The Asian puzzle: why has China been so successful?
Yingyi Qian (University of California Berkeley and CEPR)
DP3447 How Reform Worked in China
July 2002
China's reform has worked to produce some of the most impressive growth in a developing and transition economy in the past 22 years. China has transformed itself from a poor, centrally-planned economy to a lower middle-income, emerging-market economy. At an average rate of more than 9%, China's GDP has more than quadrupled in this period. China is the largest transition and developing economy. As a transition economy from plan to market, China has a population three times more than all other transition countries combined. Its economy, worth more than US$1 trillion in 2000, is larger than the total of all other transition economies put together. According to Qian, China's growth is unlikely to end anytime soon. In the first half of 2001, despite the global slowdown, China's economy continued to grow at an annual rate of about 8%. Defying the prediction that China has reached a plateau of growth, more and more economists start to believe that the best part of China's growth has not yet come. With the imminent entry to the World Trade Organization (WTO), they suspect that China's economy is perhaps on the verge of the next boom.
However, China's phenomenal growth is not a typical growth story because it is not a 'typical' country. Though China adopted many of the policies advocated by economists, such as openness to trade and foreign investment and macroeconomic stability, violations of the standard prescriptions are striking. Reform has succeeded without complete liberalization, without privatization and secure property rights, and without democratization.
Qian believes that those who do not find China's reform puzzling misunderstand it. He points out that a common misconception is to regard foreign direct investment (FDI) and exports as the driving force behind China's success. The argument that foreigners and foreign markets made China grow tends to be better received outside of China. In fact, throughout the 1980s, FDI in China was tiny and only started to increase substantially in the 1990s. Another misconception is to attribute China's success exclusively to agricultural reform in the 1980s.
With the changes that took place elsewhere in China's economy, one might have reasoned that coexistence of the planning mechanism with partial liberalization would become a source of disruption not growth. Qian's research suggests that as far as economic growth is concerned, the perfect should not be the enemy of the good. To understand how reform works in a developing and transition economy that has great growth potential, it is not enough to study 'best-practice institutions' as a desirable goal. One should also study how feasible, imperfect institutions have evolved to complement the initial conditions and to function as stepping-stones in the transition toward the goal.
This study suggests that underlying China's reform is a series of institutional changes concerning the market, firms, and the government. These changes have formed 'transitional institutions'. These institutions succeed when they improve economic efficiency by unleashing the standard forces of incentives and competition on the one hand, and aligning the interests of the ruling elite on the other. In this respect, China's experience is similar to that of Botswana: to foster growth, institutional development must fit into the initial conditions of the country and match the interests of those in power.
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