Wikilatief - Before discussing how China can become an economic giant, we discussed first how rapidly China's economic progress in just 30 years, which will certainly make anyone's eyes wide open.
How can China become the economic giant and grow so fast?
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| The photo was taken at the same point between 1996 and 2017 in The Pudong Lujiazui Financial District in Shanghai city, China. Source: (Bruce Connolly) |
In the early 1980s China was not a country to be reckoned with at all. At the time, China was a poor country where eating meat was a very luxurious thing.
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Their per capita income at that time was only US$ 205.12. China's GDP per capita at the time was equivalent to that of poor countries in Africa.
In 2019, China's GDP per capita has jumped to US$ 10,262. In just 40 years, the average income of Chinese citizens increased by 50-fold.
In 1980, China's GDP was US$ 191 billion and US$ 2.857 trillion. In 2020, U.S. GDP will be worth 20.807 Trillion, while China will reach US$ 14.860 Trillion.
In the space of 40 years, China's economic wealth has soared to 77-fold, while the U.S. has only six times that.
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| In 2010, China's GDP surpassed Japan's. In just 32 years China's economy has outperformed all countries, except the US. (Source : mgmresearch.com ) |
The Chinese state was only independent on October 1, 1949, after their independence was still plagued by many problems ranging from poverty, embargoes from America, endless political feuds to totalitarian government.
The country actually built its economy in 1978. And China's economy started to grow.
The United States, which has been independent since its independence in 1776, can directly build its economy because its country's politics are more stable.
The U.S. was named the richest economy in the 1920s or after 144 years of independence.
While China has only needed 32 years since 1978 to surpass the economies of all developed countries in Western Europe and Japan. So far, only the United States has not surpassed China.
In fact, since the end of 2014, on a GDP PPP, China has shifted the position of the United States as the richest economy.
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| (Source : http://caixinglobal.com/ ) |
Since 2014, China's PPP GDP has surpassed that of the United States. Therefore, China is currently the country with the largest economy.
In addition, China's poverty rate also dropped dramatically from 770 million in 1978 to just 16.6 million in 2018. Over the past 40 years, the poverty rate has dropped from 97.5% to below 1%.
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| The number of China's poor decreased significantly from 2012 to 2018. (Source : http://cgtn.com/ ) |
China also broke the world record because no country in the world has been able to build its economy to become world number two is in just 30 years.
The U.S. and other western countries are also beginning to twist china's rapid economic progress.
China has everything from a planned network of factories from upstream to downstream, suppliers, logistics services and adequate infrastructure, supported by capital and technology from Japan, Taiwan and Hong Kong.
They also have a plentiful and skilled workforce, and have gained virtually unlimited access to global markets over the past three decades.
Then, How does China build its economy to become a giant and China's economy grow so fast?
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All started with Economic Reform by President Deng Xiaoping, since 1978 precisely in the era of president Deng Xiaoping, China began to reform its economy by opening up to foreign investment and adhering to the principles of free markets.
Starting in 1961 at a conference in Guangzhou, China he conveyed his well-known idea, "No matter what colors the fur is, a good cat is a cat that can catch mice".
In essence, no matter whether communist or capitalism, China needs an economic system that encourages productivity in order for its people to get out of poverty.
Economic Reform 1978 includes, supporting the establishment of medium enterprises or SMEs in villages or small towns, liberalization of trade and investment activities, restrictions on price controls by the state, tax relief for foreign investors, ease of licensing for foreign investors, restrictions on the role of the state in production activities as well as various regulatory leeway on other economic activities, especially farming.
After the 1978 economic reforms, China's economy became more inclusive and open. Foreign investment began to flow in.
Foreign investment is widely used for the construction of squirming factories, the update of industrial machinery, and also information or communication technology systems.
Large flows of capital to more productive sectors such as manufacturing have seen the productivity of China's economic activities increase sharply, resulting in increased productivity accounting for more than 40% of economic growth.
China is also known as a nation of savers. In 1979, their saving rate was at 32% of their total GDP.
Then habit of saving, and saving Chinese people certainly makes piles of money in banks used as credit to finance the productive sector and increase capital stock.
The high saving rate plus the heavy flow of foreign investment into China, making their capital stocks abundant so that economic productivity can increase significantly.
No wonder, China's economic growth continues to grow around 10-13% per year. Their GDP has doubled every eight years.
Compare before 1978, whose growth was only around 6% per year, and the economy was very unstable because the political situation was not stable.
How can China become the economic giant and China's economy is growing so fast
Chinese Capitalism
China is a unique country, although it has an authoritarian and absolute system of inking, its economy is still run on the principle of free market, namely capitalism but still regulated.
China is very good at concocting a new economic system that takes what is good from capitalism and communism and abandons the bad.
They have studied the weaknesses of pure western capitalism that only run according to market mechanisms and are not planned or laissez-faire market.
They also understood Karl Marx's criticism that purely unorth regulation capitalism would create economic inequality due to discrimination in ownership of production factors.
What Marx foretold in the 19th century has happened in many capitalistic countries, 1% of the rich hold about 45% of the country's wealth.
They also learned from western faults where pure capitalism had spawned severe economic crises such as the Great Depression of the 1930s.
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Therefore, China does not want to repeat the western mistakes of turbo capitalism that gave birth to crises and economic inequality that would eventually impede economic development and poverty alleviation.
They still apply capitalism, but the market remains regulated or government interference remains.
Production activities in western capitalism are also only for profit only because they are carried out by profit-oriented private parties.
Investment for the development of innovative products in the future is very difficult because it depends on market mechanisms, so the prospect of profit is not yet clear.
Pure capitalist companies that are only profit oriented certainly would not dare to do so. They will start producing if the prospects for profit are clear.
It is country that has a big part in investing in this fairly risky field. Amazingly, China is capable.
Evidently, the development of 5G technology there is quite rapid because the Chinese government took part in the development of this technology.
The development of 5G technology in the U.S. is hampered because it relies too heavily on private parties and market mechanisms. U.S. companies don't want to take risks because they haven't seen the prospect of profit.
In addition to 5G technology, China has also succeeded in innovations in the development of renewable energy, high-speed rail, infrastructure development, smart city development, and space technology.
The state is very involved in the development of technological innovations. This will be difficult if it still applies pure capitalism that is not planned because production activities are only profit-oriented in the short and medium term.
In addition, China is also an implemented economic transformation by adopting one of the principles of communism where ownership of production factors must be owned communally aka not controlled by a handful of people or groups.
This began to be applied by private companies where most of the shares were owned by employee cooperatives.
In this way it is expected that the production factor can be owned more collectively. Examples of Huawei and Alibaba.
Jack Ma and Ren Zhengfei are the founders of Alibaba and Huawei. Although they are founders, they have only a small share in the company he founded.
Ren Zhengfei owns about 1.5% of Huawei while Jack Ma owns about 2.5% of Alibaba. The rest, the company's shares are owned by its employees through employee cooperatives.
The concept of corporate share ownership by cooperative employees is hardly happening anywhere, especially in the U.S. and Europe.
Bill Gates and Steve Jobs owned most of the shares of the company he founded.
With the company's share ownership system collectively, it is expected that the concentration of capital or production factors is more distributed to all circles, especially employees.
Thus, economic inequality due to the inequality of ownership of production factors can be reduced step by step.
By implementing modified capitalism through economic regulation, and communal ownership of corporate stocks, the Chinese economy can survive and stay ahead at a time when the economies of European and U.S. countries tend to stagnate and slow down.
Chinese-style capitalism has lifted some 850 million of its people out of extreme poverty in just 40 years. The poverty rate has also dropped from 88% in 1981, to just 0.7% in 2015.
This would be highly improbable if China continued to apply pure western capitalism that tends to be profit-oriented.
Reducing poverty is seen as an activity that does not generate clear profits. No wonder western capitalism is less effective at reducing poverty.
How can China become the economic giant and grow so fast
Conclusion: What Exactly Makes a Country Experience Rapid Economic Progress?
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| Source : https://www.economicshelp.org/ ) |
If poor countries and rich countries are hit by the same amount of capital investment, poor countries will experience higher output growth than countries that are already rich economically.
In fact, every country can catch up with its economy like China whose economic progress has surpassed that of developed countries in Western Europe.
In economics it is known the concept of the Law of Diminishing Returns and the Catch-up-Effect.
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The catch-up-Effect occurs when a country that was initially poor because it has low capital stock, will experience spectacular economic growth to pursue developed countries if it is poured into adequate investment.
Conversely, if a country that is already rich and has abundant capital stock, it will experience lower output growth or tend to stagnate in the next period, even if it has been poured into investment.
This is due to the enactment of additional laws of diminishing yields or the law of diminishing returns.
There are also economists who say, this is a middle income trap phenomenon. Stagnant economic growth in richer countries occurs because they tend to use old technology.
To maintain sustainable economic growth in order to get out of the middle income trap, a country must innovate technology.
China's rapid economic development is also due to the work of the catch-up-effect in question.
Where the influx of heavy investment accompanied by the high amount of people's savings, makes their capital stock increase.
Adequate capital stockpiles certainly boosted productivity, and as a result China experienced spectacular economic growth. China is also fortunate to have good political stability.
Political stability is one of the crucial factors for economic development.
Therefore, every country that is economically lagging can catch up with its economy by increasing the amount of capital stock through investment or national savings with a record of its people wanting to save most of their income by suppressing consumption today in order to enjoy greater consumption in the future.
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And lastly, of course, political stability must be maintained. This road has been done by China.
(How can China become the economic giant and grow so fast?)
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