Saturday, January 4, 2014

Demystifying the Chinese Economy

This is a good clear description of how the Chinese managed the transition.  What is quite clear is that they avoided throwing the baby out with the bath water while they were at it.  This was all possible because they willingly took on the challenge to change.  Had it been any other way, the disturbances would have even fatally slowed the process.  Look to Russia for an example.

A lot of this can be applied elsewhere, at least where the society has been organized with a functioning governmental infrastructure.  Cuba comes to mind but most of South America does not.

In the end, it meant a rapidly expanding private sector that remains more than willing to reinvest, flight capital tales to the side.  This has naturally fed the public sector with rapidly increasing demand to satisfy as well.  The virtuous circle continues.

How did China achieve reform without losers in its transition from socialism ?

DECEMBER 20, 2013

Justin Yifu Lin, Chief Economist and Senior Vice President, the World Bank, provides his take on how China achieved success and how other developing countries should follow in Demystifying the Chinese Economy.

China had per capita GDP of $4,260 in 2010.
China had per capita GDP (nominal US$) of $6,091 at the end of 2012.
China's per capita GDP (not including HK or Macau) will likely be about $7,000 at the end of 2013.
China's per capita GDP will likely be about $8,000 at the end of 2014. (nearly doubling the 2010 level)
China's per capita GDP will likely be about $9,000 at the end of 2015.

China adopted a gradual, dual-track approach starting in 1979. China achieved reform without losers and moved gradually but steadily to a well functioning market economy. 

During the transition process China adopted a pragmatic, gradual, dual-track approach. The government first improved the incentives and productivity by allowing the workers in the collective farms and state-owned firms to be residual claimants and to set the prices for selling at the market after delivering the quota obligations to the state at fixed prices). At the same time, the government continued to provide necessary protections to nonviable firms in the priority sectors and simultaneously, liberalized the entry of private enterprises, joint ventures, and foreign direct investment in labor-intensive sectors in which China had a comparative advantage but that were repressed before the transition.

This transition strategy allowed China both to maintain stability by avoiding the collapse of old priority industries and to achieve dynamic growth by simultaneously pursuing its comparative advantage and tapping the advantage of backwardness in the industrial upgrading process. In addition, the dynamic growth in the newly liberalized sectors created the conditions for reforming the old priority sectors.

A few other socialist economies — such as Poland, Slovenia, and Vietnam , which achieved outstanding performance during their transitions — adopted a similar gradual , dual-track approach. Mauritius adopted a similar approach in the 1970s to reforming distortions caused by the country’s import-substitution strategy and became Africa’s success story

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