China’s Economic Growth and Structural Transition since 1978
Over the past 40 years of reform and opening-up during 1978-2018, China’s rapid economic growth has become a miracle in world economic history and reshaped the world economy. In the 40 years, China has successfully transformed from an isolated agricultural country into the world’s largest industrial manufacturer. In 2018, China’s urbanization rate is expected to reach 60% with per capita GDP expected to reach 9,000 USD. After another 5 to 8 years, China will join the rank of high- income countries, successfully cross the middle-income trap and become a moderately prosperous economy in all respects. In its modernization drive, China will follow the new concept of “innovation, coordinated, green, open and shared development” and strive to achieve its “two centennial goals”.
growth transition, high- quality development, service- based economy, reshaping of efficiency model.
JEL classification code: N15, N65, O14
DOI: 1 0.19602/j .chinaeconomist.2018.01.02
1. China’s Rapid Growth since 1978 and International Comparison
China’s sustained and rapid economic growth over the past four decades has reshaped the world economy. In 2016, China contributed 41% of world economic growth. In the new normal, China has shifted from rapid yet volatile growth to medium-high growth rates with less volatility.
1.1 China’s Rapid Growth
Since reform and opening-up in 1978, China’s economy has been growing at almost 10%. In the first 25 years during 1978-2002, China’s GDP growth rate averaged 9.7%. This period can be divided into the following stages: the inception of China’s reform and opening-up program, the period of bringing order to chaos and implementing rural land contract system during 1978-1984, the development of township and village enterprises during 1985-1988, and the period of economic adjustment during 19891991. Deng Xiaoping’s talks during his tour to south China unveiled a new chapter of China’s opening-up in full swing. The Third Plenum of the 14th CPC Central Committee in 1994 established socialist
market economic theory, followed by the eruption of the Asian financial crisis in 1997, the burst of dotcom bubble in 2001 and China’s accession into the WTO on December 11 in that year.
In the first 25 years after 1978, China’s reform and opening-up became sophisticated. With great resolve and confidence, China created a socialist market economy with its own characteristics. The achievements of reform and opening-up are indisputable. After 2003, China’s industrial and urban development gained momentum. In 2011, China’s urbanization rate exceeded 50%. In 2012, China’s service sector replaced industry as a new growth engine. Amid this transition, China shifted from rapid growth to medium-high growth, i.e. 9% on average during 2003-2018. Over the past four decades, China has led the world in terms of economic growth in various stages.
As international comparison reveals, China’s economic growth rate is more than double the level of advanced economies and higher than those of emerging East Asian countries such as South Korea, Singapore, Malaysia, Indonesia, Thailand and the Philippines by more than 30% (see Table 1). Figure 1 compares China’s growth with other major world economies. While it still takes time for China to overtake the US economy, China’s growth is much steeper and gaps are narrowing. After the global financial crisis in 2008, China overtook Japan as the world’s second largest economy. Although India’s growth rate overtook China’s in 2015, India remains a medium-low income country yet China is closer to the rank of high-income countries.
1.2 China’s Re-Emergence Shapes the New Order of the World Economy
From the founding of the People’s Republic of China in 1949 to reform and opening-up in 1978, China accounted for less than 5% of world GDP, over 1/5 of world population with per capita GDP at less than one fourth of world average, and export less than 1% of world’s total. Back then, China was poor, populous and largely isolated from the rest of the world. Yet today, China accounts for 18.82% of world population, 14.94% of world GDP and 13.2% of world total export. China’s per capita GDP is also getting close to world average. Rapid growth of China and other emerging market economies has reshaped the world economy. In the post-crisis era, emerging market economies overtook advanced economies in terms of their share in world GDP. China and other BRIC countries contributed over 30% and 60% of world GDP growth respectively.
China’s economic rise started since 1978, a year of unprecedented economic reforms. Different from
the former USSR, China’s economic policy was more relevant to its own realities and led to much better results. According to the WDI database, during 1978-2016, China’s GDP (in 2010 constant US dollar) grew by more than 30 times with productivity up almost 20 times and per capita real income up over 20 times - these achievements were made possible by efficiency gains. For instance, farmers were given greater freedom over crop selection, which increased yield. High personal savings and FDI that turned into material capital supported industrial development. China’s entry into the WTO in 2001 opened and facilitated trade. Market and competition increased China’s growth tenacity.
1.3 Transition from Rapid yet Volatile Growth to More Stable Medium-High Growth
The first 25 years since 1978 is characterized by rapid yet volatile growth. Inflation, China’s most important macroeconomic target before 1997, reached 9.3% in 1985, 18.8% in 1988, 18% in 1989,
14.7% in 1993, 24% in 1994 and 17.1% in 1995, followed by a reduction in 1997 and deflation during 1999-2001. Yet in the more recent 15 years, China’s consumer price index (CPI) increased by more than 5% only in two years and was free from deflation. Measured by volatility variance (square of difference between annual value and mean value), price was 2.55 times more volatile in the first two decade than in the second two decades. After 2012, China’s economic growth stayed below the 8% trajectory and continued to slide from 7.8%. As first mentioned in the Report of the 19th CPC National Congress, China’s economy has shifted from rapid growth toward “high-quality development,” implying that the government is more tolerant about slowing growth. In 2018, China’s growth rate is expected to reach 6.5% or so, a shift from the rapid growth of 8-10% to medium-high growth range of 6-8%.
China’s increasing economic stability is reflected as follows: First, micro-level entities behaved more rationally and restrained under market system; second, economic regulators were able to deal with complex situations as regulatory infrastructure became more sophisticated and past experience offered lessons; third, institutional reforms caused smaller shocks to the economy. Both the price reform in 1988 and SOE reform in 1998 seriously shocked China’s economy. Gradualist reform that China currently follows, however, is more sophisticated and law-based with smaller impacts. Yet increasing economic openness has exposed China to external shocks and potential volatility risks.
1.4 Literature Review
International scholars have extensively discussed China’s growth challenges. Many scholars investigated China’s growth accounting since reform and opening-up in 1978 (Ren, 1995; Wang & Yao, 2001; Young, 2003; Holz, 2006; Zheng, Bigsten & Hu, 2006; Bosworth & Collins, 2008; Perkins & Rawski, 2008; Holz, 2013a, 2013b). According to Young (2003), China’s urban TFP growth was moderate during the first two decades of reform (1978-1998) and labor deepening, including labor migration from agri-
culture to urban sectors, served as a key driver of living standard improvement. It was not until the 1990s that people became aware of the contribution of capital deepening to China’s growth, as evidenced in the surge of savings and investments. Later, some scholars paid further attention to China’s inter-sectoral growth accounting and examined the contributions of sector TFP and inter-sectoral resource allocation to growth. For instance, Brandt et al. (2008), Brandt & Zhu (2010) and Dekle & Vandenbroucke (2010, 2012) conducted a quantitative analysis on China’s structural transition and sectoral accounting after 1978. Based on a three-sector dynamic model, Brandt & Zhu (2010) investigated China’s growth sources and found that agricultural labor reallocation and capital deepening had limited growth effects and may only increase TFP and serve as a key growth driver in the urban non-state sector of economy.
China also has a serious mismatch of capital: As the state sector absorbed more than half of fixed investments, improving capital allocation will vastly propel growth. Brandt et al. (2013) further examined the spatial and sectoral factors of China’s economy. Some other scholars discussed China’s reform efficiency. Song et al. (2011) created a growth model encompassing the characteristics of China’s economic transition, including rapid growth, sustained return to capital, manufacturing reallocation and largesum trade surplus, to discuss China’s financial frictions and financing efficiency. Based on a two-sector growth model, Cheremukhin et al. explored China’s economic growth and structural transition during 1953-2012. They systematically discussed two stages before reform (1953-1978) and after reform (1978-present) with a consistent analytical framework. With pre-reform growth as benchmark, they assessed China’s growth efficiency after reform in 1978 and found that China’s GDP growth rate after reform and opening-up is 4.2 percentage points higher compared with the scenario of pre-reform growth policy and model. Meanwhile, agricultural workforce reduced by 23.9%.
Some scholars investigated the growth paths that may face China as it crossed the threshold of a medium-high income country. For instance, Eichengreen et al. (2012) examined when and under what circumstances will a fast-growing economy experience a growth slowdown. Their study found that growth may slow when per capita income measured by 2005 constant US dollar reaches 17,000 USD and forecasted that China would soon reach this level in 2015. Growth may also slow for countries with undervalued real exchange rates and countries with high dependency ratios and investment rates. Eichengreen et al. (2014) further demonstrated that growth is more likely to slow within two income ranges of 10,000-11,000 USD and 15,000-16,000 USD rather than at specific time points. In their transition towards high-income stage, most fast-growing economies experienced two rounds of deceleration. It was also noted that growth rarely slowed for countries with a well-educated population and significant hightech export. As a fast-growing economy advances to a higher level, it must strive to foster skilled workforce or human capital and move up the value chain to avoid falling into the “middle income trap”. ADB (2012) also stressed that China’s economy has been dominated by low-value traditional industries due to backward modern service sector and that human capital plays a pivotal role in transforming growth pattern.
Chinese scholars extensively discussed China’s growth issues. Based on the study of the structural acceleration during China’s industrialization and the structural deceleration for service-based economy, China Economic Growth Frontier Research Group identified the direction of structural change in the middle-income stage as an important area of research: Structural slowdown will occur if structural change has led to inefficiency and reduced TFP contribution, thus preventing a country from crossing middle-income stage. China’s structural deceleration and efficiency shocks have also been discussed in detail (Research Group, 2013-2014). Based on international comparison, Zhang (2015) argued that China should transition into a service-based economy. Since structural distortion is the fundamental factor of a country’s external and internal instability, structural transition is crucial to middle-income countries.
Some other scholars discussed whether China will fall into the middle-income trap. From a risk control perspective, Yao (2015) believed that the key in avoiding the middle-income trap is to prevent mone-
tary, debt and banking crises. Zhang (2015) noted that China must reform government intervention, prevent external financial shocks, and promote innovation and economic stability. Zhang (2013) discovered that institutions and original technology progress are particularly important for middle-income countries. According to Li (2013), 90% of China’s economic deceleration is due to TFP reduction and 10% is due to insufficient capital accumulation. Li et al. (2015) considered that indigenous innovation and human capital contribute positively to growth stability. Jin and Tao (2015) conducted an empirical analysis on China’s growth momentum in different stages in light of production, structural and institutional factors.
Scholars come to realize the importance of innovation and efficiency for China to overcome growth trap in its current stage of development. Cai (2011, 2013) stressed that China must overcome the growth bottlenecks of diminishing demographic dividends and the “Lewis turning point” in its transition from dual economy to neoclassical growth stage. Policy adjustments must be leveraged to reallocate resources, promote human capital, technology progress and institutional and efficiency improvements, and transition towards TFP-supported growth. Other scholars also stressed the importance for China to develop human capital (Yao, 2013; Wu, 2014; Zhang et al., 2014). Yao (2014) believed that in the middle-income stage, China still has gaps in the quality of its enterprises, originality in scientific research and competitiveness of traditional industries. Research Group (2015) highlighted the important role of innovation factor supply in overcoming growth deceleration. The study noted that as capital-driven growth momentum lost steam, the supply of new factors, particularly knowledge sector, holds the key to transcending growth. Yuan et al. (2016) further indicated that balanced industrial and service sector development is essential for China to transcend the middle income stage by reshaping efficiency model based on knowledge and human capital factors through institutional reform.
2. Crossing Growth Stage through Institutional Transition
In 1978, China’s per capita income1 was only 200 USD. According to the latest World Bank standard for the classification of growth stages2, China was a low-income country in 1978 (per capita income<1,045 USD) and by 2016, China’s per capita income reached 8,260 USD, a successful leap into medium-high income stage (4,105 USD < per capita income < 12,735 USD). By 2023-2025, China is expected to become a high-income country with per capita income above 12,735 USD. Institutional reform lies at the heart of China’s phenomenal growth over the past four decades of transformation from a planned economy into a market-based one. This shift brought China from the verge of collapse to being the world’s second largest economy.
China’s economic reform has followed a gradualist approach. After smashing the “Gang of Four” in 1976, China started to “dispel chaos and restore peace” and then initiated the reform and opening-up program in the late 1970s. Reform started from the countryside. The Several Matters concerning the Further Improvement of Agricultural Production Responsibility System issued by the CPC Central Committee in September 1980 allows farmers to implement a two-year contract responsibility system, which breathed new vitality to agriculture. Township and village enterprises with rural collective ownership also developed rapidly. Soon after rural reform, most scholars and leaders in charge of
economic work agreed that reform and development must increase the autonomy of enterprise operation and vitality. Inspired by former Yugoslavia’s “autonomous enterprises” system, some scholars put forward micro-reform theories. The province of Sichuan carried out the reform to “increase enterprise autonomy” and Capital Steel played an exemplary role in contract system. Other enterprises also followed suit with great enthusiasm. However, the limitations of this practice later became apparent, as reflected in the uneven and imbalanced economic development.
Institutional incremental reforms were rolled out on the basis of successful rural reform. On October 20, 1984, the Third Plenum of the 12th CPC Central Committee adopted the Decisions on Economic Institutional Reform to “reform the entire economic system with cities as priority” and “develop socialist commodity economy”, “create a reasonable price system”, “invigorate enterprises and particularly large and medium-sized enterprises owned by the whole people”, and “proactively develop various economic forms and operation modes”. This document marks the inception of China’s economic institutional reform to “foster market mechanisms outside the system”.
Since 1992, China has entered into a period of coordinated reforms. In October 1992, the 14th CPC National Congress established the reform objective to create a socialist market economic system. Adopted by the Third Plenum of the 14th CPC Central Committee in 1993, the Decisions on Creating Socialist Market Economic System noted that “overall reform must go hand in hand with breakthroughs in priority areas” and that the goal is to initially create a socialist market economic system by the end of the 20th century.
The previous administrative contract system was reformed into a “tax-sharing system” (including provincial and county governments). In addition, China established a central bank system with inde-
pendent monetary policy under central government leadership. Existing banks were commercialized and policy banks were created to undertake policy tasks. In 1995, the National People’s Congress adopted the Banking Law. China further set a goal to “transform SOE operation and create a modern enterprise system compatible with market economy with explicit ownership, clear rights and responsibilities, independent operation and science-based management”, which is written into the Company Law enacted by the National People’s Congress, China’s legislature. Socialist market economic system became established and incorporated into the legal system. In 1997, the 15th CPC National Congress made another historic breakthrough by adopting the following principles: (1) reduce the scope of the state sector of economy and gradually withdraw state capital from non-critical sectors; (2) identify various forms of public ownership to promote productivity; (3) encourage individual businesses, private businesses and other forms of non-public economy as important elements of socialist market economy.
Starting from ownership restructuring, China’s gradualist reform included the following elements: developing non-public economy, restructuring “double track” economic system, reforming macroeconomic regulatory framework with linkage between public finance and taxation, and making greater efforts to propel SOE reform. After the dawn of the 21st century and particularly the 16th CPC National Congress in 2002, the reform focused on improving market economic system, social security, income distribution and environmental protection. In 2017, the Report of the 19th CPC National Congress stressed that the principal contradiction facing Chinese society is the “contradiction between imbalanced and inadequate development and the people’s ever-growing needs for a better life”. This means that economic development will continue to take center stage in China’s political and economic reforms in the coming five years - a continuation of the policy keynote to prioritize economic development since reform and opening-up. Yet the Report of the 19th CPC National Congress also attached unprecedented importance to redistribution. It calls for lifting all rural poor people out of poverty by 2020, a major victory in resolving the contradiction of imbalanced development. Gradualist approach of reform, supported by both theory and practice, requires step-by-step reforms carried out with pilot programs in sync with opening-up. Studies on this approach sparked extensive discussions on the “Big Bang” vs. “gradualist reform” .
To date, China’s economic reform can be divided into the following stages:
(1) Stage I: inception of economic reform from the countryside based on rural contract responsibility system (from the Third Plenum of the 11th CPC Central Committee in 1978 to the Third Plenum of the 12th CPC Central Committee in October 1984);
(2) Stage II: economic reforms in full swing to invigorate urban enterprises with price reform as
th a key aspect of reform (from October 1984 to the 14 CPC National Congress in 1992);
(3) Stage III: initial creation of socialist market economic system (from 14th CPC National Congress in 1992 to the 16th CPC National Congress in 2001) characterized by macroeconomic reform initiatives in 1994, reform of basic systems during 1997-1999, ownership restructuring, as well as all-round opening-up since the WTO entry in 2001;
( 4) Stage IV ( 2002- 2012): improvement of socialist market economic system, including the reform of exchange rate regime in July 2005 from a fixed exchange rate regime to a managed floating exchange rate regime. On January 1, 2006, China rescinded the four agricultural taxes that had existed for over a millennium (including agricultural tax, animal slaughter tax, livestock tax and tax on agricultural and forestry specialties) and developed rural social security, created a new rural cooperative social security system, and carried out energy conservation and emission abatement on all fronts. In the aftermath of the global financial crisis that erupted in 2008, the Chinese government adopted a proactive fiscal policy with a 4-trillion-yuan stimulus and invested heavily in infrastructure and urban development in sync with financial innovation. Various forms of financial innovation that emerged were related to financing for urbanization. Surging housing prices became a new problem of
迄今为止，中国经济体制改革过程可划分为五个阶段：①第一阶段：从农村开始的经济体制改革起步阶段（1978年十一届三中全会至1984年10月十二届三中全会），主要改革举措是农村联产承包责任制。②第二阶段：以城市为重点的整个经济体制改革的全面展开阶段（1984年10月至1992年十四大），改革的中心环节是增进企业活力，改革的关键是价格体系的改革。③第三阶段：初步建立社会主义市场经济体制阶段（1992年中共十四大至2001年中共十六大），1994年宏观五项整体配套改革取得突破性进展，1997~ 1999年进行基本制度改革，调整所有制结构，全面对外开放，2001年加入W TO。④第四阶段（2001~ 2012年）完善社会主义市场经济体制阶段，采取了一系列改革和发展的举措，2005年7月国家进行了汇率制度的改革，从固定汇率向有管理的浮
(5) Stage V (2013-present): As China entered into the new normal and supply-side structural reforms steadily advanced, the five development concepts, i. e. innovation, coordination, green development, openness and sharing, became overarching themes of this stage. This stage is characterized by the following priorities: the goal to build a moderately prosperous society in all respects, the Belt and Road Initiative, the community of shared destiny for mankind, the need to support balanced globalization, and the principle of “seeking steady progress” under macroeconomic regulatory framework.
China’s economic growth is accompanied by its transition from an agricultural country into an urban and modernized country, which can be divided into the following stages: Stage I rural economic development (1978-1991); Stage II industrialization and rural labor migration in the context of opening-up (1992-2002); Stage III increasing urbanization. By 2018, China’s urban population is expected to reach 59% and service sector will become a dominant industry. In 2015, the share of service sector in GDP exceeded 50%. The trend of China’s service-based economy shows that China has successfully crossed industrialization stage from a typical agricultural country (in 1978, China’s rural population accounted for 82.1%) and become a modern society whe re urban economy holds sway.
For a backward country, pursuing industrialization could be a choice of destiny. From the day when China’s doors were forced open by the Western powers, Chinese visionaries aspired to turn China into a strong country through industrial development. For any late-moving country, industrialization, in the highest form of heavy and chemical industries, is a goal to be pursued. Before 1978, China’s heavy industrialization inevitably led to negative consequences under a highly centralized planned economy. This part of history was fraught with volatility, stagnant living standards and seriously distorted economic structure. After rapid growth in the 1950s and 1960s, China’s economy was trapped in serious stagnation in the mid-1960s and the late 1970s and was on the verge of collapse. Traditional pattern of resource allocation under the planned eco nomy, which fettered economic growth, was replaced by a new pattern of economic growth after reform.
China’s reforms also started at the micro- level. Both enterprises and farmers all welcomed material incentives and contract systems as reform initiatives. The principle of industrial restructuring was adopted to balance reform with adjustment. The success of rural reform paved the way for future reforms and was followed by ownership restructuring and factor allocation reform. Since the “Bashan Ship Meeting” in 1988, Chinese scholars drew upon the lessons of Eastern Europe’s traditional socialist economic system, such as Janos Kornai’s concept of “shortage economy”. More importantly, they put forward a target model of reform, i.e. IIB model, characterized by market coordination with central planning. The concept of market economy ushered in great progress of reform strategies and resource allocation modes.
The key to all economic questions lies in how to increase the efficiency of resource allocation and utilization. To our knowledge, market remains the most effective means of resource allocation. For a broad range of competitive sectors, market mechanism diverts the flow of resources from inefficient sectors to more efficient sectors. It may also improve efficiency for sectors of natural monopoly that provide important public goods. This is how market economy derives its vitality and why the transition from planned economy into a market-based one is nece ssary.
China’s economic theories could not have made these developments without political wisdom. In 1979, Deng Xiaoping argued that socialism is not at odds with market economy. In 1984, the Third Plenum of the 12th CPC Central Committee made the statement that socialist economy is a “commodity economy with central planning under public ownership,” a decision that was praised by Deng Xiaoping as an invention of “political economics that combines basic Marxist principles with China’s socialist practice”. In early 1992, Deng Xiaoping further pointed out that “A planned economy is not equivalent to socialism, there is planning under capitalism too; a market economy is not capitalism,
中国经济增长的主线可以更清晰地总结为农业国向现代化国家的转变，即体现出来的是农业——工业化——城市化，围绕的是农业人口的生产率提高——农村劳动力转移和工业化——城市化率提高进入现代化的过程。这一发展的主线表现在：第一阶段是农村经济带动（1978～1991年）；第二阶段是国际化阶段带动工业化和农村劳动力大转移阶段（1992～2002年）；第三阶段是城市化的提高，即城市人口比率提高，预计2018年中国城市人口占比将达到59%，服务业成为了城市经济的主导性产业，服务业占G D P比重2015年超过了50%，中国经济结构服务化趋势特征表明，中国经济社会从典型的农业国（1978年农村人口占比为82.1%）跨越工业化，进入到了以城市经济为推动力的现代社会国家。
中国在改革的探索阶段也是从微观的实践起步的。改革能激活微观经济主体的活力，不论企业还是农民，都希望通过“物质刺激”、“承包制”等激励性工具进行改革。同时，提出了调整产业结构的方针，把改革与调整相协调，经过了改革的起步阶段，农村改革的成功将改革引向了深化，所有制结构调整，整体要素配置体系改革观念也逐步引入。从1988年“巴山轮”开始，中国的学者又将东欧的对传统社会主义经济体制反思理论引入，如科尔内的“短缺经济”概念，更为重要的是提出了改革的目标模式，即所谓I I B模式，也就是有计划的市场协调，改革战略和资源配置模式因市场经济的概念引入而得到了空前发展。
there are markets under socialism too”. In 1992, the 14th CPC National Congress defined socialist market economic system as the target model of reform. In 2013, the Third Plenum of the 18th CPC Central Committee reaffirmed the “decisive role of market economy”, which was followed by improving legal system compatible with market economy. In October 2017, the Report of the 19th CPC National Congress called for “improving socialist market economic system” and ensuring free flow of factors, flexible price response and a level playing field for enterprises.
China has developed its own growth model. Yet this model still features strong government interventions as part of its catch-up strategy. Given diminishing return to factor input and insufficient TFP contribution, how to reshape growth model and increase efficiency remains a strategic question. While prolonging its catch- up period, China should pursue a stable transition for sustainable development.
3. Modernization of China’s Economic Structure
Under the planned economy, overemphasis on heavy industries caused serious structural distortions, which were corrected through institutional reform to ensure market-based resource allocation. The reform opened China’s second round of industrialization. With rising per capita GDP and household consumption and falling Engel coefficient, the share of primary industry continuously decreased and industrialization led by manufacturing gained momentum. Urban employment became the dominant form of employment. A new chapter of economic and social modernization was unveiled. The shares of primary industry in total output value and employment dropped from 28.2% and 70.5% in 1978 to 11.3% and 40.8% respectively in 2007. In 2007, agriculture, industry and service sector contributed 3.6%, 54.1% and 42.3% to China’s growth respectively. In addition, China ranks the first in the world in terms of the output of iron and steel, coal, cement, chemical fertilizer, chemical fiber, cotton cloth and durable consumer goods, the second in terms of power generation and the sixth in terms of crude oil production. China leads the world in manufacturing many high-tech products such as electronics.
In the wake of the global financial crisis that erupted in 2008, China took resolute counter-crisis measures and increased infrastructure investment, which boosted urbanization. In 2011, China’s urbanization rate exceeded 50%. In 2015, agriculture, manufacturing and construction sectors accounted for 5%, 27% and 8% respectively of total employment; the share of service sector in China’s employment reached 59%. Obviously, urban and service sectors became dominant sectors. By 2018, China’s urbanization rate is expected to approach or exceed 60%. In the future, China’s urbanization growth will slow and stabilize. Yet such growth will be driven by urban fertility rate, life expectancy and natural population growth, higher than in the countryside, instead of continued labor migration. The past four decades of reform and opening-up have witnessed China’s transition from agriculture to industry and then to urban economy and an increasingly sophisticated modern service-based economy.
The evolution of China’s industrial structure followed a clear path. China’s first round of industrialization was supported by the former USSR through 158 industrial projects. Rural surplus production was extracted through price scissors and urban consumption was minimized to save resources to develop heavy industry. The economy developed by boom and bust. Heavy and chemical industrialization came to a halt. After reform and opening-up in 1978, China launched its second round of more balanced industrialization and recognized non-public economy. From a distorted industrial system, China has transformed into the largest manufacturer in the world. With urbanization rate above 50%, China is transitioning towards a service-based economy. In 2015, service sector accounted for more than 50% of China’s economy and 59% of labor employment.
For advanced economies, their service sectors will continue to grow proportionally. For Germany and Japan, for instance, their service sectors stabilize at 70% of economy, while this ratio is 80% for some other advanced economies. Service sector accounts for less than 60% of South Korea’s economy
按市场方式配置资源的体制改革很快激励了中国均衡结构的发展，矫正了传统计划经济片面发展重工业造成的严重结构畸形，开始了中国的第二次工业化。工业化的主要特征就是随着人均G D P的增长，居民消费提高，恩格尔系数持续下降引致第一产业持续下降，以制造业为代表的工业化开始发展，非农就业成为了社会最主要的就业方式，取代了传统的农业社会就业方式，经济社会进入现代化进程。改革开放以来，第一产业产值和就业量占比从28.2%和 70.5%分别下降到了2007年的11.3%和40.8%。2007年农业对中国经济增长的贡献仅有3.6%，工业贡献为54.1%，服务业贡献为42.3%。中国工业化不仅表现在对经济的贡献，而且更体现了它强大的生产规模，钢铁、煤炭、水泥、化肥、化纤、棉布、耐用消费品等产品产量位居全球第一，而发电量位居全球第二、原油位居全球第六等，近年在电子等高技术行业发展迅速，很多单项的产能也是全球之冠。
2008年全球金融危机爆发，中国2009年果断采取了反危机措施，加大了基础设施的投资，城市化高歌猛进，到2011城市化率突破50%，2012年服务业占G D P的比重突破50%。2015年从劳动力就业的行业分布看，农业劳动力只有5%，工业部门中的制造业占比为27%，建筑业占比为8%；中国服务业占比为59%，中国经济结构呈现出城市主导和经济结构服务化的趋势。预计2018年城市化率将接近或突破60%，中国未来城市化率逐步进入稳定增长阶段，不是靠农村居民快速城市化，而是因城市出生率高、预期寿命长、人口自然增长高于农村，而农村老龄化和死亡率程度高于城市，主导城市化的因素从人口转移转向人口自然增长阶段，城市化的高速增长期逐步变缓。改革开放近40年，中国成功跨越了三个阶段，农业主导到工业化主导，再到城市经济主导，经济结构服务化，现代经济体逐步成熟。
and this ratio is also low for other East Asian economies where manufacturing sectors hold sway. Hence, it is not necessary for China to expand its service sector too much. In fact, China’s financial services as a share in its service sector are the highest in the world and deviate from its current stage of development. Traditional sectors remain growth engines even if China strives for high-quality growth. Without clearing redundancies or introducing competition, it is likely for China to face serious risks of slowdown. China’s other service sectors, such as scientific research, education, culture, health and sports, are run by government agencies. In this sense, service sector is underestimated to some extent and service sector restructuring is an important part of reform in the next stage.
From the supply side perspective, China’s economy experienced the following changes in the past four decades: (1) Tertiary industry replaced secondary industry as a key growth driver, contributing 53.7% of growth in 2015. (2) Industry contributed more percentage points to growth than that of service sector in the first three decades after reform and opening-up, which was reversed only in the recent decade. Yet in the first 25 years, manufacturing sector served as a decisive contributor to growth and ranked the second in the following 15 years. (3) The trend of service-based economy is gaining momentum.
From demand side, the changes include: (1) Export contribution played a decisive role during 19952008, when China utilized its comparative advantage to achieve rapid growth and after 2009, China shifted towards domestic consumption and contributed to global recovery. (2) China’s demand structure became more balanced with consumption contributing 59.9% in 2015, which is a reversal of distorted investment that contributed to 67.8% at the inception of reform and opening-up. As China’s economy stabilized, its demand structure also became more balanced.
Industrialization propelled urbanization by attracting surplus rural labor to modern sectors. Industrial development within cities and in the vicinity of cities spawned urban development zones and industrial parks. Urbanization picked up speed as farmers turned into urbanites. As industrial growth stabilized or declined, future urbanization growth will be driven by an uptick in urban employment, which holds the key to future development, in the context of service-based economy. Industrialization propels urban development, which determines a country’s economic modernization reflected in human development.
4. Improvement of China’s Economic Growth Quality and Reshaping of Efficiency Model
After four decades of reform and opening-up, China has entered into a medium-high income stage and is expected to join the ranks of high-income countries by 2025. China’s growth model has also shift-
ed from late-moving catch-up to medium- and high-end development. As envisioned by CPC Central Committee General Secretary Xi Jinping, China will “basically achieve socialist modernization” during 2020-2035. Thereafter, China will build up its wealth and power and establish its position as a modern socialist power during 2035-2050. As shown by growth theories and international experience, growth quality hinges upon productivity and TFP contribution. Quantitative expansion and disequilibrium in the previous catch-up stage must give way to “innovative, balanced, green, development and shared economic growth” in the new stage.
China must strive to improve productivity, which determines wage growth, and TFP contribution. Productivity improvement largely derives from capital-intensive industries in the early stage of industrialization and human-capital-intensive industries in a service-based economy. Productivity growth reflects the level of human capital deepening and determines a country’s welfare level. Growing TFP contribution to the economy reflects technology progress and improved allocation efficiency. TFP contribution will increase only when TFP growth exceeds factor input growth. In addition, TFP contribution measures the contribution of endogenous growth. For a country, increasing TFP contribution means that a country becomes less dependent on factor input and pursues endogenous growth. TFP growth itself is an antidote to diminishing return to scale due to human and capital deepening.
Over the past four decades, capital input has contributed to 70% to 80% of China’s GDP growth. After taking into account capital and labor contributions to growth, efficiency improvement contributes about 20% to 30% of GDP growth. Obviously, low TFP contribution reflects China’s capital-driven growth pattern. (1) Growth of capital inventory kept accelerating. As Table 9 reveals, China’s capital inventory maintained an annual growth rate of around 11% during 1978-2007, a period of sustained rapid growth for China. This growth rate is high in absolute terms no matter compared with which country in a similar development stage. Despite China’s falling potential growth rate during 2008-2013, its capital
stock still maintained a high growth rate of 11%-12%. (2) Marginal return to capital continued to diminish. Long-term dependence on investment caused marginal return to capital to diminish. The vicious cycle of diminishing return and sluggish growth, together with inefficient capital-driven growth pattern, became apparent. As Table 9 shows, capital efficiency (Y/K, ratio between GDP and current-year investment) was 0.302 during 1978-2007 and only 0.079 during 2008-2015.
We calculated China’s TFP using a simple Cobb-Douglas production function: (1) TFP contributed 23.33% of growth during China’s economic takeoff of 1978-2007. During 1993-2007, TFP contribution to growth exceeded 35% (Lu et al.). Yet during 2008-2018, as growth slowed, TFP contribution fell below 20%. This period was characterized by a hefty stimulus to increase capital accumulation. As return to the scale of capital diminishes, potential growth rate will continue to decline unless the low TFP contribution is reversed.
Economic restructuring, institutional compatibility and efficiency path reshaping are fundamental for China to cross the threshold of a new development stage. Since the 19th CPC National Congress, the basic approach for economic development further improved with emphasis on the following elements: first, to propel high-quality development; second, strive to transform growth pattern, economic structure and growth momentum; third, accelerate the development of a modern economic system with high quality and efficiency. In the middle-income stage, great uncertainties exist in China’s efficiency path, development mechanism and restructuring. Without proper mechanisms to support restructuring, upgrade and shift to a new efficiency path, it would be difficult, or at least very slow, for growth to transcend the bottlenecks.
In the industrial era, the “structuralism” of developmental economics elicited extensive policy dis-
改革开放至今近40年来，资本投入对GDP增长的贡献，一直维持在70%~ 80%的水平，综合考虑资本、劳动力对增长的贡献之后，效率改进对G D P增长的贡献大致维持在20% ~ 30%的水平。显然，这种较低的T F P的贡献，是中国资本驱动的增长模式的特定现象。①资本存量增长持续加速。表9显示，在经济持续超高速增长的1978~ 2007年间，资本存量平均增长速度为11%左右，不论与哪个发展阶段相似的国家相比，这个资本积累速度都是绝对高的。2008~ 2018这个时期，虽然中国的潜在增长速度下降了，但是资本存量的增长速度仍然维持在11% ~ 12%的高水平。②资本边际收益持续递减。长期的投资依赖导致资本边际报酬递减，而且报酬递减和低增长的不良循环以及中国资本驱动模式路径依赖的低效率问题越来越明显。表9显示，1978~ 2007年，资本效率（Y/K，即GDP与当年投资之比）为0.302，至2008~ 2018年，仅为0.079。
用简单的柯布——道格拉斯生产函数对中国T F P进行计算得出：①1978~ 2007年中国高峰增长期间， T F P贡献对经济增长的贡献为23.33%，细算1993年到2007年T F P对经济增长的贡献超过了35%（陆明涛等， 2016），但到了2008~ 2018年期间，经济增长速度下滑的同时，各种计算表明T F P贡献降低至20%以下，同期主要是靠大规模刺激资本积累的方式来进行，展望未来增长，资本规模递减特征会越来越严重，不改变T F P低贡献现状，潜在经济增长率将会持续下降。
cussions and country experiences - the most important is government intervention. For late-moving countries without a complete market system, the government may also act as a super market entity to compensate for market imperfections. (1) Industrial policy, selective financial policy and tax preferences are offered to support manufacturing. (2) Various methods such as interest rate regulation are employed to raise funds, suppress labor compensation, increase return to capital, promote investment and regional competition, and use the funds raised domestically and overseas to support manufacturing. (3) Adopt opening-up policy to expand market size and exchange rate policy to increase international competitiveness through depreciation. (4) Complete “learning by doing” through equipment importation and propel technology progress and industrial upgrade. (5) Increase GDP competition at the local level. Rapid industrialization could not have been achieved without proactive government intervention. With typical “economies of scale” characteristics, industrialization will increase efficiency and accelerate growth, thus offsetting the cost of intervention.
China’s increasingly service-based economy is also fraught with uncertainties. In particular, inconsistencies have appeared among growth, structure and efficiency. International experience also shows that the growth paths of countries diverged after economic restructuring. It requires careful understanding to elucidate uncertainties in the shift of efficiency path. We may arrive at the following conclusions based on the empirical facts of structure and efficiency:
(1) Structural and efficiency paths may not be synchronized. Based on above calculations, when an economy becomes service-based, service sector will account for a growing share yet is less efficient than industrial sectors. Rising share of service sector, therefore, is inevitably accompanied by falling productivity. This process is different from industrialization. Service-fueled growth is not synchronized with increasing return to scale and efficiency. In fact, service sector is less efficient in its scale of development compared with industrialization. This is why growth rate after service-based will decelerate when the share of service sector grows. Yet the efficiency and quality of growth will diverge. While service sector contributes to the efficiency and stability of growth for advanced economies, efficiency improvement slows and economic structure becomes more distorted for late-moving countries, making them more vulnerable to external shocks. A typical empirical fact is that efficiency path is non-continuous and diverges after an economy becomes service-based.
(2) Service-based economy tends to cause “Baumol disease” or “cost disease”. Inefficient service sector and robust demand for services lead to cost hikes, causing service price to increase relative to manufacturing price, i.e. inefficient improvement leads to price hikes that increase the cost of services. In the broad sense, cost disease is reflected as the “cost disease of urbanization”, i.e. high-cost urbanization. Yet urbanization itself does not raise the efficiency of agglomeration and innovation and, on the contrary, leads to rising cost for the society as a whole. The cost problem of cities threatens not only manufacturing sector but service upgrade as well.
(3) Uncertainties of industrial upgrade. Urbanization is a natural outcome of economic development. After urbanization rate exceeds 50%, the share of service sector will increase rapidly and the share of manufacturing sector will fall - both of them face the intrinsic requirements of industrial upgrade, i.e. industries that rely on low-cost advantage will vanish under growing cost pressures. On the other side of the coin, this process also brings opportunities of efficiency improvement arising from urban agglomeration and innovation spillover. Cost is racing against efficiency. Excess cost hike and slowing efficiency improvement are an empirical fact of China’s urbanization (Frontier Research Group, 2009). High-cost housing and public services have led to rapid “de-industrialization” in China’s urbanization process, making it less likely for producer services to improve efficiency. Having lost its strategic pillar, industrial upgrade becomes more uncertain.
(4) Uncertainties exist in the path of technology progress from “learning by doing” to indigenous innovation. “Learning by doing” is normally homogeneous technology progress and is subject to the limitation of gaps with international levels of technology; the closer the progress is to the technology
工业化时期，发展经济学的“结构主义”进行了很多政策的总结，各国也做了很多实践，归纳起来最重要的就是政府的干预。在后发国家市场体系尚未建立，政府可以作为市场参与的超级主体以弥补市场的不完善性，提出了：①工业化“补贴”，利用产业政策、选择性金融政策、税收优惠政策等鼓励制造业发展；②资本积累激励，国内通过利率管制等各类方法筹集资金，压低国内劳动报酬，提升资本报酬，从而进行招商引资，并展开区域性竞争，达到国内外筹集资金用于制造业的快速发展；③开放政策，扩大市场规模，汇率政策上通过贬值提高国际竞争力等；④通过引进设备完成技术进步的“干中学”，推动国内制造业的技术进步和产业升级； ⑤将G D P作为广泛的激励相容性指标，推动地方G D P的竞争。工业化的快速推进离不开政府的积极干预，工业化具有典型的“规模经济”特征，经济效率同步提升，经济结构具有加速增长和提升效率的双重作用，并足以弥补干预带来的成本。
level of frontier countries, the less efficient it becomes. It is also limited by the scale of demand. Due to technological homogeneity, “learning by doing” may lead to diminishing return to scale. In the middle-income stage, technology progress from “learning by doing” becomes less efficient. However, this does not necessarily lead to an increasing share of innovation. Indigenous innovation must be supported by capital markets in order to create “monopolistic rents” for intellectual property rights. Innovation is heterogeneous. As innovations become more risky, it takes more human capital input, distributed innovation and market-based “high pricing” incentives. Yet given the uncertainties in innovation, companies and governments are more inclined to pursue technological evolution through importation and “learning by doing”. Growth based on “learning by doing” technology progress is less sustainable. Moreover, the “learning by doing” path will lead to excessive investment on technology importation that may lock up the path of technology evolution and suppress local innovation. Indigenous innovation and “learning by doing” have their respective pros and cons and may not necessarily reinforce each other. TFP remains the most important indicator. Falling TFP contribution is an indication of challenges facing technology progress. As international experience suggests, for most countries that moved from low-income stage to middle-income stage, the TFP increased rapidly in the early stage with improving contribution. Yet in the middle-income stage, their TFP declined significantly. The reason is that technology path in this stage is no longer continuous and needs to be shifted.
(5) Uncertainties in consumption upgrade. Transition towards a service-based economy requires an increasing share of human capital in consumption. Human capital must be improved in sync with structural upgrade to form dynamic efficiency compensation of consumption. This process, however, is also fraught with uncertainties. Successful transition requires service sector to be freed from excessive regulation, consumer services to improve human capital and consumption efficiency to increase.
With a service-based economy come a more sophisticated economic system, distributed innovation and incentives for high-quality human capital. Economic growth gives rise to “non-competitive” factors including institutional rules, creativity, knowledge sharing, education and information networks. The quality of these new growth factors determines whether service-based economy will propel consumption upgrade in this stage.
Structural sophistication of service sector is the foundation for China’s growth efficiency model; such sophistication is reflected in the increasingly knowledge and technology-intensive service sector. First, modern service sector contributes to overall economic efficiency. Second, a benign cycle of human capital improvement comes into play. In other words, we regard service sector as a vehicle of knowledge process and human capital accumulation rather than an auxiliary process or cost item of industrial sectors. In addition to increasing industrial efficiency, modern services are the engines of innovation and growth as well. In this sense, service efficiency must improve in sync with industrial efficiency in order for the high efficiency model to sustain.
Structural upgrade is the key to consumption and service growth. Two possible pathways exist in the growth transition towards advanced urbanization: First, low-skilled workforce continues to dominate service sector at the inertia of industrial expansion; second, service growth is supported by knowledge process. Service sector inevitably grows in size and proportion as the economy becomes service-based. Yet this process should be fueled by service and consumption upgrade. For education, entertainment and some other sectors, consumption is a process that takes time to complete. For instance, in face-to-face communication, knowledge producers create and disseminate knowledge and consumers receive knowledge. Consumers will pay according to the novelty of information stream and the level of psychological satisfaction - often with a price premium for high-quality knowledge.
In the Internet era, knowledge-intensive services have become more tradable. Not only does the Internet increase the dissemination, productivity and output of knowledge, it also makes it possible for consumers to access customized services from an ocean of redundant information.
Knowledge process must be embedded into traditional material production. This is particularly rele-
⑷“干中学”转向“自主创新“的技术进步路径不确定。“干中学”的技术进步往往是同质性的技术进步，它首先受到本地与国际技术水平差距的限制，越接近前沿国家的技术水平，其效率越低；其次，它受到需求规模的限制，由于技术同质性特征，很容易导致“规模收益递减”。进入中等收入阶段，随着与先进技术差距缩小和需求多样性，干中学技术进步效率迅速下降，但这并不直接导致自主创新比重的提高。自主创新核心就是自主知识产权能得到“垄断租金”的激励，更要获得资本市场的激励才能完成自主创新活动。自主创新是异质性的，其创新风险不断提高，需要更多的人力资本投入和分布式创新活动，需要市场化的“高定价”激励才能完成。但由于自主创新不确定，公司和政府都愿意通过引进的方式走“干中学”的技术演进道路，消除不确定性，这无可厚非。但是一个仅仅限于“干中学”技术进步的增长，其持续性受到了限制，而且“干中学”路径会导致“过度投资”引进技术和锁定技术演进路线，压制本土创新性。自主创新和“干中学”不是一个技术路径的简单好坏的争论和自动转换，其机制建设是根本，衡量的最重要因素仍是TFP，如果TFP贡献持续下降，则认为技术进步演进出现了挑战。从国际经验比较看，从低收入阶段跃进到中等收入阶段的大多数国家在早期阶段T F P上升很快，贡献率也明显提高，但进入中等收入阶段后T F P下降明显，说明这一阶段的技术路径已经不是连续性的了，需要路径的转换。
vant for catch-up countries that face serious challenges to consumption upgrade.
After four decades of reform and opening-up, China has embarked upon a crucial transition from rapid growth to high-quality growth - a transition that requires supply-side structural reforms to improve productivity and efficiency, explore new growth drivers and increase TFP. The goal is to create a market-based economic system with appropriate macro regulation and vibrant micro-level entities to increase China’s economic prowess and international competitiveness and pave the way for achieving the “two centennial goals”.