1997 Reports

Understanding China's Economic Performance

Sachs, Jeffrey D.; Woo, Wing Thye

Broadly speaking, two schools of thought have emerged to interpret China's rapid growth since 1978: the experimentalist school and the convergence school. The experimentalist school attributes China's successes to the evolutionary, experimental, and incremental nature of China's reforms. Specifically, the resulting non-capitalist institutions are claimed to be successful in (a) agriculture where land is not owned by the farmers; (b) township and village enterprises (TVEs) which are owned collectively by rural communities; and (c) state owned enterprises (SOEs) where increased competition and increased wage incentive, but not privatization, have been emphasized. The convergence school holds that China's successes are the consequences of its institutions being allowed to converge with those of non-socialist market economies, and that China's economic structure at the start of reforms is a major explanation for the rapid growth. China had a high population density heavily concentrated in low-wage agriculture, a condition that was favorable for labor-intensive export-led growth in other parts of East Asia. The convergence school also holds that China's gradualism results primarily from a lack of consensus over the proper course, with power still divided between market reformers and old-style socialists; and that the "innovative" non-capitalist institutions are responses to China's political circumstances and not to its economic circumstances. Perhaps the best test of the two approaches is whether China's policy choices are in fact leading to institutions harmonized with normal market economies or to more distinctive innovations. In this regard, the recent policy trend has been towards institutional harmonization rather than institutional innovation, suggesting that the government accepts that the ingredients for a dynamic market economy are already well-known.