Making Sense of China’s Economic Transformation

China’s sustained rapid economic growth over the post-1978 reform era, which is also the era of globalisation, is of worldwide importance. This growth experience has been based mainly on China’s internal dynamics. In the first half of the era, economic growth was propelled by improvement in both allocative efficiency and productive efficiency. From the early 1990s until the present time, however, economic growth has been increasingly based on dynamic increasing returns associated with a growth path that is characterised by capital deepening. In both periods, the growth paths and their associated long-term-oriented institutions contradict principles of the free market economy – i.e., doctrines of globalisation. In the form of an analytical overview, this article seeks to explain and interpret the historical background, logic of evolution, and developmental and social implications of China’s economic transformation. The analytics draws on a range of relevant economic theories including Marxian theory of economic growth, Post-Keynesian theory of demand determination, and Neo-Schumpeterian theory of innovation. It is posited that these alternative theoretical perspectives offer better insights than mainstream neoclassical economics in explaining and interpreting China’s economic transformation

Assessing the Role of Foreign Direct Investment in China’s Economic Development: Macro Indicators and Insights from Sectoral-Regional Analyses

The objective of this paper is to assess the role of FDI in China’s economic development with reference to the broader literature on FDI and late development. Three main findings come out from the analyses in the paper. First, it is found that FDI tends to promote the improvement in allocative efficiency, while having a negative impact on productive efficiency. Second, insofar as FDI does promote overall productivity growth, this tends to be a matter of cumulative causation rather than one of single-direction causation. Third, in the context of a comparative analysis of two distinctive regional models, it is found that the economic impact of FDI tends to be more favourable in the inward-looking, capital-deepening pattern of development (the ‘Shanghai model’) than that in the export-oriented, labour-intensive pattern (the ‘Guangdong model’). Further analyses, however, suggest that the ‘Shanghai model’ has its intrinsic problems of sustainability. The scope for applying it to China as a whole is thus judged to be limited

Globalisation and Comparative Economics: Of Efficiency, Efficient Institutions, and Late Development

Does globalisation entail a demand for uniformity, or diversity, of the (political) economic institutions of nation-states? What is the theoretical underpinning of the demand? And what are the implications of the demand for economic development? The conventional literature known as comparative economic systems has been unable to answer these question, because there is an intrinsic tension between its methodology (the neoclassical framework of individualistic rational choices and their equilibrium) and the subject matter (the multiplicity of economic institutions and development experiences in the real world). The new comparative economics has consisted of a variety of attempts to cope with this tension: some aimed at preserving the neoclassical framework at a more fundamental level, while some others aimed at transcending the framework to arrive at a new theory of economic systems and development. This paper argues that attempts that adhere to the neoclassical tradition is likely to lead to dead ends, while attempts that encompass collective as well as individualistic rationality represent more promising directions. Fuller developments of the literature, however, require incorporating objectified institutions and paradigmised technology into its sphere of inquiry. It is submitted that there are important lessons to learn from classical political economy and their modern presentations, particularly Marxian theories of the social forces of production, in this regard

China’s Nexus of Foreign Trade and Economic Growth: Making Sense of the Anomaly

Using a range of specifications that are standard in the relevant literature, this paper finds that China’s rapid and sustained economic growth in the reform era has tended to be negatively correlated with its export growth and positively correlated with its import growth. This finding runs counter to widely-held perceptions on China’s nexus of foreign trade and economic growth, and thus presents a serious challenge for interpretation. On the basis of some further regression analyses, and drawing on a number of applied studies on the subject matter, the paper argues that the finding is plausible and of complex ramifications. The conclusion which this paper arrives at, therefore, is that the Chinese experience has tended to be a case of strategic integration into the world market, rather than conforming to the standard neoclassical thesis of trade regime neutrality

China, the ‘East Asian Model’ and Late Development

There is an influential, neo-liberal proposition in the scholarly literature on China’s economic transformation since the late 1970s. It states that China’s reformed economic institutions are a mix of market-conforming and market-supplanting elements, that its developmental achievements so far have been ascribable to the conforming elements whereas the accumulated problems being ascribable to the supplanting elements, and that the problems have tended to outweigh the achievements as the country’s economic transition progresses from the allegedly easy phase to the difficult phase. This paper offers an alternative interpretation of the Chinese experience. The central proposition is that China’s economic institutions could be seen in favourable light both theoretically and with reference to the East Asian development experience. Specifically, the developmental implications of the market-conforming and market-supplanting elements should not be understood in any absolute sense, but rather depend on the appropriate match or otherwise between the institutions and the external environment. The developmental achievements to date indicate that China’s economic reform has managed to achieve a basically appropriate match between the two aspects, although enormous uncertainties still cloud over the future prospects owing to changes both in the external environment and the reform strategies of the state leadership

Firm Size, Technical Efficiency and Productivity Growth in Chinese Industry

Since the mid-1990s, China’s state leadership has adopted a policy of nurturing the competitiveness of large state-owned industrial enterprises. The implications of this policy have been a matter of debate in the literature. This paper seeks to provide some useful input into the debate. With a view of investigating into the potential of long-term development of large enterprises, we estimate the “sequential production technology” in computing the Malmquist productivity index for various size-groups of enterprises in Chinese industry. Our findings indicate that large enterprises did register the fastest productivity growth and improvement in technical efficiency in the 1994-97 period. It thus appears that large-scale, mainly state-owned Chinese enterprises have exhibited the potential of making noticeable improvements and the relevant state policy does have its justification

Explaining the Financial Performance of China's Industrial Enterprises: Beyond the Competition-Ownership Controversy

Scholarly explanations of the worsening financial performance of Chinese industry over the reform era, particularly the loss-making phenomenon, have coalesced around two rival stories: the “inefficient institutions causing poor financial performance” story and the “increased competition inducing profitability decline” story. This article critically reviews the arguments and empirical substantiation of the two stories, and gives an alternative explanation that takes demand conditions and industrial configurations into the analysis. On this basis, it is argued that the worsening financial performance is a macro as well as micro problem that points to the fundamental contradictions in contemporary Chinese political economy. Some policy implications from this analysis are raised in the concluding section

The cost and benefit of banking regulations and controls, Chinese style

The neoclassical approach focuses its attention on the prudence of individual banks. In its objective of achieving allocative efficiency, it seeks to prevent market failures caused by the operations of the banks. In this light, it is contended that China should further its market reforms in the direction of fostering the profit maximization cum risk minimization pursuit of individual banks. Meanwhile, the Keynesian-Schumpeterian-Minskyan approach focuses its attention on coping with systemic fragility. And systemic fragility is seen as endemic to the interaction between credit expansion and contraction, productive investment, and business profitability. In this light, even if it is indeed allocatively inefficient, Chinese finance can still have its advantages in terms of promoting productive efficiency

State-owned Enterprises in Chinese Economic Transformation: Institutional Functionality and Credibility in Alternative Perspectives

The institutions of China’s state-owned enterprises have deviated fundamentally from the principle of individual(istic) property rights. The paradox is that the enterprises appear to have performed well in terms of productivity and profitability. This article examines the institutions in the light of alternative theoretical perspectives. The central message is two-fold. First, regarding functionality, the long-term oriented institutions could be conducive to productive efficiency but could also be detrimental to allocative efficiency. Second, regarding credibility, the actual performance hinges on the appropriate match between the institutions and the broader developmental conditions. The efficiency attributes are thus found to be context-specific. Further discussion on the notion of context-specificity reveals that relative efficiency is conjunctural rather than structural in the determination of the functionality and credibility. In the spirit of Original Evolutionary and Institutional Economics, it is submitted that the attributes of relative efficiency are themselves subject to the particular “social valuation” of China’s prevailing political-economic conditions