For decades, the dominant narrative in development economics echoed the Washington Consensus: neoliberal reforms, privatization, and minimal state intervention were the keys to unlocking economic growth. China, however, has rewritten this script, offering an alternative that challenges established theories and compels a reassessment of how we understand development. Its unique trajectory, far from being an anomaly, provides crucial insights that enrich and reshape economic thought.
Joshua Cooper Ramo's "Beijing Consensus" aptly captures China's distinct approach. Unlike the Washington Consensus' emphasis on rapid liberalization and minimal state intervention, China has pursued a pragmatic, state-led model of growth. This involves incremental reforms, selective market interventions, and a sophisticated form of state capitalism. This non-ideological approach, driven purely by pragmatism, demonstrates that a strong state, far from hindering economic progress, can effectively steer development through strategic planning and targeted investments. This challenges the assumption that political liberalization is a prerequisite for economic success.
China's development intricately weaves together diverse economic theories, eschewing a rejection of established models. Education and skill advancement resonate with Robert Solow's human capital significance, while the labor shift from agriculture to industry mirrors Arthur Lewis's dual-sector model. Beyond poverty alleviation, China's trajectory expands the horizons of development economics. Embracing consumption-driven growth, it signals a nuanced comprehension of economic expansion drivers. Contrary to abrupt reforms, China's successful gradualist strategy underscores the efficacy of incremental change over radical upheaval. Prioritizing scientific and technological innovation, China epitomizes a contemporary approach to long-term economic competitiveness, transcending manufacturing-centric economies.
China’s success will inspire other developing countries and encourage them to find the suitable developmental model for themselves, rather than blindly following the prescription by the West. For these countries, the western experience might not be appliable, as specific historical context needs to be taken into consideration.
The 1970s witnessed a global economic crisis: stagflation gripped the West. In response, nations like the US and UK embraced neoliberalism, rolling back government intervention and championing free markets. This sparked a Western economic revival. But the story is far more complex than a simple triumph of free markets. The contrasting fates of the Soviet Union and Eastern Europe, clinging to centrally planned economies, highlight the limitations of a one-size-fits-all approach.
These socialist states, facing economic collapse, attempted radical reforms based on the seemingly successful Western model—a strategy often dubbed "shock therapy." The aim was to swiftly dismantle government control and establish free markets. The result, however, was economic devastation, culminating in the Soviet Union's disintegration.
Why did this Western-inspired approach fail so spectacularly in the East? One of the answers lie in the crucial difference between exogenous and endogenous factors. While the West's success with neoliberalism was undeniable, it overlooked the unique internal structures and resource allocations—the endogenous factors—of each nation. Many centrally planned economies had heavily subsidized, monopolistic heavy industries. The sudden exposure to intense free market competition proved disastrous. These industries, unprepared for such a shock, either collapsed, causing mass unemployment, or morphed into powerful oligopolies, stifling healthy market competition.
China, having also employed a planned economy before 1978, took a dramatically different path. Instead of shock therapy, it adopted a unique "dual-track" system. This approach carefully protected existing successful industries while gradually liberalizing other sectors. This measured approach, while not without its challenges, prevented the kind of violent economic upheaval seen in the former Soviet bloc. It fostered a more stable environment for reform, laying the groundwork for China's subsequent economic miracle. China's unique approach, diverging sharply from Western economic orthodoxy, demonstrates the importance of considering a nation's specific internal context when designing economic reforms.
Another reason why Western-inspired approach has crippled economic reforms in Eastern Europe and Russia, trapping Africa and Latin America in cycles of poverty and the middle-income trap, lies in the misunderstanding of market creation. Building large-scale markets capable of supporting modern industry requires significant economic and social coordination—a cost consistently overlooked by neoliberal economics. The "free" market is neither free nor costless; it's a public good demanding substantial investment.
China's industrial revolution wasn't solely driven by technological advancements, but by a proactive government fostering continuous market creation. Technological progress followed, responding to the burgeoning market demand, as exemplified by the rise of Alibaba and Huawei. Creating these markets isn't a one-time event; it requires a carefully sequenced approach guided by industrial policy. Regardless of the timing, developing nations must navigate the fundamental developmental stages of earlier industrialized nations.
Current development economics often prescribes a top-down approach, urging poor nations to leapfrog to advanced industries or adopt Western financial and political systems. This ignores a fundamental economic principle: supply doesn't create its own demand. This approach fuels instability, stagnation, and endless crises, perpetuating poverty traps. Underdeveloped nations struggle not because of inherent limitations, but due to a lack of state capacity to create the necessary markets.
China offers a new, peaceful way for countries to develop, based on government action, unity, a mix of planned and free markets, and fair trade. This challenges the current world order, and it remains to be seen if other developing nations will be allowed to follow a similar path. Creating a fairer global system that benefits developing countries is a major challenge for China and the world.
Just like almost every country in this world, China’s economy is not without challenges. Among China’s economic woes, the slow-down of GDP growth is the least of CCP’s concern, as it is a natural consequence when an economy matures. The thorniest issue is the income inequality, compounded by a quickly aging population. In 2022, the Gini coefficient of disposable income for Chinese residents was 0.467, indicating a larger income gap than that of US (0.41).
The income disparity between urban and rural areas definitely contributes to this inequality. In 2023, the ratio of disposable income between urban and rural residents was 2.39:1, indicating a considerable urban-rural gap.
Educational disparities play a significant role in perpetuating the income gap. This divide stems from unequal access to educational resources, with urban residents typically enjoying superior opportunities compared to their rural counterparts, who often lack access to high-quality education. This educational imbalance results in uneven accumulation of human capital, ultimately impacting the income growth of rural residents.
Another fundamental factor contributing to the urban-rural income disparity is the dual economic structure that segregates urban and rural regions. This divide restricts the flow of resources between agriculture and industry, leading to depressed agricultural prices and widening wealth inequality known as the 'scissors gap'. This economic system undermines the agricultural sector's capacity for growth, exacerbating the income gap between urban and rural populations.
Moreover, the hukou system, a household registration system, acts as a significant institutional barrier for rural residents, depriving them of the full benefits of urbanization. Government investments in public services such as education and healthcare tend to favor urban areas, further widening the urban-rural income gap.
China's unbalanced economic development, with pronounced disparities between the eastern and central-western regions, also plays a pivotal role. The rapid economic growth and higher incomes in the eastern regions starkly contrast with the central-western areas, where outdated infrastructure and a limited industrial structure contribute to lower incomes.
Furthermore, fiscal policies that inadequately support agriculture and prioritize urban infrastructure development over rural areas disadvantage rural residents in terms of income growth. Human capital disparities, marked by higher birth rates and lower human capital accumulation rates in rural areas, are also key contributors to income inequality.
The urban-rural income gap in China is a complex issue influenced by various factors such as education, the hukou system, unbalanced economic development, policy biases, and differences in industrial structure. However, behind all these factors, it was CCP’s strategic choice.
To establish a market-oriented economy, a nation must secure access to a vast pool of cheap labor and raw materials. In China's case, it must heavily rely on its own diligent populace, and its rural citizens in particular, considering that during the 1980s when China embarked on the journey to reform and open up its economy, over 80% of its citizens were rural dwellers.
In this dual process of industrialization and urbanization, rural residents often transitioned into migrant workers, earning meager salaries and enduring harsh living conditions as they worked on construction sites and assembly lines. This labor force has been instrumental in propelling China into the powerhouse of Asia with sizable trade surplus. Striped of financial capital, this path was chosen by CCP out of necessity.
For a long period of time, when dwelling on the lower end of global value chain, the Chinese currency and wages were deliberately suppressed to maintain a cost advantage, in exchange for trade revenues, which in turn finance the infrastructure, education and R&D for the country to move up the value chain.
The CCP realize now it is the time to reward its underprivileged citizens properly, who have made sacrifice for so long. The rural revitalization policy in China represents a comprehensive strategy crafted by the government to drive sustainable development across rural economy, society, and environmental sectors. Introduced officially in 2017, this policy gained further clarity in the Party's 19th National Congress report and received detailed guidance in the 2018 Central Document No.1, titled "Opinions of the CPC Central Committee and the State Council on Implementing the Rural Revitalization Strategy."
This strategic initiative aims to rectify the urban-rural development disparity by boosting agricultural productivity, ensuring food security, fostering rural economic diversification, and advancing ecological civilization construction. Through a multidimensional approach, including measures for agricultural modernization and rural revitalization, it targets flourishing industries, ecological livability, effective governance, prosperous living standards, and sound governance practices.
To realize these objectives, the policy encompasses diverse facets such as financial backing, tax incentives, technology dissemination, land management, and the promotion of agricultural industrialization. Specific actions involve funding support, technology diffusion, talent attraction, infrastructure enhancement, and other targeted interventions. Emphasizing the pivotal role of local administrations, the policy stresses their active implementation of central and provincial directives to ensure that policy benefits take root in every rural community.
The policy's framework and supervisory mechanisms involve joint implementation by governments at various levels, from the central to local tiers. The Central Rural Work Leading Group conducts regular inspections on the rural revitalization strategy's execution in each province, with results factored into the annual assessment of the strategy. Simultaneously, party committees and governmental bodies at all levels oversee the strategy's implementation by lower-level authorities, swiftly identifying and addressing existing challenges to drive effective policy execution.
Comparative table of rural empowerment practices. Source: Yue, X et al.
Over the years, CCP has dramatically increased the investment in agricultural construction. Particularly since the government institutional reforms in 2018, the investment has experienced a significant surge. For example, in 2019, there was a 44 billion yuan increase compared to 2018, reflecting a growth rate of 18.5%. By 2021, it had reached 338 billion yuan, marking a 48 billion yuan increase from 2020, with a growth rate of 16.49%.
While the rural revitalization policy has yielded some tangible progress, certain challenges persist. Issues like inadequate tax incentives and the need for enhanced preferential policies remain areas requiring attention. Furthermore, significant developmental disparities between regions underscore the continued challenge of achieving balanced regional progress.
Perhaps the most glaring issue is the poverty faced by senior rural residents. Across the nation, 170 million elderly rural residents subsist on an average pension of just 222.6 yuan per month. While nearly 70% of elderly citizens in urban areas primarily rely on pensions, only 10% of rural elderly citizens do the same. The majority instead depend on self-sufficiency and support from their children. Among elderly citizens with rural household registrations, the employment rate for those over the age of 70 exceeds 50%. This indicates that more than half of the rural elderly population must continue working to sustain their livelihoods.
This sheds light on the negative aspects of China's distorted urbanization process. In order to prevent the formation of ghettos or slums in cities, the country's household registration system effectively prevents rural migrants from settling in urban areas by denying them the welfare benefits enjoyed by urban citizens. For instance, the children of migrant workers are ineligible to attend public schools, and the high costs of private education are often unaffordable for them. Consequently, their only recourse is to leave their children in rural areas, leading to a growing population of "left-behind children" who receive minimal attention from parents working in cities. Similarly, rural elderly individuals are excluded from the more generous urban pension system and are left to fend for themselves in the countryside.
In an effort to address the unfair treatment of its rural population, the CCP is set to overhaul the household registration system. In 2024, China’s State Council has released a comprehensive five-year action plan aimed at accelerating the urbanization of the country's rural population. The plan prioritizes expanding opportunities for rural residents to settle in urban areas, aiming to bridge the gap between registered and resident urbanization rates.
The "Five-Year Action Plan for Deepening the People-Centered New Type of Urbanization Strategy" sets a target of nearly 70% urbanization rate for the resident population. Key to achieving this goal is a significant reform of the household registration (hukou) system. The plan calls for relaxing settlement restrictions in most cities, particularly those with populations under 3 million, where restrictions will be lifted entirely. Cities with populations between 3 and 5 million will see broadened settlement criteria. Even in larger cities, the plan encourages the removal of annual settlement quotas and a shift towards a point-based system.
The plan emphasizes the importance of tailored, locally-driven solutions to facilitate the relocation of agricultural migrant workers and their families. It stresses the need to ensure these new urban residents enjoy equal rights and responsibilities, including access to basic public services, social insurance, housing, and education. Improvements to the national household registration management platform are also planned to streamline the process.
Beyond easing settlement restrictions, the plan addresses broader urban development challenges. It promotes the rapid urbanization of regions with emerging industries, the development of modern metropolitan areas, and the mitigation of urban vulnerabilities. The plan also aims to improve the basic public service system provided at the place of permanent residence.
To incentivize this urbanization, the plan outlines several key policy measures:
Financial Incentives: Increased financial support will be directed towards cities absorbing large numbers of rural migrants. This includes bolstering central financial incentive funds, tilting construction funds towards these cities, and coordinating the allocation of new urban land indicators with population increases.
Protecting Rural Rights: The plan emphasizes protecting the land rights of rural residents who move to cities. It aims to standardize the registration and certification of rural real estate rights, ensuring that the surrender of land rights is not a prerequisite for urban settlement. Voluntary compensated withdrawal methods will be explored.
The plan represents a significant step in China's ongoing efforts to manage its rapid urbanization, focusing on inclusivity and ensuring a smoother transition for rural migrants into urban life. The success of this plan will be crucial in driving sustainable and equitable economic and social development across the country.
Economic Balancing Act: Leverage, Welfare, and the Path to High-Quality Growth
The CCP is navigating a complex balancing act as it strives for providing better welfare to its citizens and achieving high-quality economic growth. The interplay between government leverage, increased resident welfare, and structural economic reform is proving to be a significant challenge.
The government has employed increased leverage, particularly through the issuance of long-term government bonds, as a key tool to counter recent economic slowdown and stabilize growth. This strategy, while providing short-term stimulus, is also intended to facilitate a transition from high-speed to high-quality development.
However, this approach is not without risk. A significant rise in household debt, largely driven by mortgages, presents a potential threat to financial stability. While current high down payment requirements have somewhat mitigated this risk, continued wealth accumulation could lead to further increases in household leverage, potentially resulting in weakened bank assets, increased financial risk, and suppressed consumer spending. The government is therefore emphasizing careful management of household debt levels.
Simultaneously, the government is prioritizing improvements in resident welfare through increased social security and welfare spending and policies aimed at boosting disposable income, such as tax cuts. Studies suggest a correlation between moderate levels of local government debt and improved resident welfare, but excessive debt carries significant negative consequences.
The government also faces the challenge of balancing leverage across different sectors. The corporate sector currently carries a high debt burden, while household debt, though rising, remains relatively lower. Therefore, alongside efforts to boost resident welfare and manage overall leverage, the government is focusing on deleveraging within the corporate sector and implementing structural reforms to enhance economic efficiency and competitiveness.
The path to high-quality growth requires a delicate balance between leveraging government resources to stimulate the economy and ensuring the long-term financial health of both the government and its citizens.
Chinese Economy at Crossroad: Consumption-Driven vs. Export-Driven Model
The tricky balancing act of CCP signifies a peculiar stage in China’s economic and social development: it stands at a critical juncture, embarking on a significant transition from its historically export-driven model to one fueled by domestic consumption. This shift is driven by a confluence of factors, including mounting global trade uncertainties, heightening geopolitical tensions, weakening domestic demand, and the imperative for more sustainable economic growth.
For decades, China's remarkable economic expansion has been largely reliant on exports, with its robust manufacturing sector serving as the engine of growth and job creation. This export-oriented strategy, however, has left the economy vulnerable to global market fluctuations and escalating trade tensions. Recent years have presented several formidable challenges. Increased tariffs and trade barriers, particularly the ongoing friction with the United States, pose a significant threat to China's export markets. Simultaneously, a noticeable decline in domestic consumer spending, exacerbated by the recent real estate market downturn and broader economic slowdown, has underscored the urgent need for a more balanced economic structure less dependent on external demand.
In response, the Chinese government is actively promoting a consumption-driven growth model. This involves a multi-pronged approach encompassing fiscal and monetary stimulus measures, such as increased government borrowing and more relaxed monetary policies, designed to inject much-needed vitality into consumer spending.
Furthermore, there's a concerted effort to invest heavily in infrastructure and service sectors catering to domestic needs, aiming to create jobs and boost disposable incomes. This strategic shift aligns with China's long-term goals of fostering sustainable growth and reducing its reliance on volatile international markets. However, a successful transition requires deeper economic liberalization, encouraging private consumption and investment in sectors focused on domestic demand. Equally crucial is building robust consumer confidence, necessitating the creation of stable employment opportunities and a strengthened social safety net.
A transition into consumption-driven model doesn’t mean the Chinese economy will turn inward and close itself from the outside world. Instead, the CCP has proposed the "dual circulation" model. This approach, which prioritizes bolstering the domestic market while fostering synergy between domestic and international circulations, is proving to be a game-changer for the country's economic growth.
Central to the "dual circulation" model is the emphasis on strengthening the domestic market, a move aimed at reducing dependency on external markets and enhancing economic resilience. This strategic shift not only aligns with the evolving global economic landscape but also caters to the specific developmental needs of the Chinese economy.
Amid a backdrop of slowing globalization and escalating international uncertainties, China is strategically pivoting from an export-driven growth model to one that places greater emphasis on stimulating domestic demand. This transition is effectively mitigating the adverse impacts of external risks on the economy.
The renewed focus on domestic circulation is driving economic expansion by fueling consumer demand and expanding internal consumption. Leveraging its vast consumer base, China is unleashing the latent potential of domestic demand to power economic growth. Notably, consumer spending has emerged as a pivotal driver of China's economic expansion, with its contribution to GDP growth steadily increasing.
Furthermore, by implementing supply-side structural reforms and enhancing the autonomy of domestic industrial and supply chains, China is consolidating its position as a dominant force in the domestic market.
While the "dual circulation" model underscores the primacy of the domestic market, it also recognizes the importance of international engagement. By ramping up international trade and capital flows, China is positioning itself to integrate more seamlessly into the global economic ecosystem, thereby enhancing its international competitiveness.
Through a combination of regional economic optimization, industrial upgrades, and open collaboration, China is not only achieving equilibrium in the domestic market but also catalyzing global economic growth.
In practical terms, the "dual circulation" model is driving economic progress through various avenues. The booming digital economy, particularly in coastal regions, is acting as a catalyst for dual circulation, propelling economic growth. Additionally, by fostering a modern, competitive market system and accelerating industrial modernization, China is securing a more advantageous position in the global value chain.
The "dual circulation" model's success in fortifying the domestic market, unlocking domestic demand, and fostering international partnerships is propelling China towards high-quality economic development. This strategic framework not only aligns with the evolving international landscape and domestic economic reforms but also lays a robust groundwork for China's sustainable economic growth in the future.
China's economic future hinges on its capacity to effectively navigate this complex transition into the new model. While significant challenges remain, including external pressures and the need for substantial internal economic adjustments, the CCP's proactive approach to fiscal policy and structural reforms offers potential for sustainable growth in the years ahead.
