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129
JULY 2005
ASIA PROGRAM SPECIAL REPORT
Introduction
Loren Brandt and Thomas G. Rawski
T
hese essays,originally presented at aMarch 2,2005,symposium at theWoodrow Wilson InternationalCenter for Scholars,represent the initialproduct of a larger project on “China’sEconomic Transition:Origins,Mechanisms,and Consequences.”This project involves aninternational group of 45 researchers,whohave worked for several years to prepare acomprehensive and analytical overview of China’s remarkable economic gains duringthe long boom of the past three decades.Three major themes emerge from thepresent collection of essays:China’s spectac-ular economic gains,China’s potential for continuation of rapid economic progress,and formidable obstacles with which Chinamust engage in order to realize its ambitiouseconomic objectives.
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CHIEVEMENTS
China’s long boom is a major episode inglobal economic history.The broad outlinesof China’s protracted growth require nodetailed elaboration.They include enormousexpansion of output,employment,produc-tivity,exports and incomes;unprecedentedprogress in poverty alleviation and materialwell-being;and the emergence of China as amajor force in global markets.These essays highlight specific features of China’s economic achievements.LeeBranstetter and Nicholas Lardy emphasizeChina’s aggressive liberalization of trade andinvestment in advance of deadlines built intothe agreements surrounding China’s acces-sion to the World Trade Organization(WTO).From the perspective of earlier Asiangrowth spurts in Japan and Korea,China hasopened its economic doors to imports andoverseas capital to an unprecedented degree,a strategy that seems likely to create futureindustrial structures that differ widely fromwhat we see in Japan and Korea today.Scott Rozelle and Jikun Huang show thatin addition to overcoming long-standing defi-ciencies in feeding China’s growing popula-tion,China’s farm sector has achieved levels of market integration sometimes approachingU.S.standards,developed a growing array of labor-intensive export specialties,andachieved major gains in agriculture-relatedresearch,including contributions to cutting-edge innovations in biotechnology.Our own paper on industry emphasizesthe growth of China’s manufacturing capa-bilities.The growing penetration of China-made goods into global markets reflects the
ASIA PROGRAM
LorenBrandtisprofessorofeconomicsattheUniversityofToronto.ThomasG.Rawskiis professorofeconomicsandhistoryattheUniversityofPittsburgh.GangLinisprogramassoci-ateattheWoodrowWilsonCenter’sAsiaProgram.
China’s Economy:Retrospect and Prospect
EDITED BY LOREN BRANDT, THOMAS G. RAWSKI AND GANG LIN
ABSTRACT:ThisSpecialReporthighlightsChina’sremarkableeconomicachievementsoverthepastquartercentury,includingitsenormousexpansionofoutput,employment,productivity,exportsandincomes;unprecedentedprogressinpovertyalleviationandmaterialwell-being;andtheemergenceofChinaasamajorforceinglobalmarkets.Italsorecognizes,however,China’sdomesticproblemsingovernance,banking,finance,lawandthecreationofinstitutions.ContributorstothisvolumedonotpredictaquickcollapseofChina’seconomicprosperity.NordotheyanticipatethatChina’slongboomwillextendforever,orthatChinaisonapathtoovertaketheU.S.economy.
INSIDE
China’s Embrace ofGlobalization(page 6)Rural Developmentin China(page 13)Chinese IndustryAfter 25 Years of Reform(page 20)Institutional Environmentand Private SectorDevelopment in China(page 26) Will China’s FinancialSystem Stimulate orImpede the Growthof Its Economy?(page 33)Law, Institutions, andProperty Rights in China(page 42)Growth and StructuralTransformation in China(page 48)China’s Growth Prospects(page 55)China’s Political Systemand China’s Future Growth(page 62)
 
success of Chinese firms in absorbing and gradual-ly mastering an expanding array of technologiesand manufacturing processes.This developmentnow extends far beyond the labor-intensive sectorsthat dominated export gains early in the reformprocess.While foreign-linked firms play a centralrole in the transmission belts that carry interna-tional manufacturing technologies into Chinesefactories,we expect domestic firms to increasetheir contributions to the process of technicalupgrading,partly because of the knowledge theyhave absorbed from foreign markets and firms,andpartly because of the growing importance of domestic research and development spending andthe associated flows of manufacturing innovationin an increasingly competitive domestic economy.Loren Brandt,Chang-tai Hsieh and XiaodongZhu highlight the important contribution of thelarge-scale transfer of labor out of the agricultur-al sector to China’s economic growth,which aris-es from the significant gap between (higher) out-put per worker outside farming and (lower) labor productivity in agriculture.They find that the rateof total factor productivity (TFP) growth in thenon-agricultural sector largely drives this struc-tural transformation.Moreover,cross-provincialcomparisons point to the significant drag of thestate sector’s size on the rate of TFP growth,andthus on the rate of labor transfer out of the farmsector.At the provincial level,there is also verystrong negative association between the size of thestate sector at the outset of reform and the rate of labor productivity growth in both agriculture andnon-agriculture.From this perspective,“growingout of the state sector”should join “growing outof the plan”—the title of Barry Naughton’s influ-ential book—as key metrics for the progress of China’s reform.The roster of achievements extends into areasthat are generally regarded as weak spots inChina’s economy.Donald Clarke,Peter Murrelland Susan Whiting report that China has achievedconsiderable progress in building a system of commercial law.Surprisingly,survey studies findthat Chinese businesses make considerable use of the court system to resolve commercial disputes.Franklin Allen,Jun Qian and Meijun Qian findsubstantial movement toward modernization of China’s financial system.They also highlight theimportant role of China’s “hybrid”financial sec-tor,which draws on informal mechanisms for contract enforcement discussed by Clarke et al.aswell.And Yasheng Huang writes of belated,butnevertheless substantial gains toward providinginstitutional legitimacy and legal protection for the assets and rights of private businesses.
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ROSPECTS
Following nearly three decades of rapid growth,China’s prospects for continued developmentappear bright.The economy can draw on abun-dant supplies of labor,human capital,entrepre-neurial talent,and savings (including continuedinflows of foreign direct investment).Chinesegovernments at all levels are strongly committedto growth.Thomas Rawski’s essay enumeratesimportant factors underpinning growth inOrganization for Economic Co-operation andDevelopment (OECD) nations and notes China’sfavorable endowment in each category.Essays on globalization and industry describethe past economic benefits arising from China’sdeepening links to the world economy.Thesegains will expand with China’s growing participa-tion in cross-national manufacturing networks.Inaddition,relaxation of official constraints on over-seas investment by Chinese firms promises to adda new dimension to China’s absorption of usefulknowledge as domestic firms acquire ownershipstakes in overseas producers of natural resources aswell as desktop computers,machine tools,cars,auto parts,and other manufactures.
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ASIA PROGRAM SPECIAL REPORT
THE ASIA PROGRAM
The Wilson Center’s Asia Program is dedicated to the propositionthat only those with a sound scholarly grounding can begin tounderstand contemporary events. One of the Center’s oldestregional programs, the Asia Program seeks to bring historical andcultural sensitivity to the discussion of Asia in the nation’s capital.In seminars, workshops, briefings, and conferences, prominentscholars of Asia interact with one another and with policy practi-tioners to further understanding of the peoples, traditions, andbehaviors of the world’s most populous continent.
Asia Program Staff:
Robert M. Hathaway, DirectorGang Lin, Program AssociateAmy McCreedy Thernstrom, Program AssociateMichael Kugelman, Program Assistant
 
Acceleration of China-based research anddevelopment efforts,reflecting the expansion of indigenous R&D operations as well as growingactivity by Chinese subsidiaries of multinationalfirms,will contribute to the future expansion of manufacturing capabilities,technical sophistica-tion and product quality.Rozelle and Huang’ssummary of Chinese advances in biotechnologyillustrates the growing contribution of domesticscientific efforts in one specific area.The learning process associated with recentgrowth extends beyond improvements in technol-ogy,production,management,and marketing.Chinese reform experience includes a vast accu-mulation of knowledge about interactionsbetween public administration and economicgrowth.Despite many shortcomings of public pol-icy (discussed below),regional and local govern-ments in China’s coastal region have succeeded increating administrative structures that are suffi-ciently strong to attract and retain large inflows of offshore capital,and to encourage domestic invest-ment.Recent infrastructure investments haveupgraded domestic systems of transport and com-munication,effectively reducing the economicdistance between China’s thriving coastal regionsand less ebullient interior districts.If local govern-ments in China’s central and western regions canmaster the art of providing business-friendly regu-lation,both domestic and international firms maybe tempted by the lower labor and land costs avail-able in China’s inland provinces,a prospect thatmay be especially advantageous for producers of garments,shoes,toys,and other labor-intensivegoods.Fulfillment of this prospect could equipChina’s economy with two separate drivers of growth and export expansion:clusters of risingmid-level industries like shipbuilding,machinery,and home appliances based along the coast,andnew centers for labor-intensive manufactures inparts of China’s central or western regions.
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HALLENGES
Realization of China’s abundant economicprospects will necessitate further reform across abroad spectrum of institutions.Our authors iden-tify significant weaknesses that span China’s finan-cial,fiscal,investment,legal,and regulatory sys-tems.Despite differences in the details,many sec-tors reflect similar stories.Energetic and imagina-tive reform efforts have bridged a portion of thelarge gap between institutional arrangementsunder the traditional planned economy and whatis needed to support a smoothly functioning mar-ket system.In each case,our authors find thatstopgap measures and unreformed institutionsnow in place impose large costs that seem likelyto escalate in the absence of substantial newefforts to build suitable institutions.Take the example of banking and finance.Allen,Qian and Qian trace the genuine,but limitedaccomplishments in broadening the base of China’sbanking system and financial markets.Despitethese efforts,Barry Naughton shows that the dom-inance of China’s state-owned banks has actuallyincreased since the late 1990s,thereby raisingrenewed concern that China’s non-performingloan problem may be worsening.The continuedunwillingness of the big state-owned banks tomake loans to private entrepreneurs limits thegrowth of private business and exacerbates China’salready serious problem of unemployment.China’s courts and legal system continue to playonly a limited role in enforcing business-relatedlaws,in part because the system lacks clear guide-lines for assigning jurisdiction.These shortcomingsundercut the impact of the growing body of lawsissued by people’s congresses at various levels andobstruct efforts to build a unified legal system.Progress toward badly needed improvements ingovernance structures in support of accountabilityand transparency in China’s large corporations andfinancial institutions seems unlikely without sub-stantial changes in the legal infrastructure.The fiscal system,although not discussed explic-itly in these essays,fits the same mould.Recentralization has created significant imbalancesin fiscal resources across China,with numerousprovinces,cities and villages lacking financialcapacity to undertake growth-promoting invest-ments in human and physical capital.Recent ini-tiatives aimed at eliminating direct taxes on agri-culture will sharpen the conflict between financialresources and demands on the public purse,partic-ularly for local governments in rural districts.Although no single institutional weaknessseems likely to halt growth,multiple institutionaldefects could drag China into the kind of eco-nomic lethargy that has afflicted Japan’s formerlydynamic economy for over a decade.A commonthread in discussions of limits to institutional
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