The Sustainability of China's Economic Performance at the Turn of the Century

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ABSTRACT

Reform of the Chinese economy, on a step-by-step basis began in 1978, and has proceeded remarkably well, except for some early threats of accelerating inflation and the disturbances at Tiananmen Square in 1989. The level of GDP approximately quadrupled between 1980 and 2000, but can such fast economic growth be sustained? The target of Chinese planners is to duplicate this performance between 2000 and 2020. Our high-frequency forecasting models that are in regular use on a semi-monthly basis, finds no indication at the present time, 2006, of significant deviations from the targeted path. Inflation and growth together are consistent with the sustainability goal at this time in the early 21st Century. Access to international capital has been provided through foreign direct investment, as well as more traditional channels and growth has become export-led, to an extent that contributes to large holdings of foreign exchange reserves.

JEL Classification: C53, P21, O47

Keywords: Gross domestic product; Consumer price index; Producer price index; Inflation; Sustainable development; Special economic zones; Town & village enterprises; Step-by-step reform

I. INTRODUCTION

In Adam Smith's Wealth of Nations, the wise Scotsman recognized that China was once a wealthy country on the scale of world-class economic comparisons. In late 13th century, Marco Polo documented remarkable economic achievement in China, but Smith noted that there were few significant or protracted gains since that time, as shown by Angus Maddison's flat graphs of the time series curve of China's GDP per capita. From late 20th Century, the pattern is remarkably different. It is well recognized at the present time, but I doubt that any respectable analysis during the cultural revolution or soon after could have foreseen the breathtaking magnitude of advance that has captured the imagination of economists, business leaders, political authorities; or almost any kind of intellectual.

When I led a team of economists on behalf of the Committee on Scholarly Communication with the People's Republic of China (CSCPRC) to China in autumn 1979, in order to establish intellectual interchange between economists East and West, we may have known that something exciting and significant was taking place, but no one in that group could have anticipated what is taking place today.

We talked with village and provincial statisticians at each of our stopovers and learned about livestock counts, grain harvests (from highway traffic running across cut stalks strewn over the road), archeological digs, battle stories, and other aspects totally unrelated to what could be seen ahead in a few years and (growing) today.

I and some of my colleagues came away from that 1979 visit impressed and interested in trying to improve the level of economic understanding in China through arranging basic classes, in China and in the United States, with the support coming from the Ford Foundation.

Many future developments were planned:

1. Professor Lawrence Lau and I proposed a full summer's seminar in econometrics, fundamentally introducing that branch of the subject from an expanded team of specialists, participating in what turned out to be an extremely successful program in 1980, at the Summer Palace in Beijing.

2. Our colleague, Irving Kravis, had collected nearly 100 basic price quotations while moving about the country in 1979. From this collection, he was able to include China in the PENN World Tables of more than 100 countries in valuations at Purchasing Power Parity prices (PPP) which have become the standard for large-scale cross-country comparisons. Professor Kravis' initial estimates placed China at 12.3% of US estimates of real GDP, per capita in 1975, approximately at the level of the Philippines, and double that of India.

Chinese economists complained that Kravis' estimates were too high, not wanting to appear so rich as to be denied access to international loans at preferential interest rates. …