The growth of China’s GDP has fascinated economic theorists for years. The country has grown in a relatively short time from an underdeveloped nation to the second biggest exporter and consumer in the world. The growth can be attributed to three primary factors, namely, a government with extensive experience in the pitfalls of communism and a healthy approach to free markets, strong support from the primary and secondary economic sectors, and abundant labor and land resources. Besides, the entry of China into the global market sustained the growth. The admission allowed the country to focus on primary and secondary sector exports on a scale that few other nations can achieve. The combination of these factors is what has led to China’s rapid GDP growth.
How Did China’s GDP Grow So Fast?
The growth of the Chinese economy in recent years has astounded global economists and scholars. It seems as if, almost overnight, China grew into an economic powerhouse that is capable of challenging the United States and the European Union (Moak and Lee 13). Because of this growth, China is a global powerhouse, which has fundamentally altered the face of global finance, economics, and politics. China’s exceptional GDP growth and the accompanying GDP per capita growth rate are an economic anomaly (Moak and Lee 5). Additionally, according to conventional economic growth models, a nation of the size of China should not grow so fast without risking economic and social collapse as well as inflation (Naughton 15). Countering the nation’s growing influence in the world requires a thorough understanding of the mechanisms and factors behind its success. China’s economic history shows that three factors were vital to its economic growth: abundant primary and secondary sector production, the need for fundamental economic reform to compete on the global market, and a government that could combine both communist and free market ideals.
To understand how China became the powerhouse it is today, one has to go back to the last year of the Second World War. The latter cost China significantly regarding development. China’s long-standing enmity with Japan had made China a prime target, and due to the disorganization of China’s military at the time, Japan and the Soviet Union managed to wreck the economy (Naughton 19). However, after the Axis powers were defeated, China’s first move was to consolidate the economy. This restructuring required extensive investments in communications systems and infrastructure. Due to the size of the country, China adopted a highly centralized government structure that exists to this day. Centralization allowed the regime to control all the nation’s resources, including land. Similarly, the country’s financial system was centralized and currencies were unified. This governance structure is one of the reasons for the country’s fast growth in the 21st century.
From 1953 to 1960, China embarked on two consecutive major reforms that focused on nationalization and stimulation of industrial growth. The first five-year plan was implemented from 1953 to 1957. During this period, the government focused on industrialization. What is more, it embarked on an ambitious acquisition program in which privately owned manufacturers were pressured and induced into selling their enterprises to the government (Moak and Lee 20). By 1956, there were no private firms as about two-thirds were fully owned by the government and the others were public-private partnerships, although the word ‘public’ did not mean much in the communist government. China’s industrial output had been growing by about 9% per year by the time the plan came to its conclusion in 1957. Industrial growth and nationalization of key sectors allowed China’s economy to register a steady growth.
Unfortunately, the Five-Year Plan did not adequately focus on agricultural output. As such, Mao Zedong enacted the Great Leap Forward, a plan to revitalize all aspects of the economy. , however, the plan failed, leading to the deaths of many people. Having learned the importance of the agrarian sector, the government envisaged a new plan to give the highest priority to agricultural production (Naughton 25; Moak and Lee 32). Even in light and heavy industries, the emphasis was put on agricultural processing plants and equipment. Consequently, by 1965, China had regained from the losses sustained during the Great Leap Forward and started to develop.
However, Mao Zedong, the architect of the Great Leap Forward, proposed a reactionary plan, the Cultural Revolution, which would later set back China for a decade. The Cultural Revolution paralyzed the nation’s industrial sector as workers and students engaged in factional and often violent struggles. Fortunately, the Cultural Revolution was mostly confined to cities and did not significantly impact agriculture. Another effect of the Cultural Revolution was brain drain (Moak and Lee 35). Since the bourgeois, the class mainly made up of educated Chinese citizens, were the targets, millions of them were killed or exiled. Accordingly, there was collective decrease in the national technological knowledge base, which contributed to the economic stall experienced between 1974 and 1978 (Naughton 29). As the Cultural Revolution waned, in the mid-1970s, economic production increased once more.
From his historical background, it is evident that the Chinese had learned some crucial lessons that informed their economic reform plans, which resulted in the stellar economic growth in the ensuing decades. Three factors were central to China’s economic growth: the importance of agriculture and food security, the crucial nature of the industrial sector, and the need for a fundamental economic reform. These factors promoted economic restructuring, putting the country into a development and growth trajectory.
The topic of China’s economic growth is one that has been examined extensively. Thus, the methodology of this research is a desk research. Various publications are reviewed regarding the growth of the country’s economy to draw conclusions regarding the three themes or factors highlighted in the literature review. The primary advantage of taking this approach is to leverage the knowledge collected by experts and global financial institutions, such as the World Bank. By analyzing the data, it is possible to tell the significance of the three factors and their contribution to the growth of the Chinese economy.
Variables, Source of Data, and Sample Period
The primary variable observed in this paper is the GDP. Even though the GDP is no longer used as the principal national economic indicator, it still provides valuable information to understand the reasons behind China’s fast growth. Secondary variables include the annual GDP growth rate, GDP per capita, and exports. All measurements and data have been obtained from the World Bank and cover the period from 1961 to 2017. Furthermore, they are all taken at the current US$ rate to account for inflation. With these four measures, trends may be more evident.
Some information can be confirmed. For instance, the GDP growth curve shows two spikes in 1964 and 1970. The two points represent GDP growths of 18.2% and 19.3% respectively (“China”). The first occurred after the Great Leap Forward. The period between 1964 and 1965 saw China develop faster than it ever had before. However, the effect of the Cultural Revolution can be seen in the period after 1965, when growth rates dipped into negative values. The 1970 spike is because of the waning influence of the Cultural Revolution on the economy. Moreover, from 1973, the post-revolution stall is evident in the way the GDP growth rates vary widely from one year to the next.
The plans that led to China’s rapid economic growth began in 1987. It is evident that the GDP began rising faster around 1987. In 1978, the Chinese government was worried that the post-revolution economic stall would worsen into a recession. Therefore, it planned and began executing a fundamental economic reform program. Critical elements of the successful execution of the economic program were already present. For instance, a communist system of government, which was adopted from the Soviet Union, was already in place. The ideology had been implemented and improved for decades since the end of WW2 (Moak and Lee 29). The Chinese system had found the perfect balance between centralization and devolution of power and responsibilities. While power was concentrated at the top, lower-level officials had some leeway to execute their mandate. The government had also learned the importance of agriculture to the economy as the Great Leap Forward had been a harsh but valuable lesson in that area. In addition, China’s industrial sector was heavily developed because the First Five-Year Plan focused on industrialization in all sectors. After the Great Leap Forward, industrialization in the agricultural sector was developed even further. The Cultural Revolution revolved around giving the proletariat (mainly factory workers) a voice. The movement led to a further improvement of the industrial sector. China now had a government suited to effectively oversee numerous state-run industrial facilities, had a well-developed industrial sector, and had initiated the growth of the agricultural sector. Thus, the economy was prepared for growth.
On December 22 1978, China implemented an economic reform program. The government started by laying the critical infrastructure during the 1979 to 1981 period of adjustment. Export markets were sourced, light industries received additional funds, and the agricultural sector was given an additional stimulus package. New industrial policies focused on increased independence of managers and the elimination of production quotas. What is more, financial incentives were given, and industrial facilities were allowed to keep profits instead of remitting all revenues to the state. The policies incentivized managers to reduce costs and increase production. Most importantly, private enterprise was once again legalized and encouraged, and the government delegated the role of disbursing investment funds to banks, which would charge interest.
The period of adjustment readied China to enter onto the world economic stage.
After the period of adjustment, China competitively entered the global market in 1982. From an industrial point of view, the nation already had the facilities and infrastructure to develop and transport products to foreign markets. From an agricultural perspective, China was producing more food than it could consume, and needed to export the surplus (Naughton 49). Fig. 3 shows that exports began increasing steadily from the early 1980s because of economic reforms. The country’s participation in foreign trade boosted GDP growth for decades. Even between 2010 and the present when the global economy has been growing sluggishly, China has been posting GDP growth ranging between 6% and 10%, rates that are unprecedented for an economy of its size. As it can be seen from fig. 3, before 1982, exports rarely formed 10% of GDP. However, after the economic reforms, export sales increased to a high of 35% in 2006 (“China”). While some experts may credit China’s GDP growth solely to foreign trade, formidable industrial and agricultural capacities are also partly responsible. Such capabilities were developed when China was still struggling through Mao Zedong and famines. This foundation in agriculture and industry in the 1960s and 70s is now paying off for China.
Exports as a percentage of China’s GDP (“China”)
Evidence of the contribution of agriculture and manufacturing is evident when China is compared to conventional economic models. A nation’s development does not have distinct but continuous stages. In their infancy, countries have most of their output from the agricultural sector. However, as technology improves, the industrial sector begins to dominate, and more maturation leads to the emergence of a service sector (finance, IT, consulting, and retail). Eventually, the service industry outperforms both the agricultural and industrial segments. The case is evident in developed nations, such as the United States where the service (tertiary), industrial (secondary), and agricultural sectors (primary) contribute 80%, 18.9%, and 0.9% respectively (“GDP – Composition by Sector of Origin”). Contrastingly, in 2017, the primary, secondary, and tertiary industries in China contributed 8.3%, 39.5%, and 52.2% respectively. Evidently, china heavily relies on its agricultural and industrial sectors far more than other developed nations.
The country’s reliance on its primary and secondary factors is the key to the fast GDP growth. The primary factor includes land, while the secondary one entails labor. China has the largest labor force in the world along with abundant land and resources. China utilizes these two factors at near optimum levels (Naughton 11). As a result, China has more to offer to the global market than other nations regarding physical products, hence the rapid growth in exports.
Moreover, a comparison of fig. 2 and fig. 4 shows a gap of six years in which GDP was increasing but GDP per capita was not. This mismatch is an indication of high level of reinvestment, which has ensured that China has continued to grow its industries. It is evident that prior extensive preparations and a focus on the country’s unique qualities are the leading factors for China’s higher-than-average GDP growth.
China’s GDP per capita from 1961 to 2017 (“China”)
In future, researchers could look at how China’s emergence has affected the global economy. With conventional economic growth models, nations develop organically and the global economy creates space for them. By contrast, China’s entrance into the global scene has been fast and has had great effect on the world economy. Thus, a study into how China has changed both the economical and geopolitical arena can enrich the current study.
Several factors can be said to have collectively occasioned the fast growth of China’s economy. After the Second World War, China was a country without a cohesive functioning economy. Following some failed starts, the country become aware of the importance of robust agricultural and industrial sectors in spurring the development of the economy. Moreover, before 1978, China’s focus was on self-sufficiency. However, the country started pursuing entry into the global market by easing government restrictions on production. In addition, China has an abundance of labor and land, which have enabled it to invest heavily in agriculture and industry. The combination of labor, land, governance, and a prepared economy ensured that China enjoys a sustained average GDP growth of over 10% for several decades. It is evident that effective governance and reliance on the primary and secondary sectors are the key drivers of China’s ongoing economic dominance.
One limitation of this study is that it is impossible to understand the topic fully as various economic experts admit that not all factors can be accurately accounted for. While agriculture, industry, and governance are primary factors that contributed to the fast GDP growth, other minor factors also played a role. China’s entrance into the global scene has been fast and has had a profound effect on the global economy. Therefore, a study into how China has changed both the economic and geopolitical arena provides an opportunity for future research.
“China.” The World Bank, n.d., data.worldbank.org/country/china. Accessed 7 Nov. 2018.
“GDP – Composition by Sector of Origin.” The World Factbook, n.d, www.cia.gov/library/publications/the-world-factbook/fields/2012.html. Accessed 7 Nov. 2018.
Moak, Ken and Miles W. N. Lee. China’s Economic Rise and its Global Impact. Springer, 2015.
Naughton, Barry. The Chinese Economy: Transitions and Growth. MIT Press, 2007.