Why is China Growing So Fast? In 1978, the leader of the Chinese Communist Party (CCP), Deng Xiaoping, initiated the open door policy, a free-market economic reform. The reform took two decades to bring China from being a poor and introverted country controlled by the state, to being an open free market economy. The reform included accepting foreign direct investments, allowing for entrepreneurs to start their own businesses, privatizing state-owned enterprises and removing price controls. The free-market reform was the beginning of extreme economic growth. From 1978 to date the economy grew average of 9/10% a year. Unemployment rate decreased to 4% and the literacy levels stands around 95%. In brief, China has reached all the Millennium Goals or is within reach. Now China ranked the world’s largest developed economy, this has led to over 700 million people having been lifted out of poverty. The World Bank expects China to be the world’s largest economy by 2030, even if growth rates slow down.
Beside economic reforms, Deng Xiaoping introduced some social reforms. For instance, People’s communes were abolished and jobs, schools and healthcare for rural residents were no longer automatically provided by the state. Urban residents had been paying for their own welfare all along, but now both urban and rural residents had to provide for themselves. The one-child policy was introduced in the late 1970’s. The policy only allows married couples to have one child as a measure to stop China’s soaring population growth. The policy has been implemented with some extreme methods, like sterilization and fines for those who have more than one child. The policy has since then been relaxed and now allows for those born under the one-child policy to have two children. Minorities are also exempt from the policy and those who have one girl are allowed to have one more child.
Curious about why China has done so well, an IMF research team recently examined the sources of that nation's growth and arrived at a surprising conclusion. Although capital accumulation--the growth in the country's stock of capital assets, such as new factories, manufacturing machinery, and communications systems--was important, as were the number of Chinese workers, a sharp, sustained increase in productivity (that is, increased worker efficiency) was the driving force behind the economic boom. Some study shows that the productivity gains accounted for more than 42 percent of China's growth and mostly considered as the most significant source of that growth. This marks a departure from the traditional view of development in which capital investment takes the lead. This jump in productivity originated in the economic reforms begun in 1978.
Research on economic development has suggested a significant role for capital investment in economic growth, and a sizable portion of China's recent growth is in fact attributable to capital investment that has made the country more productive. In other words, new machinery, better technology, and more investment in infrastructure have helped to raise output. Despite a huge expenditure of capital, production of goods and services per unit of capital remained about the same. This pronounced lack of capital deepening suggests a constrained role for capital. The labor input--an abundant resource in China--also saw its relative weight in the economy decline. Thus, while capital formation alone accounted for over 65 percent of pre-1978 growth, with labor adding another 17 percent, together they accounted for only 58 percent of the post-1978 boom, a slide of almost 25 percentage points. Productivity increases made up the rest. It turns out that it is higher productivity that has performed this newest economic miracle in china. Chinese productivity increased at an annual rate of around 4 percent during 1978 to date. Analysis of the pre- and post-1978 periods indicates that the market-oriented reforms undertaken by China were critical in creating this productivity boom.
The reforms raised economic efficiency by introducing profit incentives to rural collective enterprises (which are owned by local government but are guided by market principles), family farms, small private businesses, and foreign investors and traders. They also freed many enterprises from constant intervention by state authorities. As a result, the output of state-owned enterprises declined from 56 percent of national output to 40 percent, while the share of collective enterprises rose from 42 to 50 percent and that of private businesses and joint ventures rose from 2 to 10 percent. The profit incentives appear to have had a further positive effect in the private capital market, as factory owners and small producers eager to increase profits (they could keep more of them) devoted more and more of their firms' own revenues to improving business performance.
Why the Productivity Boom? The post-1978 reforms granted greater autonomy to enterprise managers. They became more free to set their own production goals, sell some products in the private market at competitive prices, grant bonuses to good workers and fire bad ones, and retain some portion of the firm's earnings for future investment. The reforms also gave greater room for private ownership of production, and these privately held businesses created jobs, developed much-wanted consumer products, earned important hard currency through foreign trade, paid state taxes, and gave the national economy a flexibility and resiliency that it did not have before.
By welcoming foreign investment, China's open-door policy has added power to the economic transformation. The annual inflows increased from less than 1 percent of total fixed investment in 1979 to 18 percent in recent years. This foreign money has built factories, created jobs, linked China to international markets, and led to important transfers of technology. These trends are especially apparent in the more than one dozen open coastal areas where foreign investors enjoy tax advantages. In addition, economic liberalization has boosted exports--which rose 19 percent. Strong export growth, in turn, appears to have fueled productivity growth in domestic industries.
To sum up, China occupies a unique niche in the world's political economy unprecedented economic performance. Afghanistan needs to extend economic relationship with China and learn from the Chinese experience and draw some general lessons. By encouraging the growth of rural enterprises and not focusing exclusively on the urban industrial sector, China has successfully moved millions of workers off farms and into factories without creating an urban crisis. In addition, China's open-door policy has spurred foreign direct investment in the country, creating still more jobs and linking the Chinese economy with international markets.