Today, China is an economic powerhouse with the second highest nominal GDP (after the USA) and the highest GDP PPP (when GDP is adjusted for prices in a country) in the world. Yet just over 40 years ago, in 1981, it had a nominal GDP lower than that of Canada, a country that had a population 40 times smaller than it. The nominal GDP per capita of China was lower than that of the Central African Republic, Malawi, Sierra Leone, Madagascar and was even under an eighth of that of the Democratic Republic of the Congo. While the GDP per capita of these nations has remained low, and the DRC’s is less than a quarter of what it was in 1980, the GDP per capita of China has skyrocketed from around 300 USD to around 12000 USD. [1]

The obvious question is how this rapid growth of the Chinese economy has happened.

The Chinese GDP per capita remained fairly constant for almost 2000 years, until around 1950, only increasing slightly, and even decreasing during China’s century of humiliation, from 1839 to 1949 (see the table above). Since 1950, the Chinese economy has been growing steadily at an average pace of around 3% per year with fluctuations due to some disastrous policies like the Great Leap Forwards and the Cultural Revolution, before entering a period of stagnation around 1970. After the death of Mao Zedong, Deng Xiaoping won a power struggle against Mao’s successor, Hua Guofeng and became the leader of China.

Almost immediately, Deng worked on reforming the economy. Deng started by reforming China’s agricultural practices through decollectivising agriculture and allowing some private control of land by peasants. This increased agricultural production by 25% and set a precedent for privatising other areas of China’s economy. Deng created the “Open Door Policy” opening up China to foreign businesses and investment and created Special Economic Zones in 4 key cities: Shenzhen, Xiamen, Zhuhai and Shantou. These SEZs were attractive for foreign investment and were relatively free of the bureaucratic regulations and interventions that hampered economic growth. Special Economic Zones (including later expansions) and the later 14 “Open Coastal Cities” (which were created in 1984) granted some cities on the coast freer market-oriented economic policies, like tax and business incentives, and flexible governmental measures. They also had greater independence from the central government on international trade activities, compared to the planned economy elsewhere, making them attractive to foreign and domestic businesses and therefore foreign investment. This was a major success and driver of growth. This “openness” would later be introduced to other cities allowing them to have the same attractiveness to businesses and investment allowing further growth. Controls on private businesses and government intervention continued to decrease, for example, there was further relaxation of price controls. The Shanghai stock exchange was reopened as well as the Shenzhen stock exchange being founded.

After Deng died in 1997, his reforms continued under Jiang Zemin and Zhu Rongji. Large scale privatisation occurred. Tariffs, trade barriers and regulations were reduced; the banking system was reformed; inflation reduced; much of the Mao-era social welfare system dismantled; and forced the Chinese army (People’s Liberation Army) to divest itself of military-run businesses. China joined the World Trade Organisation in 2001. This led to a staggering growth of exports and reductions in tariffs both on Chinese imports and exports. The burgeoning export market and looser investment restrictions led to growth in Chinese capital as well as giving better access to Chinese markets and caused China to make international trade law more transparent and balanced.

China’s economic reforms had a significant impact on its economy and the wealth of its citizens. In the past 40 years, China’s GDP has increased over 60 times according to the IMF, surpassing Japan’s economy to become the 2nd largest in the world by 2000 (PPP) or by 2010 (nominal) and becoming the largest economy in the world (PPP) by 2016. This unprecedented amount of growth has been instrumental in increasing the quality of life for over a sixth of the world’s population. China’s economy has been one of the fastest growing, with a growth rate of 9.5% per year from 1978 to 2013.

Yet there have been some downsides to this opening up. Inequality in China has increased dramatically, mainly due to the loss of the welfare state and the differences in wealth between the coastal and inland areas and urban and rural areas. This can be mostly attributed to China’s economic reforms, with the Gini measure of inequality increasing from 0.31 to over 0.45 (0 meaning complete equality with everyone having the same income, and 1 being complete inequality with 1 person having all the income). This means that while most of China has become richer, some areas and people have gotten relatively very rich while others have been left behind, directly due to China’s economic reforms.

Despite some concerns of increasing inequality in China due to its economic reforms, they have been extremely effective in increasing the wealth of the average Chinese citizen. The economic reforms have transformed China into the economic superpower that it is today, from an underdeveloped nation in around 40 years. China’s economic reforms have not only benefitted China, but also the rest of the world through increased trade and access to the Chinese market.

References

[1] “World Economic Outlook Database” (International Monetary Fund)

https://www.imf.org/en/Publications/WEO/weo-database/2021/October/weo-

[2] Deng, K., and O’Brien, P. K., “China’s GDP Per Capita from the Han Dynasty to Communist Times” (London School of Economics and Political Science, 2016) http://eprints.lse.ac.uk/64857/1/WP229.pdf