How China emerged as the second largest economy of the world?

In 1991 when I visited China for the first time, I could witness a total but gradual transformation of Mao era planned economy of China to Deng's socialist market economy. Deng Xiaoping, the man who personally experienced the excesses and mistakes of the 1960s and 1970s foresaw that only reform and opening to the outside world could save the country and help it recover the immense ground it had lost. This notion was conceptualized during the Third Plenary Session of the 11th Central Committee of the Communist Party of China by way of adopting the policy of “reform and open door” in 1978. Since then China has undergone a profound transformation never seen before. In a short span of 32 years, China’s GDP increased from 147.3 billion US dollars in 1978 to about 5 trillion US dollars in the year 2010, becoming the second largest economy in the world after the United States. The number of rural poor has dwindled from some 250 million to 15 million. The overall national strength of China has increased remarkably and the texture of life of its people improved steadily.

How did it happen? China initiated reforms in three stages. During the first stage (between 1978 and early 1980s), rural reforms were initiated that involved the decollectivization of agriculture, the opening up of the country to foreign investment, and allowing the entrepreneurs to establish private business. During the second stage (between mid 1980s and 1990s) China initiated privatization of the state owned enterprises and liberalization of the prices, and the decentralization of state control. During the third stage (between early 1990s and mid 2000) large scale privatization got intensifies, most of the state enterprises, except a few large monopolies, such as banking, oil and telecom sectors were liquidated and their assets sold to private investors. During the early years of this decade, China further reduced various tariff barriers and regulations, initiated reforms in banking sector, social welfare, joined the World Trade Organization, and in 2006 abolished altogether the agricultural tax and levies, which to a large extent stabilized the countryside and enhanced peasants’ income.

How did China manage to experiment the model of socialist market economy countrywide? Though the pace of economic reforms as well as economic growth rate was feverish, however, China initially experimented with the model in a few Special Economic Zones (SEZs) and then gradually replicated them to the other parts of the country. During first phase of the economic reforms, when China carried out agricultural reforms, it simultaneously established four SEZs in the form of Shenzhen, Zhuhai, Xiamen, and Shantou for foreign investment that were relatively free of the bureaucratic regulations and government intervention. Once these regions became engines of growth, China created Pudong in Shanghai and Hainan province as two more SEZs in 1990.

Between 1980 and 2009, the average annual growth rate of the gross domestic product (GDP) of Shenzhen was around 25%. In 2009, Shenzhen's per capita GDP ranked first in the country at more than $8,619 compared to the national average of about $3900. It would not be wrong to assert that China’s industrial structure is in fact the reflection of Shenzhen’s industrial structure, which has transformed from traditional industry to hi-tech industry, from small-scale to large-scale, and from assembling and processing to independent manufacturing. Certain sectors such as telecommunications, computer hardware, and electronics account for over two third of the total industrial output in Shenzhen. Huawei and ZTE, the telecom giants of China could be regarded as the two of the most successful brand names the Shenzhen SEZ could have said produced. Even after three decades, Shenzhen remains one of the most attractive destinations for foreign investment. Over hundred companies from the fortune 500 have invested in Shenzhen.

Various factors have contributed to the success of reforms in China and especially Shenzhen, for being the first SEZ it was seen as experimentation for nationwide comprehensive reforms. First and foremost, its geographical proximity with Hong Kong and logistical advantages weighed heavily in favor of Shenzhen. Secondly, in order to enhance its competitiveness, Shenzhen enjoyed exceedingly liberal economic policies, for example by way of initiating a differential corporate tax system, the foreign enterprises paid much less tax than the domestic enterprises. This was one of the reasons why Shenzhen was able to attract unprecedented foreign direct investment (FDI) in such a short time. It was only after a span of 27 years that the Chinese government eliminated the system of differential corporate tax. Thirdly, the competitiveness of the industry was further enhanced by an easy access to finances by enterprises, even today if the figures are to be believed, Shenzhen has maximum numbers of venture capitalists in China. Finally, the administrative efficiency and efficacy for comprehensive nationwide reforms was also tested in this SEZ. The government ensured single window clearance for all the foreign funded as well as domestic enterprises as regards registration and other business procedures. This not only simplified the business processes but also made the system transparent and weeded out corruption at various levels. Furthermore, the concentration of various industries such as semi-conductor, pharmaceuticals, construction materials, chemicals production and processing, computer software, electronics assembly and manufacturing, instruments and industrial equipment production, medical equipment and supplies, telecommunications equipment etc. has been successful owing to the economies of scale. Initially, Shenzhen SEZ consisted only of Luohu, Futian, Nanshan and Yantian, however, in July 2010 Bao’an, Guangming and Longgang districts were also incorporated into the SEZ. Of these, Luohu is the financial and trading centre, Futian, the seat of the municipal government, Nanshan, the centre for high-tech industries, and Yantian the logistics hub of Shenzhen.

There are diverging viewpoints as regards the success of China's economic reforms amongst scholars. However, everyone subscribe to the viewpoint that China is the largest country to have sustained the fastest ever economic growth from the liberalization or globalization in the shortest of time. It would have been impossible for China to realize the desired goals of opening and reforms, had it not decentralized the state authority, and allowed provinces to experiment with various ways to privatize the state owned enterprises and ameliorate and invigorate the economy. Although we may not attribute all the reforms and opening up to Deng Xiaoping, however, he is the person who put a stamp of approval on it. Other viewpoint which is in vogue is that after the success of the SEZs, the provincial leaders competed for FDI and high economic growth, for the economic success story of their provinces catapulted them to higher political positions.

Yet the economic reforms in China have their flipside too, for despite the elimination of extreme poverty, the Chinese growth story has increased rural-urban economic disparity. The challenge thrown by the increasing social imbalance has rendered millions of rural folks disgruntled and disappointed, and have bred various social problems. The divide is also reflected by the Gini’s Coefficient that has continued to rise at an alarming rate and is about to touch 5. During my own field investigation in An Hui and other provinces in 2007 while being a fellow at the Rural Development Institute of the Chinese Academy of Social Sciences, it was evident that the agricultural foundation in China is fragile, farmers’ income low, and the de­velopment of the countryside lag far behind that of the cities, espe­cially in terms of education, public health, living standards, culture, infrastructure development and so forth. Owing to these reasons the reforms has come under a scathing criticism from the neo-socialists. Some scholars including the neo-lefts in China and beyond feel that in order to alleviate inequality, it is necessary for China to revive the pre 1985 welfare policies and institute a redistributive income tax regime. In my opinion it would be increasingly difficult to undo the economic processes initiated in the wake of the reforms, the best China could do to eliminate the rural-urban imbalance is to expand secondary and tertiary industrial base in rural areas, particularly the processing industry for agricultural products.

Finally, three decades of economic reforms have changed the entire socio-economic landscape of China. Now, China is one of the most important engines for economic growth in the world. It is world’s fourth largest exporter, trading extensively with the European Union, the United States and Japan. It is due to the robust economic growth that even during the times of financial meltdown world over, China managed to pump in billions of dollars to augment domestic demand. Even though the growth has created some imbalances, but these are unlikely to hinder the overall growth in China. Nevertheless, an asymmetry between the economic reforms and political reforms may lead to conflict, and become a hurdle in further deepening of the economic reforms.