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Opinion
Witness to a Miracle
Reform and opening up can continue to benefit both China and the world
By Justin Yifu Lin | NO.30 JULY 26, 2018
This year marks the 40th anniversary of China's reform and opening up. Over the past four decades, the country has managed remarkable average annual GDP growth of 9.6 percent, a feat unprecedented in the history of human economic development.

Based on the exchange rate 40 years ago, China's GDP per capita was a mere $155 in 1978, while the figure for sub-Saharan Africa, widely considered the poorest region in the world, was in places as high as $499. In terms of global ranking, China's GDP per capita was the third lowest among more than 200 countries prior to reform and opening up.

Yet now, China's annual GDP growth has reached 7.2 percent, a goal set by Deng Xiaoping, the architect of China's reform and opening up, back in the early days of the policy. Such rapid and sustained growth was beyond the wildest imagination of myself and many others.

China's contribution

I feel lucky to have been witness to the economic miracle and transformation that China has undergone over the past 40 years. The country's GDP per capita surged from $155 in 1978 to $8,836 in 2017, higher than the global average. In 2009, China surpassed Japan in terms of economic aggregate to become the world's second largest economy. In 2010, China overtook Germany as the world's biggest exporter, and three years later it replaced the United States to become the world's largest trading nation. During this time, more than 700 million Chinese people rose out of poverty.

I was appointed senior vice president and chief economist of the World Bank in 2008, a position widely considered the pinnacle for economists worldwide. I became the ninth chief economist of the World Bank, and those who came before me were leaders in their field who not only contributed to economics, but many of whom also had rich political experience. Yet one of the most important factors which qualified me for the job was China's economic development and its huge contribution to worldwide poverty alleviation.

China's biggest contribution to the world is its fast and stable economic growth, especially in times of global economic uncertainty over the past 40 years. East Asia, generally considered the best performing region economically in the post-World War II (WWII) era, was hit by a sudden financial crisis in 1997. Many observers thought that the regional economy would take 10 to 20 years to recover, but it bounced back after 2000 and continued to grow afterward. The countermeasures that China took in the wake of the crisis played an important role.

As a responsible country, China made sure that the renminbi would not be devalued, so as to prevent countries hit by the crisis from suffering the competitive devaluation of their currencies. In this way the economy of East Asia stabilized and China's 8-percent economic growth throughout the rehabilitation period also helped stimulate the recovery of other national economies in the region.

Eleven years later, 2008 saw the first major financial crisis since the end of WWII and the most severe global economic incident since the Stock Market Crash of 1929. Many were convinced that the consequences would be felt for a long time after. Now, 10 years have passed and some developed countries are still trying to pull themselves together, while others saw a stabilized but still fragile economy as early as 2009 and 2010.

The key to recovery was China. In 2009, the country introduced proactive fiscal measures which led to economic resurgence from the first quarter of the year. China suffered recession only in the last quarter of 2008, and the positive trend of its economy triggered the recovery of other emerging markets. Now, China's contribution to global economic growth exceeds 30 percent each year.

Policy works wonders

Average annual GDP growth of 9.6 percent for 40 years was hitherto unheard of. An increase in revenue is not equal to the accumulation of currency, but the strengthening of consumption. The prerequisite to this real form of growth is the improvement of labor productivity, which requires upgrading existing industrial technology and products. This is one way to guarantee an increase in revenue.

The emergence of new, higher value-added industries and the reallocation of labor from low value-added industries to these new ones is also necessary for the sustainable increase of revenue. Simply put, scientific and technological advancement can stimulate economic development. Both developed and developing countries can follow such a mechanism to facilitate long-term growth.

However, there is a difference between developed and developing countries in this regard. Following industrialization, the income and technology of developed countries remained high, and innovation and invention were necessary to achieve technological and industrial upgrading, breakthroughs which are hard to guarantee. The yearly increase of income in developed countries is around 2 percent, or 3 percent if increases in population are accounted for.

By comparison, developing countries, also in need of technological innovation and industrial upgrading, can make use of the "latecomer's advantage" by capitalizing on existing technology as a tool for their own development, which has the benefit of being far less risky than funding and experimenting with the development of technology and practices from scratch.

In theory, fewer costs and less risk mean quicker pace. In practice, among the world's 200 plus developing economies after WWII, 13 had managed to utilize the "latecomer's advantage" by 2008, securing 7-percent or higher annual growth, more than twice that of developed countries. Such growth, sustained for 25 years or more, has allowed some developing countries to catch up with the world's developed economies.

China became one of the 13 after the adoption of the reform and opening-up policy, over the duration of which its growth has maintained a rate three times that of developed countries. It was through exploitation of the latecomer's advantage that China was able to elevate productivity through technological innovation and industrial upgrading.

Reference to others

What does China's reform and opening up mean to the world? Looking back at the unprecedented scale of achievement across the past four decades, it seems that there must be some logic or reason in China's success.

To date, examples of other developing countries achieving economic success by following the theories of developed countries are scarce. My theory of new structural economics is borne from the experiences of China and other developing countries, and emphasizes the structural difference between developed and developing countries, and how such differences affect industrial development, institutional arrangement, financial policies and requirements for human capital.

Traditionally one of the poorest countries in Africa, Ethiopia has learned from China's practices and pooled its resources to create a sound environment for economic development in recent years. In spite of its weak infrastructure, Ethiopia has established industrial parks, attracted foreign businesses and investment and offered investors services, yielding tangible results. The country has sustained 10-percent growth for a decade and become the largest recipient of foreign direct investment in Africa.

Poland has also benefited from China's experience. Before 2015, Poland had not established new industries or created fresh job opportunities, so a large number of its workforce relocated to other countries, such as Ireland, Spain and France. In 2015, the newly elected Polish Government made a long-term national economic development plan based on my theory of new structural economics. Polish Prime Minister Mateusz Morawiecki said in a speech at this year's Davos Forum that in 2017 the Polish population accounted for one 10th of people in the EU, but that the country created 70 percent of the EU's job opportunities. It was an instant and perceptible outcome of the development plan. Besides an efficient market, policies to tap the potential of industries with comparative advantages and mobilize resources implemented by an effective government have been another outcome of the plan.

China's reform and opening up has brought about impressive transformations worldwide. The value of the policy lies not only in the improvement of living standards for 1.4 billion Chinese, but in its potential to change the lives of more people around the world.

Currently, 85 percent of the world's people live in developing countries. Even if China becomes a high-income country by 2025, 66 percent would still be living in the developing world. They, like us all, wish for a better life. I have already mentioned that a developing country is yet to successfully reform itself via the theories of developed countries. As a developing country, China can offer its experience to others in a similar situation. The development theories of developed countries are derived from their own experiences and economic conditions, which are not applicable to developing countries.

One of the most important achievements of reform and opening up is the development theory that China has summarized from its practice, which has not only enabled China to understand the past and present, and prepare for a better future, but can continue to help other developing countries to turn their vision for development into reality.

Author Profile

Justin Yifu Lin, born in 1952, is a former chief economist and senior vice president of the World Bank, Dean of the Institute for New Structural Economics and the Institute of South-South Cooperation and Development, and Honorary Dean at the National School of Development, Peking University.

Building on a distinguished career as one of China's leading economists, Lin is currently undertaking a research program that examines the industrialization of rapidly developing countries and sheds new light on the causes of slow economic growth in poor regions.

He took up his position at the World Bank in June 2008, after serving as professor and founding director of the China Center for Economic Research at Peking University for 15 years.

His books include Going Beyond Aid: Development Cooperation for Structural Transformation and Beating the Odds: Jump-Starting Developing Countries.

Copyedited by Laurence Coulton

Comments to zanjifang@bjreview.com

 

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