of goods.
Due to the ease of transportation, the first Special Economic Zone was built along the coast. Maritime transportation accounts for the vast majority of trade. Furthermore, port construction facilitates the collection and distribution of goods.

Biejing’s central government gave foreign investors a lot of flexibility. For example, without the approval of the government, foreign investors can construct their own infrastructure in these areas. As a result, businesses have control of managing their investments, production, and making market decisions-something that was unprecedented before. The incentives quickly attracted direct foreign investment, resulting in more consumer goods industries and a larger population. The SEZ was clearly a success, as Shenzhen’s population grew from 30,000 in 1979 to over one million by the turn of the century.

Encouraged by the success of SEZ, China opened 14 more cities along the coast to foreign trade and investment in 1984. The Chinese government also created new regions, such as the China-Singapore Cooperation Park, and upgraded existing special economic zones to take advantage of new opportunities. Since 1992, China has continued to introduce more of its cities by adopting the same policies as foreign direct investment.


Special Economic Zones (SEZs) have contributed significantly to China’s development. They have allowed for market-oriented reform and have served as catalysts for the efficient allocation of domestic and international resources. They have also deepened the opening of the economy by attracting international capital, technology, stimulating industrial development of the country and China’s further integration into the global economy. Ever since 1978, the country has witnessed the exponential growth of FDI from 0 to 135 billion US dollars in 2017- an annual growth of 16%. China’s cumulative usage of FDI has topped two trillion dollars over the last 40 years, accounting for 10% of urban jobs, 20% of fiscal revenue, and nearly half of China’s international commerce.

China’s Attempts at Industrialization

The opening-up success in 1978 sparked successful industrialization in China. However, this is not the first ambitious industrialization undertaken in China’s history. It was at least the fourth in terms of historical stage. The first was initiated by the foreign affairs movement after the defeat of the Second Opium War in 1860.  Deeply humiliated by unequal treaties imposed by Western industrial powers, the Qing monarchy, who was in control of China, initiated a series of ambitious programs to modernize its backward agrarian economy, including establishing a modern navy and industrial system. However, this vigorous attempt turned out to be a gigantic failure. The government was deep in debt, and the hoped-for industrial base was nowhere in sight. The next three attempts nevertheless did not get China anywhere. 

The reason for China’s failures in these three attempts was neither the lack of free market nor private-property rights. First, the Qing dynasty probably had a better market system and property rights than that of Europe. It wasn’t the lack of democracy either. Actually, the government of the Republic of China was so inclusive that they even invited their “enemy”, the Communist party of China. If so, what made the fourth attempt so special that it pushed China out of poverty and successfully launched its own industrial revolution?

What Made China’s Industrialization a Success?

The answer is that in the fourth attempt, under the Leader DengXiaoPing in 1978, the country did not take advice from Western economists (like it had did for the previous attempts, such as either mimicking the Soviet Union’s central planning model or the U.S. political institutions). 

Instead, it took a very humble, gradualist, experimental approach with its economic reforms. In addition to adopting its own “Chinese” approach, another key is that, instead of a comprehensive and rapid rollout of market-oriented reforms like those in Latin America, Eastern European countries, etc. China started with rural reforms. What’s unique is that China did not start with enterprise reforms nor  the opening up and liberalization of the financial sector. China took a “bottom-up” approach by allowing farmers and poor people to get rich first. China also encouraged the development of manufacturing industries to exchange daily manufactured goods for foreign currency and machinery. In addition, it has long established various industrial policies to encourage manufacturing exports.

As shown in the figure, China accounted for the vast majority of the growth in developing economies. Latin America saw a 5% increase in industrial production, <a href=Africa and the Middle East saw a 6% increase, and Eastern Europe saw a 10% increase. However, China’s industrial output increased by 100 percent during this time period; overall, industrial output in developing Asia increased by 65 percent, but China accounted for the majority of this increase. In addition, the rise in industrial production demonstrates China’s high productivity.” class=”wp-image-32848″ width=”666″ height=”426″/>
As shown in the figure, China accounted for the vast majority of the growth in developing economies. Latin America saw a 5% increase in industrial production, Africa and the Middle East saw a 6% increase, and Eastern Europe saw a 10% increase. However, China’s industrial output increased by 100 percent during this time period; overall, industrial output in developing Asia increased by 65 percent, but China accounted for the majority of this increase. In addition, the rise in industrial production demonstrates China’s high productivity.

Conclusion

China’s economic success is not accidental: it has gone through trials and errors as shown in the previous failed industrial revolution. It was through changing the methodology that Deng XiaoPing was able to reform, starting in agriculture, a sector long mismanaged by Mao ZeDong. Under Deng’s leadership, productivity grew rapidly due to profit incentives. As a result, this induced rural farmers to move out of agriculture and into the manufacturing industry. Actually, China is the world’s largest manufacturing powerhouse: It produces nearly 50 percent of the world’s major industrial goods. Furthermore, the opening of China has also encouraged international trade and development through gradually introducing special economic zones to incentivize direct foreign investment. The present China is considered an emerging global superpower in economy, military, technology, diplomacy and soft power influence. It is a country that was raised beneath and continues to grow in the future, positioning itself just one place below the Superpower, the United States.

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