Fang Cai Understanding China’s Economy The Turning Point and Transformational Path of a Big Country Understanding China’s Economy Fang Cai Understanding China’s Economy The Turning Point and Transformational Path of a Big Country FangCai ChineseAcademyofSocialSciences Beijing,China ISBN978-981-33-6321-2 ISBN978-981-33-6322-9 (eBook) https://doi.org/10.1007/978-981-33-6322-9 JointlypublishedwithCITICPressCorporationandthroughtheagencyofChinaNationalPublications Import&Export(Group)Co.,Ltd.B&RBookProgram TheprinteditionisnotforsaleinChina(Mainland).CustomersfromChina(Mainland)pleaseorderthe printbookfrom:CITICPressCorporation. ©CITICPressCorporation2021 Thisworkissubjecttocopyright.AllrightsarereservedbythePublishers,whetherthewholeorpartof thematerialisconcerned,specificallytherightsoftranslation,reprinting,reuseofillustrations,recitation, broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionorinformation storageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilarmethodology nowknownorhereafterdeveloped. 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The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore Contents PartI China’sMiracle 1 UnderstandingtheStagesofEconomicDevelopment ............. 3 DemarcatingStagesofEconomicDevelopment ..................... 3 The Malthusian Poverty Trap: The Long Dark Night Before the“GrandDivergence” ......................................... 7 DrivenbytheDemographicDividend:TheLewisModel ............. 11 TheLewisTurningPointandtheMiddleIncomeTrap ............... 16 Solow’sNeo-classicalGrowth:InnovationChangestheWorld ........ 24 2 HowFastHastheChineseEconomyGrown? .................... 27 Sustained,RapidGrowth:China’sEconomicMiracle ................ 27 TheAchievementsofChina’sEconomicGrowth .................... 27 China’sEconomicGrowthisUndeniable .......................... 28 HowtoInterprettheJudgmentThatChinaIs‘No.1’forGDP ........ 32 OnCalculationsofChina’sPotentialGrowthRate .................. 34 DecliningActualandPotentialGrowthRates ....................... 34 StimulatoryPoliciesShouldNotBeUsedto‘PreserveGrowth’ ....... 35 RaisingthePotentialGrowthRateThroughReforms ................ 37 TheChineseEconomicMiracleandtheLogicofItsContinuation ..... 38 3 UnderstandingChina’sDevelopment ............................ 45 The Riddle of China’s Development: A Noble Prize Grade Question ...................................................... 45 ResearchingtheChineseEconomywithaCriticalMindset ........... 51 AvoidingBiasedMindsets ....................................... 53 Counterfactuals ................................................ 54 ConventionalWisdom .......................................... 55 ForWantofaNail .............................................. 57 StylisedFactsAboutEconomicGrowth ........................... 58 Kuznet’sFactsonModernEconomicGrowth ...................... 59 Palant-PrescottDevelopmentFacts ............................... 60 TheKaldorFacts ............................................... 60 v vi Contents TheNewKaldorModel ......................................... 61 Decoding the Mystery of the ‘Deceleration’ of the Chinese Economy ..................................................... 61 WhyisThereaMiddleIncomeTrap .............................. 62 OldComparativeAdvantageGone,NewComparativeAdvantage MIA ......................................................... 63 ChangestoSourcesofGrowth ................................... 63 4 EscapingMisunderstandingsAbouttheRelationshipBetween PopulationandtheEconomy ................................... 67 ALargePopulationisNoBarriertoEconomicGrowth .............. 67 TheAgeingofthePopulationisInevitable ......................... 69 TheInevitableDisappearanceoftheDemographicDividend .......... 72 LabourSupplyisaFiniteResource ............................... 74 LabourShortagesareNotanExcusetoIgnoreEmployment .......... 78 PartII TheDevelopmentTurningPoint 5 TheLewisTurningPointforLargeCountries .................... 83 HowtoUnderstandtheLewisTurningPoint ....................... 83 TheCriticalPoint:FromtheTurningPointtoTurningInterval ........ 85 ControversyOvertheLewisTurningPoint ...................... 89 Howa‘LargeCountryEconomy’Differs .......................... 90 DefiningLarge(andSmall)CountriesandTheirCharacteristics ....... 91 China’sLargeCountryEconomy ................................. 93 TheFlyingGeeseParadigmCanRestructuretheNationalLayout ..... 93 TheEvolutionandKeyAspectsoftheFlyingGeeseParadigm ........ 94 WhyThereNeedstoBeaChineseNationalFlyingGeeseParadigm ... 95 Digression .................................................... 96 6 TheDemographicTransitionandLabourSupply ................ 99 China’sSemographicTransition .................................. 99 The Demographic Transition and the Development Stages oftheDualEconomy ........................................... 100 TheCurseofBeing‘OldBeforeRich’ ............................ 103 TheGrandReversal:LabourSupplyandDemand ................... 106 LabourShortagesandEmploymentDifficulties ..................... 108 Reducingthe‘OldBeforeRich’Gap .............................. 110 7 TheChallengesAftertheLewisTurningPoint ................... 113 TwoDifficulties:ShouldWagesRise? ............................. 113 DelayingtheMomentumofRisingLabourCosts ................... 116 TheDifficultiesofThreeGroups:TheLatentFragilityofLabour ...... 118 TheStateoftheAgriculturalWorkforce ........................... 123 ChangestotheAgriculturalWorkforce ............................ 123 TheDemographicCharacteristicsoftheAgriculturalWorkforce ...... 124 PostTurningPointRuralLabourTransitions ....................... 127 References .................................................... 131 Contents vii 8 China’sSecondDemographicDividend ......................... 133 IstheChineseTurningPointSpecial? ............................. 133 TheSecondDemographicDividend ............................... 136 EnormousPotential:SavingsRateandthePensionSystem ........... 140 RaisingSkillSetsandMaintainingComparativeAdvantages ......... 142 References .................................................... 146 PartIII SidesteppingtheTrap 9 China’sInevitableSpeedBump ................................. 149 DoNotBeAfraidoftheWolf .................................... 149 HowtoSetRationalGrowthSpeedTargets ........................ 153 TwoLShapeTrajectories ....................................... 155 TheVShapedRevivalisOutdated ............................. 155 ShortandMediumTermLShapeGrowthTrajectories ............... 160 ALongerTermLShapeTrajectory ............................... 162 Reference ..................................................... 165 10 UnderstandingtheMiddleIncomeTrap ......................... 167 WhatistheMiddle-IncomeTrap ................................. 167 TheLowIncomeStage ......................................... 168 TheMiddleIncomeStage ....................................... 168 TheHighIncomeStage ......................................... 168 TheTetralogyoftheMiddleIncomeTrap .......................... 170 HowtoAvoidtheMiddleIncomeTrap ............................ 172 AccuratelyAssessingtheEconomicGrowthStage .................. 172 UnearthinganInstitutionalDividendThroughReform ............... 173 DevelopingEducationandTraining ............................... 175 11 EmploymentIssues:FromtheAggregatetotheStructural ........ 181 UnderstandingtheLabourMarket ................................ 181 TheFunctionsoftheNaturalUnemploymentRate .................. 185 StrongWageGrowthasBadasWeakWageGrowth ................. 186 EmploymentStructureandQuality ............................... 191 12 TheIncomeDistributionKuznetsTurningPoint ................. 195 WeNeedtoReacquaintOurselveswithEqualityandEfficiency ....... 195 TheIncomeDistributionTurningPoint:TheKuznetsTurningPoint ... 197 WhatIstheCauseforandOriginofDispute ....................... 201 IncomeDistributionPolicyErrors ................................ 203 PartIV CreatingaNewMiracle 13 CanChinaCreateAnotherEconomicMiracle? .................. 209 CantheChineseEconomyContinuetoGrow? ...................... 209 NewConceptsGuideNewGrowth ................................ 210 TheFundamentalsofanImprovingEconomy ...................... 213 viii Contents StimulatingMicroeconomicVitality .............................. 215 EvaluatingtheNewPatternofGrowth ............................. 217 HowtoDestroythe‘XilingEffect’ ............................... 218 OpeningtheRightPolicyToolbox ................................ 220 WhyEmphasisethe‘ThreeIncreases’ ............................. 221 ProductivityGuidedIndustrialRestructuring ....................... 224 TheKeyAspectsofIndustrialUpgrading .......................... 224 TheWorrisome‘ReverseKuznetsEffect’ .......................... 226 ChangingApproachestotheUpgradingofIndustrialStructure ........ 229 14 FromtheDemographicDividendtotheReformDividend ......... 233 PeopleCentredNewModelUrbanisation .......................... 233 PathwayOutcomes ............................................. 234 TheNewPeopleCentredFocus .................................. 235 HowtoReallyImplementPeopleCentredUrbanisation .............. 237 TheModernisationofAgriculturalProductionMethods .............. 239 ChallengesattheNewStageofAgriculture ........................ 240 OnTraditionalConceptsofEconomiesofScale .................... 241 ScaleConstraintstoAgriculturalModernisation .................... 243 LandRegulations:TheReformBridgehead ........................ 244 FromtheDemographicDividendtotheHumanCapitalDividend ..... 245 TheContributionandFormationofHumanCapital .................. 246 EducationandReforms ......................................... 247 TheCostBenefitReformFormula ................................ 250 15 FromtheDemographicDividendtotheOpenDividend ........... 253 TheReversalofGlobalisation .................................... 253 InternationalTradeandTransnationalInvestment ................... 254 TheDepthandBreadthofGlobalisation ........................... 256 ThePopulistGenesinWesternGovernments ....................... 259 VotingwithHands,andVotingwithFeet .......................... 260 PopularPopulism .............................................. 262 ChinaandGlobalisation ......................................... 262 WhyDoesChinanotOpposeGlobalisation ........................ 263 DeclarationsatDavos ........................................... 265 Notes ......................................................... 268 Addendum:CharacteristicsofEpidemicShockandResponse Policy ............................................................ 271 Part I China’s Miracle China’sReformandOpeninghasnowbeenunderwayfornearlyfourdecades.The economy has soared and people’s livelihoods have greatly improved, and so it is knownasthe“ChineseMiracle”.Thechangeswroughtbythismiracleareunprece- dented throughout the nation’s millennia of history, and are also vanishingly rare globally. This book aims to dissect the underlying logic to the Chinese Miracle via the perspectives of population and development theories, look at the Chinese economyfromtheperspectiveoflong-termhistoricaltrendsandglobalcategoriza- tionanddemonstratethecoursechartedbytheChineseoceanlinerindeepwatersvia investigationandresearch.HowshouldtheChina’sexperienceofeconomicdevel- opmentbedemarcated?Whatkindofuniquecharacteristicsdoesthedevelopmentof theChineseeconomydisplay?HowshouldweunderstandChina’seconomicdevel- opmentandwhattypesofmisunderstandingsarewelikelytohave?Eachchapterof thisbookoffersdetailedanalysisandexplanationstothesequestions. Chapter 1 Understanding the Stages of Economic Development Ihavewrittennumerousarticlesandgivenmanylecturesonthesubjectofthestages ofChina’seconomicdevelopment.Ioftencomparemyownexperiencetothatofa Russian doll. When I tell such stories, the audience listens, but with doubt etched ontheirfaces,andwhenrespondingtosuchdoubt,Iamconstantlyengagedonnew research.SuchresearchpertainstotheentireprocessofthehistoryoftheChineseand globaleconomies,andincorporatestheprinciplesofeconomicgrowthfromarange ofnationalexperiences.Iturntheseintoaunifiedwhole,andbringinresearchofmy ownintoeachaspect,andtheendresulthasthelikenessofaRussiandoll.Thislarge dollisinfactagrandframework.Thischapterwillconductageneraldemarcation ofthestagesofeconomicgrowthandtellhowChinajoinedtherace,andhowitis placed at each specified development stage, and then delineate the propositions of thekeytheoriesateachdevelopmentstage,andthenanalysehowthesepropositions applytotheChineseexperience. DemarcatingStagesofEconomicDevelopment ThestoryofChina’seconomicgrowthcannotbeavoidedwhendiscussingthestages of economic development. The Chinese experience is not purely a Chinese expe- rience, for it is the only one that also deepens our understanding of development economicsandtheoriesofeconomicgrowth.Fromaglobaleconomicperspective, thenationhasessentiallyskippedtheoverwhelmingmajorityofthemainstagesof economicdevelopment,andisnowslowlyenteringthefinalstage.TheChineseexpe- rienceisvastinscopeand,havingcomparativelyquicklyskippedmanyofthemajor stages, brims with observations and data. Furthermore, and critically, the Chinese experiencehasbeenaprocessofgrowthanddecline,followedbyrenewedgrowth (seeFig.1.1). A look at the longer term history of the Chinese economy shows that its GDP formerlycomprisedamajorproportionoftheworldeconomy,peakingaround1820 ©CITICPressCorporation2021 3 F.Cai,UnderstandingChina’sEconomy, https://doi.org/10.1007/978-981-33-6322-9_1