The Third Plenary Session of the 11th Central Committee, held between December 18 and 22, 1978, marked the prelude to China’s reform and opening-up policy. Since then, the world has witnessed China’s economic growth miracle of the past 40 years. With an average real growth rate of gross domestic product (GDP) of around 9 percent, China’s GDP share over world total GDP increased from 2.5 percent in 1978 to over 15 percent in 2017. However, in recent years, China has entered the “new normal” stage in which economic growth has appeared to slow down. The after-tax return to capital dropped to 4.17 percent in 2013 (Bai and Zhang 2014). The demographic dividend contributed 26.8 percent to the growth of per capita GDP during 1982 to 2000, but the dividend is disappearing (Cai and Wang 2005). Demand for exports decreased sharply after the 2008 financial crisis and may decrease further under a looming trade war.
China is at a crossroads: the growth strategy that relies on exports, cheap labor, and often at the price of sacrificing the environment is no longer sustainable. To avoid the middle-income trap, new sustainable growth strategies are imperative. As deepening the unfinished reform to tackle the challenge has been the consensus, it is time to summarize what China has done right over the past 40 years and what can be further reformed in the future. We devote this special issue to this goal. The issue covers six topics: the political economy background of the reform and opening-up policy, the population dividend, changes in rural institutions and village governance, development of the exchange rate scheme, international trade during the opening-up process, and the trade war with the United States.
Yang Yao’s paper, “An Anatomy of the Chinese Selectocracy,” provides a political economy explanation of China’s economic success, as opening to international trade and investment alone cannot ensure successful growth. The paper depicts the reform as an interactive process between local experiments and changes in the ideology of the central government. The changes in ideology are characterized as a de-politicization process of the Chinese Communist Party (CCP). Yao characterizes the central government as disinterested, that is, the government favors the social or political group that can bring success to the economic reforms, but not any specific group consistently. The “selectocracy” selects local officials largely based on merit, evaluated based on the officials’ ability to develop the economy and their loyalty to the central government. Consequently, the CCP is no longer a conventional political party but an institution of China’s constitutional setup, molded by successful economic reforms. After comparing China’s selectocracy with democracy, the paper proceeds to discuss the weaknesses in the system, including large gaps between the content and implementation of the Constitution, imperfect constitutional arrangements, and the gap between the CCP’s claimed ideology and its ideology in practice.
China’s population has followed the universal law of demographic transition, but at a much faster pace, creating the so-called population dividend. How the occurrence and disappearance of this dividend will affect economic growth is a significant issue for China, the most populous country in the world. In Fang Cai’s paper, “Population Dividend and Economic Growth in China, 1978–2018,” the country’s economic growth and social development are the major factors bringing down the total fertility rate, and the population policy is only an additional and diminishing factor. The paper explains how reforms helped to promote efficiency in labor utilization in five steps: (1) releasing surplus rural laborers, (2) promoting the mobility of laborers among sectors and regions, (3) breaking the barriers deterring labor from entering high-productivity sectors, (4) creating new jobs and relocating the labor force to urban sectors, and (5) expanding aggregate employment through participation in the global division of labor. Cai shows that labor reallocation indeed has had a positive effect on labor productivity improvement and thus economic growth. To maintain the momentum of economic growth in the era of the new demographic transition, the paper suggests pushing through the unfinished reform of the household registration (hukou) system.
Most of the areas in China were rural in 1978, hence rural reform is one of the main themes of the reform and opening-up process and has an ongoing impact on the future of China’s sustainable development. In “China’s Rural Institutions and Governance Since the Beginning of the Rural Reform,” Shouying Liu and Xuefeng Xiong illustrate the evolvement of rural governance and reveal the current challenges and policy implications. Through describing the evolution of rural governance in China over the past 40 years, the paper shows how the township power and village autonomy governance structure was established, that is, the administrative power reaches the township level, but villages have autonomy. The authors provide an excellent description of how two factors are intertwined to create such a governance structure: one is the informal institutions and governance system in rural China inherited from ancestors over thousands of years, and the other is the institutions and governance system created by the CCP. The government changed the indirect governance of villages to direct governance through the urban-rural integration strategy. The paper discusses challenges such as weakening kinship relationships among farmers when young-generation farmers leave the land and villages. As these challenges have implications for the cost-benefit structure, the authors end the paper with policy suggestions on appropriate governance arrangements for rural transformation.
China’s exchange rate is one of the country’s most important prices, and its determination has been a topic of focus over the past 40 years. Yongding Yu’s paper, “The Long-Drawn Process of Reform of the Exchange Rate Regime and the Evolution of China’s Exchange Rate Policy,” first reviews the history of exchange rate reform over the past 40 years and then discusses the central parity rate–setting rule, which was introduced in early 2016. The author explains in detail how the central parity exchange rate–setting rule works, its pros and cons, and reasons for the introduction of the so-called countercyclical factor. This discussion naturally leads to the observation that the whole reform process has been characterized by fear of a floating exchange rate scheme. The paper explores why this fear is deeply rooted in the minds of decision makers as well as the general public. As the exchange rate has not reflected market supply and demand, the author argues that exchange rate inflexibility is responsible for the misallocation of resources across countries and generations. To further the reform and opening-up process, the author calls for immediate floating of the renminbi exchange rate as soon as possible, to curb the irrational pattern of the international balance of payments.
Miaojie Yu’s paper, “China’s International Trade Development and Opening-up Policy Design in the last Four Decades,” discusses China’s opening-up strategy in detail. The paper reviews three stages since the country began its economic reform, that is, the extensive margin of opening-up (1978–2001), the intensive margin of opening-up (2001–17), all-around opening-up (since 2017). Yu shows that China’s gains from trade are inspired by various economic factors. Before the new century, the large trade volume was due to the realization of comparative advantage based on factor endowments. However, after China’s accession to the World Trade Organization, the country’s gains from trade have been due, in large part, to the realization of economic scale effects associated with the enlarged market size.
The export-led growth strategy has contributed greatly to China’s growth miracle, but at the expense of creating many disputes with trading partners, especially the United States. How the recent trade war with the United States will evolve is one of the critical issues for China’s future development. Tao Liu and Wing Thye Woo’s paper, “Understanding the U.S.–China Trade War,” identifies three areas in which to reduce China’s international economic disputes. For disputes over China’s large trade surplus, the authors argue that hoping to solve the trade imbalance issue through pushing China’s policy changes alone will not be successful, since the imbalance reflects the economic conditions in China and the United States over the past 40 years. On the role of industrial policy, the authors’ opinion is that the state subsidies component of China’s industrial policy is too large, and China indeed has used its market power to benefit itself at the expense of its trade partners. Lastly, will trade with China hurt U.S. national security? The authors believe that such fear stems from ignorance about the primary determinants of U.S. innovation capability. If the focus is on how to hold down China technologically rather than focusing on technology development in United States, the United States will eventually become more vulnerable, with decreasing competitiveness in technology. Therefore, the United States should focus on building a competitive and resilient domestic innovation system, and China should employ alternative ways to accelerate technology transfer and provide more reciprocity in its trade and investment relations with advanced economies.
To summarize, these six papers provide different angles for looking at China’s reform and opening-up process, but with one common theme, that is, how China has unleashed its economic potential through breaking the barriers that hinder the utilization of efficiency and creativity of the people. To achieve sustainable development, a steadfast attitude toward further reform and opening, toward deeper integration with international collaboration, is a must. The policy suggestions in the six papers provide insights toward this direction.