China’s Economy: Historical Perspective and Future Outlook
The more I think about the Chinese economy, the more I feel I can learn from Chinese history. Ultimately, I believe that no single country’s economic fortunes can be separated from its history and politics. This applies doubly for China, where history and politics have shaped the surging growth (The Chinese Economic Miracle) and periodically massive pitfalls (The Great Leap Forward) its economy has experienced since the inception of the People’s Republic in 1949.?
When we think about China’s economy today, when we consider its potential future growth opportunities and possible stumbling blocks, the historical context is as important to bear in mind as ever. China’s history tells a compelling tale of how political motivations can shape economic upturns and downturns more profoundly than the ‘surface level’ events that lead to more short-term economic shocks.?
Let’s start at the very beginning, by looking briefly at some ancient history.?
China and India – Two giants of the ancient world’s economies?
In 1700, China and India, ruled by the Qing Dynasty and Mughal Empire respectively, were the world’s biggest single-entity economies. The core reasoning is very simple; their massive populations lent them greater economic muscle. In the ancient world, per-capita income was essentially the same wherever you looked – therefore, having more people meant greater economic power.?
However, despite centuries of being on top, this status quo was never meant to last. The expanding revolutions in scientific thinking and industrial production methods would smash this ancient formula to pieces, forever. With it, both China and India would lose their premier economic status in a (relatively) short space of time.?
Revolutions of mind and matter – Europe and US ?
By 1950, the world looked very different indeed. From 1820-1950, you can see that China and India’s GDP growth rates had remained essentially flat, while that of the USA had taken off spectacularly. Between them, Europe and the US owned over 50% of global GDP share, while China and India accounted for less than 9%.?
Gone is the ancient assertion that a large populace is sufficient to ensure prominent economic presence. The Scientific Method approach, championed initially in Europe and later in North America, laid the foundations for a virtuous cycle of scientific breakthroughs and new industrial methodologies. These advances were all based on simple maxim that formation of theoretical hypotheses and testing them against empirical evidence would reveal better ways of doing things. ?
The results, economically speaking, are compelling. With Scientific Revolution followed by Industrial Revolution, Europe and the USA dominated the world’s economy for subsequent two hundred years. China and India did not follow the same path, and consequently their fortunes languished, as they were overtaken by smaller (population-wise) but more productive national competitors. Think of it as tech-based disruption, but on a global economic scale. ?
Efficiency versus equity – the eternal economic tug-of-war?
If you want to understand a country’s economy, you must view it from two angles. The first angle is what is happening on the ‘surface level’ – the state of its resources, its technologies, the strength of its industrial base, etc. The other angle is politics, more specifically capitalism vs socialism. ?
This is not to say that economics is all about ideological struggle. It is simply the case that political developments within a given nation matter deeply to its long-term economic outlook. At the heart of the matter is the eternal struggle (or balancing act, if we’re being less confrontational) between efficiency and equity. ?
Capitalism champions efficiency and the simple idea that if you’re strong, you win, but if you’re weak, you lose. In its ‘purest’ form, the drive for efficiency overrides all other concerns. To take manufacturing as an example, if China is the cheapest place to produce goods at the right quality and quantity, you go to China. If it suddenly becomes India, or Vietnam, or anywhere else, then you go there. The core tenet of capitalism is the never-ending drive towards high efficiency. Adam Smith, widely viewed as the father of modern economics, understood that while this system produces a lot of growth, it also produces an awful lot of suffering:?
“Wherever there is great property there is great inequality. For one very rich man, there must be at least five hundred poor.” ?
About 100 years after Adam Smith wrote his great treatise on capitalist economy, the suffering caused by this rather bloody system had been observed enough. From Charles Dickens to Karl Marx, there was a yearning for alternative ideas and new systems that might alleviate this suffering. The idea of creating economic growth and efficiency alongside greater equity – more even-handed, equitable treatment for all members of society – was gaining ground. ?
In every country, there is a politicised tug-of-war between efficiency and equity. This is the very balancing act that has perplexed leaders since the Industrial Revolution, and it features heavily in Chinese political thinking today.?
Surges and pitfalls – How policy has impacted Chinese economic fortunes historically?
At the risk of greatly oversimplifying major events across a long stretch of Chinese history, the above graph shows the impact of political decisions and policy measures on the Chinese economy.?
First 5-year plan (1953-1957) – The Soviet Union supplied expertise to lay the foundations for modernising Chinese infrastructure.?
Great Leap Forward (1958-1961) – Massive GDP drop due to closed economy and failed centralised planning.?
Recovery from GLF (1961-1965) – Some market-economy elements were introduced for economic recovery.?
Great Cultural Revolution (1966-1976) – 10-year drop ended when Chairman Mao passed away in 1976.?
These economic highs and lows are handy demonstrations on just how important politics is as a driver of China’s economic prospects during its first 30 years as a republic.?
Looking at the next 30 years following on from the Great Cultural Revolution, you can see more of the same. The reform and opening-up policies of Deng Xiaoping introduced large amount of market-economy elements to China’s economy and the result was 10.2% average GDP growth between 1978 and 1988 - far outstripping the marginal 2.6% growth of the Mao era. Following the political turmoil in 1989, China’s economic growth experienced a major dip in 1989-1991, but China climbed out of the pit and achieved an average growth rate at over 10% in the “Take-off” period (1992-2000) and the “WTO dividend” period (2021-2007) leading up to the Global Financial Crisis of 2008.?
Not only can we see the impact of politics on the deep-seated trends of China’s economic development, we also see the tug-of-war between efficiency and equity at play. The Chinese economic miracle would never have happened if not for the abandonment of the closed-economy and central-planning policies of Mao era, coupled with China’s abundant labour and a maturing industry base necessary to become the world’s factory and the good fortune that it had in the face of rampant globalisation and exploding demand for affordable manufacturing. ?
China’s economy flourished as Deng Xiaoping forged an ‘efficiency first’ set of economic policies, bringing prosperity but also, inevitably, greater challenges regarding equity. Balancing these two factors is the greatest test of national governments today, and nowhere is the scale and complexity of the task more apparent than in China.?
In Pursuit of Efficiency and Equity – Chinese-style Modernisation?
No economy, no matter how successful, can enjoy surging growth forever. There must be a levelling off period at some point. For China, this reduction in growth has been viewed as the “New Normal” – an almost inevitable symptom of its transition from a quantity economy to a quality-based one. ?
For example, China’s labour force, the backbone of its growth engine, will continue to age and contract, but already we are seeing it increase in skill, knowledge and innovative qualities, particularly in the case of young people. So, while China’s advantage in raw labour may diminish along with its competitiveness in certain areas of manufacturing, the transition to higher-skilled, higher-end products and services should bring a new kind of sustainable growth. ?
Crucially though, there is the political will present at the very top of Chinese leadership to make this new stage of economic growth a more equitable one. Chinese-style modernisation, as proposed by President Xi Jinping at the 20th National Congress of CPC (Communist Party of China) in October last year, aims for the creation of an economy that enjoys maximum efficiency alongside maximum equity. While it has a broad range of policy goals, the most important one is the promotion of common prosperity. This has begun with the ongoing process of lifting hundreds of millions of Chinese citizens out of poverty. Beijing claims it will go beyond that, with active redistributions of wealth to close the inequality gap. Exactly how and when this will work out in practice remains to be seen.?
It's a big dream, to secure efficiency without sacrificing equity, particularly in an economy that encompasses more than 1.4 billion people. After the shocks of Covid-19, the timing is not ideal either. However, as an optimist, I do sincerely hope that it is an achievable dream, because it represents nothing less than a new way for humanity to not just survive, but thrive.?
Future Outlook for the Chinese Economy?
Every year, new economic projects are made (with great fanfare) regarding when China will overtake the USA as the world’s biggest economy. However, it is more realistic to view this as a question of ‘if’, not ‘when’. It is far too soon to understand the full ramifications of the pandemic and its impact on the Chinese economy. The end of the Zero Covid policy and subsequent opening up may signal the end of this short-term shock. Equally, the economy may be heading towards another pitfall similar to that of the 1989-1991 political turmoil. It is just too early to tell.?
What we can say with certainty is that politics will continue to shape the deeper economic trends occurring in China, both positive and negative. As with the 73 years since the republic’s founding, its future economic success will depend on its political leadership providing a greater measure of certainty and a deeper commitment to an open market economy where government maintains a reliable, good-faith actor role. ?
As I’ve said already, this is no small task, and if the vision of Chinese-style modernisation is to be fully achieved, this won’t happen overnight. It will be years, possibly decades, before we can see tangible signs that everyone within the Chinese economy is enjoying higher equity of the fruits derived from higher efficiency. ?
For now, let us stay tuned, and remain open-minded.?
