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UPDATED: July 20, 2015 NO. 1 JANUARY 1, 2015
Will the 'China Miracle' Continue?

Per-capita GDP, which represents a country's labor productivity and technological and industrial prowess, can be used to measure the extent of its latecomer advantage. The per-capita GDP gap between China and developed countries reflects a gap in technological and industrial development. According to data from the late British economist Angus Maddison, in 2008, China's per-capita GDP was about 21 percent that of the United States, which was roughly the gap between the United States and Japan in 1951, Singapore in 1967, and South Korea in 1977. Japan, Singapore and South Korea saw economic growth soar to 9.2 percent, 8.6 percent and 7.6 percent over the following 20 years by making full use of their latecomer advantages. In this sense, China should also have the potential for 8 percent annual growth from 2008 to 2028.

From theory to reality

Of course, to turn growth potential into actual growth, China needs to continuously carry out technological innovation and industrial upgrading to make full use of its latecomer advantage.

To this end, an effective market is needed, so that the right signal about prices can be sent to businesses in order for them to make decisions on which technologies and industries to invest in. Meanwhile, the government should play its due role by tackling those inevitable market failures during technological innovation and industrial upgrading, so as to guide the country's industrial upgrading in a timely fashion. The government should refrain from "too much intervention" and it should also avoid "too little intervention."

To build an effective market, the double-track price system should be changed to a market-based price system. In this way, price can be a signal to reflect relative scarcity of different production factors in China and problems left behind by the double-track price system--such as income disparity, rent seeking and corruption--can be completely rooted out. At the same time, an active government that can make the best use of the situation will not only enable the Chinese economy to fully tap the country's latecomer advantage, but also give the government more energy to deal with other internal and external challenges, such as the waning demographic dividend domestically and a fragile recovery of the global economy.

China has become an upper middle-income country whose products are competitive in both domestic and overseas markets, such as home appliances, automobiles, ships and large equipment. Government subsidies have become a dispensable supplement to businesses compared with a necessity in the beginning of the reform and opening up. Therefore, the market should play a decisive role in allocating resources and the government should play a better role, just as decided at the Third Plenary Session of the 18th Central Committee of the Communist Party of China. China can grant subsidies to the few necessary industries from fiscal revenue, a common practice among developed countries.

If an effective market and an active government can be built in China amid efforts to comprehensively bolster reforms, China can make full use of its latecomer advantage.

In that case, even if developed countries have yet to recover from the global financial crisis in 2008 and breakneck expansion in exports can't be sustained in China, China is likely to achieve 7 percent or faster growth, backed by boosting domestic consumption and investing in areas with high social and economic benefits, such as industrial upgrading, improvement of infrastructure, environmental protection and urbanization. If so, the per-capita GDP and per-capita rural income can double by 2020 from the 2010 level.

Coupled with the appreciation of its currency, the yuan, China is highly likely to join the ranks of high-income nations around 2020, which would make it the third one to climb from low-income to middle-income and finally to a high-income economic entity after World War II.

Email us at: yushujun@bjreview.com

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