CHAPTER SEVEN

BEYOND THE EAST ASIAN MIRACLE: LOOKING BACK AND FUTURE PROSPECTS FOR CHINA’S ECONOMIC GROWTH MODEL

Wu Jinglian and Fan Shitao

After analyzing empirical statistics from major industrial countries in Western Europe and North America during the middle of the 20th century, Simon Kuznets, a Nobel Prize laureate in economics, pointed out that rapid economic growth is truly a modern phenomenon. He divided economic growth into two stages, namely “early-stage eco- nomic growth” and “modern economic growth.” Between the fi rst Industrial Revolution in the late 18th century and the second Indus- trial Revolution in the late 19th century, leading industrial countries all devoted large amounts of resources to capital-intensive machine building, as well as other heavy industries, which served as the foun- dations to industrialization. As manual labor was gradually replaced by machine processing and natural resources were no longer crucial to economic growth, the economies of this period grew rapidly. This type of growth is considered to be of the “early-stage economic growth model.” However, since the second Industrial Revolution in the late 19th century, the science-related development of modern technology and increased production effi ciency, rather than capital accumulation, has been the major impetus for economic growth. This type of eco- nomic growth is of the “modern economic growth model.” Kuznets asserted that economic growth relies on the advancement of tech- nology and corresponding adjustments to the economic system and ideologies.1 The growth models developed by Kuznets were com- monly accepted as truth by contemporary economic scholars and since have been widely cited.2 Another Nobel Prize winner, Robert Solow,

1 Kuznets, Simon, The Economic Growth of Nations, 1971. 2 From its earliest editions all the way to the eighteenth, Paul A. Samuelson has devoted a chapter of his pioneering textbook Economics to “growth theory,” writing that the economic growth of modern industrialized nations can be divided into three 242 wu jinglian and fan shitao developed the “neo-classical exogenous growth model.” Based on quan- titative analysis, he pointed out that economic growth in the United States mainly relies on technical improvement and higher effi ciency, instead of factor investment. This chapter uses the ideas of extensive and intensive growth, used widely in socialist countries, to analyze Kuznets’ models of early and modern economic growth. Within this framework, we shall examine China’s sustained and rapid development over the past thirty years. From 1978 to 2007, the average growth rate of GDP was as high as 10 percent, growing by a total of over seventeen fold; in 2007, the average annual dispos- able income of urban residents and the average annual net income of rural residents had increased from 343 yuan and 134 yuan in 1978 to 13,786 yuan and 4,140 yuan respectively. Meanwhile, China’s eco- nomic growth model has undergone changes since the reform and opening, but these changes have been temporary and the nature of China’s economic growth, boosted by factor infusion into the econ- omy, especially capital, has remained unchanged. Since the mid-1990s, China’s export-oriented economic policy has been an important reason behind its extensive economic growth, but these authors believe that this model is not sustainable. In order to maintain the rapid growth of the Chinese economy, we must accelerate the transformation from extensive growth to intensive growth and from the early growth model to the modern growth model. To achieve this transformation, China must accelerate the improvement of the market economy, create economic policy that steps beyond the growth pattern that formally supported the “East Asian miracle,” change its export-oriented strate- gies and policies, reduce governmental intervention through industrial policy and “administrative guidance,” maintain economic stability, and stimulate economic entities to actively participate in the process of transition.

stages: the “pre-development stage;” “early-stage economic growth;” and “modern economic growth” (refer to Hayami Yujiro, Development Economics—From Poverty to the Wealth of Nations, 1998). In National Competitiveness, Michel E. Porter, a leading authority on competitive strategy, divides national competitiveness into four stages: (1) the fac- tor-driven stage, in which the competitive advantage arises from basic factors of pro- duction, such as cheap labor and natural resources; (2) the investment-driven stage, in which improvements in competitiveness rely mainly on large-scale investment in tech- nologies and advanced machines; (3) the innovation-driven stage, in which companies