When you talk about China, one of the first topics to be brought up is usually their economy. More often than not, the word “growth” is used, for example:
- “China has been growing at an unprecedented rate”
- “The Chinese economy has been growing every year for the past 40 years”
- “China is projected to keep growing and overtake the U.S. as the world’s #1 economy”
While all of these statements are true, it’s important to understand why they’re true. What did China start doing differently that allowed them to grow at such an amazing rate? Through this article, we’ll take a look at some of the reforms that China passed to jump-start their economy as well as bring them to where they stand today.
This is how China achieved their amazing economic growth:
Free Markets and Why They Lead to Growth
One of the first aspects we want to talk about when mentioning China’s growth is the role of free and open markets when it comes to economic growth. It’s been proven historically that open, competitive markets have resulted in the fastest economic growth for countries that implement them. This is the main argument in Yuval Harari’s Sapiens and it could be argued that this transition was the leading factor for China to start growing their economy.
If you’re not familiar, a free market is defined as “an economic system based on supply and demand, with little or no government control. It requires that all decisions made in a given economic environment are voluntary. In other words, it’s an economic system where people make decisions instead of the government. People are free to:
- Start new businesses based on societal needs
- Make decisions on what to do with their profits. They can either keep them or invest them back into the business
- Create their own production goals. If they want to grow, they can produce more or if they just want to sustain, they can maintain current production levels
In addition to an open market, minimum regulation from the government and a population focused on entrepreneurship are two other keys to growing the economy of a country.
Let’s take a closer look at entrepreneurship and how it plays a role in creating economic growth.
If free markets are the car that drives economic growth, then entrepreneurship is the gas that goes in the tank. When an entrepreneur has a new business idea, he fills up the tank and the car of economic growth moves forward.
More often than not, entrepreneurs are responsible for the growing economy of a country. They solve societal problems, create new industries and put the population to work. One important aspect to note is that innovation never stops. Entrepreneurs can (and will) keep coming up with new business ideas that drive a country’s economy forward. For example, some of the United States’ top companies were founded in the past 20 years:
- Facebook (2004)
- Uber (2009)
- Google (1998)
- Bird (2017 – fastest company to reach a $1 billion valuation)
- Airbnb (2009)
You can be pretty much certain that there are companies in their seedling stage now that will dominate the world in the next decade or so.
Here are a few more manners in which entrepreneurship spurs economic growth:
➢ Adding jobs to the economy – What’s the easiest way to lower unemployment? Create new and exciting companies that can hire people. One of the best examples of this is the recent creation of the gig economy. The gig economy is described as an economy of short-term freelancers and temporary jobs, we have dedicated an entire article to this topic that can be accessed by clicking HERE. The gig economy just recently came into existence but now allows people to make extra cash in incredibly simple ways. Not only has the gig economy put more people to work but it has also put more spending money in people’s pockets (which further spurs economic growth)
➢ Adding to the national income – Existing companies can sometimes hit a glass ceiling in terms of the amount that they can grow. The larger they become, the longer the decision-making process and the more stifled innovation gets. Start-ups, on the other hand, enter new markets and create new income where there previously was none
➢ Create social change – Due to the fact that entrepreneurs solve societal needs, they effectively improve the overall quality of life for humanity and increase economic freedom
There are clearly plenty of ways through which open markets and a plethora of entrepreneurs can drive economic growth.
So what does this have to do with China?
For the overwhelming majority of China’s history, they’ve been dominated by the state. There was no private enterprise and no entrepreneurship. Every company was more or less owned by the state and the government dictated things like production levels and management decisions. Remember how free markets thrive because people work in their own self-interest? China wasn’t doing that at all.
The following graphs do a good job of illustrating how quickly the country flipped and have been sourced from an article in Quartz:
Not only did the poverty rate plummet (first graph) but incomes also increased significantly:
One of the most meaningful initiatives Xiaoping proposed was that China should learn from other countries and let their citizens “vie” to get ahead. This type of societal structure will inspire workers with a lower standard of living to work harder and improve their situations. When this happens, society will be better off as a whole.
This is essentially the crux of laissez-faire economics implemented in the United States and other free-market countries. The United States, in particular, is known for their “American Dream” mentality. This is a mentality that anyone can become rich and successful, regardless of who they are and where they come from.
Individuals are inspired to work harder to improve their own lives instead of working hard to please the government. Additionally, the ability to work harder and earn more money means that people will have more money to spend on products/services provided by businesses, which means more money for the business owner and this creates a self-sustaining cycle.
We want it to be clear that China is still a communist country*. The state still dominates the country and gets the last say in all businesses. They just tweaked their laws so that people were allowed to create their own businesses.
So if these reforms happened in 1978 and have obviously been quite successful, where does that put China at today?
As mentioned previously, China’s economy has been on a tear and they are on the brink of overtaking the United States as the world’s largest economy. According to WorldBank data:
- China’s GDP currently sits at $13.6 trillion
- Annual GDP growth is projected at 6.9%
- Their population sits at 1.4 billion
- The average life expectancy has been steadily increasing and is now at 76
Although China’s growth has been amazing over the past couple of decades, nothing is certain. There are still a few factors that could change China’s projections. For example, continued escalation of the trade war between the United States and China could pit these two countries against each other even more.
Additionally, a change in ideology in leadership or within the Chinese population could also derail the country’s direction. For example, due to the coronavirus pandemic, the current generation is at risk of having a less easy life than older generations. This could lead to generational unrest and a search for an alternative to socialism with Chinese characteristics.
Speaking of the coronavirus, this is the final question mark for the future of China. This is true for most countries but especially China because ground zero for the COVID-19 virus is in Wuhan, China. The virus has crippled the economy during the first half of 2020, causing the first GDP contraction in 40 years and thrusting untold numbers into unemployment.
It can be difficult to tell how the county is handling the pandemic because China’s reports have been questionable. However, the future of the country will be determined by how they deal with the virus and how quickly they can return to business as usual. The same is true for most nations.
We hope that you’ve found this article valuable when it comes to understanding a little bit about how China achieved their amazing economic growth. If you’re interested in reading more related to China, keep an eye out for new blog posts or go through our existing ones. And, of course, do not hesitate to reach out if there is anything our team of experts can be of assistance with.