Over the past 150 years China moved from a closed, self-sufficient economy to the world's largest trading nation through forced opening after the Opium Wars, a Soviet-style planned economy, Deng Xiaoping's 1978 market reforms, and WTO accession in 2001, with industrial policy now pushing it up the value chain into sectors like electric vehicles.
China's rise from a largely closed economy to one of the world's biggest trading nations is one of the most remarkable economic stories in history.
In this episode of Economics Unpacked, Hanwei Huang explores more than 150 years of China's economic development – from the Opium Wars and the opening of China's ports, through central planning under Mao, the market reforms of Deng Xiaoping, WTO accession, and the country's emergence as a global manufacturing and technology leader.
We'll also examine the role of trade, industrial policy, foreign investment, and economic reform in shaping modern China, before asking an important question: can other countries replicate China's success?
Transcript
Over 150 years ago, China was a mostly self-sufficient economy that remained closed to the rest of the world. One and a half centuries later, China is now the world's largest economy in international trade. How did that happen?
Welcome to Economics Unpacked, a VoxDev series where we try to answer the big questions in economic growth. In the next few minutes, I'm going to try to explain the economic history of over 150 years. That sounds crazy, but let me give it a try.
China's growth story started more than 100 years ago when China lost the Opium War. The cause of the war was due to China's rejection of the UK and France's demand to trade opium in China. Before then, China was basically a closed economy. As a result of the Opium Wars, China was forced to open more than five trading ports, including Shanghai. At the same time, territory including Hong Kong was annexed by the UK. The emperor realised China must engage with the West and started introducing Western technologies and ideas to China. At the same time, Westerners started to come to China, introducing modern technologies and setting up enterprises in China.
The next stop is the interwar period. The Western countries were busy fighting wars. It provided a brief opportunity for China to make use of modern technologies, building up its own production and then exporting to the rest of the world.
The next key date is 1949, the establishment of the People's Republic of China, or the PRC. The PRC adopted the Soviet economic system, which was dominated by state-owned enterprises in the urban area and collective farming in the rural area. The planned economy helped China to build its heavy industry base, which was facilitated by 156 projects transferring Soviet know-how and technologies to China. However, the planned economy also featured low efficiency and high distortions, which brought disasters.
For example, the Great Leap Forward movement in the 1950s. The reason why this system didn't work was that the collective farming system didn't provide people enough incentive to work on the farm. What you get out of this system depends very little on what you do. People weren't rewarded for how much they worked, and there was a severe free-riding problem: the system rewarded collective outputs, so people could free-ride on other people's efforts.
1978 is a watershed moment in China's growth history. It marked the start of the era of reform and opening.
Two important things happened. First, China transitioned from the planned economy to the market economy. State-owned enterprises gave way to private enterprises and firms from foreign countries in the rural area. A household responsibility system was introduced, which basically replaced collective farming. The other important thing that happened is the opening of China to the rest of the world. China started to engage more in foreign trade and attract foreign investment, and this was helped by important reforms such as the establishment of the special economic zones, which allowed foreign firms to do processing trade in China.
Trade is important for three key reasons. First, it allows countries to specialise in sectors in which they have a comparative advantage. Second, it allows countries to exploit economies of scale. Firms can sell not just to buyers from their own countries, but also to buyers from the global market, which allows them to lower their costs. And third, trade spurs innovation and technological advancement. By trading with other countries, you get to learn from them, and it gives firms more incentive to do R&D. During the 80s and 90s, many of the previously state-owned enterprises were privatised during this reform period as the country transitioned to the market economy.
After decades of negotiation, China finally got into the WTO in 2001. This helped China to rise for three reasons. First, the WTO enabled China to get access to more than 100 member countries of the WTO with reduced trade costs. Second, WTO membership implied more certainty in the trade policies faced by Chinese exports, which gave firms more confidence to invest in China. And third, as a commitment to becoming a WTO member, China had to deepen its reforms. For example, in certain industries it was previously not allowed for foreign investment, but once China became a WTO member, it had to level the playing field for foreign and domestic firms. One example is the financial sector.
Since the WTO accession, China has basically become the world champion in trade and manufacturing. At the very beginning, China specialised in low-value-added sectors such as textiles, and now China has gradually moved up the value chain, making sophisticated products such as cell phones, electric vehicles and chips.
Another important moment came in 2015, when China came up with the Made in China 2025 growth initiative, targeting certain advanced industries such as the semiconductor industry and biotechnology.
A good example would be electric vehicles. Since the early 2000s, China has started to invest heavily in the electric vehicle sector, providing subsidies for production, consumption and R&D. It's very difficult for China to break into the traditional auto sectors, but in this new and growing electric vehicle sector, China has been able to gain more brands and more patents, and to outcompete Japanese and German competitors.
So here are the big three lessons for today. First, trade openness brings prosperity. Second, industrial policy can work if the government does not simply pick winners but provides the right incentives to firms. And third, the government can play a role when the market is not functioning properly.
Can other countries copy China's success? I think the answer is both yes and no. No, because China is a large country with a unique culture, history and its own unique political system. But at the same time, yes, because there are two lessons that we can take from China. First, China has been quite successful in adopting an experimental approach to policymaking — as Deng Xiaoping famously put it, "crossing the river by feeling for the stones." By experimenting with different policies in certain areas and sectors, this allows policymakers, firms and workers to adapt to the policy and find the policy that can work, and this approach has been adopted by countries like Vietnam. Second, the lesson that we can learn from China is the long-term vision in policymaking. China has been investing in the green sector, for example, for more than two decades, and this has given firms certainty in their investment, which I think is one key reason China is now leading in this sector.
There we have it: 150 years in less than 10 minutes. You have been watching Economics Unpacked. If you enjoyed this episode, please like, share, follow and subscribe.