Since China began its economic reforms in 1978, its economy has had a remarkable record of economic growth. Within just one generation, China has transformed itself from an economically impoverished and politically unstable country to the second-largest economy in the world.
But China faces monumental challenges, both economic and political, in the years ahead, notes author Yasheng Huang. As he explains, one thing we know about economic growth is that it typically slows down after a period of robust performance. It is much more difficult for a country to grow at a sustainably fast pace when the per capita GDP is high than when per capita GDP is low.
Despite more than three decades of reforms, Huang argues, China is still substantially statist in its basic orientation. The result is that for each percentage point of GDP growth, China requires more and more energy and investments, with very worrisome implications for its environment and the health status of its population. China has grown by relying heavily on investments and exports and on its huge, low-cost labor force, not on technology and innovations. But there is increasing evidence that China is seeing diminishing returns with this growth model.
Research shows that fast growth at an extremely low income level is relatively easy, although not every low-income country is able to grow. What is harder, says Huang, is being able to grow after the country has attained what is known as “middle-income status” (between $6,000 and $8,000 dollars per capita, a level that China has attained or is very close to attaining).
Can China avoid the middle-income trap and grow at a sustained rate for another decade or more? Huang believes it can, but only if the country undertakes significant reforms, especially political reforms. As he points out, the factors that drive a country to grow when its per capita GDP is $700 are totally different from the growth drivers when a country has a per capita GDP near $7,000. At $700, China could simply copy and transplant the technology and production methods of other countries; it didn’t need to come up with its own innovations and technologies.
Huang argues that China needs to transition to a stronger, market-based economic system, a political system that is more open and democratic, and a legal system that is rule-based and offers strong IP protection. There should be more freedom to think and to challenge authority, and limitations on the reach and power of government. In other words, China needs political reforms as well as economic reforms to enter the next stage of its growth model.