The Chinese Approach: How China Has Transformed Its Economy and System? 9811618984, 9789811618987

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Fang Cai   Editor

The Chinese Approach How China Has Transformed Its Economy and System?

The Chinese Approach

Fang Cai Editor

The Chinese Approach How China Has Transformed Its Economy and System?

Editor Fang Cai Chinese Academy of Social Sciences Beijing, China

ISBN 978-981-16-1898-7 ISBN 978-981-16-1899-4 (eBook) https://doi.org/10.1007/978-981-16-1899-4 Jointly published with China Social Sciences Press The print edition is not for sale in China (Mainland). Customers from China (Mainland) please order the print book from: China Social Sciences Press. Translation from the Chinese language edition: 中国智慧 by Fang Cai, © 中国社会科学出版社 (China Social Sciences Press) 2018. Published by 中国社会科学出版社 (China Social Sciences Press). All Rights Reserved. © China Social Sciences Press 2021 This work is subject to copyright. All rights are reserved by the Publishers, whether the whole or part of the material is concerned, specifically the rights of reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Preface

Introduction China’s reform and opening-up has concluded more than 40 years since 1978. “At thirty, I took my stand. At forty, I was without confusion,” said Confucius in his classical summarization of the phases of life. In fact, Confucius was not only talking about his own life in the summarization; he also implied social relevance. For example, regarding the phase of 30 years of age, Confucius once said, “If there were one who reigned as a true king, and after a generation, all would be ren(benevolent).” A generation, or “shi”, refers to a period of 30 years, as annotated by leading scholars on Analects of Confucius, and what Confucius meant by that saying is that any policy to improve people’s lives needs 30 years to show its effect. Meanwhile, no confusion at 40 implies extraction and distillation of experiences from practice, or in today’s language, entering the kingdom of freedom from the kingdom of necessity. Therefore, the achievements over the 40 years of reform and opening-up with development and sharing, as well as the growing practical experiences, not only show that the policies of the reform and opening-up were correct, but also reveal the need to extract theories from the experiences in order to guide the subsequent progression of China’s reform and opening-up and to inspire the reformers in other developing countries. Apparently, the time point of the 40th year with no confusion is of particular relevance for theoretical study. As early as 1994 when the reform and opening-up reached the point that can be described by Confucius’ saying of 15 years of age, i.e., “at fifteen, I set my heart on learning,” Lin Yifu, Cai Fang and Li Zhou already predicted that China would overtake Japan and the USA in the economy1 . Right around the same time, some Western economists such as Krugman were starting a discussion to negate and criticize the mode of economic growth in East Asia, including China, which I call the “Krugman—Young curse”. These scholars have so far initiated at least three rounds of criticism or curse about China’s economic development. In the first round, Paul Krugman, based on 1 Lin, Yifu, Cai, Fang, and Li, Zhou, China’s Miracle: Development Strategy and Economic Reform,

Shanghai Sanlian Bookstore & Shanghai People’s Publishing House, 1994 v

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the quantitative studies by Alwyn Young et al., argued that the economic growth in the Four Asian Tigers was not a miracle or anything sustainable as the growth had relied primarily on input of factors with no sign of improvement in the productivity, and he concluded that the Tigers were merely “paper tigers”.2 The curse of this round also gave China a ride. In the second round, they turned their focus directly to China. Alwyn Young wrote a paper of considerable importance, which claimed that a statistical technique was all that was needed to transform the so-called Chinese miracle from extraordinary into mundane.3 The third round took place when China’s economic growth started to slow down after having achieved unprecedentedly high speeds, and they stated that China’s economy would finally “hit the wall”.4 It seems that these scholars have based their assertion both on theoretical and empirical evidence to deny China the possibility of sustainable economic growth. Theoretically, they refused to acknowledge China’s miracle of economic growth because they, based on the assumption of neoclassical growth theory, failed to understand the development characteristics of a dual economy with unlimited supply of labor. Once preoccupied with the assumption, they purposefully manipulated statistical methods and denied any improvement in the productivity in China based on their empirical studies. To them, since the growth had been primarily driven by factor input without any improvement in the productivity, China’s economic growth was at the best a single regression to the possible margins of production brought by some structural reform measures with no potential for a high growth rate, and therefore the seemingly high growth rate would not be sustainable in the long run. In contrast, most economists do not agree with these viewpoints that negate the achievements of China’s economy and have instead highly evaluated the growth miracle created by the reform and opening-up in China. However, these mainstream economists have also failed to properly capture the theoretical summarization of China’s experiences due to various reasons, such as adoption of inapplicable theoretical hypotheses and lack of in-depth empirical understanding. This has led to limited understanding on their own with underestimation of the significance of China’s experiences in general, of which the following types of literature are overall representative. First, the necessary condition of China’s high-speed growth has not been uncovered. For example, when Brandt and Rawski edited a 2008 monograph on the economic transition in China, in which Chinese scholars and those overseas made thorough analysis on the effects of China’s reform5 , they adopted a viewpoint by Hollis Chenery, former Chief Economist of the World Bank, i.e., a country, once it has identified and reformed the defects of its system, will achieve fast development 2 Krugman,

Paul, “The Myth of Asia’s Miracle”, Foreign Affairs, Vol. 73, No. 6, 1994, pp. 62–78

3 Young, Alwyn, “Gold into the Base Metals: Productivity Growth in the People’s Republic of China

During the Reform Period”, Journal of Political Economy, Vol. 111, No. 6, 2003, pp. 1220–1261 Paul, “Hitting China’s Wall”, New York Times, July 18, 2013 5 Brandt, Loren & Rawski, Thomas G., “China’s Great Economic Transformation”, in Brandt, Loren & Rawski, Thomas G. (eds.), China’s Great Economic Transformation, Cambridge, New York: Cambridge University Press, 2008 4 Krugman,

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even though the necessary condition for development is missing. However, the point that the necessary condition for development was missing in China was confusing because it could not explain where the high-speed growth in China in the past 40 years came from; thus the monograph only provided theoretical rationale for the “Krug-Young curse”. Second, the sharing nature during China’s development has been underestimated. Most economists, domestic or overseas, have spoken highly of the achievements of China’s reform and opening-up and development. However, they have various comments on whether or not the achievements have been shared adequately. Those on the denial or pessimistic side usually do not understand the development of a dual economy and have thus failed to fully recognize the positive effect of labor transfer on the income of peasants; instead, they often raise voice on how the salaries of peasant workers have been intentionally held down. To support this conclusion, they have included some indicators of income inequality empirically such as the trend in the Gini coefficient of resident incomes and the ratio of urban-to-rural income. Third, the initiative and internal logic of China’s reform and development have been completely ignored. For example, Hayek, late Nobel Laureate and economist, once noted that one kind of social changes is actually “an accident of human behaviors”, which implies that the desired goal can be accidentally met although no efforts have been directed in that specific direction. Many, including Ronald Coase, also a Nobel Laureate, and his followers such as Zhang Wuchang and Wang Ning6 , have cited China as a wonderful case to support this view. They have described the innovative achievements of China’s reform and opening-up as the outcome of unintentional events, setting a methodological barrier to scientific summarization of the miracle and the wisdom of China while brushing aside the wisdom and efforts of all those who have explored, designed and practiced the reform in China. Einstein once said that compound interest is the eighth wonder of the world. From the perspective of compound growth rate, once the economic growth of China since the reform and opening-up is compared with those of several countries (i.e., UK, USA and Japan) in their respective phases of high growth after the Industrial Revolution, the “Chinese miracle” may be further confirmed. The UK had an annual growth rate of GDP per capita of only 0.9% from 1880 to 1930. Given that the life expectancy at birth in 1880 was 50 years, a British with an average life span would feel that his life improved by 56% during his lifetime. Such growth in the UK was the first breakthrough out of the Malthusian Trap that had survived for several thousand years. Following the UK and other countries in Western Europe, the US became another modern power. From 1920 to 1975, the growth rate of GDP per capita in the USA was approximately 2%. Given that the average life expectancy at birth was 55 in 1920, that generation in the USA would see their living standards doubled in their lifetime. Japan is the first Asian country that succeeded in catching up with the Western powers and modernizing itself. From 1950 to 2010, the growth rate of GDP per capita 6 Coase,

Ronald & Wang, Ning, How China Became Capitalist, Palgrave Macmillan, 2012

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in Japan exceeded 4%. Based on the average life expectancy of 60 years, the Japanese born in 1950 would see their lives bettered by almost 10 times in their lifetime. At the beginning of the 1980s, the reform and opening-up pushed China onto the track of fast growth. During the 30 years from 1981 to 2011, the average annual growth rate of GDP per capita in China was 8.8%, and an average Chinese would have already felt his life bettered by more than ten times. In addition, after 2011, the GDP per capita still kept growing. Based on the average life expectancy of 68 years, the Chinese born in 1981 are expected to live in 2049, the centennial anniversary of the People’s Republic of China. If the growth rate in the past is kept, an average “post80’s” Chinese would experience the increase in his income by several hundred folds. Although China’s economic growth will not stay the same as it was, the growth itself and the miraculous improvement in people’s lives will without question be noted down in the history of social development of humanity. It is of particular importance for economists of China, especially the researchers who have developed their academic careers together with the development of the reform and opening-up, to accurately reveal the necessary and sufficient conditions of the high-speed growth in the past 40 years and to characterize the unique features of China’s reform and opening-up with a serious attitude and standardized methods; it is also important to further the reform and opening-up and maintain the economic growth and income increases while required by the goal to contribute to economics and to distill the Chinese experiences into the Chinese wisdom. China, as the biggest developing country, has nearly one-fifth of the world population, and therefore, its path to successful economic development will certainly lend lessons to the development of humanity and China’s approach will also provide important inspiration to other developing countries.

The Necessary Condition for China’s High-Speed Growth In the system of a command economy, rejection of market mechanisms leads to inefficient allocation of resources on the macro-level, lack of incentive mechanisms leads to inefficient economic activities on the micro-level, and absence of reward and punishment compromises the initiative of workers, peasants and administrators in work. The growth in the factors of production that is realized by the government’s strong mobilization of resources is to a large degree canceled out by the negative growth of the total factor productivity (TFP) and cannot be transformed into favorable outcome of economic growth. Therefore, reforming this system improves the microscopic efficiency and consequently brings the economic growth to quickly come back to the possible margins of production. Exactly because of this reason, the relatively fast growth in the absence of the necessary condition for growth, as related by Chenery, actually describes the improvement in the growth performance despite “absence of any additional source of economic growth” with only a return to “the economic homeostasis”.

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Fig. 1 Changes in the population age structure and the opportunity window Source United Nations, Department of Economics and Social Affairs, Population Division, World Population Prospects: The 2015 Revisions, DVD Edition, 2015

However, the economic growth at as high as 9.6% and for as long as 40 years achieved by China as a big country of over a billion population is something that no other economy has ever seen. Therefore, there is a need to identify the necessary condition for China’s economic growth, or, what the economic growth homeostasis is under the condition of “making the system right”. This is essential to correctly interpreting China’s performance in the long-term growth as well as recognizing and exploring the potential for future development. As shown in Fig. 1, China’s reform and opening-up and the resulting high-speed growth period highly overlap with a special phase of demographic transition. As a result of a specific phase of demographic transition or marked decline in the fertility rate, the working-age population from 15 to 59 in China grew at an average annual rate of 1.8% from 1980 to 2010, while the dependent population outside the age range was almost in zero growth (–0.2%). Such population scissors resulting from the differential growth of the two populations are also manifested as a sustained decline in the population dependency ratio, thus creating an opportunity window of population. It created a positive effect on promoting the economic growth, which is also called the demographic dividend. In the same period, the relative growth between the working-age and dependent populations in all developed countries combined or in all developing countries (excluding China) combined was far less favorable than that in China. For example, in the same period (1980–2010), the growth rates of the working-age and dependent populations were on average almost the same in developed countries, and in

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developing countries excluding China, on average, the dependent population grew markedly although the working-age population grew even faster. Therefore, to some degree, the characteristics of the population structure in China during this period is so unique as to be almost blessed. For a long time, decision-makers and researchers, Chinese or not, have held population growth as an adverse factor of economic and social development due to the idea that it brings pressure on resources, environment, employment and social welfares. With progressing observation and comparative study of development experiences, economists have begun to admit that there may form a population structure favorable to economic development in a specific phase of demographic transition, which has been validated empirically by relevant experiences of economic development, and this specific source of economic growth is then named demographic dividend. Economists have revealed the contribution of the demographic dividend by using growth accounting or growth regression where the population dependency ratio is plugged in as a proxy variable on the right side of equations such as a production function. With similar methods, researchers have also noticed how China benefited extensively from the demographic dividend during the reform and opening-up and estimated its contribution to the economic growth. For example, Wang Feng and Mason adopted the population dependency ratio as the proxy indicator for the demographic dividend and estimated that 15% of China’s economic growth from 1982 to 2000 was contributed by the demographic dividend.7 Estimation of the same period by Fang Cai and Wang Dewen showed that the decline in the dependency ratio in the period contributed to as much as 26.8% of the growth of GDP per capita.8 In fact, when its contribution to growth rates is apprehended in a broad sense or understood from the growth theory instead of demographic approaches, the demographic dividend becomes a necessary condition for high-speed growth as it is reflected in almost every variable on the right side of any production function. In contrast, the contribution estimated with the dependency ratio as a variable is at the most the residual contribution of the demographic dividend. We may make new assumptions and interpretations of the contribution by the demographic dividend based on the real experiences of the economic development of economies in East Asia and China while extending the theoretical frame of neoclassical growth by incorporating theories such as those pertaining to dual economies. Here we summarize demographic factors of economic growth and draw on relevant experiences and evidence in the literature to demonstrate a fuller presentation of the contribution by the demographic dividend below. First, a low and decreasing dependency ratio is favorable to achieving a high savings rate while an unlimited labor supply slows down the process of diminishing 7 Wang, Feng & Mason, Andrew, “The Demographic Factor in China’s Transition”, in Loren Brandt

and Thomas G. Rawski (eds.), China’s Great Economic Transformation, Cambridge, New York: Cambridge University Press, 2008, p.147. 8 Cai, Fang & Wang, Dewen, “China’s Demographic Transition: Implications for Growth”, in Ross Garnaut and Ligang Song (eds.),The China Boom and Its Discontents, Canberra: Asia Pacific Press, 2005.

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returns of capital, resulting in capital accumulation to become the major engine that drives economic growth. An early study by the World Bank found that accumulation of material capital contributed 37% to the GDP increase from 1978 to 1995.9 The contribution by capital accumulation to the growth was estimated to be even higher by Fang Cai and Zhao Wen.10 Recent studies have shown that the labor productivity in China is a significant factor to contribute to the economic growth while it has also been shown at the same time that among the factors boosting productivity, capital deepening or the capital–labor ratio accounts for a large portion, which is still growing.11 The significant contribution by capital input to the economic growth was criticized by some economists as an extensive mode of growth, who thus concluded that the high-speed growth driven as such could not be called a miracle; nor did they predict it to be sustainable. However, multiple economies in East Asia and the Chinese experiences have proven the prediction wrong, which shows exactly why the economists of neoclassic growth failed in theory: ignorance of the unique growth source of the development of dual economies. In fact, during the development period of Lewis’ dual economies attested by the experiences in China and elsewhere in East Asia, the unlimited supply of labor did attenuate the diminishing returns of capital in certain period of time12 , and the contribution, therefore, is a manifestation of the demographic dividend. Second, a favorable demographic factor ensures that the quantity and quality of labor make significant contribution to the economic growth. A young population structure translates into abundant supply of labor, and the abundancy in the supply of this productive factor shall undoubtedly contribute to the economic growth. However, it is often neglected by researchers that a favorable demographic structure also ensures the continuous entry of new laborers into the market, which is an increment channel for developing countries to improve the overall human capital of their laborers. In general, China quickly improved on the number of years of education of its adult population during the period when it benefited from its demographic dividend.

9 World Bank,

China 2020: Development Challenges in the New Century, Oxford University Press, 1998 10 Cai, Fang & Zhao, Wen, “When Demographic Dividend Disappears: Growth Sustainability of China”, in Aoki, Masahiko and Jinglian Wu (eds.), The Chinese Economy: A New Transition, Basingstoke: Palgrave Macmillan, 2012 11 Zhu, Xiaodong, “Understanding China’s Growth: Past, Present, and Future”, Journal of Economic Perspectives, Vol. 26, No. 4, 2012, pp. 103-124; IMF, “Asia Rising: Patterns of Economic Development and Growth”, Chapter 3 of World Economic Outlook, September, 2006, p.4; Kuijs, Louis, “China through 2020-a Macroeconomic Scenario”, World Bank China Research Working Paper, No.9, 2010 12 According the Bai Chong’en, et al., China’s capital returns remained at a fairly high level for a long period during the reform and opening-up (see Bai, Chong’en, Chang, Tai Hsien, & Qian, Yingyi, The Return to Capital in China, NBER Working Paper, No. 12755, 2006), but when the unlimited supply of labor disappeared, the returns declined quickly (Bai, Chong’en & Zhang, Qiong, “The Return to Capital in China and Analysis of Impact Factors”, The Journal of World Economy, 2014 Vol. 10, pp. 3–30)

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According to the Human Development Report (HDR) by the United Nations Development Program (UNDP), from 1990 to 2015, the average number of expected years of schooling increased from 10.0 to 13.2 in the world and from 8.8 to 13.5 in China. Apparently, with all other conditions unchanged, the more evident and significant improvement in the human capital in China made it contribute more considerably to the economic growth. For example, Walley and others estimated that the human capital in China contributed to 11.7% of the economic growth during the reform and opening-up, and their estimation of the contribution by the human capital went up to 38% after the role of education to promote the improvement in productivity was taken into account.13 Third, the surplus laborers in agriculture and enterprises flow in the ascending order of productivity between industries, professions and regions, which brings improvement in the efficiency of re-allocating resources and becomes the major component of the increased TFP. Such an effect on productivity of structural changes in industries, recognized and highlighted by Kuznets14 , has been wonderfully verified in China. For example, in the study above by the World Bank, the authors decomposed the TFP further into the efficiency of re-allocating resources and the residual. The former is the increase in productivity brought by the flow of laborers from sectors of lower productivity (such as agriculture and state-owned enterprises (SOEs) with surplus laborers) to sectors of higher productivity, which was shown in the paper to contribute to 16% of the economic growth. Such contribution was estimated to be 21% by Fang Cai and Wang Dewen when they studied how the labor transfer from the agricultural to non-agricultural sector in earlier years had brought improvement in the TFP and consequently to the economic growth.15 The study by Zhu Xiaodong, as referenced above, found that the good performance of the TFP from 1978 to 2007 relied on the fast development of the non-state-owned economy and the even faster increases in productivity. Last, for a country, a large scale of population means a large demand for and a large potential supply of innovation, and expedition of technological advancement and increases in the TFP may promote the economic growth. This view comes from the latest achievements of the theory of economic growth and the history of economics, while economists have also made a few attempts to test it empirically. However, we have not seen any publication about such empirical studies with China as the subject.

13 Walley, John & Zhao, Xiliang, The Contribution of Human Capital to China’s Economic Growth, NBER Working Paper, No. 16592, 2010 14 Kuznets, Simon, “Quantitative Aspects of the Economic Growth of Nations II: Industrial Distribution of National Product and Labor Force”, Economic Development and Cultural Change, Vol. 5 (Supplement), pp. 3–110 15 Cai, Fang & Wang, Dewen, “Sustainability of China’s Economic Growth and Labor Contribution”, Economic Research Journal, 1999, Vol. 10, pp. 62–68

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The Sufficient Condition of China’s Economic Miracle A population structure that is theoretically favorable to economic growth doesn’t automatically turn into the demographic dividend that becomes a factor of highspeed growth in reality. Experiences have shown that many countries that shared the same or similar courses of the demographic transition as China did not achieve the same economic growth as China in the same period, or in an earlier or later stage; in fact, the population structure of China before the reform and opening-up had already been favorable, but it did not promote the economic growth then. For example, the World Bank and the International Monetary Fund divided countries and regions into “post-dividend economies”, “late-dividend economies”, “earlydividend economies” and “pre-dividend economies” by stage of demographic transition.16 Among these economies, 54 countries and regions including China were classified as “late-dividend economies”, i.e., their fertility rates in 1985 were above the replacement level and the proportions of their working-age populations were projected to decrease or remain unchanged during the period from 2015 to 2030. Among these economies, none of the 44 countries with available data other than China achieved economic growth comparable to China. From 1978 to 2015, the average growth of GNI in China was 9.73% and the average growth of the other 44 countries was 3.77%. Among these countries, China had the lowest GNI in 1978, which was only 200 USD. We may assume that those countries with a GNI lower than 1000 USD at the time had the same potential of development as China, but they subsequently lagged far behind China in economic development. In fact, after the mid-1960s, China’s population structure already showed a favorable trend to economic growth, with fair performance in the accumulation of human capital and material capital. For example, China’s GNI per capita or GDP per capita ranked the fourth from the bottom among over the 100 countries with available statistical data in 1980, but the average years of schooling of those above 25 years of age ranked 62nd among the 107 countries with data available while the life expectancy ranked 56th among the 127 countries with data available.17 Although the low income per capita reflected a low potential of capital, China realized a high rate of capital accumulation thanks to its strong ability to mobilize resources during the period of the command economy. From 1953 to 1978, the accumulation rate in China was on average 29.5%, higher than the world average.18 However, the command economy could not solve the problems of the other two necessary systematic conditions for economic growth, i.e., resource allocation and 16 World

Bank and International Monetary Fund (IMF), Global Monitoring Report 2015/2016: Development Goals in An Era of Demographic Change, Washington, DC: The World Bank, 2016, pp. 268–273 17 Cai, Fang, Demystifying China’s Economy Development, Beijing, Berlin, Heidelberg: China Social Sciences Press and Springer Verlag, 2015; Rawski, Thomas, “Human Resources and China’s Long Economic Boom”, Asia Policy, 2011, No. 12, pp. 33–78 18 Lin, Yifu, Cai, Fang, & Li, Zhou, The China Miracle: Development Strategy and Economic Reform (revised edition), Hong Kong: The Chinese University Press, 2003, p. 71

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incentive mechanism, and thus the demographic dividend failed to transform into the source of economic growth. Therefore, only a profound reform on the conventional system of the economy could create sufficient conditions for growth. According to general rules, a country needs to sort out how to accumulate and allocate the material capital and the human capital in the economic system in order to succeed in developing the economy, which involves many issues including the system, signals, efficiency and incentives. Starting from a command economy that cannot address the issues above will be met with many barriers when the reform is initiated, and at least three conditions must be met for the reform to be politically plausible and practically operational. First, the reform must benefit specific laborers, microscopic units and social sectors in order to form the fundamental motive to drive itself. Second, the reform does not contradict the interests of any other social sector directly, or, it seeks the so-called Pareto improvement. Third, the reform must potentially trigger a key cog to turn so that the others on the same logic cogwheel of the reform may follow. Unfortunately, the last condition is usually not known prospectively. The agricultural reform that implemented the household contract system and abolished the People’s Communes best satisfied the conditions for reform above. From the end of the 1970s, the reform of the household contract system started to be trailed quietly in some areas. This spontaneous reform trial had become popular in areas such as Anhui, Sichuan and Inner Mongolia even before the Third Plenary Session of the 11th Central Committee of the Communist Party of China (CCCPC) was held, and in the short period of a few years in the early 1980s, the CCCPC policy toward the reform went from acknowledging the status quo, through allowing it to be trailed in the remote and impoverished areas, to implementing it country-wide, which helped the reform on the agricultural production system to be finished quickly. By the end of 1984, all the production teams and 98% of the rural families in the entire country had adopted the operational form of the household contract system, and the People’s Commune system was officially abolished soon after. The reform solved the long-standing problems of the agricultural labor and operation incentives with one strike, and granted rural families, who had become residual claimants now, the corresponding right to allocate factors of production and the autonomy in operation, and the right and the autonomy were extended stepwise. In the few years after the implementation of the household contract system (1978– 1984), the unit yield of crops increased by 42.8%, and the total yield, 33.6%, and the real increase in the agricultural production grew by 52.6%. Quantitative analysis showed that 46.9% of the agricultural growth during this period was contributed by the systematic reform of the household contract system.19 During the same period, the nominal growth of the per capita income of peasants was 166%, and the rural population in absolute poverty decreased from 250 to 128 million while the poverty threshold increased from 100 RMB per person per year to 200. These changes also led to a large-scale increase in the urban supply of agricultural products, creating 19 Lin, Yifu, “Rural Reforms and Agricultural Growth in China”, American Economic Review, Vol. 82, No. 1, 1992, pp. 34–51

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the condition for abolishing the institution of commodity ration coupons (known as Liangpiao) a few years later. Some previous analyses held the rural reform with the household contract system at the core as the only successful measure among all the economic reform measures in China in the early 1980s.20 In fact, reforming procedures with similar methods and effects also took place in SOEs. In 1978, the rewarding system was restored in enterprises, which was actually a loosening-up of the grip on and a reform of the salary system, and it addressed the issue of how to motivate enterprise employees with the employee–enterprise relationship involved. At the same time, the enterprise reform that was dominated by delegating the administrative power and sharing the profits was also initiated, which was focused on the issue of how to motivate enterprises and those running them with the enterprise–market and enterprise–state relationships involved. In a nutshell, as the core of the urban economic reform, the enterprise reform was carried out along three major lines. First, it started with continually extending the autonomy of SOEs in operation, graduated to construct the robust mainstay of operation, and eventually landed on establishing the modern enterprise system, i.e., the corporate governance mechanism. Second, the relationship between SOEs and the state was redefined. The reform was initially characterized by the state sharing the profits with enterprises, while the reform that is being promoted now is directed to managing capital as the major task with strengthened supervision of State-owned assets, restructuring the mechanism of authorization of operating state-owned assets, establishing several corporations based on state-owned capital and supporting the eligible SOEs to be reorganized into companies invested by state-owned capital. Third, the non-state-owned economic sector was allowed and encouraged to develop, and with Zhuada Fangxiao (grabbing the big and letting go the small) and the introduction of direct investment of foreign capital, SOEs were pressured by competition and motivated in business. While the ownership institution and the governance structure were being reformed, SOEs became the market mainstay and paid more attention to improving their efficiency based on the essential factors of the competition between enterprises of multiple forms of ownership and the formation of mixed ownership. From the statistical perspective, the pattern of coexisting and developing with completion of multiple forms of ownership and mixed ownership had already been established. Although the incentive mechanisms for agricultural households and enterprises had already been formed, a correct market signal was still needed to truly establish their status as the mainstay on the market and to promote the reasonable flow and re-allocation of factors of production and resources. In other words, logically the next reform goal would only be correcting the twisted market signal by developing the product and factor markets. From planned pricing of products to pricing by the market, from command allocation of products and production materials to free

20 One example is seen in Huang, Yasheng, Capitalism with Chinese Characteristics: Entrepreneur-

ship and the State, Cambridge, New York: Cambridge University Press, 2008

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trade on the market, and from central allocation of productive factors to free circulation on the factor market, all these key changes were completed through a dualtrack system—gradual transition from the command track to the market system—by diminishing the former and promoting the latter. Through the reform course that went along the logic of transitioning from the command economy to the market economy, the mechanisms of accumulating and motivating the material capital and human capital and of market allocation were established with a macroscopic environment of corresponding policies. China’s economic reform was multi-faceted and all dimensional, but many important reforms in many aspects may be seen as surrounding the basic logic above. With the reform progressing, new problems kept emerging and were addressed, which in turn propelled and completed the specific reform moves in pertinent fields with appropriate methods. It is noteworthy to point to the transformation of the government function, or, the reform on the relationship of the government with enterprises and the market. In general, the government gradually withdrew from direct participation in economic activities and turned to take on the role of promoting the social development by re-distribution. However, the Chinese government, and especially regional governments, is highly attentive to economic development, which for a long time was embodied as the competition between regional governments in their efforts to increase their financial capabilities by promoting the local GDP growth. Such a mode of government function played a positive role in transforming the incentives of the reform into growth speed, but at the same time, also led the government to directly intervene in the resource allocation excessively, which impaired the market from playing its role. With the Chinese economy stepping into the new normal and the deepening reform of simplifying administration and loosening up on the power grip, the government function has now increasingly pivoted to the supply of public goods, such as promoting education and development, strengthening social protection, maintaining the market order and regulating the economy on the macroscopic level. The opening-up was 1, consistent in the logics with, 2, temporally parallel to, 3, conditional and promotional to in effect, and 4, propelled in the same way as the economic reform described above. In other words, it progressed gradually. Through expanding international trade, introducing direct Investment by foreign capital, investing overseas by enterprises, participating in global governance, and more recently, actively promoting the “Belt and Road” initiative, the opening-up has helped China become part of the economic globalization to the largest degree, while at the same time promoting the realization of a series of reform and development goals, including helping enterprises to become the mainstay of competition, learning foreign technologies and governance experiences, shortening the learning curve of resource allocation by the market mainstay in China, cashing the demographic dividend during the economic growth and obtaining a comparative advantage in industrial development.

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The Nature and Origin of the Path with Chinese Characteristics Most researchers and observers agree with virtually no conservation that China’s economic reform has been successful. In fact, economists often include the achievements and experiences of China’s economic reform in their discussions about target models and modes of reforms, which involve the contrast between the Washington Consensus and the Beijing Consensus, comparison between gradual and radical reforms, and talks about government roles and market development. However, scholars often draw different conclusions based on the same experiences of China. It may seem plausible that researchers have come to conflicting conclusions by observing and describing the same phenomena because many have started with existing theoretical doctrines and thus failed to account for the unique visions and practices in China’s reform that have no parallel in other countries, but the underlying reason is that they have failed to understand what was behind the uniqueness, i.e., why the reform was started in the first place and how it was advanced. Most researchers have noticed that China’s reform is gradual. The microscopic system defects of the command economy were first targeted at and the reforms in agriculture and enterprises cut right through the lack of incentives and low efficiency with reform measures such as the contracting system to boost incentives, improve production and drive economic growth. While these reforms showed effects, which gave people confidence in the entire reform, the more active microscopic business units started to seek increased input of productive factors outside the command system to further improve the allocation efficiency, business profits and laborers’ incomes. Therefore, the reform took the subsequent step into the realm of resource allocation. The market mechanism was birthed on the side of the command economy, and it kept increasing the ranges and scales of product circulation and productive factor allocation. With a growing market of products and factors, their prices gradually got out of the control of the commands and were instead decided by demand and supply on the market and the relative scarcity. China’s reform is also incremental, another feature that has been noticed. The reform started with issues of incentives and microscopic efficiency, and as it did not haste to adjust the stock, interest groups in the conventional system were spared losses. In fact, many so-called interest groups in China are mostly average people with low incomes. For example, adjusting the “great pot” (daguofan, the egalitarianism problem)–style stock of SOEs might have affected the employees who were not only on a low wage, but also less competitive on the labor market due to relatively older age, shorter years of education and fewer skills. Had the commodity price reform been implemented all at once, those who were vulnerable in the low-wage system would have been the first to be hurt. Therefore, insisting with a reform that brings increments and protecting interest groups moderately do not simply translate into compromise to the privileged interest groups. Instead, such a principle is aimed to lower the social risk and human sacrifices that may accompany the reform.

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Many observers and researchers overseas have noticed that China’s gradual reform took its first steps without a comprehensive blueprint. The steps were taken one by one to tackle the imminent problems at the time in pursuit of direct effects. Such a characteristic of “crossing the river by feeling the stones” accompanied the Reform for a long time even after the socialist market system was established as the target model of the Reform at the 14th National Congress of the Communist Party of China (CPC) in 1992. For example, there was no specific time frame for many reform tasks, many reforming measures were not taken in an order that had been articulately determined, and the reform was pushed forward in different ways dependent on the places and the timing. It was not until after the 18th National Congress of the CPC did the characteristics of a top-down design of the reform become increasingly evident. Economists focused on economic transitions are usually most concerned with how a reform minimizes the loss inflicted on the interest groups, thus consequently minimizing the political cost and risk of the reform. Such a political economic perspective, when used to interpret the reform methods with Chinese characteristics, is appropriate only in theory. However, China’s reform did not show its characteristics from this perspective although it did avoid unnecessary risks. In fact, despite the lack of a clear picture of a pre-determined target model for quite some time, China’s reform had a clear view from the very beginning of why it was started and how it would be advanced, i.e., the “three benefits” by Deng Xiaoping—whether the reform benefits the growth of the productive forces, the overall strength of the socialist state and the living standards of the people. These were the goals when the reform was initiated and gradually advanced. They have also been used as the standard to evaluate whether the reform has been steered in the right direction, whether the measures taken are appropriate and whether the effects of the reform are satisfactory. Insistence on “the three benefits” as the philosophy and the direct goal of the Reform has prevented China from following any prior doctrines or existing models, paths or consensuses blindly when formulating its guiding principles for the reform and advancing it. China has persisted with its gradual reform as well as the idea of reforming, development and sharing. Even after the socialist market system was established as a goal of the reform at the 14th National Congress of the CPC, such an orientation did not become an unconditional, independent goal. It has always come secondary to the fundamental objective of improving the productive forces, the overall strength of the country and the living standards of the people. At the same time, the way the reform was initiated and advanced, as described above, ensured that it was advanced as a whole. It is true that there was no clearly stated comprehensive blueprint in the beginning of the reform, but the economic system was a whole and every part of the system needed to cooperate with and adjust to each other. In addition, China combined the standard of “the three benefits” with respect for people’s innovation in the progress of the Reform, while the top-down and bottom-up characteristics were integrated into each other. Therefore, the choices of areas for reformation and the decisions on the progress of the reform, although sometimes seemingly spontaneous, were never random or arbitrary, but had their intrinsic logics.

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Digging into the course and logics of China’s economic reform reveals the relatively radical reformations that involved the stock integrated at various periods, stages and areas with the gradual, incremental reformations that characterized the reform overall. In fact, the formats and steps a reform takes depend on how the system adapts to it as a whole and how the society takes it. In China, the reform has been advanced as a whole from both a close-up view and the effects of each stage. There is no area that has virtually gone too far or been left behind. The standard of “the three benefits”, proposed by Deng Xiaoping in his famous talk on his inspection tour of several southern provinces, as the principle for China’s reform, has been clearly specified and closely followed all the time. Guided by this reform vision, reform, development and stability have been integrated into each other as a whole. Reform is carried out for development, but must give in to stability, while development effects are used to assess whether the reform has been steered in the right direction and stability makes it possible for further reform. Since the 18th National Congress of the CPC, the socialism with Chinese characteristics has stepped into a new era. The idea of people-oriented development is a cornerstone of the socialist economic concept with Chinese characteristics in the new era. As pointed out by President Xi Jinping, the CPC comes from the people and serves the people, and all the Party’s work must therefore be held against the fundamental interest of the overwhelming majority of the people as the highest standard. Likewise, the reform led by the CPC must see the people as the mainstay of the Reform and development as well as the mainstay who shares the benefits and the biggest, ultimate group who benefit from the reform and development. The idea of people-oriented development is the touchstone that differentiates the CPC from all other political parties in the world. It has also been tested by the longterm explorations of the patterns of the CPC’s governance, building of a socialist society and development of the humanity in China’s practice. In the passages below, we will illustrate the sharing nature of China’s reform and opening-up by analyzing the dilemma that has long been bothering the economic development across the world, making the cake bigger versus distributing the cake fairly. Economic growth, technological advancement and economic globalization are all effective in making the cake bigger. However, they do not automatically help distribute the cake fairly. That is also to say, there is no “trickle-down effects” between economic development and income distribution. In some countries, politicians often compete with each other to promise more benefits and better livelihood when running for offices in order to get more votes. However, once elected, they either forget what has been promised and fail to deliver them or take populist policies that lead to excessive provision of benefits that cannot sustain. Only the Communist Party of China that serves the people wholeheartedly and holds the idea of people-oriented development in heart all the time may break the dilemma of making the cake bigger and distributing the cake fairly with systematic, institutional and policy arrangements. For example, creating more jobs and re-allocating laborers between rural and urban areas, between different geographical regions and between different industries may cash the demographic dividend and bring high-speed economic growth. In logic, this should be a sharing mode of economic development, and it has been proved so

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in China’s practice. We will now review the experiences during the reform and opening-up and include the changes in each stage of the economic development to reveal how the urban and rural residents in China have shared the benefits of the reform and opening-up in three channels that are temporally successive and spatially overlapping. First, during the typical development stage of the dual economy in China, the unlimited supply of labor maintained and intensified the comparative advantages and international competiveness of China’s labor-intensive industries, created more non-agricultural jobs and improved the income levels of urban and especially rural residents, although it inhibited increases in people’s wages. From 1978 to 2015, the actual consumption level of urban and rural residents increased by 16 folds while the actual GDP and GDP per capita increased by 29 and 20 folds, respectively. Of a special note, before the lack of laborers in 2004 (i.e., before the Lewis turning point was reached), the increases in incomes were mainly due to the growth of participation in non-agricultural labor, but not to the increases in wages. Such income increases may be further revealed by examining the Chinese economy before the Lewis turning point. From 1997 to 2004, there was no material increase in the wage rates of peasant workers, but the total wages earned by peasant workers increased by an annual rate of 14.9% because the labor force increased from fewer than 40 million to more than 100 million peasant workers. As a result, the wage incomes of peasant families, even when underestimated, accounted for a significantly higher percentage of their net incomes at 34.0% compared to 24.6%21 . Second, after 2004 when the Lewis turning point was reached in China’s economy22 , some characteristics of the dual economy began to disappear, with which came lack of laborers, who became more powerful at negotiations on the job market. Average laborers and low-income families saw a quick growth in their incomes. For example, the actual wages of peasant workers grew by 10.1% annually from 2003 to 2006. The increasing wages for average laborers, a feature associated with the Lewis turning point, pushed for the arrival of the peak of income differences, the Kuznets turning point. The income difference between urban and rural residents (the ratio of city and town resident income to that of rural residents), calculated based on the constant price, reached its peak of 2.67 in 2009 and subsequently declined and was 2.36 in 2016, a total decrease of 11.6%. Meanwhile, the Gini coefficient of the incomes of nation-wide residents declined from the peak of 0.491 in 2008 to 0.465 in 2016, a total reduction of 5.3%. Third, consistent with the time point when the Lewis turning point was reached, the central and regional governments all took more measures in re-distribution policies to further improve the degree by which the economic development was shared among all through sufficient and equal provision of basic public services. Not only were urban 21 Cai, Fang, Du, Yang, Gao, Wenshu, & Wang, Meiyan, Labor Economics – Theories and Realities

in China, Beijing Normal University Publishing House, 2009, p. 220 22 For definition of the Lewis turning point and when it was reached, please refer to Cai Fang, Demystifying China’s Economy Development, Beijing, Berlin, Heidelberg: China Social Sciences press and Spring-Verlag, 2015

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employees and residents covered in a substantially wider social security system, but the focus was given to expanding the coverage of the social security system to rural areas after 2004 and to including more and more peasant workers and their families as well as the unemployed in the urban social security web. In particular, the development of the labor market system and the social security system was brought to a fast lane while the economic development and the social development were more coordinated, showing the extensive tolerance of China’s experiences.

What China’s Wisdom and the Chinese Path Mean to the World In 2017, President Xi Jinping gave a keynote speech at the opening session of the World Economic Forum, in which he pointed out the major problems troubling the global economy to be: 1, lack of robust driving forces for global growth that is needed to support sustained and stable growth of the world economy, 2, inadequate global economic governance that falls behind the development in the global economy and 3, uneven global development that makes it difficult to meet people’s expectations for better lives23 . Among the three problems troubling the global economy, the first two, namely the problem of growth and the problem of governance, are the new challenges brought by the changing pattern of the global post-crisis economy, and the last one, the problem of development or poverty, is the oldest problem of global governance, which is also closely associated with the first two problems as it involves the fundamental concept of the goal of development. Former World Bank economist Easterly described how the poor are faced with two tragedies around the world in his book. The first tragedy is well-known: A few hundred million people are in extreme poverty globally and are waiting for help and development. The second tragedy, which many avoid to talk about, refers to the fact that trillions of dollars have been spent on helping the poor by developed countries, but there has been little effect24 . We can name this important problem as the “Easterly tragedy”. In a more general sense, the economic growth, trade and technological exchanges that are increasingly characterized by globalization have not solved the problem of how to distribute the benefits of advancement evenly among countries or within a country, and overall, it is far from being solved on the global and country levels. However, China has made direct contribution to answering the challenges of the global economy and to solving the “Easterly tragedy”, and, with its own successful development experiences, offers a new option for developing countries. 23 Xi,

Jinping, “Jointly Shoulder Responsibility of Our Times, Promote Global Growth: Keynote Speech at the Opening Session of the World Economic Forum Annual Meeting 2017”, People’s Daily, Jan. 18, 2017, p. 03 24 Easterly, William, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good, CITIC Press Group, 2008

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From 1981 to 2013, the world population in absolute poverty, i.e., those with a daily income below 1.9 international dollars (based on the constant price of 2011), reduced from 1.893 billion to 766 million, while the same population in China decreased from 878 million to 25.17 million. In other words, China contributed 75.7% to the global efforts of lifting people from poverty. Such a contribution to the global combat against poverty from China was due partly to China’s reform and opening-up that had promoted the economic growth with benefits shared and partly to the strategy that was targeted at the impoverished regions. As the second largest global economy, an active participant in the economic globalization and a propeller of the stable development of the global economy, China will play a larger role in the global economic governance. In particular, to address the global poverty that has long been tackled on with little effects, China is most qualified as well as responsible to come up with a plan and make a greater contribution with its own experiences, wisdom and capacity. Deng Xiaoping, general designer of China’s reform and opening-up, already said the following in as early as 1979 to visiting Japanese guests: with such a total (economic) production, we will be able to do something we’d like to and to contribute more to the mankind25 . When included in the second volume of Selected Works of Deng Xiaoping, these words were formally expressed as such: “At that time, we could offer more assistance to the poor countries of the Third World.”26 President Xi Jinping has also stated that China will strive to make bigger contributions to the causes of peach and development of humanity. While helping developing countries in areas such as Asia and Africa to speed up development and in efforts to meet the challenges facing the humankind around the world, China does not see its own path as something superior. Nor does China impose it on any other country. Instead, China starts with diagnosing the root issues that cause the problems bothering the global economy and developing countries and shares opportunities in its own development with the world. The reform and opening-up in China promotes development and sharing, and some experiences that have been successfully reproduced in regional development, together with further development, are the public product that China has to provide to the world, which brings all countries, especially the vast number of developing countries, aboard the development of China through initiatives and opening-up strategies such as the “Belt and Road” initiative. Over the past 40 years in China, reformations were advanced in many aspects such as incentive mechanisms, enterprise governance structures, pricing mechanisms, resource allocation models, opening-up systems and macroscopic background of policies, and system barriers that blocked accumulating and allocating productive factors in the times of the command economy were gradually removed. Conventional productive factors such as material capital, human capital and laborers were more quickly accumulated and more efficiently allocated. That means the high-speed 25 Dong, Zhenrui & Yi, Lei, “Memoire of Deng Xiaoping’s Visit to Japan and Meeting with Masayoshi Ohira: An Interview with Wang Xiaoxian”, Literature of the Party, 2007, vol. 2, pp.18– 20 26 Deng, Xiaoping, Selected Works of Deng Xiaoping, volume 2, People’s Publishing House, 1994

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economic growth driven by the reform did not just entail input of factors, but was accompanied with large-scale increases in the productivity. In fact, the economic growth in China was supported to a large degree by the increasing labor productivity, which was achieved mostly by adjustments to the industrial structure, increased job opportunities in both the urban and rural areas, and more effective allocation of labor. In particular, more jobs gave more people, both rural and urban, opportunities to participate in the reform and opening-up and development, who shared the development equally. China’s narrative is both national and regional. Due to regional differences in development rooted in historical reasons, the course of the reform and openingup is regionally gradient and for a time, showed differences of economic development between the eastern, central and western areas. The solution was to reproduce innovatively in developing the central and western areas the experiences of how the reform and opening-up had successfully promoted development and sharing in special economic zones and subsequently in a wider coastal area. Specifically, when bringing the reform and opening-up to get more and more deeply rooted in the central and western areas, the central government implemented the strategy of large-scale development of the west at the beginning of the twenty-first century, and soon afterward, the rise-of-central-China strategy and the strategy to revitalize the old northeastern industrial bases. These strategies were all targeted at the problems holding the economic development in the provinces concerned, such as lack of human capital, inadequate infrastructure, unilateral industrial structure and heavy reliance on natural resources. With the implementation of the strategies, large-scale investment in infrastructure and basic public services has been poured in the central and western areas and a series of significant construction projects have been landed. Despite some lessons that were learned hard, the series of regional development schemes have overall achieved evident effects. Transportation, infrastructure, sustained provision of basic public services and human capital accumulated have all been improved in the central and western areas, creating a much favorable environment for investment and development and bringing a positive motivation to laborers, business starters, entrepreneurs and officials at all levels to throw themselves in the regional development with lots of innovations. In the first decade of the twenty-first century, the Chinese economy met with two important turning points, marking a brand new stage of development. The first was the Lewis turning point, which showed itself as the continued lack of laborers since 2004, leading to rapid increases in the wages of average laborers. The second was the point at which the demographic dividend disappeared, which was marked by the peak population in 2010 of the working age from 15 to 59 that had already slowed down in growth for a long time, and the demographic factor became unfavorable to economic growth accordingly. The two turning points first showed their effect by weakening the comparative advantages of manufacturing industries in the coastal regions due to increasing cost of labor, making it difficult to keep the usual economic growth rate. If only the experiences in other countries could have be borrowed here, i.e., the

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flying geese model of the international industries27 , the reduction in the comparative advantages of China’s manufacturing industries would have resulted in a large-scale transfer of industries to countries with low labor cost. However, most of the transfer actually went from the coastal to the central and western areas due to the emerging effects of the strategies to develop the west and for the central area to rise while the central and western areas still had the advantage of a low cost of labor. The flying geese model of international industries was localized to a domestic version of China’s28 . Labor-intensive manufacturing industries began to take faster paces to move to the central and western areas, and the increases in industrial investment in the central and western areas pioneered all investment areas, promoting a more rapid economic growth in these areas. For example, starting from 2005, the increases in the fixed assets of the above-scale industrial enterprises (enterprises above the designated size) were faster in the central and western areas than those in the east. Not only has the economic development been significantly balanced between regions, but the greater contribution to the national economic growth and the sustained high-speed growth made by the central and western areas also pushed back the time point at which China’s economic growth began to slow down by quite a few years. The provincial GDP growth rates in 2016 also showed how these areas could play an important role in maintaining the mid-high growth of the Chinese economy in the new normal as half of the western provinces had growth rates at or above the national median. China has a story of how the reform and opening-up has successfully promoted development and sharing, and it also has useful experiences of setting up special economic zones and pioneering trial areas followed by implementation of regional development strategies, which culminated in reproducing the development miracle of the coastal area in the central and western areas. These may be studied with theoretical research and distilled into China’s wisdom that may be generalized so that other countries may use it as one of their potential options. In addition, China’s story and experiences may grow into the Chinese path that promotes the healthy development of the global economy and helps the vast number of developing countries get out of poverty and embrace modernization as China becomes more involved in economic globalization and governance of the global economy. Countries around the world are at various development stages and possess various histories and cultures, but people in all countries desire peace and development. Governments and ruling parties around the world also set as their goal and keep promising their people to lift them out of poverty and improve their lives, which are seen as basic marks of an increased level of a country’s socioeconomic development. Meanwhile, people all tend to agree that any country, while managing to develop itself, cares for other countries and that the mutual development of all countries is 27 For the flying geese model, please refer to Kiyoshi Kojima, “The ‘Flying Geese’ Model of Asian Economic Development: Origin, Theoretical Extensions, and Regional Policy Implications”, Journal of Asian Economics, No. 11, 2000, pp. 375–401 28 Qu, Yue, Cai, Fang, & Zhang, Xiaobo, Has the “Flying Geese” Phenomenon in Industrial Transformation Occurred in China? In McKay, Huw and Song, Liang (eds), Rebalancing and Sustaining Growth in China, Canberra: Australia National University E Press, 2012, pp. 93–109

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what makes one’s development ultimately sustainable. Since assuming the office of the Chinese President in 2013, Xi Jinping has always called for and elaborated in depth on the idea of a shared future for mankind. The idea was quickly echoed on in the international community and has been included in a series of resolutions by the United Nations (UN). The desire for mutual development does not mean the choice of a single path or a single model. Instead, multiple paths of development are allowed, with localization and timely progress of the paths. However, there are some barriers that have blocked or are still blocking the way of the development of all countries, such as the bottleneck of capital accumulation, inequality in international trade, insufficient infrastructure, difficulty in nurturing human capital, and incapacity to mobilize and inefficiency to allocate human resources. Therefore, while a multitude of models are acknowledged and encouraged, all countries, especially developing countries, are in urgent need of a development strategy frame that helps create necessary conditions for development, break the bottlenecks in key areas and learn lessons from both successes and failures while offering sufficient space for every country to make their own choices. The “Belt and Road” initiative that the Chinese President Xi Jinping proposed in 2013 is one such open frame. First, the basic ideas and the torso theories of the “Belt and Road” initiative have already been validated in the development and sharing experiences in China’s reform and opening-up. Second, the “Belt and Road” initiative observes the principle of “extensive consultation, joint contribution and shared benefits” (gongshang, gongjian, gongxiang). The initiative is not simply a recapitulation of the symbol of the ancient land-and-sea silk road. It comprises a much deeper historical connotation and practical importance that focuses on the role of the inter-communication and learning from each other between the western and eastern civilizations in human history and pays special attention to the new idea that global poverty shall be extinguished if all countries become part of the effort. Third, the “Belt and Road” initiative has found the key factor that restrains the development of all countries alike, infrastructure. Last but not least, the “Belt and Road” initiative offers adequate space for every country to explore their own development models according to their unique national conditions. After all, how a country gets out of poverty and realizes modernization ultimately relies on its resolution and efforts to remove all barriers in development, systems and environment and the efforts must be based on its own national situations. The “Belt and Road” initiative is such a Chinese path that bears China’s wisdom while be able to coordinate with the unique needs and efforts of each country.

Several Facts that Characterize China’s Path Efforts that have been proved successful in one country may not be unconditionally applicable in general, and that is why China has never copied and pasted development models from other countries or output its own. On the contrary, any success in the reform and development of one country must have come from practical explorations

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based on its own unique conditions. In this sense, theoretical study of successful efforts that reveal the pattern that bears general inspiration is undoubtedly of academic value to development economics. As the Chinese population accounts for nearly one-fifth of the world population and the problems and difficulties facing China at the beginning of the reform and opening-up were similar to those in many developing countries, a well-summarized narrative of China’s experiences that is distilled into China’s wisdom and path will certainly become a brand new option for other developing countries. Here preliminary efforts are made to summarize the existing experiences of China’s reform and opening-up to describe a few characteristic facts as one step to realize the grand yet demanding academic goal. 1.

2.

The Path of Reform Combining Grassroots Explorations and Top-down Design. The way the reform was carried out in the manner of “crossing the river by feeling the stones”, which characterized the early phase, and the topdown design that has been highlighted since the 18th National Congress of the CPC are not contradictory to each other. Nor do they represent the fundamental difference between China’s reform and those in other countries. The fundamental feature that differentiates the model with Chinese characteristics from others elsewhere is the original aspiration. From the initiation of the reform by Deng Xiaoping to feed the people and to realize common prosperity to the comprehensive deepening of the reform by President Xi Jinping to meet people’s increasing demand for better lives runs the same idea of peopleoriented development. Starting from and concluding with the aspiration of improving people’s lives decided the ultimate goal of the reform, which then decided the way to carry it out, established its schedule and completed the routes along which it was to be advanced. All prior models were thus essentially negated, and China’s experiences were proved by practice to be effective and applicable in general. The Path of Opening-up from Participating in the Global Division of Labor to Leading the Economic Globalization. Employment is the most important to people’s lives. It was also China’s starting point to open up and embrace globalization. After accepting the ongoing rules of the World Trade Organization (WTO), China joined the international division of labor and has since transformed its demographic dividend to comparative advantages and improved people’s incomes through increased employment. As such, China benefited the most from economic globalization. With the Chinese economy entering a new development stage, the comparative advantages have changed while protectionism against China grown stronger worldwide. As China approaches the central stage of the world, it should make greater contributions to the mankind, and the opening-up should be further expanded for it to be brought to a whole higher level. Therefore, simply accepting the rules and following the directions made by western countries can no longer ensure that China will still benefit from the opening-up. However, China has no intention to break the current rules. Instead, it has opened up alternative routes to bridge the gaps of the current rules by means such as the “Belt and Road” so that the world

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has another option to reach the shared future for mankind. China has come to this position because it aspires to make greater contributions to humanity and because the aspirations that started the reform and opening-up have pushed China here. Progress in Stability Set as the Basic Tone of Work to Maintain the Macroscopic Stability of the Economy. Providing for and improving people’s lives are the starting point of the reform and opening-up, as well as the cornerstone to support the macroscopic stability of the economy. Unlike those countries preached with and following the Washington Consensus, China does not honor any of such consensuses as a golden standard, but nevertheless achieved macroscopic stability of the economy during the entire course of the reform and opening-up. China has also successfully dodged the blows of the Asian financial crisis and the world financial crisis, withstood the damages of natural disasters such as a catastrophic flood and earthquake, and managed to go through the difficulties brought by some radical reformation measures such as the price liberalization and de-staffing to improve efficiency. Furthermore, while increasing the gross economic product and optimizing the industrial structure, China has also seen smaller and smaller fluctuations in the economic growth. Progress with stability has set the following tones for all economic and social policies and even administrative measures. First, the economic growth rate has been stabilized at a level consistent with potential rates. Therefore, the economy has been carefully kept from being excessively heated in lack of economic conditions; the macroscopic economic policies focused on how to keep the economy from blows on the short-term demands when it was hit by outside events, and contracyclical measures were taken to push the actual growth rate to go back to the potential rate; and since the economy entered the new normal, careful study has been made to understand the supply-side contribution to the slowing-down, and a v-shaped economic recovery curve is not chased after. Second, the reform has been persistently continued and the timing for reform measures chosen cautiously. During the whole time, potential social risks were evaluated adequately, opportunities for the Pareto improvement were taken to the fullest, and efforts were also made to apply the Kaldor improvement methods. Third, many policies have been taken with all policy measures coordinating with and complementing each other to maintain the macroscopic stability of the economy, lower systematic risks and safeguard the social security. Regional Development Policies from Gradient Advancement to Coordinated Development. Despite lack of an official strategy on gradient implementation of regional development, there is still inequivalent development between regions due to different historical heritage such as time to initiate the reform and opening-up, resources, economic development and industrial structures. Such differences initially helped with the determination to start the reform and opening-up, and in the early stage of the reform and opening-up, lots of experiences of developing the economy and adjusting the structure were

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gained. Since the beginning of the twenty-first century, a series of regional development strategies have been implemented and increased investment in human capital and infrastructure has been made in relatively underdeveloped regions, creating an improved system and policy environment and adequate and sufficient conditions for economic development in these regions. With increasing labor cost and, consequently, declining comparative advantages of manufacturing industries in the coastal regions, the central and western areas have accepted many industries transferred there, which has accelerated its convergence in development to the developed regions. The Three Rural (sannong) Policies Starting by Promoting Integration of Urban and Rural Areas. The first breakthrough in rural reforms and the three rural issues was to implement the household contract responsibility system. It was not just a reform measure to solve the incentive problems in rural labor and operation. It was also designed to liberate the productive factors including laborers, which was manifested as the transfer of rural laborers to non-agricultural industries and the development of township and village enterprises (TVEs) based on rural capital and land. The contribution to agriculture made by the factors, which had been discussed in some earlier development economic studies, was in fact manifested as an increase in the overall labor productivity of the Chinese economy due to re-allocation of resources. Agricultural modernization and sustainable increases in peasants’ incomes were ultimately dependent on the scale of land operation, and to increase the scale, adequate transfer of laborers was a must. Therefore, the ultimate solution to the three rural issues boiled down once again to the urban–rural relationship, making it imminent to reform the household registration system (Hukou) and the land laws. There thus came the strategy to boost the rural areas planned out at the 19th National Congress of the CPC, and it is essentially a national strategy to integrate the urban and rural areas. Always Staying Oriented with People to Break the Attenuating Effects of Poverty Lifting Efforts. In all poverty-lifting efforts around the world, there is always a pattern of attenuating marginal effects, i.e., with decreasing number of people in poverty comes substantially increased difficulty to help the last, small-sized group of people in poverty because they live in geographically clustered regions that have adverse ecological, productive and living conditions and they often are characterized by lack of working capacities such as disabilities, diseases, old age and little education. Therefore, the last efforts to lift people out of poverty is usually extremely difficult, and most developing countries and even many developed ones have all failed to claim success on these last poverty groups. In material production, once the marginal profit shows decreases, investment is usually stopped and the money starts to move to other areas. However, poverty-lifting efforts are for people, not materials, and should not follow the same pattern. In China, exactly because the development principle is always oriented with people, the poverty-lifting efforts since the reform and openingup, especially since the 18th National Congress of the Party, have achieved

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greatly. Both the efforts and the achievements have been acclaimed by the World Bank as the “best textbook of the global anti-poverty cause”. China’s wisdom and path embodied in these efforts are in fact the principle of peopleoriented development. While implementing this principle, China has innovated a series of practical and effective methods and mechanisms, which have greatly advanced the poverty-lifting cause. It is estimated that all the rural population in poverty will be lifted out of it in 2020. As what has been promised, no single person will be left behind in the common prosperity. The Path of Industrial Development from Getting Big to Getting Strong. In the course of China’s economic growth that was realized by “learning during doing”, making industries big was the necessary track for them to become strong, and “getting big” was the prerequisite of “getting strong”. This track comprises the following steps or periods. In the first step, the industrial structure was adjusted so that resources were re-allocated from agriculture with low productivity to the non-agricultural, particularly manufacturing, industries with higher productivity. The resource re-allocation had its effects and the TFP was increased. At the second step with conditions of the dual economy, a mechanism of allocating resources by the market was implemented to scale up the secondary industry that had comparative advantages (thus with high productivity), transforming the demographic dividend to comparative and competitive advantages. At the third step when the unlimited supply of labor was diminishing, industrial policies were implemented in the direction of dynamic comparative advantages in reliance on the market to allocate resources to improve the competitiveness of industries by making industries strong and optimizing the industrial structure. Technological Advancement from Late-Mover Advantage to First-Mover Advantage. One of the important engines that has driven China’s economic growth is the increase in productivity. While learning and converging, China had a huge gap in technology with developed countries when its economy started to soar up, which also gave China the advantages of a late mover. With necessary and adequate conditions for economic growth, such advantages as a technological late mover gave China a chance to catch up with or overtake developed economies. Through introducing and learning application technologies and relying on increases in the TFP and accumulated material capital and improved human capital, the late-mover advantages were transformed into a potentially high growth rate. As a result of staged changes in economic development, China has narrowed its gap with developed countries in science and technology while at the same time, sustained economic growth has become even more reliant on the TFP. Although the advantages of a late mover are not completely gone, and further learning and applying basic science and technologies may bring extensions in commercial scale through the immense market scale (as in the so-called four new inventions), further innovation-driven economic growth requires a shift from the late-mover advantages to winning the first-mover advantage in core technologies in many areas, especially the strategic and emerging industries.

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Due to the restraints in core technologies imposed on China by developed countries, particularly the USA, the shift is becoming more necessary and imminent by the day. As China has the advantage of an immense market and scale industries, great demand may be formed and input increased, creating more favorable conditions for the shift to take place. The Ecological Civilization from Instrumentalism to Teleology. Regarding the issue of ecology of resources and environment, the world has seen ideas evolving from “management after pollution” through “management during pollution” to sustainable development that is not on the cost of the development of younger generations. The track along which the ideas evolved shows greater marks on the protection of the ecology of resources and environment, but the protection has always been seen as an instrument to bring development, but not the objective of development. During a period of high-speed economic growth in China, this instrumentalism view was also prevalent and a high price was paid. Since the 18th National Congress of the Party, the Central Committee of the CPC with Xi Jinping at the core has taken the ecological environment as an integral part to the aspiration that people have for a better life. An up-to-date view of the objective of development was thus revealed: “The environment is people’s livelihood, green mountains are beautiful, a blue sky is happiness, and green mountains with blue water are gold and silver mountains.” The philosophy of the ecological civilization has been formulated, and more measures with greater effects were taken to manage pollution and protect the ecological environment, which have shown great successes. The Human Resources Strategy from Making Use of the Demographic Dividend to Accumulating Human Capital. In the period with the typical dual economy, the development was centered around the idea that jobs were fundamental to people’s lives, and a series of system barriers that had held the flow of labor were removed through reforms, the industrial structure was adjusted, surplus laborers in rural areas and urban enterprises were accounted for, the efficiency of resource allocation was improved while more jobs were created and both urban and rural residents had increased incomes, and the TFP was significantly elevated. When the Chinese economy crossed the Lewis turning point and the demographic dividend sped up to disappear, there was no way to turn the tide of the changes in the number of laborers given the pattern of the demographic transition, but there was still a large potential for the human capital to accumulate. Human capital not only replaces laborers, but is the source of the TFP as well, with an additional advantage of helping laborers become more competitive when faced with robots. Therefore, for the highspeed growth to transition to high quality, the human resources strategy must transition from making use of the demographic dividend to improving the human capital. Establishing the Social Security System Through Equalizing Provision of Basic Public Services. It is not accurate to describe the establishment of the social security mechanisms and system during the reform and opening-up as “from none to existence”; it is rather a progressively equalizing course. In the

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command-economy era, despite the lack of a modern social security system, some security and welfare other than compensations for working were still there, and they varied by employment type and employer type. Therefore, there has always been a huge difference in the social welfare between stateowned and collectively owned units, between urban and rural areas, between the employed and the unemployed, and between regular employment and irregular employment. The development and reform of the social security system have been in fact continuous expansion and equalization of the coverage. As a way of re-distribution, the social security system has become more and more equalized in coverage with the changing development stages, and China is now in a new stage of comprehensively equalizing the provision of social security, or, in a more general sense, basic public services (including health care, basic education, elderly care, labor market mechanisms and social governance). Shared Development with Equality and Efficiency Integrated. Economic growth, technological advance and economic globalization are all means to make the cake bigger. However, none automatically help distribute the cake fairly. Therefore, it is conventionally believed that there must be a trade-off between equality and efficiency. In China, however, integration of equality and efficiency was overall followed during the reform and opening-up although policies had specific focuses and the sharing mechanisms and the degree of sharing varied according to the specific challenges in each period. Overall, as the idea of people-oriented development was set up, the reform and openingup was advanced to align with the improvement of people’s lives and the development was generally shared among people. In addition, the Communist Party of China was in long-term governance, a fundamental nature that ensures that policies are always concerned about the overwhelming majority of the people and their long-term and fundamental interests, and populist policies are therefore always avoided.

Beijing, China

Fang Cai

Contents

The Path of Reform: Grassroots Explorations and Top-Down Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Xiaojing Zhang Opening-Up: From Participant to Leader . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yuyan Zhang and Weijiang Feng

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The Macroscopic Economy: Insistence on the Overall Principle of Advancing in Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Zhizhong Yao

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Regional Development: From Gradient Advance to Coordinated Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houkai Wei

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The “Sannong” Policy: Starting with Integrating Urban and Rural Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Xiaoshan Zhang From Large-Scale Poverty Reduction to Targeted Poverty Alleviation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Guobao Wu Industrial Development: From Big to Strong . . . . . . . . . . . . . . . . . . . . . . . . . 187 Qunhui Huang Leadership of Science and Technology: Beyond the Traditional Late-Mover Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 Ping Li Ecological Civilization: From Instrumentalism to Teleology . . . . . . . . . . . 249 Jiahua Pan Human Resources: From Demographic to Talent Dividend . . . . . . . . . . . . 287 Wenshu Gao

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Social Security: Establishment and Equalized Provision of Basic Public Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 Yanzhong Wang Income Distribution: Towards Integration of Equality and Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353 Zhong Wei Epilogue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385

The Path of Reform: Grassroots Explorations and Top-Down Design Xiaojing Zhang

As suggested by how Deng Xiaoping is called the general architect of the reform and opening-up, people always assume that the Reform since the late 1970s has had a top-down design. However, when they think of the story of Village Xiaogang in Fengyang, Anhui Province, one tends to understand the Reform as having started from the very grassroots level and dispersed gradually. In fact, China’s reform is both, having both a top-down design and explorations at the grass roots. The organic connection and the frequent interaction between the two hold the secret of why China’s Reform has come to where it is today. Had there been only one aspect, either one aspect, things would have been much worse today. However, throughout the 40 years of the Reform, there was some “imbalance” in the course with more top-down designs sometimes and more explorations at the community level at other times. For example, during the period when the dualsystem was being reformed, there were more explorations at the grassroots level and a relatively high price was paid as there was not much design from the top down. Another example is the ongoing reform on State-owned enterprises (SOEs) where there is quite some design from the top down which has resulted in several rules and restrains, but they are not landed well, and together with inactive explorations at the grass roots, the effects of the SOE reform are compromised. One more example is how the financial innovations and development since the latest international financial crisis led to sustained high leverage ratios and escalating financial risks due to lack of a sophisticated plan in the top-down design. In this case, practices were ahead of supervision, and financial issues have become the first among the three problems that must be solved. A similar situation is with the development of real estate, which has always lacked comprehensive planning and long-lasting effective mechanisms. “Nine rounds of adjustment and control in ten years” have got it nowhere near satisfaction. In fact, excessive attention to speed and surpassing with ignorance of X. Zhang (B) Institute of Finance & Banking, Chinese Academy of Social Sciences, Beijing, China

© China Social Sciences Press 2021 F. Cai (ed.), The Chinese Approach, https://doi.org/10.1007/978-981-16-1899-4_1

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comprehensive coordination for sustainability in economic development has also resulted in substantial problems of unequal development. The underlying reason is not just lack of a top-down design (for example, it was proposed to transform the growth mode in as early as 1995). Many top-down designs were not landed, and that shows a lack of matching measures in the reform. Of course, one should not be too picky with the reform. At the philosophical level, it is not practical to start doing something after all have been thought through. A promising blueprint comes in part from recognitions in practice, and how good a blueprint sometimes depends on how well things are practiced. From practice to knowledge, followed by re-practice and then re-gaining knowledge, there goes the dialectical relationship between grassroots explorations and top-down design, which also shows the fundamental unity of knowledge and action.

1 “Crossing the River by Feeling the Stones” to Find a Way in for the Reform At the beginning of the Reform, there was no completed blueprint. Therefore, the general architect proposed to “cross the river by feeling the stones”. Rural reforms, together with enterprise reforms and the development of the nonpublic sector of the economy were all conducted in a way of “crossing the river by feeling the stones”. It is not without a reason. One reason is that China wanted to establish a socialist market economy, of which there had been no precedent, and must rely on itself to find a way. A second reason is that different regions in the vast land of China had immense differences in development and other aspects and were faced with different challenges, which required different solutions. A third reason is that the stones that were felt were in fact those protruding during the explorations at the grass roots and therefore became the way in for the Reform. Essentially, exactly because practice and exploration had identified problems as well as solutions, the Reform had samples and experiences to rely on. If the Reform needed to be oriented with problems in order to show any effect, the problems all came from practice, from explorations at the grass roots.

1.1 The Rural Reform Between the summer and autumn in 1978, a centennial drought devastated Anhui, causing great hardships to the people there. The Anhui provincial Party committee reached a decision to lend the lands that could not be collectively cultivated to peasants and the peasant who would cultivate a land would bring home all crops of the land without being charged the quota in crops that would have been turned in after harvest in a regulation situation. The decision of “lending lands for crop cultivation” was echoed by active participation in the agricultural production of many peasants,

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and it also led to “contracting of yields with groups” (baochandaozu) and “contracting of production with households” (baogandaohu) in some areas. The production teams in the Xiaogang Village of the Fengyang County became a typical example of those who first started “contracting of production with households” (baochandaozu) in all villages in China. At the end of 1978, 18 peasants pressed red hand prints on the responsibility agreement of land contracting. To them, it was like a “life-and-death” contract, and they took a great risk in a manner of “entrusting each other with one’s surviving child”. Within one year of implementing the “contracting of production with households”, the total crop yield of the Xiaogang Village reached 66 tons, as much as the village’s total crop yield of the five years from 1966 to 1970. In fact, there were quite some twists and turns that are not well known. After all, “prohibition of household contracting of land” was just specified in 1978 in the “Draft of the ‘Decision on Several Issues of Promoting the Agricultural Development’” issued at the Third Plenary Session of the 11th Central Committee of the Communist Party of China (CCCPC). Then, what was the arduous course this significant rural reform measure experienced and how was it eventually reckoned by the Central Committee to become a top-down policy? At the time, the period of 1966 to 1976 had just been over and all that had been undone were waiting to be done in China. One fundamental problem was to feed the people, to which the issues of agriculture, rural areas and peasants were vital. By the end of 1979, “contracting of yields with households” had been only implemented in very few places, accounting for 9% of the national villages. However, many people had started to follow suit spontaneously, leading the number to grow gradually. In April, 1980, the Central Committee held a conference to write up long-term planning. At the meeting of asking for suggestions, Du Runsheng suggested “contracting of yields with households” in impoverished regions. When the suggestion was passed on to Deng Xiaoping, he said that measures such as “contracting of yields with households” should be allowed in areas with large lands but few people, underdeveloped economies and poor livelihood such as the northwest, Guizhou and Yunnan. In May, 1980, Deng Xiaoping, in one of his talks, praised the practice of contracting land to households in the Feixi County of Anhui and the “big production contracting” (dabaogan) practice in Fengyang. He said, “Now more flexible policies have been introduced in rural areas, and ‘contracting of yields with households’ has been adopted in places where it is suitable. It has been quite effective and brought many changes.”1 The two talks by Deng Xiaoping marked the “contracting of yields with households” to be a possible way in for the economic reform in China. In fact, as many as 1200 production teams in Anhui had adopted the “contracting of yields with households” by 1978, and the number evolved to 38 thousand in 1979, accounting for 10% of all the production teams in the province. By the end of 1980, 70% of all the production teams in the entire province of Anhui had implemented the 1 Deng,

Xiaoping, On Questions of Rural Policies, May 31, 1980.

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“contracting of yields with households” or “big production contracting”. Meanwhile, in Sichuan, Guizhou, Gansu, Inner Mongolia and Henan provinces, “contracting of yields with households” was also progressing in public or in disguise. By the fall of 1980, 20% of the production teams nationwide had implemented “contracting of yields with households”, and the percentage grew to 50% at the end of 1981. Development in practice transformed people’s minds. The land operation mechanism of the household contract responsibility system was officially acknowledged at the national rural-work meeting in the winter of 1981 and in the subsequently drafted “No. 1 File” of the CCCPC in 1982 (i.e., Minutes of the National RuralWork Meeting), concluding the 30-year old debate on “contracting of yields with households”. One of the important reasons why “contracting of yields with households” was adopted throughout the whole country is that it liberated the land and labor. In 1978, the total crop yield in China was approximately 300 billion kg, and as the government usually bought about 30–35 billion kg every year, an extra ten percent purchase of the government would significantly affect how much the peasants would have left, which had been the case for the more than two decades with a collective economy. In contrast, once “contracting of yields with households” and “contracting of production with households” were implemented, the yield immediately increased, reaching 400 billion kg in 1984. At the same time, the gross agricultural production increased by 68% and the per capita income of peasants increased by 166%, marking a world-renowned achievement.

1.2 Development of the Non-public Sector of the Economy When the reform and opening-up was first initiated, some individual businessmen and owners of private enterprises made great efforts to break barriers and found ways to survive and develop in the small cracks of the command economy system at the time. They were brave to innovate, take risks, reform and start up, and became the pioneers of the reform. The leadership of China gradually recognized the reforming energy underlying the individual and private economies and started to adjust the policies that had been suppressive to those economies in the conventional system, lifting up the constraints on them, acknowledging their presence and development, and giving legal status to them. As the reform continued to deepen, the leadership kept creating the environment and conditions for them to grow and continued to explore how to help them participate in the market competition fairly. The non-public sector of the economy has developed since the Reform in a way of “crossing the river by feeling the stones”, and the policies regarding the non-public economy also showed characteristics of gradualism. Overall, they experienced four stages. The first stage lasted from 1978 to 1984, during which individual business was allowed and developed. As stipulated by the Constitution of the People’s Republic of China as amended in 1982, “the individual sector of the economy that exists within the limits prescribed by law are complementary to the socialist public sector of the

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economy. The State protects the lawful rights and interests of the individual sector of the economy. The State encourages, supports and guides the development of the individual sector of the economy and, in accordance with law, exercises supervision and control over the individual sector of the economy.” The status of the individual economy was therefore acknowledged by law. The second stage was from 1984 to 1992, during which the private economy was allowed and developed. In 1987, the 13th National Congress of the Party announced, “The multiple forms of ownership with the public ownership as the dominating form, as well as the private sector of the economy allowed for existence and development, are all decided by the actual situation of the productive forces in the primary stage of socialism. This is the only way to promote the productive forces.” The following was also announced: “The economic components other than the State-owned sector are not too many, but quite insufficient now. We must continue to encourage the development of urban–rural collaborative, individual and private economies.” Based on these, the Constitution Amendment in 1988 stipulated the following: “The private sector of the economy that exists within the limits prescribed by law are complementary to the socialist public sector of the economy. The State protects the lawful rights and interests of the private sector of the economy. The State encourages, supports and guides the development of the private sector of the economy and, in accordance with law, exercises supervision and control over the private sector of the economy.” The private economy was thus acknowledged its lawful status for existence and development.2 The third stage extended from 1992 to 2002, during which the non-public sector of the economy was given equal status in market competitions step by step while the importance and roles of various non-public economic forms in the socialist market economy were specified. The necessity to establish the ownership structure comprised of various economic components was once again confirmed in the 14th National Congress of the Party in 1992. In 1993, the Third Plenary Session of the 14th CCCPC issued the “Decision on Several Issues of Establishing the Socialist Market Economic System”, which specified the following: “The state shall create conditions for all forms of ownership to participate in the market competition equally and shall deem all types of enterprises in the same way.” In 1997, the 15th National Congress of the Party summarized the lessons of the ownership reform in the past 20 years and pointed out, “It is a basic economic institution in the primary stage of socialism in our country for all the economies of various forms of ownership to develop side by side while the public ownership is in dominance… The non-public sector of the economy is a major component of the socialist market economy. The state shall continue to encourage and guide the non-public sector such as individual and private economies for them to develop healthfully.” These expressions took a major departure from the conventional theory of socialism that had excluded nonpublic economies outside the socialist economic system in that they changed the conventional idea that only the public ownership was socialist and integrated various 2 However, the private economy that had gained its lawful status was once obstructed in development

due to changing situations from the second half of 1988.

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forms of ownership into socialism so that the non-public sector was included in the socialist economic system and its status was elevated from a complementary role to a major component with important contributions to the national economy. This was a significant breakthrough in the conventional theory of socialist ownership. Subsequently, the Constitution Amendment in 1999 stipulated, “During the primary stage of socialism, the State adheres to the basic economic system with the public ownership remaining dominant and diverse sectors of the economy developing side by side… Individual, private and other non-public economies that exist within the limits prescribed by law are major components of the socialist market economy… The State protects the lawful rights and interests of the non-public sectors of the economy such as the individual and private sectors of the economy.” These marked the status of the non-public economy as being “inside the system” rather than “outside the system”. The fourth stage has been ongoing since 2002, during which the background policies for the non-public sector of the economy have been further improved. The Constitution Amendment in 2004 intensified “encourage” and “support” of the nonpublic sector of the economy from the highest-level law of the state. In 2005, the first government document to promote non-public economies was issued, Opinions on Encouraging, Supporting and Guiding the Development of Individual, Private and Other Non-Public Economies, marking the transition of the disperse policies supporting non-public economies to forming a policy frame. In particular, this document focused on creating a fair environment of competition and specified rules for non-public economies to enter major economic fields including monopoly industries. In 2007, the 17th National Congress of the Party stated to adhere to protect property ownership equally to create a new pattern for economies with all forms of ownership to compete fairly and promote each other. The “equal” protection by law and the “fair” competition economically became the cornerstone of promoting the development of non-public economies and further pushed for non-public economies to gain a fair hand to enter the market and to finance. Based on all the above, the issuance of Opinions on Encouraging and Guiding the Healthy Development of Private Investment in 2010 further expanded the areas and ranges for private investment and specified the goal of creating a market for non-public economies to compete and enter fairly. Such an “outside development strategy” to look for breakthroughs outside the State-owned economy greatly promoted the development of the non-public sector of the economy, which has become part of the energetic base of China’s microscopic economy. According to the report on the development of national market mainstays by the State Administration for Industry and Commerce, there were 15.4637 million private enterprises with registered capital of 59.21 trillion RMB and 49.8406 million individual business men with registered capital of 2.93 trillion RMB at the end of 2014. Apparently, the percentage of the non-State-owned sector, primarily the non-public sector, out of the national economy increased significantly. Today, the industrial increments created by the non-public sector of the economy accounts for about half of the annual industrial increments in China, and it contributes at least 3/4 to the new jobs in cities and towns nationwide, about 3/4 to the total annual imports and exports of China, about 2/3 to the annual urban investment in fixed assets, and

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over 50% to the tax revenue of the state. The non-public sector has become a major pillar supporting the national economy.

2 Pushing the Market-economy Reform Forward as a Whole After the Southern Talks Deng Xiaoping’s talks during his inspection tour of several southern provinces in early 1992 laid the philosophical foundation for China to step on the path to a socialist market economy with its own characteristics. In October, 1992, the 14th National Congress of the Party established the socialist market economy as a reform goal, and in November, 1993, the Party’s 14th National Congress passed the action plan, Decision of the CCCPC on Several Issues Concerning the Establishment of a Socialist Market Economy, to show the resolution to change the old reform strategy of “gradual progression overall with breakthroughs at stages” to a new one, “overall advancement with breakthroughs in key areas”. The 50-item Decision listed five key areas, the financial and tax, banking, foreign currency management, SOEs and social security systems, to match the Reform in order to set the frame of the market economic system. From the initiation of the Reform to orient with the market at the end of the 1970s to the comprehensive advancement of the Reform towards the socialist market economy, the economic reform in China was more solid and stronger at each step.

2.1 From Developing the Commodity Market to Developing the Factor Market The Reform involved marketing of fund, labor and land factors. First, the factor of funds need to be reformed to align with the market, and this involved the development of a capital market and the marketing of interest and currency exchange rates. Although the reform to establish a multi-layered capital market and to align interests and currency exchange rates with the market is still ongoing, the first step was quite difficult at the time. The second effort was to put laborers on the market. The reform was initiated with efforts to break the pattern where labor resources were uniformly allocated through administrative measures by gradually expanding the range of market allocation of labor resources. For the non-public economies, the labor resources were mostly allocated by the market from the very beginning, and the labor price (i.e., wages) was primarily decided by the demand and supply on the labor market, which later became an important reference for State-owned units to set their wage rates. Meanwhile, inside the State-owned economy, the system of labor contract covering all laborers was promoted after 1995 with issuance of Labor Law and other matching laws and regulations, which eventually combined the tracks

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of allocating labor resources so that both the supply and demand sides on the labor market could make their own choices in both directions based on the labor contract. The third aspect was to reform the land system to bring it to the market. To do this, the commodity nature of the land resource must be first restored and a mechanism of how to pay for land use was to be established. Then a system that allowed open trading of the land-use right was introduced one step at a time to form the market system for land pricing. Three forms of agreement, bidding and auction to sell and trade the right of land use were allowed in the Temporary Regulations on Selling and Trading the Right to Use Urban State-Owned Lands issued in 1990. From the late 1990s on, the progress of market allocation of the land factor was sped up and the degree to which land prices were determined by the market was gradually increased. In 2006, industrial lands were first included in the bidding, auction and selling of lands. In 2013, as many as 92.3% of all the State-owned construction lands that sold the right to use them were sold through bidding, auction and selling. Additionally, the right to use land in rural areas started to circulate in the late 1990s. Peasants came up with multiple ways of trading the right to use land in practice, such as sub-contracting, trading, leasing (including reverse-leasing and reverse-contracting), exchange and chipping in, and the market of circulating the right to use rural land was also established with explorations with the mechanism of “separation of the three rights”—ownership of contracted lands, the right of contractors and the right to operate the lands–gradually established. According to the Ministry of Agriculture, the nationwide area of the household-contracted arable lands with their operational rights traded had been 380 million mu by the end of June, 2014, accounting for 28.8% of the total area of the household-contracted arable lands.

2.2 Reform from the Microscopic Level to the Macroscopic The first to reform was the financial and tax system, which was mainly conducted in three aspects: reforming the mechanism to distribute the financial revenue between the central and regional governments, reforming the tax laws, and reforming the budget system. Among all these reforms, the core aspect was to reform the mechanism to distribute the financial revenue between governments, and centered on this reform were three phases. The first phase, starting in the early 1980s, saw how the central government started to loosen its control over regional governments and to give them more benefits to establish a financial packaging system in which the central and regional governments “had separate pots to eat from”. The second phase saw reform on the system of tax distribution between the central and regional governments. The third phase of explorations started in the end of the 1990s. The next to reform was the financial system, which involved reforms on the organizational structure of the financial system, the financial market structure, and the system of macro-regulation of finance by the government (as well as other reforms related to government roles on the financial supervision and the management of State-owned financial assets). To reform the macro-regulation system of finance, measures were taken on three

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layers. On the first layer involving the regulating body, it was first determined that the People’s Bank of China should assume the position and the role to regulate finance on the macroscopic level, and steps were subsequently taken to strip it of the roles of securities supervision, insurance supervision and banking supervision such that monetary-policy making was separated from financial, particularly banking, supervision. On the second layer involving the regulated body, policy finance was separated from commercial finance in that policy banks were formed and all the pre-existing specialty banks were transformed to State-owned commercial banks while stock and regional commercial banks and non-bank financial institutes were developed. On the third layer involving the regulating method, management of the size of credit and loans that had previously been the major method gave way to instruments of monetary policy such as interest on reserves, the central bank’s interest on secondary credit and open market operations, while the central bank also created oriented tools of monetary policy, including two short-term interest-regulating instruments that were released on the open market in early 2013, short-term liquidity operations (SLO) and standing lending facility (SLF), as necessary means to complement the routine operations of the open market, as well as a mid-term interest-regulating instrument, pledged supplementary lending (PSL) that started to be explored in mid-2014.

2.3 From Focus on Efficiency to Increased Attention to Equality In the first stage, attention was primarily paid to overcoming the drawbacks of egalitarianism with adherence to “efficiency first with equality considered”. Such a practice filled the pitfalls of “egalitarianism” to a large degree, motivated the enthusiasm of the entire society effectively and greatly boosted the rapid development of the productive forces of the society. While social wealth piled up quickly, individuals were all able to enjoy the swift growth of their absolute incomes and the visible improvement in their welfare. In the second stage, in lieu of the increasingly widening income gap in reality, “paying more attention to social justice” was highlighted. In the background of worsening income distribution and a widening gap between the rich and the poor, a growing aspiration for a fairer society came strong from all. In light of this background, the 16th National Congress of the Party let go the principle of “efficiency first with equality considered” in the description of the relationship between equality and efficiency, and instead reiterated “paying attention to efficiency at the primary distribution and to equality at secondary” with the intention to solve the unequal distribution. It was then emphasized to “pay attention to social justice” at the Fourth Plenary Session of the 16th CCCPC to echo the requirement to establish a harmonious socialist society. At the Firth Plenary Session of the 16th CCCPC, it was further stated, “On top of economic development, more attention must be given to social justice so that all the people will enjoy the benefits of the reform and opening-up

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and the socialist modernization.” Then at the 17th National Congress of the Party, it was expressively stated to “properly handle the relationship between efficiency and equality at both the primary and secondary distributions with more attention to equality at the secondary.” These expressions and the changes in their focuses reflect the deepening understanding of efficiency and equality. Centered on social justice that attracted increasing attention, reforms were made to the distribution system of income and the social security system.

3 Disadvantage of Lacking a Top-Down Design: The Gradual Reform and Its Limitations China’s economic reform is characterized primarily by its gradualism, which is also a valuable lesson of China’s success in the Reform. A gradual reform does not first seek disruption of the old system, but manages to develop new system components “on the side” or “in the cracks” of it. With the development of the new system components, their proportion in the entire economy grows increasingly, bringing deeper and deeper reformation on the old system. Such a reform usually starts with the easy and surface part, and goes on to tackle the difficult and the core, cautiously pushing itself forward in the frame of the preexisting system, and is thus gradual in the choice of time, speed and sequence. This is also why one important feature of a gradual reform is coexistence of the new and old systems for a certain period of time. Tolerance of the old system, on the one hand, is necessary in the beginning of the reform as proper protection of the interest groups and helps reduce the social resistance the reform may solicit, and on the other hand, is necessary for the old system to transition to the new one smoothly as the new system does not usually fully thrive overnight. In China, the gradual reform was rich in experiences, which may be summarized into two major points: transition between two tracks and expansion of trials (or crossing the river by feeling the stones). For over 40 years, China has maintained a high-speed economic growth and stable politics, and it is to a large degree attributable to the gradualism of the reform. However, while credit must be given to the gradualism of the reform for its huge success, one should not ignore the “reformism” tone in the reform mode, i.e., gradually introducing the market factor without completely negating the old system. The reform in China essentially followed a strategy of “advancing from the peripheral” in that the easy problems were taken care of first and the most difficult were left to the end. This approach was robust, but it has brought many challenges. First, it brought friction between the two systems. Unlike a radical reform, a gradual reform has a major weakness in that it is incomplete and long lasting. In fact, that “quick pain is better than hurting for a long time” is perfect to describe such a situation. It’s been more than 40 years since the reform and opening-up and China’s market economy has come a long way. However, some deeply-lying problems of the old system have not been rooted out. For example, the relationship between the

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government and the market is not straightened, and there are still many twists caused by government intervention in many areas, leading to low efficiency and moral risks resulting from implicit government guarantees, which are both adding to the risk the economy accumulates. Second, the Reform was not well-coordinated in various areas. “Coordinated advancement” of the Reform refers to simultaneous initiation and advancement of the Reform in multiple areas, and reforming one aspect should not wait until another aspect has been reformed. In addition, simultaneous advancement of the Reform in all areas should make all reforming measures coordinate with and promote, but not hold, each other. In fact, if the Reform cannot be coordinated in advancement in all areas, the reforming measures in different areas will prevent each other from showing effects and thus affect the efficiency of the entire system. With the economy being more oriented with the market, some economic fields that have been reformed may be held at risk by the long overdue reform in other fields. For example, the control over exchange rates has been loosened up compared to what it was 10 years ago, and large-scale intervention in the foreign exchange market at the time when capital enters China may lead to severe imbalance of balance sheets inside the financial system (although this has become less of a problem for the recent couple of years with changes in the balance pattern of international payments and the decreasing pressure of currency appreciation as well as withdrawal of the central bank from routine intervention of the foreign exchange market). Similarly, with more freedom enjoyed by banks, the banking system that is supported by the government is faced with an increased risk of another round of bad debt. In fact, many factors that affect whether a financial system operates at a high efficiency are inter-dependent, and that is why the reform needs a comprehensive plan. China has made great achievements for the past 40 years, but there is still a long way to go. China should not stop trial and error, and be more audacious when it comes to measures. “It may be time to move beyond feeling the stones and, instead, take some bigger steps on the road to reform.”3 For today’s China, there is quite some catching-ups in the reform of both the financial and political areas. Third, the unbalance strategy has brought challenges. China’s “gradual reform” chose a road that was regional and imbalanced and went from points to planes. Such a road, from the very beginning, dictated the economy to develop in an imbalanced way in that some were allowed to get rich first, who would then help the others to get rich later, eventually leading to common prosperity. Since the reform and opening-up, “the first rich” have been quite obvious, but there is still a long way to common prosperity. Take the development in urban and rural areas as an example. Although the Reform found its first break-in in villages, cities were preferentially developed in order to advance industrialization. This has resulted in a dual-economy between urban and rural areas and rural areas were left behind for a long time with an increasingly widened gap from urban areas. The gap, although narrowed to some degree in recent years, is still significant. Take regional development as another example. The coastal areas have many development advantages and they are at the 3 Wolf,

Martin, “China Should Risk Bolder Trials”, Financial Times, June 12, 2006.

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full front of the Reform and have enjoyed the most benefits from the Reform. In contrast, the central and western areas were left behind for a long time, seeing a wide gap from the coastal areas. Such an imbalance in regional development does not see any fundamental change in any time soon although China has implemented strategies such as the large-scale development of the west, revitalizing the northeast, rise of central China and the east to develop the first. In addition, with economic development come increasingly poignant social issues with income distribution and equality. All these will hold the social economy from normal, orderly development. All the problems above show that a gradual reform also has its limitations, which are fundamentally rooted in the lack of a comprehensive top-down design of the reform and insufficient coordination, systematism and comprehensiveness of the Reform. As a result, some areas went fast in the Reform and some were slow, and some are reformed and some are not, leading to systematic profiting and a large number of interest groups who hold further reform from moving forward, and comprehensive and complete reform is thus difficult to progress.

4 Disadvantage of Lacking Grassroots Explorations: The Wang Anshi Reform and the Shock Therapy As mentioned above, grassroots explorations alone without a top-down design usually cause many problems. A top-down design focuses on the complete picture, and efforts from the top down are also authoritative and legitimate (while explorations at grass roots are sometimes “edge-ball games”). Therefore, it is necessary and desirable to have a top-down design. However, top-down designs are usually not self-sufficient as a top-down design alone cannot survive. Here two examples are presented below: the Wang Anshi Reform in the Chinese history and the shock therapy in the Soviet Union and East European countries.

4.1 The Wang Anshi Reform The Wang Anshi Reform in the Northern Song Dynasty holds a special position in China’s history. The reform had good intentions and was supported by the reigning emperor at the time, Emperor Shenzong, but ended up with unsatisfactory effects. One reason of the failure is perhaps excessive focus on the top-down design with ignorance of grassroots explorations. First, Wang Anshi had noble pursuits and was supported by the emperor, necessary factors for a top-design to be possible in the first place. Wang Anshi described himself as “being good at theories and therefore good at managing political affairs”, and persuaded Emperor Shenzong to “learn from Yao and Shun instead of Emperor

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Taizong of the Tang Dynasty for good reigning strategies.”4 That shows that Wang Anshi’s ideals were to be equivalent with Yao and Shun and that he didn’t even think of the causes of Emperor Taizong of the Tang Dynasty as something worthy of pursuing. What were his lofty ideals exactly? He wanted to establish a society with soldiers and peasants combined as one to protect the society through institutions such as organized households (baojia), a society with land annexation suppressed and all living a sufficient life through institutions such as the square land tax system (fangtian), the crop pricing mechanism (qingmiao), the institution to balance market demand and supply (junshu) and the trade institution (shiyi), and a society that was open and reasonable with education popularized through schools and reforming institutions such as the imperial examinations (keju). Second, the reform failed to win support from his colleagues, thus lacking a “united front”. The Wang Anshi Reform was different from Fan Zhongyan’s. Fan had previously initiated a reform and all who opposed him were considered non-decent people (xiaoren), but most of those who opposed Wang Anshi were considered decent (junzi). Even those junzi who had previously sided with Fan Zhongyan, such as Han Qi, Fu Bi and Ouyang Xiu, all opposed Wang Anshi for his reform. In fact, Ouyang Xiu had gone great lengths to help Wang Anshi in his political career as a senior official, Sima Guang had been a good friend to him, and Cheng Hao had wanted to help him, but they all ended up stopping working with him, which was, unfortunately, the biggest reason why his reform failed. No wonder his contemporaries described him as being stubborn and not understanding how things worked. Third, the essence of the reform was completely lost from the top to the grass roots. The reform measures Wang Anshi took were not well implemented by those who were at the work and thus did not show any intended effects. Lu Dian, who had learned classical studies from Wang Anshi, once told him, “The new measures are not bad, but they have not been implemented properly and thus disturbed people.”5 The new institution that was most vehemently opposed against by people at the time was the Qingmiao system, but people criticized it mostly based on the actual issues with implementation. In contrast, Wang Anshi always only talked about the intentions of the reform. He once said, “If ten people are allowed to manage money and one or two fail, the benefit and loss must be properly calculated.”6 This was one focus of the debate between the two sides. One other problem with Wang Anshi’s implementation of the new measures was that he got only fixated on one objective, but failed to notice several important events that were politically relevant. Cheng Hao had initially been in favor of the reform, but eventually joined the other side. Last but not the least, he was too hasty to succeed. Fan Chunren once told Emperor Shenzong, “A distant goal should take time to get to, a big cause cannot be achieved rapidly, people with talent do not come instantly and problems that have formed over time cannot be reformed right away. If one hastens to get things done and to

4 Qian, 5 Qian, 6 Ibid.

Mu, A General History of China, 2010, The Commercial Press. Mu, A General History of China, 2010, The Commercial Press.

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claim success, there will be room for malicious people to manipulate things.”7 This actually cut right at the core of the problems with Wang Anshi’s reform. Zeng Gong also wrote to Wang Anshi to elaborate on the core problems, but Wang did not pay attention. In Xining Year 6, Zhang Shangying submitted to the emperor a letter discussing five issues, which stated, “Your Majesty have ascended the throne for five years and have changed tens to hundreds of things. Among all the changes, five that had the most political importance were discussed most: herong, qingmiao, mianyi, baojia, and shiyi. The mechanism of herong has shown effects and the system of qingmiao has been implemented. However, the mianyi, baojia, and shiyi measures have great deficiencies. If they can be implemented slowly with the right people, they will result in great benefits; otherwise they will cause great harms. May Your Majesty take a break to calm down with all the ministers and then choose the right people. If one thing is not finished while another is initiated, no effects will result in the end.”8 What Zhang Shangying emphasized was that there were so many things to do that they must be patient. Unfortunately, the haste to get things done, which is quite comparable to the shock therapy, aimed to cut the mess with a swift knife so that problems were solved rapidly. However, it is often the case that many problems are intertwined with each other, and people must be patient and resolute to carry out a reform. After all, a reform that is only “implemented slowly” may show effects.

4.2 The Shock Therapy The radical reform that the Soviet Union and East European countries took is also called the shock therapy. Such a reform is characterized by full and complete disruption of the institutions of the previous command economy and subsequent rapid establishment of the system frame of a market economy through a whole set of radical transitional measures (such as economic liberalization, privatization of property and macroscopic stabilization), which enables the economy to land at the market from command in only one stride, giving itself a nickname of the Big Bang strategy. Soviet Union and East European countries paid a high price for the shock therapy. By 2004 (15 years after the economic transition), only half of these countries had reached their respective GDP levels in 1989. On a special note, Russia’s GDP was only a little more than 80% as much as that of 1989, and Ukraine, only about 50%. The best economic recovery was observed in Poland, which were more than 140%, followed by Slovakia, Slovenia and Hungary. In terms of the economic recovery rates, Poland was also the first to start recovery (which started around 1991), as well as Hungary (which started around 1993). In addition to the downfall of GPD in Soviet Union and East European countries during the transition, the gap between the high and low incomes was also worsening. The difference between the gaps of the rich and the poor before and after the transition 7 Ibid. 8 Qian,

Mu, A General History of China, 2010, The Commercial Press.

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(assessed based on the Gini coefficient) was the worst in Ukraine with an increase in the Gini coefficient by 0.24. Kyrgyzstan, Russia and Estonia also had considerable increases in their Gini coefficients, by 0.145, 0.142 and 0.124, respectively. Poland had the smallest increase, only short of 0.03. In fact, Poland and Hungary did not suffer the least during the economic transition because they adopted the shock therapy in the reform. Instead, they took many gradual measures in many aspects. Grzegorz Kolodko, former Polish First Deputy Premier, Minister of Finance and renowned scholar, once said, “The success of Poland came from abandonment of the shock therapy, but not the other way around. The ‘shock therapy’ has, without question, failed, and all thoughts and actions in line with the ‘shock therapy’ have led to large-scale sliding down in production. The ‘shock therapy’ should be held accountable for such a miserable consequence.” Why did the shock therapy fail? We may come up with a lot of reasons, such as ignorance of the support in the system, overlooking the role of the government in the transition, and that it was impossible to realize the three goals of the shock therapy (liberalization of prices, privatization, and financial balance and macroscopic stability maintained by the government) at the same time. However, one important reason must not be overlooked: the shock therapy, as a design from ideals, had not been tested in practice or supported in explorations at the grass roots.

5 Comprehensively Deepening the Reform Needs the Top-Down Design Combined with the Grassroots Explorations 5.1 Initiation of Comprehensive Deepening of the Reform In 1994, the reform strategy of “overall advancement with breakthroughs in key areas” was released, and the reform planning since the 18th National Congress of the Party is an upgrade to the overall advancement strategy. The overall reform planning in 1994 was still limited in the economic field, and the all-round reform since the 18th National Congress has covered all areas of politics, culture and social and ecological civilizations in addition to the economic field. The Third Plenary Session of the 18th CCCPC passed the Decision of the CCCPC on Several Major Issues Concerning the Comprehensive Deepening of the Reform, in which the ultimate goal of comprehensively deepening the reform was proposed and systematic planning detailed. This shows that in the new historical conditions and faced with complex problems intertwined together, making reform measures and releasing policies must be coordinated with each other and planned together so that all measures and policies are comprehensively considered so that they are systematic, wholesome and coordinated without any imbalance. In particular, it was announced at the 18th National Congress of the Party that we must strive to reach common prosperity and an overall planning of “five in one” for the socialist cause with Chinese characteristics was

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also determined. These added to the great and arduous task to overcome all difficulties, and a stronger determination, more wisdom and harder efforts are required to advance the reform comprehensively to win new advantages in development. The Reform has entered a new stage, and is now more evident that it is systematic, comprehensive and restructured with unprecedented intensity, coverage and degree of interest affected. The Reform is now in deep water, and every move will profoundly affect others while in need of the help of others. In fact, if the reform always marches forward in one direction, it can never go well or far, even with potential mutations of itself to some degree. The economic reform will for sure continue to lead the reform in other areas, but efforts must be made to accelerate the reform in politics, society, culture, ecology, Party building, national defense and the military at the same time. We must “not miss the timing to deepen the reform in key areas” and comprehensively advance the reform with breakthroughs in key areas via the interpromotion and positive interaction among various reform measures to form a massive force to continue the Reform. The Third Plenary Session of the 18th CCCPC blew the horn for the comprehensive deepening of the Reform. To comprehensively deepen the Reform in the new era highlights the importance of a top-down design, such as the emphasis that the Reform is systematic, comprehensive and coordinated, while reckoning the necessity of explorations at the grass roots, such as the need to explore a road in practice to reform SOEs and the relationship between the central and regional governments and to find a better role for the government. Therefore, the road to deepening the Reform comprehensively must combine a top-down design and grassroots explorations.

5.2 Top-Down Implementation is a Valuable Lesson of China’s Reform Reform is a highly complex, systematic project and it needs to break up some things and set up some other things. It takes a long time, involves the interest of all social sectors and bears potentially high risks, and it cannot progress well without a unified, strong leadership in politics or an effective, reliable and authoritative government. Particularly in China where things are unique and highly complex, a political leadership including the role of the government is of special importance in reform. In the past 40 years, the Communist Party of China, as the leadership, and the Chinese government under its leadership showed their roles in comprehensively planning and coordinating the Reform in the following three layers.

5.2.1

Ensuring the Reform to Be Politically Appropriate

First, the Party and the government ensured that the direction of the Reform was in line with the objectives. Lessons from some countries that had gone through transitions

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showed that political instability during the transition would make it impossible for any government term to stick to a complete strategy and policy, if any, and political turmoil would be even more vehement and the transition prolonged if the making of any strategy and policy was manipulated by oligarchy. In China, the leaders, who had similar objectives and clear strategic intentions, always dominated the progress of the Reform successfully as they relied on the wisdom and the capacity when they initiated the Reform and the influence and resolution when they persisted with the Reform plan. As a result, the Reform did not derail from its original direction and kept progressing toward the objectives originally set. This is how the Reform was guaranteed to be politically appropriate. Second, the Party and the government ensured that the road to reform was effective. On the one hand, it was ensured through the planning and guidance of the Chinese leadership from the top down and on the other hand, through the leadership’s encouragement and escalation of the Reform from the bottom up. As shown by the Reform planning and in particular, the choice of initial moves, choices were made by the leadership according to the major barriers in reality or the most imminent problems and the timing of removing the barriers or solving the problems. As a reform is usually “path dependent” in that initial moves will solicit demand for subsequent moves, changes in the system will evolve in the direction along a certain internal logic. Due to this reason, China’s leadership paid special attention to the track of the intrinsic logic in their subsequent moves and tried every effort to align the speed and order of the Reform moves with the change-soliciting track of the system while “consciously” guiding the Reform. Exactly because of this consciousness, the course of China’s Reform, when examined retrospectively, shows agreement with a certain logical order despite lack of a complete strategy drawn out in advance. In fact, the Chinese leadership allowed and even encouraged those local reform trials and innovative moves that had broken out of the preexisting system, and usually summarized and optimized the successful experiences from the grassroots explorations in a timely fashion while correcting and adjusting the unsuccessful also in a timely fashion. Based on this, the wisdom from the grass roots was centralized and summarized theoretically and more innovations were made at the system level, which were then introduced nationwide. Last, the Party and the government ensured that the procedure of decision making was proper, which was also related to the demand to optimize the public governance in recent years. Since the recent years, China has paid attention to inclusion of public opinions while making reform decisions to continuously increase the participation of the society and to adopt various means to introduce social resources including specialists into the discussion of reform plans. As a result, the decision making during the Reform is increasingly participated by the public and more transparent and scientific, all parties with interest involved have a say in the decision making to some degree, and the reform decisions cover the interest of all parties as much as possible.

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Ensuring the Reform to Be Politically Practical

First, the Party and the government ensured that China stayed unified and stable during the transition period. For more than 40 years of the reform, China has paid attention to the central role of the leadership to “make comprehensive plans and coordinate all parties” so that more than one billion people are united and the social order preserved in the changing society. The reform practice in China shows that a unified leadership during a reform to reach a multiplicity of economic mainstays is important to prevent the country from falling apart and dividing up, and the unified leadership also lays foundations for the reform to progress smoothly. Second, the Party and the government ensured that the interest of all parties involved were well coordinated to reduce the friction cost. The Reform is a profound revolution in the economic base as well as many fields in the superstructure, which was destined to change the various unreasonable interest patterns formed in the old system and during the transition and thus met with various resistance and challenges. In particular, China made some strategic choices in the early phase of the economic transition to speed up the establishment of the market economy, such as certain policies to protect some State-owned agencies and to allow regional governments to participate in market competitions as “athletes” instead of “referees”, and these choices may have resulted in some interest groups inside the system during the middle and late phases of the economic transition. Such internal interest groups are different from those general ones that result from fair competition during the marketoriented transition because they are usually more strongly motivated to maintain the status quo and resist to the introduction of policies with Pareto improvement. These special interest groups are more energetic in action than general ones and may cast a stronger impact on political decision making, and therefore may hold the transition to the market economy that is still ongoing and thus lock the system in a status of suboptimal efficiency. Under such a circumstance, adjusting interest relations has become a major factor that affects the actual progress of further reform, and the political power with certain authority, when declaring a clear attitude or exerting effective management of the reform, can defy the subjective influences from various political fractions to a large degree, inhibit the expansion of special interest groups and push the society to the balance point of efficiency.9 Exactly in this background, China has relied more on the coordinating role of political authorities on the Reform during the decision making with the continuous deepening of the Reform to best prevent interest groups, especially the government-organ and regional ones, from affecting the planning and the progressing of the Reform. Through setting up reform coordinating institutes, which are on the top and multi-departmental but are little involved in interest groups, to make plans for the Reform, the barriers set by special interest groups are removed, the Reform is continued, and its direction and intention are maintained. 9 Regarding analysis to this end, please refer to Tang, Yugang & Zhao, Daping, “On Short-Term Deci-

sions of Government Preference on Supply: Political Balance and Economic Efficiency”, Economic Research Journal, Vol. 1, 2007.

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Finally, the Party and the government ensured that their governance capacity kept improving. Many international studies highlight the role of government transition in the economic transition. In particular, in order for the government to transition to a supporter of the market to help with and make use of the market, effective public organs and updated government human resources are vital. It’s been proposed, “Economically and politically, how to update the outdated human capital is a central piece of the transition.”10 In the past 40 years of China’s Reform, attention was paid to how to help the professionalization of officials and improve their capacity to make and implement proper reform strategies and policies. This is one of the reasons why the Chinese leadership has played a more outstanding role in maintaining and promoting the market-oriented transition than other countries’.

5.2.3

Ensuring the Reform to Be Politically Reliable

First, the Party and the government ensured that the basic reform policies were consistent temporally. For example, policies regarding the land contracting system described above were consistent and stable so that they continued to motivate peasants to invest in land. Second, the Party and the government ensured that investment incentives were reliable promises, as shown in the relatively trustworthy background policies of investment and the thriving non-public sector of the economy, also described above. Finally, the Party and the government ensured that redistribution promises were reliable. During the adjustment to the interest involved in a reform, reliable political promises, especially the dynamic consistency in the political games of redistribution, are important to the success of the reform. In fact, in Latin American countries, it was exactly the lack of trust from individuals in the future policies and in the redistribution promises that increased the resistance to the reform and weakened consensus of reform. In contrast, during the Reform in China, the leadership made reliable promises to increase the reform benefits and compensated those who had suffered losses during the reform through payments coming from taxes to increase the acceptability of the Reform.

5.3 From “Crossing the River by Feeling the Stones” to Designing from the Top Down At the beginning of the Reform, Deng Xiaoping came up with the theory of “crossing the river by feeling the stones”, which was intended to call for all the party members and the entire country to liberate their minds and explore boldly. The same theory also guided the Reform in the early and middle phases. Now that the Reform is being advanced to deep water, it is no longer desirable to find ways to break in by intuitive 10 Shleifer,

Andrei & Vishney, Robert, The Grabbing Hand, Chinese ed., translated by Zhao, Hongjun, CITIC Press Group, 2004.

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findings and sensible explorations must be made. It is the reform at a higher level, which relies more on people’s confidence in the theories they have and consciousness of the road they are taking to lead the reform to go deep and far. The reform is now officially transformed from the typical practice from bottom up to designing from the top down. In the past, major reform moves were all made first by finding a way out by people at the grass roots, which was then recognized and taken by the central government as a typical example to introduce to the whole nation. This is the reform from the bottom up. For example, the household contracting system was first practiced by 18 peasant families in the Xiaogang Village, Fengyang County, Anhui Province when they contracted lands to their households. The practice was later reckoned by Deng Xiaoping and subsequently introduced throughout the nation. This major reform move that had come from innovations of the people solved the problems of feeding the country, stabilizing agriculture and development, and also promoted and pushed for the SOE reform in cities and towns, making itself the origin of the national reform. However, from now on, further reform will rely on the top-down design by the Central Committee of the Party and the State Council for planning and will be pushed throughout the country from the top down. This is the new road, mode and choice of the Reform. At the present stage, the Reform is in real need of a top-down design to ensure that it is in the right direction and to avoid major problems at important relationships and key points. Through the explorations and practice for many years, China has learned abundant lessons of reform and is ready for designing from the top down. The top-down design should start from the perspective of the strategic whole with careful and overall planning while various measures should match and coordinate with each other in order to advance the Reform comprehensively and in coordination. The modern market economy is a complex, delicate and huge system. It cannot be set up while being designed at the same time. Nor is it a straw shoe that is rough, needs no structural design, and “looks better and better as the straw is knitted”. After all, the sub-systems would not be able to interact and coordinate with each other if it were such a shoe. The market economy is a massive system, and all regions and organs often arrange their institutions from the perspective of their respective convenience and interest to gain the local benefits. Therefore, if the grassroots units are allowed to design their own work and all the designs are later mosaicked together to become one, the one huge system will not work in coordination. To design from the top down is to take into consideration the new features of China’s comprehensive reform, to take measures that are different from the individual trials in the past, to make comprehensive and coordinated plans for the economic, political, cultural, social and ecological systems, to make better calls about the connection of all reform moves, to match the overall picture with the regional measures, to combine the measures from the core and on the surface and help gradual moves and breakthroughs promote each other. The strategy should be aimed at the whole and the reform should be ensured to be systematic, interactive and coordinated. Designing from the top down for the Reform involves the following three layers.

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First, the Reform should be thoroughly studied to be theoretically ready. Objectively speaking, the 18th National Congress of the Party has sketched the overall picture for the socialist market economy as well as the road to this ideal. However, as the Reform is a great cause that involves millions of people, it still remains an arduous task for us to use the theory to educate the people, to collect suggestions from the people and to further enrich the theory. In addition, as the Reform touches on a massive range of aspects, we are still not well prepared at some theoretical fronts. Therefore, we will need to keep enriching the theory and strategy of the Reform by motivating all social sectors and conducting deeper studies on the Reform to find a more effective road. During the whole process, we will promote the public to participate in the Reform and inspire their enthusiasm for participation. Second, the Reform should be steered from the overall perspective, designed systematically and advanced comprehensively to avoid fragmentation. Although the a comprehensive and systematic plan was made for all reform aspects at the Third Plenary Session of the 18th CCCPC, the plan needs to be optimized and further specified in each area as the Reform involves many aspects and requires extensive practice. In particular, in the subsequent overall progression planned, a clear, specific action plan is still lacking. Next, we need to take the overall perspective to steer the Reform to avoid fragmentation while making specific goals and a map of paths for all reform measures. The Reform should reduce rules and simplify administrative procedures. Transparency should be improved and social rules reconstructed, and the Reform will be advanced in more transparent social rules. A gradual reform, as one move is taken after another, often lacks coordination in progression and is not systematic enough and various institutions often drag each other behind. As analyzed in Toward a Comparative Institutional Analysis by Masahiko Aoki, the institutions in a system are usually complementary to each other strategically, and when one or several institutions are changed, the others will change accordingly or fall short of matching the changed ones and then prevent them from implementation.11 Therefore, changes in institutions are comprehensive in nature although they can be implemented in steps in practice; otherwise, there will be issues with high cost of running the institutions. The reform and opening-up is a profound and comprehensive social resolution, and every reform move affects the others considerably while every move needs coordination and support from the others. Therefore, the reform and opening-up is a systematic project and must be carried out comprehensively so that all moves are advanced in coordination. Such a reform will never work without a top-down design. Third, mechanism designing should be improved for the Reform. There should be an authoritative institute at the top level, which is not involved in any local interest, to design for the Reform from the top down and make all the plans and supervise the execution of the plans with the support from the grassroots innovations. Designing from the top down should include as many people as possible and people’s demand for the Reform and the political innovations of the grassroots governments must 11 Aoki, Masahiko, Toward a Comprehensive Institutional Analysis, Shanghai Far East Publishers, 2001.

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be taken into consideration. A basic concept of designing a mechanism is that a watermelon will be distributed fairly if the person who cuts the melon is the last to take a piece. Such a concept should be included in the designing, i.e., designing for the Reform should not be a chance for some to claim interest in advance, but instead, all those participating in the Reform shall see the promise to share the benefits fairly and a mechanism to truly guarantee the fairness.

5.4 Explorations at the Grass Roots and Trials Ensured the Reform to Secure Final Success To reiterate the importance of designing from the top down is in no way intended to let go crossing the river by feeling the stones completely. China is big, and there is absolutely no room for any fundamental issue to have a fatal mistake, which cannot be corrected once there. However, this is not a reason for doing nothing or reforming nothing. It is therefore important to start a move in trial sites to find a way, which is then studied to reach a consensus. Once consensus is reached, the move may be introduced to more areas, thus collecting small successes into a big one. China has a large land, with vastly different situations in different places, while the reform at the present stage is quite complex. Thus the unexpected occurs all the time. Those major reform moves that must be made but are not entirely predictable should be first made in eligible places as a trial or explored in reform trial sites. If successful, the moves can then be introduced widely, and if going awry, the risks and effects can be contained. Such an approach is an active yet safe way to push the reform forward smoothly and effectively. In the future reform progress, therefore, not only should macroscopic deliberation and top-down designing be improved, but the Reform should be made more systematic, comprehensive and coordinated as well while innovations, bold trials and pioneering acts at the grass roots are still to be encouraged to keep deepening the Reform. For China’s Reform to continue to be successful, both a top-down design with visions and grassroots innovations with expansion of trial experiences are necessary. To reform, people must tread on roads that no one has, and trial and error are unavoidable. Meanwhile, trial and error are also necessary if fatal mistakes are to be avoided. Experimenting in trial sites lays solid foundations for identifying laws of reforming without a high risk. Practice is the sole criterion to test truth, and learning, mastering and applying laws is the only path for a cause to march forward. Therefore, to meet the highly complex and difficult challenge of comprehensively deepening the Reform, continuous efforts must be made to trial, to err, and to keep practicing and learning lessons. Simply put, to have trial sites is an important way to reform. At the 13th meeting of the CCCPC Leading Group for Continuing the Reform Comprehensively (LGCRC), President Xi Jinping said, “Setting up trial sites is an important task of reform, as well as an important way to reform. Whether or not we can stride up and find a path for

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setting up trial sites is directly associated with the effect of the Reform.” At the 35th meeting of the CCCPC LGCRC, President Xi Jinping further said, “The objective of setting up trial sites is to explore the path and format to realize the reform and to identify reproducible methods that can be generalized to large-scale reform moves. To have real effects of trial sites, we must liberate our minds, keep up with the times, and exhaust as many problems and reveal as many discrepancies as possible for the trial sites to play a real role in pressure testing.” To set up trial sites is a strong guarantee to break ice and make progress in the Reform. With continuous deepening of the Reform, it will become harder, more complex and more systematic. To break ice and to conquer the unconquerable in reforms, the paths and formats must be explored in trial sites to provide reproducible methods to be generalized widely, while at the same time, trial sites may lead the entire reform as examples, breakthroughs and leadership. From trial sites for freetrade zones (FTA), through those for the SOE reform and for the judiciary system reform, to those for the ecological system reform, the leadership of the CCCPC with Xi Jinping at the core has focused on a number of major reform tasks in recent years and worked on a series of important trial sites to cultivate the reform “trial patch” intensively, which has accumulated extensive experiences for the nationwide reform and motivated surprising vigor and vitality. As shown in the practice, whether we have strode up and found a path with setting up trial sites is directly associated with the effect of the reform. The work in trial sites is crucial to the first steps to implement a reform measure. While the Reform goes deep and overcomes formidable challenges, trial sites are not only practical to solve real problems, but also a strong guarantee to make breakthroughs and achieve effects for the entire reform by driving the whole through their individual experiences. To work in trial sites motivates the enthusiasm for reforming in all aspects. The work in the trial sites must be aligned with the development strategies of the CCCPC while the explorations at the grass roots must be respected when following the topdown design. In fact, the demands at the grass roots and the front line of the reform must be carefully collected to obtain as many raw materials as possible, and new things and new measures should be properly apprehended. Trial sites should not be strictly scrutinized, but approached in a dialectical and developing way. They should be allowed room for trial and error. All that meet the real demands and follow the laws of development shall be encouraged, all trials and daring changes be supported, the enthusiasm of all communities and units be protected, and the enthusiasm, proactivity and innovation of all sectors be motived to the largest degree. Meanwhile, improved summarization and assessment should be made on the work of trial sites and, in a timely fashion, the effective measures extracted to introduce to a wide area after being optimized and generalized. In this way, trial sites play a role to lead the entire reform by their individual efforts. To set up trial sites should take into full account of the diversity of the real world. After all, “ten fingers play piano”, and “things are different, which is the nature of all things.” Things are vastly different, and in order for the work in trial sites to be as scientific as possible, various situations must be differentiated, intrinsic connections among all sites analyzed, and differentiated guidance with overall planning and

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coordination provided to master the rhythm of the work in trial sites. For the sites to trial reform moves in major fundamental, supporting institutions, efforts should be made to form institutional lessons as soon as possible. For the trial sites that are highly correlated and inter-dependent, coordination is needed in the progress. For the trial sites that are for similar reform fields and functionally complementary to each other, comprehensive, nested plans may be implemented to push for a systematic effect. For the trial sites where things move slowly and tasks are overdue, advance alert should be issued and help given to urge the completion of the tasks. In summary, the principle of “one key to a lock” must be followed and the method to “play piano with ten fingers” adopted to integrate all forces and efforts with systematic thinking and precision policy, and then individual trial sites may provide useful lessons and driving force for the entire reform. Trial sites test people’s courage and responsibility to reform. Whether trial sites are well used for work and to deepen the reform shows one’s courage and wisdom and test how responsible one is. For many things, how does one know without giving it a try? Of course, there are barriers in people’s minds, in deficiencies of the system and in solidified interest groups, and the Reform will meet resistance, discrepancies and problems, which will not make it go rapidly or smoothly. That is why setting up trial sites cannot just rely on presumptions or arbitrary choices. Local trial sites are to benefit the whole, which means the work in the trial sites must be aligned with the development strategy set up by the CCCPC to create favorable conditions for the implementation of the national strategy. In all regions, the overall planning and coordination, supervision and the responsibility system should be laid out for trial sites, and the range and levels of the trial should be flexibly conditioned to the reform need such that the effects are predictable, risks are under control, the work in the trial sites is in the hands of the people working there, and the experiences and effective methods are reproduced and generalized. In this way, trial sites become powerful weapon for the reform to overcome difficulties and solve puzzles. Today, the Reform is being comprehensively deepened and it is now in deep water and in great hardship, and hopefully, a large number of people who are willing and able to work and promote the Reform will show up through site trials.

5.5 The Only Path to Comprehensively Deepened Reform is Constant Combination of Designing from the Top Down with Explorations at the Grass Roots To comprehensively deepen the Reform in the new era needs the combination of designing from the top down with explorations at the grass roots. First, it is the need to maintain the overall stability for the reform and development. Reform, development and stability are the three important pillars of China’s socialist modernization. Reform drives the socioeconomic development, development is key to solving the economic and social problems, and stability is the condition for reform

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and development. For over 40 years, one of the important reasons why we have achieved world-renowned successes is that we handled the relationship between reform and development and stability well. China is a big country with 1.4 billion people, and there is absolutely no room for any fundamental issue to have a fatal mistake, which cannot be corrected once there. Therefore, designing from the top down is necessary for the Reform so that the path to reform will be as less winding as possible while at the same time, China still needs to cross the river by feeling the stones for the moves that are not immediately clear or well characterized to explore and to learn lessons before they are generalized nationwide. Only through these approaches will the Reform be ensured to go smoothly and the overall stability be guaranteed for reform and development. Second, it is a must because it is extremely complex and difficult to comprehensively deepen the Reform. At the beginning of the reform and opening-up, most of the reform moves we made were additive, almost all who participated benefited from them, the addition to the reform participants’ interest did not harm the interest of any other groups, and thus consensus was easy to reach among those participants as well as in the whole society. However, with the reform going deep and hard, the interest involved became more and more complex, resistance grew and various underlying problems began to emerge. Since all economic, social, and political issues are intertwined, any reform move may involve others and none can be resolved by only a couple of policies, and simply crossing the river by feeling the stones no longer meets the demand of the developing Reform. As a result, the top-down design must be improved to plan in a comprehensive, systematic and scientific way. Third, it is necessary for the decision-making of the Reform to be more scientific. Designing from the top down and crossing the river by feeling the stones have their respective advantages. To design from the top down is thinking aligned with objectives and it helps steer the reform on the whole to prevent overall mistakes. It also helps connect various reform measures to avoid the one-sidedness of each, reduce the cost of reform and prevent fiddling around and delays in the implementation of the measures. In contrast, crossing the river by feeling the stones targets specific problems. It helps avoid blindness in reform to prevent social instability from unclear situations or improper measures. It is therefore an important way to bring a healthful and orderly progress of the reform. Designing from the top down and crossing the river by feeling the stones thus agree essentially, as the former, if scientific and reasonable, provides a clear direction and path for specific reforms and reduces the cost of “feeling the stones” and the latter, if successful, helps further optimize the former and realize the objectives of the former more rapidly. Therefore, to comprehensively deepen the Reform, attention should be paid to both designing from the top down and crossing the river by feeling the stones for the decision-making of the Reform to be more scientific.

Opening-Up: From Participant to Leader Yuyan Zhang and Weijiang Feng

1 Introduction: Meeting the World in 1978 On October 22, 1978, Deng Xiaoping, invited by the Japanese government, started his visit to Japan on a designated airplane. It was also the first time a State leader of China visited Japan after the establishment of the People’s Republic of China. In Japan, Deng Xiaoping visited several enterprises including Nissan–an automobile manufacturer, Kimitsu Steel Works of Nippon Steel, Panasonic Corporation’s factory in Ibaraki and Japan Mint in Osaka, talked to people in the economic field of Japan, and had a ride on the ultra-express train of Light-81 of the Shinkansen Line. On Nissan’s commemoration book, Deng Xiaoping wrote, “To the great, diligent, brave and wise Japanese people from whom we should learn”. When watching computer-controlled rolling of steel plates in a hot rolling mill of Kimitsu Steel Works, Deng Xiaoping asked “Japanese friends, by all means, to introduce their advanced management experiences to the Chinese workers on internships here or coming as interns”. While riding the Shinkansen train, Deng Xiaoping, when asked by a Japanese journalist about how he felt, said, “I only feel fast, as if the train were rushing me forward, which is perfect for us now.” On the banquet, Deng Xiaoping also responded positively to the suggestion by friendly Japanese that “it’d be best for China to set up Chinese-foreign joint enterprises”. In his talk right before departing Japan, he expressed “great happiness to see the immense achievements in economic and scientific and technological development by the great Japanese people.”1 Deng Xiaoping had an international vision compared to the contemporary major leaders of China. As early as the 1920s, he took a 50 thousand-ton cruiser when 1 The

Central Archives of the CCCPC, Deng Xiaoping’s Chronology (1975–1997), Vol.1, Central Party Literature Press, 2004, pp. 406–415. Y. Zhang (B) · W. Feng Institute of World Economics and Politics (IWEP), Chinese Academy of Social Sciences, Beijing, China © China Social Sciences Press 2021 F. Cai (ed.), The Chinese Approach, https://doi.org/10.1007/978-981-16-1899-4_2

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travelling abroad.2 After restored to office, Deng Xiaoping felt through various input channels the huge gap in China’s economy and science and technology with the world’s major powers. He reiterated in multiple places that the gap had been small in the 60s, but with the global science leaping and soaring by the day from the late 60s to the 70s, the gap had become wider and wider, which must be recognized and acknowledged, and that we must learn the advanced technologies of other countries and catch up with all efforts possible.3 In April, 1978, when briefed by Gu Mu, then Deputy Premier and Chairperson of the State Infrastructure Committee, and others about their preparation for the upcoming visit to France, Switzerland, Belgium, Demark and West Germany, he said, “You must cover as much ground as possible, investigate carefully and study some issues in depth during the visit. You should look at the good side and the bad side. Watch the level at which their modern industries has developed, as well as how they manage their economies. We should take home all the advanced, good experiences of the capitalist countries.”4 Aside from the investigation group led by Gu Mu, the central government also dispatched three other groups in the first half of 1978, and all of their visit reports provided recommendations about how China could expand opening-up and accelerate modernization. In September, 1978, Deng Xiaoping led a group to Pyongyang for the ceremony to celebrate North Korea’s 30th-National Day. When talking to his old friend Kim Il-sung, Secretary General of the Workers’ Party of Korea, he admitted frankly, “Our comrades went out for visits recently. The more they saw, the more they felt that we had been left behind.”5 It’s better to see it once than hear it a hundred times. All that he heard from various channels did not shock Deng Xiaoping as much as he went there and saw it with his own eyes. The visit to Japan in 1978 and that to the U.S. in early 1979 reassured his judgement that China had been left far behind the world’s best and solidified his will to open up the borders for development. Back in September, 1977, Deng Xiaoping had introduced to some European guests that China’s goal of developing science and technology was to “get as close as possible to the world’s first-class level by the end of the twentieth century, with quite a few areas having caught up with the world’s best and a few overtaken.”6 But after his visits to Japan and the U.S., Deng Xiaoping down-set the anticipation for China’s future economic development by a large scale. On March 21, 1979, he spoke to a visiting UK delegate, “Our technologies now are about the same level as yours in the 50 s. If we can get to the level of yours in the 70 s by the end of this century, it’d be truly great. In fact, we need to make a lot of efforts even to reach this level.” He called this “the Chinese style of modernization”.7

2 Ibid.

p. 245. p. 164, 201, 218, 223, 316 and 389. 4 The Central Archives of the CCCPC, Deng Xiaoping’s Chronology (1975–1997), Vol. 1, Central Party Literature Press, 2004, p. 305. 5 Ibid. p. 372. 6 Ibid. p. 206. 7 Ibid. p. 496. 3 Ibid.

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Looking back with today’s information, the remarks above by Deng Xiaoping, which somewhat gave people a feeling of “showing weakness”, were actually quite sharp. Horizontally, China’s gross domestic product (GDP) in 1978 was short of 150 billion USD, accounting for approximately 1.8% of the world’s total while those of the U.S. and Japan at the same time were 2.4 trillion and 1.0 trillion USD, respectively, accounting for 27.6 and 11.8% of the world’s total, respectively. Meanwhile, the per-capita income in China was only about 200 USD, a mere 10% of the global mean, 2.7% of that of Japan and 1.9% of that of the U.S. at the time. In terms of exportation, China’s total commodity exports were less than 10 billion USD in value, about 0.8% of the global level while the U.S. and Japan exported 146.0 billion dollarand 98.0 billion dollar-commodities, accounting for 11.5 and 7.7% of the world total, respectively.8 Longitudinally, China, at the crossing of 1978, was also in the economic trough over the past two thousand years. According to Maddison who estimated the historical scales of the world economies, China’s economy accounted for 26.2% of the world total in 1 AD, 22.7% in 1000, 25% in 1500, 29.2% in 1600, 22.3% in 1700, and 32.9% in 1820 when Emperor Jiaqing died and Emperor Daoguang ascended the throne in the Qing Dynasty, the historical high that was about 1/3 of the global economy. Even after the Opium War when China was frustrated externally by the Western colonists and internally by the Taiping rebellion, China’s economy still accounted for 17.2% of the world’s economy in 1870.9 However, this percentage was reduced to less than 5% in 1978. In fact, it fell below 5% in 1961 and had stayed there for as long as 18 years.10 Deng Xiaoping did not know the data above, but he nevertheless made an accurate diagnostic of the global trend and China’s position through the historical fog with the help of his intuition and vision. However, it did not frustrate him, but instead inspired him for development. He said frankly several times to foreign visitors that China was laid back and weak at the time. For example, he said to French guests that China “[was] a small country in terms of development, or at the most a mediumsmall country, not even a medium one”.11 He was also this candid when accepting guests from medium and small countries. For example, when meeting guests from Somali, he said, “In terms of productive and scientific levels, we are the same as you. We are both small countries… We can’t brag much.”12 In fact, he also reiterated in several occasions that China should start from the newest advancement in the world to develop.13 He even said very pragmatically, “We cannot develop with ambitions. 8 Calculated based on data retrieved from the World Bank database at https://data.worldbank.org.cn/. 9 Maddison, Angus, The World Economy: A Millennial Perspective, translated by Wu Xiaoying, Xu Xianchun, et al., Peking University Press, 2003, p. 261. The numbers are from the following book that cited it: Zhang, Yuyan and Feng, Weijiang, China’s Peaceful Development, China Social Sciences Press, 2017, p. 18. 10 Calculated based on the data from Maddison. Please see Maddison, Angus, Statistics on World Population, GDP and Per Capita GDP, 1—2008 AD, http://www.ggdc.net/maddison/oriindex.htm. 11 The Central Archives of the CCCPC, Deng Xiaoping’s Chronology (1975–1997), Vol.1, Central Party Literature Press, 2004, p. 229. 12 Ibid. p. 279. 13 Ibid. p. 223, 269.

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We need concrete policies and practical measures, without which our ambition would be like a hydrogen balloon that puffs with a huff.”14 Opening up the country to integrate into the world was one of the most important policies and measures he promoted and pushed forward. The Time magazine of the U.S. selected Deng Xiaoping as the Time Person of 1978. In the introduction, he was described as such: Dreamer of a brand new China, Deng Xiaoping, opened the entrance to the “Central Country” for the world, a tremendous enterprise that is vast, daring and unique in history.15

2 International Background Among the global trends, China’s opening-up is not an isolated event in the history of humanity. Historian Chen Yinke, when commenting on new tides in scholarly fields, built up on a Buddhist phrase and came up with the concept of “pre-tide”. He said, “Those who pioneer this new tide are pre-tidal seers, and those who do not see it are left behind the tide… This isn’t something those who shut themselves in at home in attempts to invent a car may understand.”16 In fact, this isn’t just true for scholarly tides. It is also the case for the tides in historical development of a country. The pretidal seers ride the tide and get relatively rapid development with big achievements, and those left behind the tide keep repeating their old behaviors and feel good about themselves and will be deserted by the tide or times. At the crossing of the 1970s and 1980s, the pattern of the Cold War between the West and the East was changing quietly while some open economies in East Asia started to leap in development under the leadership of the “Leading Goose”, Japan. Deng Xiaoping was sensitive enough to capture the changing tide of the times and China’s second-generation leadership with Deng as the core was formed, who collectively made a strategic decision at the historical turning point of great importance. China thus seized the moment and became a pre-tidal country of the global tides and strode on a path to opening up with no turning back.

2.1 Evolution of the Cold War Between the West and the East Since the announcement of the Truman Doctrine in 1947, the Cold War, going through the phase of “US charging and Soviet in defense” from the mid- to late 1950s to the

14 Ibid.

p. 211. p. 468. 16 Chen, Yinke, “Preface to Records after Surviving Hardships in Dunhuang by Chen Heng”, Second Compilation of Manuscripts from Library Jinmingguan, Shanghai Classics Publishing House, 1980, p. 236. 15 Ibid.

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early 1960s and the phase of “Soviet charging and US in defense” since the mid1960s, had been on for 30 years by the end of the 1970s. There were objective reasons why the U.S. was in defense at the time. First, the U.S. strategic military power relative to the Soviet Union had changed. From 1965 to 1970, the expense of the Soviet Union on national defense increased by more than 30% while the amount of strategic weapons and other weapons it possessed also increased rapidly.17 By 1969, the Soviet Union had achieved an effective nuclear equivalence with the U.S., and the two sides held a negotiation about weapons for the first time, during which it was found that the Soviet Union had caught up with the U.S. in many aspects, suggesting a minimal possibility for the Soviet Union to back out should the Cuban missile crisis in 1962 happen again.18 Second, the Vietnam War had cost the U.S. greatly, and together with the oil crisis in the 1970s, it weakened the power of the U.S. Finally, the Western countries were divided among themselves. France had resented the U.S. as the leader and its impact on Europe for a long time,19 and the Federal Republic of Germany, with its rapid economic growth and increasing political stability, had started to defend itself as an independent country rather than accepting the “supervision” of the U.S. and other countries.20 In contrast to the defending U.S., the Soviet Union showed a clear gesture to charge with its promotion of “class struggles” around the world and “output of revolutions”. For example, Brezhnev once said that making foreign policies must take into account every corner of the world.21 To East European countries, they were in strict control of and interfered rudely by the Soviet Union politically, militarily and economically and countries that dared to challenge its authority, such as Czech, was “taught lessons” as the Soviet Union saw fit. In the Third World, the Soviet Union kept increasing its influences and, by political, economic and diplomatic means and ways such as fostering proxies, got itself into international conflicts and snatched places of strategic importance, thereby consolidating its stand in the geopolitical rivalry with the U.S.22 Such globally aggressive expansion culminated in the invasion and occupancy of Afghanistan in December, 1979, which was strongly resented and struck back by the U.S. In January, 1980, the U.S. launched Caterism, intensifying its strategy to check the Soviet Union. In 1981, Reagon, who was extremely anti-Soviet Union, became President of the U.S., and he abandoned the “soft” attitude to the Soviet Union, actively sought to revive the U.S. economy and increased the budget for the

17 Leffler, Melvyn P., For the Soul of the Mankind: The United States, the Soviet Union, and the Cold War (Chinese edition), translated by Sun, Minxin, et al., East China Normal University Press, 2012, p. 226. 18 Crockkatt, Richard, The Fifty Years War: The United States and the Soviet Union in World Politics, 1941–1991, Social Sciences Academic Press, 2015, pp. 265–266. 19 Ibid. p. 257. 20 Ibid. p. 259. 21 Liu, Jinzhi, A History of the Cold War, World Affairs Press, 2003, p. 920. 22 Liu, Jinzhi, A History of the Cold War, World Affairs Press, 2003, pp. 922–927.

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national defense in order to get back the initiative in the competition with the Soviet Union.23 The U.S. also sought international collaboration actively for joined efforts against the invasion of Afghanistan by the Soviet Union, sanctioned the Soviet Union and called for all countries to do the same, withdrew from the Moscow Olympic Games, and eventually declared the Strategic Defense Initiative (the Star Wars) while asking its allies in West Europe to isolate and contain the Soviet Union. These actions put the U.S. in abruptly increasing demand of the support from the international community with China in it, which agreed wonderfully with the strategic need of China that was seeking to open up to the world. In fact, the Sino-Soviet relations had suffered great cracks since the 1950s. At the end of the 1960s, there was a large-scale military conflict between China and the Soviet Union, and Mao Zedong reached a conclusion that the major threat to China came from the Soviet Union, not the U.S. In 1971, U.S. Secretary of State, Kissinger, visited China in secret. In the next year, U.S. President, Nixon, visited China and signed the Shanghai Communiqué between the United States of America and the People’s Republic of China, which started the normalization of the relations between the two countries despite a slower-thanexpected normalization progress. One of the reasons behind the slow progress was that the tension between the U.S. and the Soviet Union was temporarily “eased”, which lowered the U.S. demand for a better relationship with China while raising doubts in China’s real intension for the U.S. The second reason was that Nixon, who had promised to establish diplomatic relations with China before the end of his second term, resigned over the Watergate scandal. The third reason was that China was still in the period of 1966 to 1976 at the time and couldn’t really open up for development. In the end of the 1970s, the barrier was no long there. Therefore, after proper arrangement of the “Taiwan question”, China and the U.S. signed the communiqué to establish diplomatic relations on December 15, 1978 (which was five days before the Soviet army entered Afghanistan, following the deployment of a large Soviet army at the Soviet-Afghan border), which was in effect half a month later, i.e., the New Year of 1979. Now China and the U.S. established official relations.

2.2 China Against Regional Hegemonism After Kissinger’s secret visit, China started to help with international issues that were of important concern to the U.S. For example, China urged Vietnam to reach compromise with the U.S. Unfortunately, however, some in Vietnam believed that China had sacrificed Vietnam for the U.S. and considered it vital to strengthen the tie with the Soviet Union in order to lessen the increasing political pressure from

23 Crockatt, Richard, The Fifty Years War: The United States and the Soviet Union in World Politics,

1941–1991, Social Sciences Academic Press, 2015, p. 386.

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China,24 which also foreshadowed Vietnam’s subsequent regional hegemonic actions in reliance of the support of the Soviet Union, such as invading Cambodia, chasing out people of Chinese descent and confiscating their properties, and provocative behaviors and invasion at the Chinese-Vietnamese border. China had been a long-term supporter of the Vietnamese struggle against the imperialist invasions and offered substantial help morally and in material. However, the Vietnamese Communist Party thought it no longer needed to keep the previous relations with China after it obtained the overwhelming nation-wide victory,25 and with the support of the Soviet Union, started to plan annexing Cambodia and Laos to establish an “Indochinese Federation”. Given that a pro-Vietnam government had already been in place in Laos, Vietnam targeted directly at Cambodia. In early December, 1978, shortly after it signed a peace and friendship pact with the Soviet Union, Vietnam invaded Cambodia and quickly occupied it. In January, 1979, Deng Xiaoping told Carter during his visit to the U.S. the scale and duration of the military action that the People’s Liberation Army was going to take. To Deng Xiaoping, China’s defense and counterattack war against Vietnam as a punishment was to fulfil the duty of “opposing hegemony of any country or county-group” in the ChinaU.S. communiqué, and the two countries should take complementary measures and obtain comprehension of this war in the global, not regional, background.26 After all, if China didn’t take the responsibility, the U.S. had to.27 On February 17, 1979, the Chinese border army struck back in defense against the invasion of the Chinese soil by the Vietnamese army, and in a short time, occupied more than 20 important cities, counties and towns in Northern Vietnam. The army fulfilled the battle task and had withdrawn back home by March 16. The U.S. did not show its support of this action of punishment publicly, and Carter even expressed opposition to China’s military measures to Deng Xiaoping after an internal discussion reached consensus. However, the U.S. took China’s decision as 24 MacFarquhar,

R. & Fairbank, J.K., ed., Cambridge History of China, Volume 14: The People’s Republic of China, Chinese version, China Social Sciences Press, 1992, pp. 441–442. 25 MacFarquhar, R. & Fairbank, J.K., ed., Cambridge History of China, Volume 14: The People’s Republic of China, Chinese version, China Social Sciences Press, 1992, p. 464. 26 Deng Xiaoping stated at the meeting with Carter, “In dealing with the Soviet Union’s efforts to establish a global hegemony, the U.S. is by all means the major force. However, for quite a long time, the U.S. hasn’t fulfilled its responsibilities to the fullest. The Soviet Union has expanded globally. In particular, it set its foot in Africa using Cuba and supported the Vietnamese invasion of Cambodia. But it did not get due containment and punishment.” Refer to Xiong, Zhiyong, Sixty Years of the China-US Relations, People’s Publishing House, 2009, p. 201. Regarding the Vietnamese invasion of Cambodia, Deng Xiaoping further pointed out that it was part of the Soviet Union’s strategic plan. “At one end, the Soviet Union sought to establish the Indochinese Federation through Vietnam to promote its Asian Collective Security System, and at the other end, it is trying to control the Strait of Malaca that connects the two ends through controlling Afghanistan, Iran and India and through going south to the Persian Gulf.” “From the perspective of the strategic whole, it is necessary to teach Vietnam a lesson for its wildly arrogant ambition.” Refer to Gong, Li, “The Triangle between China, the U.S. and the Soviet Union during the Defense and Counterattack War against Vietnam”, Collection of Papers on Party History, 1995, vol. 8, p. 35. 27 MacFarquhar, R. & Fairbank, J.K., ed., Cambridge History of China, Volume 14: The People’s Republic of China, Chinese version, China Social Sciences Press, 1992, p. 467.

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support of the interests of the U.S. overall. In fact, the memory of their own indecent retreat from the same land was so fresh to the U.S. that they could not restart any meddling of the security in the area directly, and China thus took on the role as the indirect protector of the regional security.28 Declassified documents showed that the U.S. actually responded in favor of China later with actions such as material support of China in the Security Council, efforts to stop the intervention of the Soviet Union and the arrangement for Secretary of Treasury, Blumenthal, to visit China on time, who concluded many economic-collaboration agreements with China.29 In summary, the U.S. “covered up” China in a “righteous manner”, which was undoubtedly consistent with Deng Xiaoping’s opinion that “the two countries should take complementary measures”.30 China did not just bleed and sacrifice for the anti-regional hegemonism war that was fought in defense to counter the attack of Vietnam. China also paid a high economic price. The Chinese government had to cut down the contracts with Japan to build factories due to limited budgets, and even implemented a three-year economic adjustment policy.31 However, the decision laid the foundation for the subsequent opening-up for several decades, gaining benefits far greater than the economic cost at the time being. On the one hand, the decision de facto announced China’s breakage with the Soviet Union publicly, which highly agreed with the strategic interest of the U.S. In particular, China started to win the trust of the U.S. and even the U.S. leader felt that they “should not let down China with its trust”, laying the foundation for China 28 Ibid.

p. 468.

29 After Blumental criticized China for counterattacking Vietnam in defense during his visit, Carter

sent him an urgent telegraph to “admonish him to watch his speech”. Refer to Brzezinski, Power and Principle: Memoirs of the National Security Adviser, 1977–1981, Chinese version, translated by Qiu, Yingjue, et al. World Affairs Press, 1985, p. 469. 30 The corresponding goals and principles decided at the U.S. National Security Council (NSC) on Feb. 16, 1979 included holding the Soviet Union from military intervention. In addition, Carter leaned toward China because he believed that China showed its trust in the U.S. by notifying the U.S. before taking military actions. In response, the U.S. should “cherish the trust of China” and avoid mentioning the letter Deng Xiaoping sent President Carter before the military clashes between China and Vietnam in public speeches, which would otherwise put China in an awkward position. Therefore, as Carter strongly recommended, the meeting reached a unanimous decision to respond clearly, “Deng did not mention anything about the war between China and Vietnam during his visit to the U.S.” On February 17, the U.S. sent a diplomatic note to the Soviet Union, which stated that if the Soviet Union took any action, the U.S. would “take the reciprocal action”; in particular, “if the Soviet naval vessels show increased activities in the region, we will take corresponding military measures to respond.” In addition, the U.S. also sent two letters during the war, on February 24 and March 7, respectively, to the Soviet leader and urgently summoned the Soviet ambassador in the U.S., Anatoly Dobrynin, twice on February 24 and 27 to express the request that the Soviet Union refrain itself and to warn the Soviet Union not to take any stand that might result in escalation of the war. Refer to Guan, Jingzhi & Li, Guang, “The U.S. Stand on the “Defense and Counterattack War against Vietnam” in 1977 from the Evidence of the Newly Declassified Documents”, CPC History Research and Teaching, 2016, vol. 1. 31 MacFarquhar, R. & Fairbank, J.K., ed., Cambridge History of China, Volume 14: The People’s Republic of China, Chinese version, China Social Sciences Press, 1992, p. 469.

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to be subsequently accepted and integrated into the open-economic system led by the U.S.32 In the background following the defense and counterattack war against Vietnam, Deng Xiaoping, when meeting with the deputy group of the U.S. Senate in April, 1979, talked about the possibility to collaborate with Washington on public security, including visiting military ports, purchasing advanced weapons from the U.S. and checking the Soviet Union’s execution of weapon control pacts using American monitoring stations on the Chinese soil.33 Selling sensitive technologies actually meant that the U.S. would see China as a semi-ally, which was taken as something hectic in the settings at the time, but was eventually accepted after multiple rounds of lobbying and after the Soviet Union invaded Afghanistan. The U.S. government loosened up on the restrictions of exporting top technologies to China, and the isosceles pattern between the U.S.–Soviet and the U.S.–China relations was thus broken. On the other hand, the war gave China an image of a responsible country to the countries in the region, and resolved the concerns at least partially of the region that China would seek a “zone of influence” while laying a good foundation for China to learn from and collaborate with the surrounding countries in its subsequent opening-up. In fact, right after the U.S. retreated from Vietnam, China wanted to show kindness to the world, especially the surrounding countries and hoped that leaders of all countries would believe that China would no longer “output revolutions” or continue to support the armed struggles of the communist guerrillas in various countries. After Vietnam invaded Cambodia, China took military actions again Vietnam, providing the public goods of regional security. In fact, China promised to provide military aids to Thailand if Vietnam invade it. China also showed solid support of the Southeast Asian Nations (ASEAN), and formed a “united front” with Thailand and Singapore to stop the international community from acknowledging the proxy government set by Vietnam and to isolate Vietnam in the region. These measures gained China trust and removed concerns of countries in the surrounding regions, especially Southeast Asia. In fact, the Southeastern economies such as Singapore and Thailand indeed became important partners for China to learn from and collaborate with in the opening-up.

2.3 The Success Experiences of Open Asian Economies At the time when China was ready to open up to the outside world to bridge itself with the world, some small open economies in Asia had already exhibited huge “opening dividend”, which attracted Deng Xiaoping’s attention. In May, 1978, Deng Xiaoping said, “Now there are four ‘small tigers’ in the East: one is South Korea, one is Taiwan, China, one is Hong Kong, China, and the other is Singapore. Their economies grew

32 Some

see this war as a “loyalty gift” for China to befriend the U.S. R. & Fairbank, J.K., ed., Cambridge History of China, Volume 14: The People’s Republic of China, Chinese version, China Social Sciences Press, 1992, p. 467.

33 MacFarquhar,

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very fast, and so did their overseas trade. If they could all develop their economies that fast, why can’t we?”.34 The four “small tigers” in the East that Deng Xiaoping mentioned were later known to the Chinese as the “Four Little Dragons in Asia”. They achieved economic leap in a relatively short period of time starting in the 1960s by taking the advantage of developed countries, especially Japan, when they transferred their labor-intensive industries out of their borders. They attracted foreign capital and technologies and implemented export-oriented development strategies, and became emerging wealthy Asian areas. After the Second World War, Japan first rose as a strong economy, followed sequentially by the economic leap of the four Asian dragons, the “Four Asian Tigers” (Thailand, Malaysia, the Philippines and Indonesia), and the mainland of China, showing a pattern that the industrial structure was passed down among different countries and forming a “flying-geese pattern of the international division of labor” headed by Japan. This development mode is also called the “flying-geese model”. China was greatly encouraged by the pioneers that practiced the flying-geese model. After the Second World War, the Japanese economy regained its highest prewar level in 1955 and then entered a nearly 20-year period of high-speed growth until the early 1970s. Introduction of advanced technology and nurturing innovation were important reasons underlying the high-speed growth. Studies have shown that from 1960 to 1973, among the factors such as capital, labor, residential consumption and total factor of production (TFP), the increase in capital contributed the greatest to the growth of Japan, followed by the TFP, which represented technological advancement. Advanced technologies in developed countries in Europe and North America were quickly introduced to Japan, and the technologies that had been developed due to military demands were also transferred to the non-military sector, both of which, together with the investment in facilities following technological revolution, strongly pushed the Japanese economy to move forward. Aside from advanced technologies, Japan also introduced knowledge and methods from the U.S. such as cost management, business planning and investigation and job analysis, to improve the modernization of enterprises. Japan also dispatched many overseas investigation groups made up of entrepreneurs and union members to Europe and North America to learn their management methods, amounting to over 1,000 groups with a total number of more than 10 thousand people between 1955 and 1975, which were called the “Showa Envoys to the Tang Dynasty”. The Japanese government also played a positive role in guiding the market or making proper industrial policies. It deserves attention that the positive role did not only result from the policies implemented solely by the government, but from the administrative guidance and industrial policies that were implemented jointly by the government and the society. In addition, the large-scale migration of population from rural to urban areas created abundant laborers and expanded consumption, driving the economic growth from both the supply and internal demand sides. Regarding the external demand, 34 The Central Archives of the CCCPC, Deng Xiaoping’s Chronology (1975–1997), volume 1 of 2, Central Party Literature Press, 2004, p. 320.

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the continuous increase in the export processing trade also supported the Japanese economy, and as the exports gradually turned into high added-value goods, Japan’s current account balance successfully became and stayed positive during the highspeed growth period, thus contributing to the world economy.35 The World Band published The East Asian Miracle in 1993 and described the growth characteristics and lessons in Japan, the “Four Asian Dragons”, Indonesia, Malaysia and Thailand in an extended range, which included mainly the “government guided” development model, stabilization of the macroscopic economy and promotion of export growth, innovative investment in and accumulation of human capital, and high rates of investment and savings.36 In the late 1970s, South Korea, Taiwan, China and Hong Kong, China all grew to emerging industrial economies. They gradually lost the favorable geopolitical conditions the U.S. had given them, and, like Japan, started to face the trade limitations placed by the U.S. in ways such as tariffs, allocations and exchange rates. Meanwhile, they also had their own problems, such as lack of labor, increases in employer-employee clashes, increased land prices and high environmental costs, which all drove the labor cost to spike up. To ensure a stable supply of low-cost laborers, they were motivated to expand their manufacturing network to mainland, China and other Southeast Asian countries, resulting in a win–win situation where China’s opening-up and the development of these economies were complementary. The achievements of the open economies in Asia provided helpful inspiration for China’s opening-up while reassuring China to open up for development.

35 Hamano, K., et al., The Economic History of Japan: 1600–2000, Chinese version, translated by Peng, Xi, et al., University of Nanjing Press, 2010, pp. 243–262. 36 World Bank, The East Asian Miracle, New York: Oxford University Press, 1993, pp. 8–59. Of course, there was always reflective questioning of the East Asian miracle, the most famous of which came from Paul Krugman. He argued that the Asian growth came primarily from hard work, not inspiration, or from harder instead of smarter ways of work. Refer to Krugman, Paul, “What Ever Happened to the Asian Miracle?” Fortune, August 18, 1997, p. 27. After the Asian financial crisis, the World Bank published Rethinking the East Asian Miracle, an assembly of research papers, to revisit the driving force and reasons of the East Asian development after the “East Asian Miracle” had been proposed. The paper assembly summarized the East Asian model that had previously been accepted, including persistent management of the macroeconomic basis (a stable, low-inflation commercial environment encouraging long-term investment, sustainable financial policies, exchange rate policies maintaining competitive exports, an open and advanced financial industry able to militate domestic savings to the largest degree and integrate into the global financial system as to improve the allocation efficiency, minimized price twist and active support of education), a bureaucratic system made up a strong government able to promise to design and execute long-term plans, policies promoting industrialization and exports, and development strategies that were flexible, practical and quick to “cut losses”. Refer to Stiglitz, Joseph & Yusuf, Shahid (eds.), Rethinking the East Asian Miracle, Oxford, U.K.: Oxford University Press, 2001, pp. 5–7.

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2.4 No More World Wars Opening up for development must be pre-conditioned with a peaceful world. In the Mao Zedong time, it was concluded that the themes of the international environment or times were mainly war and revolution. At the CCP’s 8th National Congress (1956), it was reported that the international environment was predicted to have “a trend toward a less intense world with the possibility of prolonged peace.” However, from the 9th (1969) to the 11th (1977) National Congress, the CCP reports always emphasized the risk of war when predicting the international environment. At the 9th Congress, it was reported, “The imperial U.S. and the revisionist Soviet Union are wild in opposing China”, at the 10th, “The current world is characterized by a total mess”, and at the 11th, “While revolutionary factors grow, war factors are evidently growing as well”. In such a background, it was very hard to focus on development, let alone to open up. At the crossing of the 70s and the 80s, China’s strategic judgement of the international environment or the theme of the time started to change, from war and revolution to peace and development, which was necessary to the initiation of the opening-up. As early as 1975, Deng Xiaoping made a prediction at the extended meeting of the Military Commission that “there [would] be no war in five years”. In August, 1977, Deng Xiaoping reckoned to spread his words that “there [would] be no war in five years”, made at the talk of the Central Military Commission, at the meetings of the Party Standing Committees of Military Regions. At this time, the prediction was only circulated within a certain range. On December 28, 1977, Deng Xiaoping proposed to “try every effort to delay the outbreak of a war” at a plenary meeting of the Military Commission because, on the one hand, there was room for China to make some efforts as “we [had] the strategy and diplomatic principles of Comrade Mao Zedong about classification of the world into three worlds, which [would] help us succeed in the anti-hegemony struggles globally”, and on the other hand, there was objective conditions at the time that was favorable to maintain the current peace since “the Soviet Union [was] not done with its global strategic planning and the U.S. [was] now in defense after its failure in Southeast Asia [was] not ready for another world war.”37 In July, 1978, while briefed on military industrial production, he said it one more time, “There will be no war in five years.” In August, at another briefing, he said, “There will be definitely no war in five years.” In March, 1979, when he was briefed by the science and technology committee of the Central Military Commission, he said, “It seems another world war will not happen in ten years,” a prediction of an overall peaceful world in a somewhat extended period.38 When meeting foreign guests, Deng Xiaoping reiterated his intention to maintain a long-term peaceful environment. For example, in September, 1977, when meeting 37 Deng, Xiaoping, “Speech at a Plenary Meeting of the Military Commission of the Central Committee of the CPC”, Selected Works of Deng Xiaoping, Eng. ed., Beijing: Foreign Languages Press, 1984, Vol. II. 38 The Central Archives of the CCCPC, Deng Xiaoping’s Chronology (1975–1997), volume 1 of 2, Central Party Literature Press, 2004, p. 191, 336, 351 and 494.

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with Japanese guests, he said, “At least, we hope there will be no war in 23 years, and it will be the end of the twentieth century in 23 years.” In August, 1978, when meeting with Libyan guests, Deng Xiaoping said, “We hope to have 20 years of peace to focus on development. We hope for 20 years of stability and a stable world to develop our economy and to increase people’s incomes.” Later that month, he said to Thai guests, “We have told many foreign friends that as far as China is concerned, we need at least 20 years of peace because we need this much time to execute the policies we made and to realize the four modernizations. Once a war breaks out, there will be little hope for modernization.”39 The judgement made by Deng Xiaoping was gradually accepted by the Central Committee as the consensus on the international environment. By the 12th National Congress of the Party (1982), the tone of the Congress report changed somewhat and said, “The risk of another world war is growing. However, the people around the world will be able to mess up with their strategic plans.” Later, the reports of the next few Congresses emphasized more on the peace factors of the international environment, and believed in “lessened intensity between the East and the West to some degree”, “possibility to fight for a peaceful world and to avoid a new world war in a relatively long period of time in the future”, “possibility to avoid a new world war in a relatively prolonged time”, “no chance for a new world war to break out in the foreseeable future”, “a shift in the global power balance toward the end favorable to the world peace with more favorable conditions to maintain the overall peace of the world”, etc.40 Looking back today, peace and opening-up complemented and constructed each other dynamically for China. Absence of peace would surely have negated the possibility to open up for development, and expansion of the range and improvement of the level of the opening up must have intensified China’s ability and belief to maintain peace, making all countries including China reluctant to go back to the state with threats of war and even display of weapons. Nonetheless, peace or “a new world war impossible to break out” was the starting point of China’s logic to open up, and China’s achievements today through the opening-up were closely associated with the strategic determination of the second-generation leadership group with Deng Xiaoping at the core that “it [was] impossible for a new world war to break out”.

3 The Course of the Opening-Up: From Participation Through Integration to Leading the Trend Since 1978, China has gone through three phases to open up to the world. The first phase was from 1978 to 2000, and the start is marked by the Third Plenary Session 39 The

Central Archives of the CCCPC, Deng Xiaoping’s Chronology (1975–1997), volume 1 of 2, Central Party Literature Press, 2004, p. 201, 352 and 363. 40 Zhang, Yuyan & Feng, Weijiang, China’s Road to Peaceful Development, China Social Sciences Press, 2017, pp. 77–78.

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of the 11th CCCPC that drew the curtain of the reform and opening-up. In this phase, China opened up its door, got in contact with the world, participated in the international division of labor and tried to bathe in the globalization tide. The second phase was from 2001 to 2011 and the start is marked by China’s entrance to the World Trade Organization (WTO). In this phase, China fully embraced or integrated into the international economic system dominated by the U.S., withstood the blow of the international financial crisis, and kept moving from the margin to the center of the system. The third phase is still ongoing from 2012, and the start is marked by China’s newest leadership group in position. In this phase, the Central Committee of the Party with Xi Jinping at the core set out to lead China on a new journey to “fight a great war, build a great project, advance a great cause, and realize a great dream”, marking a whole new phase for the opening-up.

3.1 To Reform and Open up to Participate in the Global Economy The Third Plenary Session of the 11th CCCPC in 1978 established the Party’s second generation of leadership group with Deng Xiaoping at the core41 and new development goals with economic development as the central task, opening a new historical chapter of reform and opening-up. In fact, through a series of preparations and efforts, such as the overseas investigations commissioned by the Central Committee, the reports of the investigations and discussions on the modernization acceleration conference held by the State Council in the Huairen Hall of Zhongnanhai, it had been a consensus of the entire Party by 1978 to launch opening-up policies to promote economic development and modernization. It was thus solemnly stated on the Third Plenary Congress of the 11th CCCPC that the guiding principles of developing the economy was to “proactively establish economic collaborations with all countries around the world on the basis of self-dependence and adopt world-leading technologies and devices with all efforts possible”, which showed that the principle to open up in the new period in China had already been determined.42 However, the principle, although determined, still needed “magic grips” as the leverage for implementation. One of the grips was to establish special economic zones. In early 1979, the Guangdong provincial party committee proposed the idea of taking the advantage of proximity to Hong Kong and Macao to set up a coastal export processing base with some special policy incentives. The idea was reported to 41 This leadership group mainly includes, apart from Deng Xiaoping, Chen Yun, Li Xiannian and Ye Jianying. Refer to Chen, Yun, Selected Works of Chen Yun, vol. 3, People’s Publishing House, 1995, p. 341. Deng Xiaoping once said, “The Party’s Third Plenary Session of the 11th CCCPC established a new leadership group, which is the second generation of leadership group. In this group, one may say that I am in an essential position.” Refer to Selected Works of Deng Xiaoping, vol. 3, People’s Publishing House, 1993, p. 309. 42 Liu, Jianhui & Cao, Pu, A Governance History of the Communist Party of China (vol. 3): 1976– 2011, People’s Publishing House, 2011, p. 98.

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Deng Xiaoping by Xi Zhongxun and Yang Shangkun in April of the same year, who gave positive feedbacks. Deng Xiaoping said, “Let’s call it a special zone. Shanganning was originally called a special zone. We have no money here at the Central Committee, but we can offer policies. You are on your own. Go ahead and fight a way out.”43 From 1979 to 1985, China made its first law on sino-foreign joint equity ventures and set up four special economic zones in Guangdong and Fujian, where foreign investors were offered favorable conditions such as an income tax at only 15%, limited foreign currency discounts and low cost of land use.44 The economic zones were met with strong reactions both domestically and overseas, especially among the Hong Kong and Macao compatriots. Many came to investigate the conditions and started to talk about issues such as processing, assembly, compensation trade and joint business.45 In 1988, the Hainan special economic zone was established. In 1992, the mode of special economic zones was applied at a national level and new national zones such as the Pudong New Area in Shanghai emerged one by one, marking a new round of the reform and opening-up. The other grip was to loan money from foreign parties. In September, 1979, Gu Mu visited Japan on a commission of the Central Committee, and reached a deal of 50 billion Yen (230 million USD at the time) loan, the first batch of a 30-year government loan at an annual interest rate of 3%. This deal broke the shatters that had long oriented people’s minds with taking pride in no external debt and no internal debt and insisting on refusal to loan money from Western countries, and at the same time preluded the large-scale employment of foreign loans. From 1979 to 1981, China signed agreements with Kuwait, Belgium and other countries for government loans and started to loan money from the World Bank and the International Money Foundation (IMF) after it sought and restored its seats in these international organizations.46 These efforts, setting up special economic zones or loaning money from foreign parties, are at the most limited participation in the global economy by making use of the exterior world in a specific range or on a specific factor. To get on the same track with the world from the perspective of following rules, China’s understanding of itself deepened gradually, and the progression of the Opening-up was not always smooth. For example, China started the negotiation in 1986 on restoring its lawful seat in the General Agreement on Tariffs and Trade (GATT) out of the need of obtaining textile quotas, but the biggest obstacle for a long time was that China refused to admit that it was developing a market economy.47 In 1992, Deng Xiaoping said in his speech during his southern inspection tour, “The proportion of planning to 43 The Central Archives of the CCCPC, Deng Xiaoping’s Chronology (1975–1997), volume 1 of 2, Central Party Literature Press, 2004, p. 98. 44 Zhang, Minjie, The Second Revolution in China, Commercial Press, 2001, p. 51. 45 Liu, Jianhui & Cao, Pu, A Governance History of the Communist Party of China (vol. 3): 1976– 2011, People’s Publishing House, 2011, p. 100. 46 Zhang, Minjie, The Second Revolution in China, Commercial Press, 2001, p. 51. 47 Liu, Jianhui & Cao, Pu, A Governance History of the Communist Party of China (vol. 3): 1976– 2011, People’s Publishing House, 2011, p. 100.

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market forces is not the essential difference between socialism and capitalism. A planned economy is not equivalent to socialism because there is planning under capitalism, too, and a market economy is not capitalism because there are markets under socialism, too. Planning and market forces are both means of controlling economic activities.” These remarks liberated people’s minds and allowed the market economy to be acknowledged in China. After that, the Chinese negotiation delegates started real dialogues with their counterparts in the “GATT re-entry” negotiation. On April 15, 1994, it was decided at the Uruguay round of the GATT Ministerial Meeting in Marrakesh, Morocco to establish an organization that was more of global concern, the World Trade Organization (WTO), to replace the GATT established in 1947. On January 1, 1995, the WTO officially commenced, and it co-existed with the GATT for a year before the latter ended its historical mission. China’s efforts to “re-enter GATT” that was yet to succeed were thus turned into negotiations to join the WTO (entering WTO), which went on year after year until November 15, 1999 when China sealed a deal with the U.S., and the biggest obstacle to China’s entrance to the WTO was finally removed. While expanding the opening-up to integrate into the global economy continuously, China was also faced with increasing risks brought by the opening-up to the external world. In July, 1997, a financial crisis broke out in Thailand, which led to a series of chain reactions in the Southeastern countries and areas. The crisis also affected Taiwan, China, South Korea and Japan, and had quite some impact on the global financial market. It went down history as the Asian financial crisis. The Chinese leaders were also shocked, and Jiang Zemin responded, “As shown by facts, financial risks are often sudden, affect a wide range and cause great harms. We must stay alert.”48 Fortunately, the capital account was in strict control in China and was not opened up, and such an exchange system with “current account convertibility and capital account in control for foreign currency” withstood the blow of the Asian financial crisis.49 The IMF also included “prudent policy of liberalizing the capital account” as one of the reasons why China had sailed safely through the Asian financial crisis in its report in 1999 that summarized the discussions with China on the fourth article. Its report in 2000 on the discussion also showed support of China’s prudent approach to liberalize its capital account. The collateral impact of the Asian financial crisis on China’s opening-up is that it greatly promoted the financial collaboration of China with the Association of Southeast Asian Nations (ASEAN) and of the ASEAN countries with China, Japan and South Korea (10 + 3). The promotion was at least partially due to the discontent with the IMF aid conditions commonly felt by the countries severely hit by the Asian financial crisis such as Thailand and South Korea. Together with the compassion of the other countries, the treasury ministers of the 10 + 3 countries unanimously 48 Jiang, Zemin, “Comprehensively Advance the Tasks of the Reform and Opening-up and Modernization”, from The Central Archives of the CCCPC, Selected Important Documents of the Economic System Reform in the New Period of Time (Volume 2 of 2), Central Party Literature Press, 1998, p. 1499. 49 Chen, Jirong, et al., Establishment and Development Trend of the World Trade Center and What Our Country Can Do, People’s Publishing House, 2000, p. 455.

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endorsed the Chiang Mai Agreement regarding establishing a network for multilateral currency swaps in May, 2000. All the countries launched efforts to establish local financial security networks so that, in case of a liquidity shortage of foreign currency or issues with balance of international payments in one country, all the other members could collectively provide emergency fund in foreign currency. China (and Japan) played a positive role in the formation of the agreement.

3.2 Joining the WTO and Integrating in the Global Economy On December 11, 2001, China officially joined the WTO, marking a whole new historical age for China’s opening-up. The WTO is one of the most important international economic organizations and is called the “economic United Nations”. When established, it aimed at a complete, more vigorous and long-lasting multilateral trade system including goods, services, trade-related investment and intellectual properties that would cover the trade liberalization of the GATT and all that had been achieved during the multilateral trade negotiations at the Uruguay round. The roles of the WTO are: provision of venues and platforms for multilateral trade negotiations; implementing and monitoring the multilateral and all bilateral trade agreements, which are all parts of the WTO, and supervising the trade policies of its members; settling trade conflicts; developing trade capacities; collaboration with other organizations; etc. The WTO honors the basic principles that are the foundation of the multilateral trade system, including non-discrimination, increased openness, predictability and transparency, fair competition, more benefits for less-developed countries and environmental protection.50 Becoming a member of the WTO put a stop to China’s fragmented participation in the global economy, and China started to integrate into the international economic system from all aspects. To fully integrate into the global economy, China started an in-depth “self-revolution” by reforming the economic system to accommodate to relevant international rules, practicing its promises of the opening-up and protection of intellectual properties, and adjusting pertinent industries with “labor pains”. First, China cleared and amended laws and regulations in a large scale after joining the WTO, with more than 2300 laws, acts and departmental regulations sorted by the central government and more than 190 thousand local policies and rules by regional governments, which covered areas including trade, investment and intellectual property protection. Second, China delivered on its promise of opening up trade in goods, reducing import tariffs by a large degree, removing non-tariff barriers significantly and completely letting go the control on enterprises conducting foreign trade. By 2010, China had fulfilled its promise of reducing goods tariffs and the total tariff rate decreased to 9.8% from 15.3% in 2001. By January, 2005, China had removed all non-tariff barriers such as import quotas, import permits and specified bidding. From July, 2004, enterprises in China no longer needed government review and approval to 50 https://www.wto.org/english/thewto_e/whatis_e/what_stand_for_e.htm.

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start foreign trade, and filing with the proper authority sufficed. Third, China delivered on its promise of opening up service trade and opened the market of services in a large scale. By 2007, the 100 sub-categories of the 9 categories that China had promised to open up were all open. Fourth, protection of intellectual properties was strengthened with legislative and law-enforcing measures. Fifth, a transparency law was made to ensure timely notification to the WTO of the amendments, adjustments and implementation of relevant laws, regulations and measures in China.51 Within a decade after China joined the WTO and integrated into the global economy, the Chinese economy grew quickly, with the total economy rising to the second place of the world from the sixth. In this phase, China made significant progress in both global governance and regional collaboration. In 2008, a financial crisis developed in the U.S. and grabbed the globe, greatly threatening the development of China as well. However, China got alert early, made accurate decisions and was quick to respond. With a timely and decisive package solution, China successfully handled the centennial international financial crisis, stabilized the economy and the society and avoided big setbacks in the progress to modernization,52 becoming the first country in the world to bring its economy to stability and growth.53 During this international financial crisis, the U.S. and Europe became the origin of the crisis and the most affected, hence finding themselves in increasing need of emerging economies such as China for global cooperation to manage crises together. As a result, the emerging economies gained bigger weight in the global governance. In fact, the Group of 20 (G20) that was founded in 1999 was expanded to summits of heads of governments after this international financial crisis, and the Pittsburgh summit in September 2009 established G20 as the major forum for international economic collaborations. Compared with the Group of Seven (G7) that included only major developed countries, the G20 is apparently more representative of the world, and developing countries including China made use of this platform to push for reforms of the Bretton Woods system, for the international currency system to be more diverse, and for the global governance system to take a turn for justice and equality. Also under the pressure of this crisis, China, Russia, India and Brazil upgraded the BRIC system to leader summits in 2009, and South Africa was invited in 2010. The BRICS became an important force to coordinate developing and emerging countries and to push for reform of global governance. In regional collaboration, China kept deepening its collaboration with the ASEAN. In 2010, the China-ASEAN Free Trade Area was officially launched, the biggest FTA in the world among developing countries that covered 1.8 billion people with a GDP of nearly six trillion USD and trade value as high as 4.5 trillion USD. 51 The

State Council Information Office of the People’s Republic of China: China and the World Trade Organization, June, 2018. 52 Wen, Jiabao, “Summarizing Experiences and Identifying the Direction to Keep Breaking New Grounds for the Financial Work”, January 6, 2012, http://www.gov.cn/2012-01/30/content_2054 248.htm. 53 Hu, Jintao, Marching Forward along the Path of Socialism with Chinese Characteristics Unswervingly, Striving to Achieve a Society with Common Prosperity: Report at the 18th National People’s Congress of the Communist Party of China, People’s Publishing House, 2012, p. 12.

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3.3 Pressing on and Working Hard to Lead the Global Economy After the Party’s 18th National Congress in 2012, the new central leadership group with Xi Jinping at the core were in position and exhibited a proactive attitude to push for full opening-up to lead the tide of the global economic governance and development. However, China was faced with bigger pressure from the outside after the 2012 round of opening-up compared with the first two phases, but China was more active to shape the external environment with its increasing national strength. Around China, the conflicts over territory lands and waters with Japan and the Philippines were heated for a while, and countries farther away such as Australia also showed excessive interest in criticizing China. About the relationship with the major power, the competition between China and the U.S. became increasingly evident after Trump took office, who listed China as the major strategic competitor in his first National Security Strategy report and preached for protectionism in the name of “America first”. As for the global governance, the plan to reform the Breton Woods system agreed upon at the G20 was faced with problems in implementation for a long time as the impacts of the international financial crisis attenuated. Faced with the pressure, China did not go back to the old closed system, but met the challenges with expanded opening up. Ideal-wise, China promoted the awareness of a shared future for all mankind. As early as 2012, it was already stated to “promote the awareness of a shared future for all mankind, taking into account the reasonable concerns of other countries while pursuing the interest of our own and promoting the mutual development of all while developing our own”.54 On January 18, 2017, Xi Jinping elaborated on China’s approach to building the world as an integral whole with a shared future and asked for joined efforts from the whole international community to build a world with sustained peace, general security, common prosperity, openness and tolerance, and cleanliness and beauty.55 In October, 2017, it was decided at the Party’s 19th National Congress to add “promoting the construction of a community of a shared future” to the Party Charter, and in March, 2018, it was added to the new Constitution amendment, showing China’s will and resolution to contribute to the community with a shared future by formal institutions. Mechanism-wise, China made great efforts to formulate the mechanisms of the “Belt and Road” Initiative and construct relevant platforms so that they would become an important channel for practices of constructing the community of a shared future of all mankind. In 2013, President Xi Jinping proposed the initiatives of building a “Silk Road Economic Belt” and a “21st Century Maritime Silk Road” in Kazakhstan

54 Marching Forward along the Path of Socialism with Chinese Characteristics Unswervingly, Striving to Achieve a Society with Common Prosperity: Report at the 18th National People’s Congress of the Communist Party of China. 55 Xi, Jinping, “Work Together to Build a Community of Shared Future for Mankind: Speech at the United Nations Office at Geneva”, January 18, 2017, http://www.xinhuanet.com/world/2017-0119/c_1120340081.htm.

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and Indonesia, respectively, and advocated for strengthened international collaboration through communicating policies, connecting facilities, removing barriers of trade and capital flow and bridging hearts. To promote regional connections and communications and economic integration and to provide financial support to the infrastructure of countries involved in the “Belt and Road”, China initiated the establishment of the Asian Infrastructure Investment Bank (AIIB) and created the Silk Road Fund. In 2014, the Silk Road Fund Co. Ltd. was established and started to run, and China announced to add 100 billion RMB to the Fund at the Belt and Road Forum for International Cooperation in 2017. The AIIB was formally established in 2015, and in June, 2018, it already had 87 formal members. The advancement of the “Belt and Road” Initiative de facto pushed the reform of the Breton Woods system that had been going extremely slowly, and in December, 2015, The U.S. Congress eventually approved the reform plan of the IMF quotas that had been agreed upon five years earlier. According to the plan, approximately 6% of the quotas would be transferred to emerging economies and developing countries that had been under-represented, and as a result, China’s quota increased from 3.996 to 6.394%, now ranking the third compared to the previous 6th position. Action-wise, China furthered its internal reform with free trade trial zones as the anchor, and based on the experiences, made and announced major strategic decisions of opening-up.56 China also successfully pushed Renminbi to be one of the IMF’s basket currencies with special drawing right (SDR) in 2016, and at the same time, made use of domestic diplomatic opportunities, such as the G20 Summit in Hangzhou, the BRICS summit in Xiamen, the Belt and Road Forum for International Cooperation, the Shanghai Cooperation Organization Summit in Qingdao and the Boao Forum for Asia, and important international forums, such as U.N. congregations, to advocate proactively for economic globalization and against protectionism to guide the international community to shape a new world order with increased justice and equality.

4 Achievements of the Opening-Up The achievements of the opening-up is most directly manifested as the large-scale increases in trade, direct foreign investment and Chinese investment overseas while indirectly as the positive spill-over of these overseas economic activities in technology transfer, increased human capital and institution improvements as well as the contributions China made through the opening-up to the cooperation with and development of the surrounding areas or regions and global governance. Challenges faced

56 On

April 10, 2018, Xi Jinping announced four major strategic decisions at the keynote speech at the Boao Forum for Asia, including large-scale loosening up on the market entry control, creating more attractive environment for investment, strengthening protection of intellectual properties, and voluntary expansion of imports.

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by the opening-up include, among others, insufficient innovation, lack of coordination in regional opening-up, negative spill-over of economic cooperation with foreign countries on public issues such as environment problems, profound changes in the international economic cooperation and competition and non-neutral distribution of the benefits of opening-up.

4.1 Significant Achievements of the Opening-Up The development of foreign trade of China has been growing rapidly since 1978. The value of exports in goods increased from 9.8 billion in 1978 to 2.2635 trillion USD in 2017 while the value of imports increased from 10.9 billion to 1.8410 trillion USD in the same period, and the total value of trade in goods reached 4.1045 trillion USD in 2017, which was 199 times that of 1978. The exports of services increased from 2.7 billion in 1982 to 228.1 billion in 2017 and the imports, from 2 billion to 467.6 billion USD, with the total value of trade in services at 695.7 billion USD in 2017, which was 148 times that of 1982. From 1978 to 1993, China was mostly in deficit with trade in goods, 11 out of the 16 years, to be exact. However, since 1994, China has kept a trade surplus for goods, and the surplus has shown an overall increasing trend. The increase in the trade surplus was reduced to some degree from 2008 to 2011 due to the impact of the international financial crisis, but it quickly went up again from 2012 to 2015, reaching the peak of 593.9 billion USD in 2015 and falling back to 422.5 billion in 2017. Things are somewhat different for service trade. From 1982 to 1997, China mainly had a positive balance of trade for services, with an average surplus of 2.4 billion USD except for 1995 when there was a small deficit, but from 1998 to 2004, the balance was negative, at 1.4 billion USD on average. From 2005 to 2008, the balance became positive again, with an average surplus of 3.0 billion USD, and it showed an overall increasingly negative balance from 2009 on, reaching the peak of 242.6 billion USD in 2016. The deficit decreased a little in 2017, but it was still as high as 239.5 billion USD. Compared to the deficits since 2009, the balances of trade in services before 2009, positive or negative, were quite limited in size. The reason is the large-scale increase in service imports after the international financial crisis (Fig. 1). The achievement in attracting direct foreign investment was also significant while investing overseas emerged as well. In 1984, the actual use of foreign capital was only 1.26 billion USD, but in 2017, the number rocketed to 131.0 billion, which was 104 times the former. The actual use of foreign capital was still increasing in 2018, reaching a total of 52.7 billion USD from January to May, an increase by 3.6% compared to the same period of the last year. Meanwhile, China’s direct (non-financial) investment overseas also grew rapidly in recent years. In 2016, the direct non-financial investment overseas made by China reached a record high of 170.1 billion USD while the actual use of foreign capital was 126.0 billion USD, marking China as a country with net output of capital in that its direct investment overseas outnumbered the capital introduced domestically. However, in 2017 when

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Fig. 1 Imports and exports of goods and services of China since the opening-up Source Wind database. Note Exports are shown as positive and imports, negative for convenience in the figure above

China started to investigate and rectify investment overseas, the scale of investment overseas fell back and dwelled at 120.1 billion USD, which was outnumbered by the direct foreign investment in China, 131.0 billion USD. The numbers of January through May, 2018 show that China’s investment overseas (non-financial) was 47.9 billion USD, slightly lower than the direct foreign investment in China (Fig. 2). The contribution to economic growth made by the direct investment of foreign capital has been achieved by, 1, the capital effect shown as the direct addition of capital to drive growth and 2, the trade effect shown as the promotion of exports by foreign capital. When China was first opened up, direct investment of foreign

Fig. 2 China’s actual use of foreign capital and non-financial investment overseas since the openingup Source Wind database. Note The data of 2018 only cover January through May. The non-financial direct investment overseas is shown as negative numbers for convenience

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capital quickly became an important part of the capital in China. In 1985, the rate of actual use of foreign capital to the total capital was only 1.6%, and the rate reached the peak of 14.6% in 1994, after which time the percentage of foreign capital of the total capital in China decreased gradually with the increasing scale of capital formed, reaching 2.5% in 2016. Similarly, the percentage of imports and exports of enterprises with foreign investment out of the total value of imports and exports in China also increased after the Opening-up and then decreased. In 1995, the percentage was 39.1%, and it reached the peak of 58.9% in 2006, taking over half of the total value of imports and exports, but it decreased to 45.8% in 2016. From this perspective, the contribution of foreign capital under the conditions of China’s opening-up was not just manifested as direct contributions to the economy in the early times, but also as a driving force to stimulate the intrinsic economic engine of China through economic activities of the foreign capital, which subsequently pushed the Chinese economy to be promoted more by the intrinsic engine than by the foreign capital. Studies have shown that the direct foreign investment, domestic investment of China, imports and exports, and the market level of the economy are actually quite “complementary” to each other.57 In addition, direct foreign investment also has positive spill-over along the routes such as human capital,58 technology transfer and imitation. In fact, empirical analysis has shown that the technology transfer reflected in the localization of production by enterprises with foreign investment plays a positive role in economic development.59

4.2 Challenges During the Course of Opening-Up While achieving considerable economic and social development during the course of the opening-up and interaction with the world, China was also faced with many risks and challenges both domestically and overseas, and the negative externality of globalization became increasingly evident, especially after the twenty-first century. Domestically, despite the possession of quite favorable conditions for development, China had prominent issues of imbalance, incoordination and unsustainability, saw the underlying problems that had long built up to emerge by the day, and recognized increasing system and mechanism factors that held development, while extensive development with unsatisfactory efficiency and benefit resulted in a high cost for the

57 Song, Yingying, “A Study on the Effect of FDI on Economic Growth and Its Impact Factors: Real

Case Analysis Based on the National Time Series Data from 2000 to 2015”, Industrial Economic Review, 2017, vol. 4, pp. 1–8. 58 Dai, Qian & Bie, Zhaoxia, “FDI, Human Capital Accumulation and Growing Experiences”, Economic Research Journal, 2006, vol. 4, pp. 15–27. 59 Fu, Yuanhai, Tang, Weibing & Wang, Zhanxiang, “The FDI Spill-over Mechanism, Routes for Technological Advancements and Performance of Economic Growth”, Economic Research Journal, 2010, vol. 6, pp. 92–104.

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development, the pressure of the population, resources and environment grew significantly, and the conventional model of economic growth was no long sustainable.60 Externally, each period of China’s opening-up was constrained by a harsh external environment. In the report of the Party’s 15th National Congress, the following was state: “The cold-war mindset is still there, hegemonism and power politics are still the major factors threatening the peace and stability of the world” and “the old order of the international economy that is unjust and unreasonable is still sabotaging the interests of developing countries”. At the 16th: “The old international eco-political system that is unfair and unjust has not changed fundamentally, and uncertainty factors that affect peace and development are increasing.” “Hegemonism and power politics have new manifestations.” At the 17th: “Hegemonism and power politics are still there,” and “the global peace and development are faced with many difficulties and challenges.” At the 18th: “Factors of instability and uncertainty of the global economic growth are increasing,” and “hegemonism, power politics and new interventionism are growing.” At the 19th: “There is lack of kinetic energy to drive the global economy,” and “non-traditional factors threatening security continue to spread and humanity is faced with many common challenges.” Overall, from “a world still not in peace” at the 15th National Congress, through “the world in turmoil” at the 16th and “the world still in turmoil” at the 17th and 18th, to “the world faced with imminent problems of instability and uncertainty”, it is increasingly clear that the external strategic freedom is shrinking with China’s growth in strength. In the first 10 years of the twenty-first century, faced with these challenges, the Central Committee with Comrade Hu Jintao as Secretary General emphasized that development was of prime importance, the key was to orient with people, basic requirement was comprehensive coordinating sustainability, and the fundamental solution lied in overall and holistic approaches,61 while in terms of foreign policies, ideas such as pushing for a harmonious world62 were proposed. The negative externality of the opening-up both domestically and overseas was thus partially lifted. President Xi Jinping analyzed the major problems and issues facing the development of China in his speech at the second plenary session of the Fifth Plenary Session of the 18th CCCPC, which included five areas of innovation, coordination, green development, opening-up and sharing. It was based on this judgement that the Central Committee proposed the five new concepts of development to address the problems and issues. Generally speaking, the problems China faced during the opening-up were actually reflections of the problems in these five areas in the opening-up, i.e., lack of innovation, incoordination of regional opening-up, negative spills-over of economic foreign collaboration in public areas such as the environment, profound changes in the pattern of international economic collaboration and competition and restraints or 60 Composing

group of this book, A Companion to the View of Scientific Development, People’s Publishing House, 2013, p. 8, 38. 61 Hu, Jintao, “Learning and Understanding in-depth the Scientific Outlook on Development”, Selected Works of Hu Jintao (vol. 3), People’s Publishing House, 2016, pp. 1–8. 62 Hu, Jintao, “Making All Efforts for a Harmonious World with Sustained Peace and Common Prosperity”, Selected Works of Hu Jintao (vol. 3), People’s Publishing House, 2016, pp. 1–8.

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impact on the setting of further opening-up by issues such as non-neutrality of benefit distribution of opening-up. The key to these problems is opening-up per se because the idea of opening-up, as part of the five-component development concept, is clearly of systematic importance to the whole. Scientific and technologic innovation, as one of the basic component to the development concept of innovation involves independent research and development as well as how to make the best of the advanced scientific and technologic achievements and good management experiences created by humanity. In fact, in today’s world where inter-country co-dependence is unprecedentedly high, no coordinated internal development is possible for a country without positive interactions with the external world. Green development itself is something that needs mutual actions of all countries. Further, the value of the opening-up idea for development is manifested as China’s proactive participation in the global governance. Global governance is in nature a system of rules that regulate how games are played among countries and non-state actors. The current international rules by and large were made under the leadership of Western developed countries including the U.S., and therefore favor the interest of developed countries. Now that the power balance between big countries is undergoing profound changes, there arise conditions for China, together with other emerging countries, to push global governance in the direction of establishing a more just and reasonable system.

5 China’s Approach: All-Round Opening-Up Looking back at the course of China’s Opening-up, we may summarize the following features for China’s approach. First, the opening-up is treated as a basic state policy and it has been followed through. Second, the focus of the opening-up is that it should be gradual. Third, the opening-up is oriented with the market under the condition that the government plays an increasingly better role. Fourth, the principle of mutual benefits and wins has been given full respect all the time. Fifth, reform the inside and opening-up to the outside have been complementary to each other.

5.1 Always Following the Basic State Policy of Opening-Up From Deng Xiaoping to Xi Jinping, China has consistently followed the basic state policy of opening up. It was Deng Xiaoping who made the strategic decision to always open up to the outside out of the global tide or trend. He said, “It’s an open world today.” “It will be difficult to develop the economy without opening up. All countries around the world need to open up to develop their economies, and Western countries are actually integrated and interactive in terms of the capital and technology.” “If the policy to open up stays unchanged for the first 50 years in the next century, then we will have a lot more interactions with global economies and become much more co-dependent and indispensable in the second 50 years, and there will be no reason

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to change the policy.”63 In recent years, the U.S. has started to turn to protectionism and the competitive side of the relations between China and the U.S. has become increasingly highlighted. Under such a background, Xi Jinping reiterated in multiple occasions the basic state policy to open up with detailed explanation. On September 22, 2015, Xi Jinping gave a speech at the welcome banquet in Washington State jointly held by the local government and friendly U.S. groups, and he said that the open entrance to China would never be closed. He also said that with the opening-up as the basic state policy of China, China’s policy of making use of foreign capital would not change, protection of the lawful rights of enterprises invested by foreigners would not change, and the goal of providing better services for enterprises all over the world investing in China would not change.64 In November, 2016, during the keynote speech at the summit of the Asian Pacific Economic Cooperation, he reiterated that the open entrance to China would never be closed, and would only be opened wider and wider. He then explained in details the specifics of the more proactive strategy of the opening-up China was going to take while saying, “We will adopt a more proactive opening-up strategy to create a pattern of opening-up to the outside that is more comprehensive, deep and diverse.”65 On June 21, 2018, when meeting with leaders of international enterprises visiting China for Global CEO Committee special round-table summit in the Diaoyutai State Guesthouse, Xi Jinping said again, “We are more confident in the reform and opening-up, and we believe more than before that opening up is a key to China’s development.” “The open entrance to China will not be closed, and will only be opened wider and wider.”66 In fact, it is easily visible in the course of China’s opening-up for 40 years that opening-up is by no means a temporary answer to international troubles in a short period for China; nor is it a forced, reluctant action in response to external pressure. It is an intrinsic requirement for us to develop and to realize national rejuvenation.

5.2 The Gradual Opening-Up During the opening-up, gradualism was in every aspect of China’s action, be it the domestic adjustments such as establishing special economic zones, opening up

63 Deng,

Xiaoping, Selected Works of Deng Xiaoping, vol. 3, People’s Publishing House, 1993, p. 64, 367 and 103. 64 Xi, Jinping, “Speech at the Welcome Banquet in Washington State Held Jointly by the Local Government and Friendly U.S. groups”, September 22, 2015, http://www.xinhuanet.com/world/ 2015-09/23/c_1116656143.htm. 65 Xi, Jinping, “Deepening Partnership, Empowering Development Engine: Keynote Speech at the Summit of the Asian Pacific Economic Cooperation”, November 19, 2016, People’s Daily, November 21, 2016, p. 3. 66 “Xi Jinping Meets with Foreign Delegates Participating in the Special Round-Table Summit of the Global CEO Committee”, June 21, 2018, http://www.xinhuanet.com/2018-06/21/c_1123017 970.htm.

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coastal cities and setting up free trade zones, or the shaping and leading efforts internationally such as improvement to the international rules and systems. “Crossing the river by feeling the stones” that was emphasized during the reform and opening-up is a vivid representation of gradualism. “Crossing the river by feeling the stones” was first proposed as a working method by Chen Yun. According to information available, Chen Yun first mentioned “crossing the river by feeling the stones” at the Administration Council meeting on April 7, 1950. He said that increases and decreases in prices would harm production alike and it’d be better to cross the river by feeling the stones. On December 16, 1980, Chen Yun gave an important speech at the working conference of the Central Committee, “Economic Outlook and Lessons”. During this speech, he summarized the principles and methods that should be taken for the reform and opening-up and said, “We need to reform, but we need to do it safely. We are faced with complex issues at the Reform, so we must not haste. Of course we need some theoretical research and economic statistics and forecast, but it is more important to start with trial sites and summarize the lessons learned all the time. That is also to say, we must ‘cross the river by feeling the stones’. We should take small steps at first and walk slowly.” At the closing meeting on December 25, Deng Xiaoping said specifically that he fully agreed with Chen Yun, citing Comrade Chen Yun’s “speech as having properly summarized all the lessons of our country’s economic development for the past 31 years regarding a series of issues, which should be our long-term guidelines.”67 Xi Jinping inherited and developed the idea of “crossing the river by feeling the stones” of the reform and opening-up, and proposed the concept to integrate “crossing the river by feeling the stones” with strengthening the top-down design. He said, “Crossing the river by feeling the stones is a reform method with Chinese characteristics and it agrees with China’s national conditions. Crossing the river by feeling the stones is essentially looking for laws to learn the truth from practice. Crossing the river by feeling the stones and strengthening the top-down design are a dialectical unit. Any local, phased reform and opening-up should be pushed under the condition of strengthened top-down design and strengthening the top-down design must be based on advancement in local, phased reform and opening-up. To strengthen overall thinking and top-down designing, we must pay more attention to the systematic, holistic and concert nature of the reform while continuing to encourage bold trials and breakthroughs to keep pushing the reform and opening-up to deepen.”68 The gradualism that integrates crossing the river by feeling the stones with topdown designing must be honored domestically for the Reform, and it is the same for international issues. China is still primarily a receiver of current international rules and institutions. When we become stronger, we may have some appeals and seek to change some rules and institutions. Some have excessive expectations for this, but honestly and objectively, it is a long way to go. For the unreasonable international 67 Zhang, Yuyan & Feng, Weijiang, China’s Peaceful Path to Development, China Social Sciences Press, 2017, p. 81. 68 “Xi Jinping Emphasized: Deepen the Reform with More Political Courage and Wisdom”, http:// www.gov.cn/node_16404/content_2444191.htm.

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rules or institutions, or more precisely, those favorable to the interest countries and groups, it is not realistic or necessary to revolutionize them. What we should and can do in the next decade is to find the timing and to collaborate with other major emerging economies to seek local reformation on some non-neutral international rules. We will work gradually to pool small streams into a large river.

5.3 The Opening-Up Oriented with the Market with a Better Role of the Government The economic logic of the opening-up has shown that the source of growth is improvement in the labor efficiency, which comes mainly from the improvement in the level of labor division and specialization resulting from increases in the market size. To spread the positive effects of the opening-up, it is fundamentally needed to increase the market size and to focus on the decisive role of the market and the market allocation of resources. Xi Jinping said, “Economic development is to improve the allocation efficiency of resources, especially the rare resources and to get as many products and benefits as possible with as little resources as possible to input in the production. It’s been shown both by theoretical study and in practice that market allocation of resources is the most efficient. It’s the general law of a market economy for the market to allocate resources and a market economy is in nature an economy where the market decides resource allocation.”69 China’s opening-up was aligned with the market throughout the whole course of it. At the beginning of the reform and opening-up, we were in urgent need of advanced foreign technologies and management experiences, and we offered benefits to foreign capital that were superior than the domestic through ways such as establishing special economic zones. These benefits included, but were not limited to, simplified review procedures with a maximum reviewing period, prolonged use of land, special permit allowing foreign enterprises to keep all their incomes in foreign currencies, multiple entry visas for foreign investors, foreign banks allowed to set up branches in Shenzhen, waiver to foreign enterprises of labor management regulations applicable to State enterprises to grant them considerable flexibility in hiring and the initial resulting cost of labor at only 10% of the total cost of foreign enterprises, exemption of import/export tariffs, exemption of enterprise income taxes from the enterprise profits, and 50% discount of income taxes for the foreign citizens working in the special economic zones. Given the regional advantages, the central government dominated the policies benefiting investment in the opened areas at the coastline out of considerations such as the geographic advantages of being closer to the international market, historical background and overseas connections. From 1953 to 1978, the investments in the coastal, middle and western areas by the central 69 Xi,

Jinping, “Explanation Regarding the ‘Decision of the Central Committee of the Communist Party of China on Several Major Issues Concerning Comprehensively Deepening the Reform’”, http://cpc.people.com.cn/n/2013/1116/e64094-23561783.html.

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government accounted for 39.52%, 34.01% and 26.47%, respectively, with no significant differences, but from 1979 to 1991 after the Reform and Opening-up, the central government clearly focused its investment on the coastal line and the percentages of the three areas were 53.52%, 28.26% and 18.22%, respectively.70 Without an effective market itself, China made an optimal choice that the government offered benefits to introduce external market factors with engagement in production targeted at the external market. With the reform and opening-up continued to deepen, a fair and orderly environment for competition was established under the guidance of the government to fully release the power of the market, which increasingly became the new engine to drive further opening-up. Financially, China started to expand the opening of the financial industry to the domestic and international markets, push reformation on policy financial institutions, improve the multi-layered market system of capital, optimize the mechanism of marketing the RMB rates, accelerate the marketing of interest and push for the opening of the capital market in both ways. In terms of science and technology, China started to focus on establishing and improving the institutions and mechanisms to encourage and integrate innovations and to introduce and master technologies followed by innovation while improving the mechanism of marketoriented technological innovation. In terms of institutions and mechanisms, China emphasized wider entrance for investment, pushed for pilots and trials of free trade zones, accelerated the establishment of free trade zones, expanded the opening-up on the coastline and in the inland areas, further reduced the overall level of tariffs and started to advance the “Belt and Road” Initiative overseas.

5.4 Win–Win Cooperation with Mutual Benefits with the Other Party’s Comfort Zone Taken into Consideration China’s opening-up has always been characterized by win–win cooperation with mutual benefits. Chinese leaders have emphasized in multiple occasions that “China never hesitated to open up with the strategy of reaching a win–win situation with mutual benefits”, that “seeking win–win situations with mutual benefits when promoting mutual development and security and increasing the common interests with all countries of the world to strengthen complementary and mutually-beneficial cooperation is essentially creating a favorable environment for our own development,” and that “the spirit of partnership should be honored as we are in the same boat and we will all win and enjoy benefits.” Different from the ally politics where the winner takes it all, which is filled with zero-sum games and the cold-war mindset, China’s opening-up always respects the mindset and concept of mutual-development, mutual-discussion and sharing and the 70 Yao, Yang, The Economic Reform as a Systematic Innovation, Shanghai People’s Publishing House, 2008, pp. 192–197.

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associated behavioral logics. Based on the accurate grip of the laws of the historical progress of peace and war in the human world, and especially on the profound reflection on the agonizing lessons of the Second World War, Xi Jinping has pointed out that the jungle rule where the strong devours the weak is not how humans may coexist, that showing muscles or hegemonism is not how humanity finds peace, and that the zero-sum game where the winner takes it all is not how the humanity develops.71 As China’s Minister of Foreign Affairs, Wang Yi, put it, “in today’s world, if the winner takes it all or takes care of himself only, it is not only inappropriate given the times, but gets him exactly the opposite as well. Seeking unilateral absolute security makes one even more insecure. Caring about one’s own development will only cost the motivation and room of further advancement eventually. The partnership China is promoting is aimed at making a bigger cake of benefits through cooperation so that all may share it and all may develop and prosper.”72 Apparently, at the core of the partnership is win–win with mutual benefits. Aside from seeking win–win situations with mutual benefits, China also always remembers to take into consideration the comfort zone of each party, especially the other party in cooperation. As Xi Jinping put it, “the overall principle is to respect and trust each other and to gather consensuses and resolve differences, the rough direction is to cooperate to achieve win–win situations and a common future, and we shall respect each party’s core concerns and take into consideration the comfort zone of the other party.”73 “During the course of advancing regional cooperation, Asian countries have communicated with and learned from each other, held discussions to reach consensuses, and taken into consideration the comfort zone of each party. This is the Asian way and it is in accordance to the tradition of this region in terms of managing inter-relations. This tradition embodies how neighboring countries in Asia get along and should continue to be promoted today.”74 In fact, in the negotiations of free trade agreements between China and countries and regions such as the ASEAN, there were occurrences where the comfort zone of the other party was well taken into consideration. For example, in the article of “gains in the early phase”, China showed willingness to accept some conditions that were more favorable to the other 71 Zhong, Guoan, “Writing a New Chapter of National Security under the Guidance of the Overall Outlook on the National Security by President Xi Jinping”, Qiushi, 2017, No. 8. 72 Wang Yi has pointed out the four unique features of the partnership China is promoting that make it different from the traditional theory international relations: (1) seeking peace and cooperation, (2) insist on equal cooperation, (3) promotion of openness and tolerance, and (4) emphasis on win–win and sharing. Refer to Wang, Yi, “Establishing a Partnership to Develop Together in Peace: Speech at the Lunch of the Annual Meeting of the Higher-Level Forum of Development in China”, March 20, 2017, http://www.fmprc.gov.cn/web/wjbz_673089/zyjh_673099/t1447084.shtml. 73 Xi, Jinping, “Joining Hands in Making the Future of Cooperation between China and South Korea, Celebrating Together the Rejuvenation and Prosperity of Asia: Speech at the Seoul National University in South Korea”, July 4, 2014, http://www.xinhuanet.com/politics/2014-07/04/c_1111 468087.htm. 74 Xi, Jinping, “Watching out for and Helping Each Other, Joining Hands in Making the New Era of the Development of the China-Mongolia Relations: Speech at the Mongolian State Great Khural”, August 22, 2014, http://www.xinhuanet.com/world/2014-08/22/c_1112195359.htm.

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parties in exchange for the overall advancement of cooperation and better effect of trade creation in the future.

5.5 Internal Reform and Opening-Up to the Outside to Complement Each Other It is impossible to open up to the outside without support of internal reforms while the internal reforms are often forced by opening up to the outside.75 On the one hand, lack of reform compromises the benefits of opening-up. As analyzed above, when China had no clear understanding of the positioning and direction of the market economy in the 1980s, the important measures of Opening-up such as “re-entering GATT” were hard to push. On the other hand, after over 40 years of reform and opening-up, there emerged interest groups in China intertwined with each other. As pointed out at the 25th meeting of the CCCPC Leading Group for Continuing the Reform Comprehensively (LGCRC), “the Reform is a revolution. It is the institutions and mechanisms that are reformed and interest affected. It is not possible without real actions with knives and guns.” To break the vested interest, sometimes or many times, it is needed to open up to the outside or to adopt international rules as the driving force. In fact, the Central Committee has already recognized the complementary relationship between reform and opening-up. Xi Jinping, at the 16th meeting of the LGCRC in September, 2015, said, “It is our country’s successful practice to promote reform and development by opening-up. Reform and opening-up are complementary to and promote each other in that reform shall always require opening-up and openingup, reform. We must implement the basic state policy of opening-up unswervingly, adopt strategies of opening-up that are more proactive, improve the level of an open economy unswervingly, introduce foreign capital and technologies unswervingly, better the institutions and mechanisms of opening-up unswervingly, and push the Reform to deepen by expanding the opening-up and the opening-up to expand by deepening the Reform to inject new motivation and energy and break new grounds for economic development.”76 In the background of competition between China and the U.S., another fold of the meaning of the complementary relationship between opening-up to the outside and reform on the inside must be underlined, i.e., China must push the openingup independently and in order based on the rhythm of its own reform. If market 75 Internal reform also involves opening up to the domestic market. Deng Xiaoping proposed at a very early time that the laws of socioeconomic development must be respected to approach developed countries in terms of economic development and two opening-ups must thus be carried out: one is to opening up to the outside and the other to the inside. Opening up to the inside is actually the reform. Refer to Selected Works of Deng Xiaoping, vol. 3, People’s Publishing House 2001, p. 117. 76 Xi, Jinping, “Always Promote Reform to Deepen by Expanding Opening-up, Improve the Level of an Open Economy Unswervingly”, http://www.xinhuanet.com/politics/2015-09/15/c_1116570 386.htm.

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mechanisms are replaced by administrative orders to “push forward” the openingup under external pressure, the opening-up itself will not sustain and may further disrupt the rhythm of the domestic reform, severely interfering with the national rejuvenation.

6 Closing Remarks Opening up to the outside isn’t for the sake of opening-up per se. To open up is to develop the economy and to improve people’s lives. To realize this goal, the first question to answer is how to sustain the economic growth for a long time. Therefore, the economic logic of the opening-up is to describe how expanded trade and market due to the opening-up promote long-term economic growth. As early as more than two thousand years ago, Chinese thinkers and historians already made accurate descriptions on the relationship between free trade and economic prosperity. According to “Biography of Traders of Goods” of Shiji (Historical Records), “What one has in excess is exchanged for what is rare.” Further descriptions may be found in “Conventions and Traditions” of Huainanzi: “People make nets by waters and cultivate lands on higher grounds so that they may exchange what they have for what they don’t and what they are good at for what they are not.” “What people are good at in exchange for what they are not” in Huainanzi is actually exactly the same as the labor division and specialization by Adam Smith. “What people are good at” and “what people are not good at” not only cover the “absolute advantage” or disadvantage resulting from labor division and specialization, but also suggest a “comparative advantage” or disadvantage, as well as in close relation with the technological and process innovations brought by specialized production. The Chinese idioms, “making good use of what one is good at and avoid what one is not”, “taking appropriate measures based on the local conditions” and “mutual communication and interaction”, are three typical examples of how “yi” (i.e., exchange) may promote trade benefits and economic development. Through the Chinese history of several thousand years, the periods with the “Huainanzi-Simaqian Theorem” as the basis of economic policies and focusing on trade and enlarging the market are all associated with a thriving economy, wealthy people, stable society and an advanced culture.77 The 40 years of opening-up are the same. In our book, China’s Peaceful Path to Development, we expounded the SimthOlso-Schumpeter path describing the long-term economic growth mechanism, i.e., the mechanism, with the support of innovation, of “increased market—potential ‘trade incomes’ or increases—property right and contracting right properly endorsed by the government—exchange made possible—increased level of labor division

77 Zhang,

Yuyan, “The New Era Is Calling for an Even Higher Level of Opening-up”, Economic Information Daily, October 25, 2017, p. 8.

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and specialization—increased labor productivity—economic growth”.78 Openingup may fit in this path perfectly. First, from the State level, an increased market may be divided into an increased domestic market and an increased international market and opening-up means a growing international market and bridging the domestic and international markets. Second, opening-up increases the degree of freedom of private sectors to choose reliable property protection and the governments with an adequate governance level, which will in turn drive all governments around the world, including their own, to improve their ability to protect properties and of governance. Third, opening-up helps the international division of labor and facilitates the fast and wide spread of advanced technologies and management experiences, thereby improving the labor productivity. In addition, opening-up helps emergence of new combinations of productive factors and conditions and creation of new products, new methods, new markets, new materials and new organizations, thus promoting the innovation in the sense of Schumpeter. For the 40 years of reform and opening-up, China has achieved greatly in the opening-up, which has provided a strong engine to the long-term economic growth in China and the great rejuvenation of the Chinese nation. This is due to the joint efforts to push technological advance, economic growth and social development of the Chinese people under the leadership of several generations of the Central Committee with adherence to the line of respecting the truth and the basic national conditions. According to the report at the Party’s 19th National Congress, the major discrepancy of the Chinese society in the new era has transformed into the mismatch between people’s increasing demand for a wonderful life and the unbalanced and inadequate development. The changing national conditions have also shown their strength in what it means and how it is done by opening up to the outside. As described in the Preface, China has walked a walk from participating in the international division of labor to leading the trend in the economic globalization. The opening-up in the new era should aim at the development of the humanity and the future of the world, make comprehensive planning with both the domestic and international pictures in mind, and realize the three great goals of pushing national rejuvenation and human advance, maintaining the national sovereignty, security, development and benefits, and establishing the joined future of the humanity. Therefore, the four grips of the “Belt and Road” Initiative, global governance reform, global partnership network and an open economy of the world, must be held tightly. At the same time, the rapid growth of China’s economy has also roused anxiety and alert of the countries dominating the international system and the discussion about the “Thucytides Trap” has the danger to become a “self-fulfilling prophecy”, which has reduced the degree of freedom of China’s strategy for further opening-up. After the major strategic decision of reform and opening-up in 1978, China’s opening-up is now once again at a new crossing. In the 40 years of reform and opening-up, China became a major contributor as a member of the international economic system led by the U.S. from a participator, a view that is indirectly 78 Zhang, Yuyan & Feng, Weijiang, China’s Peaceful Path to Development, China Social Sciences Press, 2017.

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supported by evaluations made by some U.S. think tanks.79 Now, however, the U.S., the leader of the international system, started to take a dangerous approach to this system and China, a major contributor. The foreign policy-making elite group in the U.S. have more or less reached a consensus regarding China and the China-US relations are now in a period of essential changes. These changes may be summarized as an adjustment to the U.S. policy concerning China from “engagement” to “confinement”, which is essentially to curb China’s actions, lock the space and level of China’s economic growth, and thus confine China’s development and growth within the level incapable of threatening or challenging the dominating role of the U.S. in the world.80 It is foreseeable that before a new multi-lateral frame is established, trade frictions may be routine events among global economic activities and under some circumstances, uni-lateralism, protectionism and populism may rage on. However, a systematic summary of the lessons of the reform and opening-up tells us that for China, the fundamental solution to meeting the external pressure or challenge is to implement version 2 of the opening-up with the initial ideals in mind and in a comprehensive and orderly fashion.

79 For example, the Lander in the U.S. made a sensitive observation in an earlier report: “As a later comer to participate in the global system, China has shown a much more active attitude than Japan. The Chinese economy is more open than the Japanese.” It noticed many changes in China. “One important change is the decision to adopt the Western concept of rule of law, inclusion of competition as an important factor of economic activities, and the de facto education with English as the second language of educated Chinese… What is more important is probably that China has sent many young elites abroad for internationalism education, just as how the Romans sent their kids to Greece for education.” Overholt, W.H., China and Globalization: Testimony Presented to the U.S.-China Economic and Security Review Commission on May 19, 2005, Santa Monia, CA: RAND Corporation, 2005. 80 Zhang, Yuyan & Feng, Weijiang, “From Engagement to Confinement: The Strategic Intent of U.S. Towards China and Four Prospects the China-US Game”, Tsinghua Financial Review, 2018, vol. 7.

The Macroscopic Economy: Insistence on the Overall Principle of Advancing in Stability Zhizhong Yao

The macro environment of the economy during the reform and opening-up in China for over 40 years evolved with the market-oriented reform and the economic development, which is quite different from the developed areas such as the U.S. and Western Europe where the economies have been in a market-economic setting that is relatively fixed. During the whole course of the reform and opening-up, the Chinese economy became increasingly integrated with external economies and other countries drew more and more from China’s experiences in the macroeconomic management. By learning from developed economies on the macroeconomic management to draw on the lessons of the developed and even developing and emerging economies while continuously adapting to the unique system and development background of its own, China has developed a set of macroeconomic management theories and policy framework with Chinese characteristics.

1 Reform, Development and Stability: The 40 Years of China’s Macroeconomic Regulation and Control From 1978 to 2017, China had the fastest and the most stable economic growth among the major global economies (Table 1). During the 40 years, the real GDP growth rate of China was 9.6%, the standard deviation of which was 2.7 percentage 1 Standard deviation (SD) measures the average deviation of all the data from the mean of a set of data. Coefficient of variation (CV) is the ratio of the SD to the mean of a data set and measures the average variability of all the data in the set from the mean. The greater the CV, the more dispersed each data point is relative to the mean, showing that the data are more variable on average or have a larger fluctuation range on average. The smaller the CV, the closer each data point is to the mean, showing that the data are less variable on average or have a smaller fluctuation range on average.

Z. Yao (B) Institute of World Economics and Politics (IWEP), Chinese Academy of Social Sciences, Beijing, China © China Social Sciences Press 2021 F. Cai (ed.), The Chinese Approach, https://doi.org/10.1007/978-981-16-1899-4_3

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Table 1 Real GDP growth rates (means) and standard deviations in major global countries, 1978– 2017 (%) China

U.S.

U.K.

Japan

Germany

France

South Korea

India

Singapore

Mean

9.6

2.7

2.2

2.1

1.8

1.9

6.2

6.3

6.5

SD

2.7

1.9

2.0

2.6

1.9

1.4

4.1

2.0

4.0

CV

28

70

88

125

105

75

66

33

61

Note The mean and standard deviation (SD) were calculated based on the real GDP growth rate of each year for each country. The mean was geometric mean. The coefficient of variation (CV) of each country was the ratio of the SD to the mean as shown in the table for the country. The calculations for all the countries were based on data from 1978 to 2017 except for India where calculations were based on the data from 1980 to 2017 due to data availability Source The WEO Database of the International Monetary Fund for India, the Statistics Bureau of Japan for the GDP growth rates of Japan from 1978 to 1980, and the Wind for all other data used here

points, and the fluctuation degree of the GDP growth rate was 28% measured as the coefficient of variation.1 During the same period, the U.S. topped all the developed economies in the growth rate and stability, with an average real GDP growth rate of 2.7% and a fluctuation degree of 70%. Apparently, China had a far higher growth rate and far lower fluctuation than the U.S. Among developing and emerging economies excluding China, Singapore had the fastest growth rate with a real GDP growth rate of 6.5%, lower than China’s, and India had the most stable growth with a fluctuation degree of 33%, less stable than China’s economy. China’s high-speed economic growth was due to the reform and development policies that facilitated efficient allocation of factors, and its economic stability was due to the macro-economic management policies that fit China’s real conditions and were relatively effective. Since 1978, China has experienced five economic booms and five periods with a declining economic growth rate. We are now in the fifth period of declining economic growth (Fig. 1). In each economic boom, the maximum real economic growth rate was above 10%, with the rate as high as 15.2% in 1984. The latest peak of economic growth was in 2007 when the real GDP growth rate was 14.2%. At the beginning of the reform and opening-up, the fluctuations and management of the macroscopic economy in China both showed evident characteristics of a command economy. After the period from 1966 to 1976, the national leaders as well as the entire society were all enthusiastic about accelerating the economic development to compensate for what had been lost in that period. In 1977, the National Planning Commission amended the Outlines of the Ten-Year Plan for the National Economic Development from 1976 to 1985, which was passed by the Central Committee of the Communist Party of China (CCCPC) and by the National People’s Congress in the end of 1977 and the beginning of 1978, respectively. The Plan proposed the following: From 1978 to 1985, 120 large-scale projects would be established or continue to be built, including 10 large steel bases, 9 large non-ferrous metal bases, 8 large coal and charcoal bases,

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Fig. 1 China’s real GDP growth rates: 1978–2017. Source The Wind database

and 10 large oil and gas fields among others.2 The new Plan led to large-scale increases in the infrastructure in 1978, with the real capital sum increased by 25.1%, 15.6% points more than that in 1977, and the real GDP growth of 11.7% in 1978, 4.1% points more than that in 1977.3 The large-scale acceleration of the economic growth was primarily because the government tended to speed “accumulation”, which in turn generated a rapid expansion in investment and in the overall demand. This is known in economics as the type of economic overheating due to “planning impulse”, a common type of economic fluctuations in a command economic system.4 When prices are controlled by planning, expansion in investment and in the overall demand will lead to severe shortages, which, when spreading in width and depth, will not only prevent the investment projects planned from being truly completed, but also stop production immaturely, suppress consumption and trap the entire national economy in a mess. To deal with such a situation, contractionary fiscal policy and money policy in the modern sense are not something reliable, and a government must be in direct control and resort to administrative measures to downsize the scale of infrastructure construction and to stop and hold some projects. China did just that. In December, 1978, it was pointed out at the Third Plenary Session of the 11th CCCPC, “Construction of infrastructure must proceed in order with active yet affordable efforts… Crowded construction is not encouraged as it may lead to work delays and

2 Based on data from the People’s web database of each five-year planning at http://dangshi.people.

com.cn/GB/151935/204121/205062/12925475.htm. 3 The data of investment and GDP were retrieved from the Wind. All data in this chapter were from the Wind unless otherwise specified. 4 Refer to Fan, Gang, Zhang, Shuguang, et al. Outlines of the Macroeconomic Theories of a PubliclyOwned Economy, Shanghai Sanlian Bookstore and Shanghai People’s Publishing House, 1994.

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waste.”5 This showed a policy tendency to restrict the scale of infrastructure projects. In April, 1979, the working meeting of the Central Committee proposed the guideline of “adjustment, reform, rectification and improvement”, which officially drew the curtain of a three-year adjustment of the national economy. Through measures such as downsizing the infrastructure projects, lowering the expenses on national defense and administration and restricting bank loans, the spurt of the rapidly growing investment in fixed assets was contained and the overheated national economy cooled down. In 1981, the GDP growth rate fell to 5.1%. There went the end, in 1981, of the first round of economic boom and contraction at the beginning of the reform and opening-up. The fluctuation characteristics and the management measures of the macroscopic economy in this round were totally different from the economic fluctuation and macroeconomic policies in the modern system of a market economy. Therefore, this round of economic fluctuation, although temporally following the reform and opening-up, was still the “heritage” of the previous command economy. In 1982, China’s second round of economic boom since the reform and openingup started, and in 1984, the GDP growth rate reached the peak of 15.2%, which then started to cool down and fell to 8.9% in 1986. This round of macroeconomic fluctuation bore features characteristic of both the command economy and the reformation progress from the command to market economy. The fluctuation features characteristic of the command economy came primarily from the transition of China’s economic management mode from a centralization system to a devolution system. The centralization system featured all-round centralized management of the economy by the central government while in the devolution system, regional governments and State-owned enterprises (SOEs) obtained some autonomy in certain economic activities. For example, regional governments under the fiscal responsibility system obtained partial autonomy of distributing financial resources and investment, SOEs obtained some self-collected funds for investment after the implementation of profit retention and replacement of profit submission with taxes, and banks obtained partial autonomy in giving loans. In the setting of the devolution system and soft budget-constraints, the desire to expand of regional governments and enterprises quickly pushed investment to sore and overheated the economy. Different from the overheated economy due to the “planning impulse” in 1978, this round of economic overheating resulted primarily from a “fraternal competition” with soft budget-constraints after regional governments and enterprises obtained some autonomy. To check the overheating, the central government contracted the economy by taking back some of the power that had been delegated to the lower levels. The rotation of “taking back the power from and delegating it to” the grass roots overlapping with the cycle of “cooling and heating” the economy is

5 Refer

to the Communiqué of the Third Plenary Session of the 11th Central Committee of the Communist Party of China on December 12, 1978 at http://cpc.people.com.cn/GB/64162/64168/ 64563/65371/4441902.html.

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another common form and typical character of the macroeconomic fluctuation and management in a command economic system.6 The reform characteristics of this round of economic fluctuation originated primarily in the initiation of transforming to a market economy with efforts to change people’s minds and institutions. In September, 1982, “the command economy in dominance with supportive market regulation” was specifically stated in the report at the Party’s 12th National Congress, as well as support and encouragement of multiple forms of ownership such as urban–rural collective and cooperative economies and individual business together with persistent dominance of the state-owned economy.7 In October, 1984, the Third Plenary Session of the 12th CCCPC further specified that China would implement a planned commodity economic system with the decision to switch the reform focus from rural to urban areas to push forward the entire economic system reform based on cities.8 This round of reform was primarily based on a “gradual reform” and characterized mainly by “increment reform” and “dualtrack transition”. The “gradual reform” in China was aimed at a market-oriented economic system to be developed without fundamental changes to the existing command economic system. The addition of a market economic system on the side of the command economic system was manifested as “increment reform”, which inevitably resulted in the coexistence of “dual tracks” of both the command and market economic systems, giving the period its name, “dual-track transition”.9 The newly-added market economic system did not just include the marketing of the mainstay, but also the marketing of the mechanism of resource allocation. The marketing of the mainstay led to the non-State-owned economic sector with full autonomy in investment and operation outside the State-owned sector,10 and the marketing of the mechanism of resource allocation meant that the allocation of resources would now rely on price mechanisms instead of planning. Therefore, during the period of the “dual-track transition”, the State- and non-State-owned sectors of the economy coexisted, and so did planned prices and unplanned market prices. Such coexistences started to impact the macroscopic economy from 1982 to 1986. The “increment reform” resulting from the new market economic system on top of the command economic system ensured that the existing command system was still working well, avoided the destructive economic decline that would result from the “shock therapy”, and improved the efficiency of resource allocation significantly in the newly-added market economic factors, leading to a super high-speed growth 6 Refer to Fan, Gang, Zhang, Shuguang, et al. Outlines of the Macroeconomic Theories of a Publicly-

Owned Economy, Shanghai Sanlian Bookstore and Shanghai People’s Publishing House, 1994. to the Report of the 12th National Congress of the Communist Party of China at http://cpc. people.com.cn/GB/64162/64168/64565/65448/4526430.html. 8 Refer to the Decision of the Central Committee of the Communist Party of China Regarding the Reform on the Economic System passed by the Third Plenary Session of the 12th CCCPC on October 20, 1984. 9 Refer to Fan, Gang, Zhang, Shuguang & Wang, Limin, “Dual-Track Transition and “Dual-Track Regulation and Control” (Part 1 of 2), Economic Research Journal, 1993, vol. 10. 10 The state-owned sector of the economy was also being marketed. 7 Refer

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of the entire economy. In addition, the dual-track price mechanism in the “dualtrack transition” allowed the prices of some commodities to get out of the control of command and be decided by the market. This is why a large-scale price increases were evident in this round of economic overheating. The GDP deflator of this round increased from 1.1% in 1983 to 4.9% in 1984, and further accelerated to rise to 10.2% in 1985, while the consumer price index (CPI) increased by 9.3% in 1985 as well. This round of economic overheating still did not exhibit a large percentage of market components of the economy despite its somewhat different characteristics due to the market-oriented reform. Therefore, the conventional command economic measures in response to an overheated economy, such as the macroeconomic management methods of taking back some power that had been delegated and downsizing the investment and loan scales, were still satisfactory in terms of contracting the economy. In 1986, both the GDP growth rate and the inflation rate decreased by large scales. However, compared to macroeconomic “fine-tuning” policies that may sustain the economic prosperity for a while when preventing economic overheating at the same time, measures of direct control of the economy to prevent economic overheating cool down the economy rapidly and bring significant declines in growth rates, and that is a major defect of command-economic measures to manage the macroscopic economy. In 1987, China saw the third round of economic boom since the reform and opening-up, and the real GDP growth rate of that year reached another peak of 11.7%, and it was kept at 11.2% in 1988. Subsequently under the impact of foreign and domestic factors, the economic growth rate declined rapidly and it fell to 3.9% in 1990, the lowest since the reform and opening-up. This round of economic overheating did not show much difference from the last in terms of the mechanism as it was still characterized by the dual-features of the command economic system and the market economic reform. In 1987, after a new round of power delegation and profit concession from the central government, regional governments and enterprises had more autonomy and investment thus expanded, which was still the mechanism in effect at the time. The increment reform led the non-State-owned sector to further thrive, resulting in a sooner and deeper economic overheating. In such a circumstance, a wider-range of price reform caused more inflation. In 1988, the GDP deflator increased by 12.1%, and the CPI increased by 18.8%. Coexistence of shortage and inflation led to “panic buying” and social instability. In response to this round of economic overheating, China took measures of indirect regulation of the macroscopic economy. On January 1, 1987, the People’s Bank of China increased the legal reserve deposit ratio from 10 to 12%, and further to 13% on January 1, 1988. On September 1, 1988, the People’s Bank of China increased the interest rate of six-month deposits by 0.36 percentage points, and those of oneand three-year deposits by 1.44 percentage points. Such large-scale increases in the reserve deposit ratio and interest rates would effectively contract the economy in a modern market economic system. However, these measures did not contain the overheated economy at the time, and accordingly, the People’s Bank of China made one-time increases of 2.52 percentage points to the interest rate of six-month

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deposits, and 2.70 and 3.42 percentage points to those of one- and three-year deposits, respectively, on February 1, 1989. Now China’s interest rate of six-month deposits was as high as 9.0%, and the rates were 11.34% and 13.14% for one- and threeyear deposits, respectively. Compared to the 0.25 percentage points by which the U.S. Federal Reserve raised the interest rate each time, the one-time addition of 2.52 percentage points to the interest rate made by China seemed quite enormous. Why did China raise the interest rate by such a large scale? It was certainly associated with the macroscopic economy with severe economic overheating and high inflation, but what was more important was that regional governments and enterprises were not sensitive at all to interest rates in the power-delegation system with soft budgetconstraints. Large-scale increases in interest rates could hold the growth of loans and investment to a degree, but what the increases really held was the non-Stateowned economic component including township and village enterprises (TVEs) and individual business, while for the State-owned economic sector, regulating interest rates played a far smaller role than direct control of loans, restriction of investment and price control. In fact, in the third quarter of 1988, the Chinese government already started to cut down the size of investment in fixed assets directly and abruptly and stopped reviewing any unplanned construction projects, sorted all enterprises, especially trust and investment companies, examined and controlled the size of loans strictly and intensified price management with ceiling prices imposed on important means of production.11 With the tough contraction policies above, China’s GDP growth rate showed a large-scale decrease of 7 percentage points and hit 4.2% in 1989. The high inflation was effectively checked. In 1989, the growth rate of the GDP deflator decreased by 3.5 percentage points, reaching 8.6%, and that of the CPI fell back from 18.8% in 1988 to 18.0% in 1989 and 3.1% in 1990. China’s macroscopic economy now showed an over contraction, with the real growth rate of the gross fixed capital formation decreasing from 12.1% in 1988 to 1.8% in 1989 and nearly zero in 1990. To stimulate the economy, the People’s Bank of China started to loosen up on the control over loan sizes and re-initiated addition to the loans of the State-owned economic sector at the end of 1989, and lowered the interest rates for both deposits and loans three times in large scales from March, 1990 to April, 1991. Both the Stateand non-State-owned sectors recovered in 1991 and the real GDP growth rate went up to 9.3%. Then China started the fourth round of economic boom. The real GDP grew by 14.2% in 1992, and the GDP kept the high-speed growth in 1993 and 1994, with respective growth rates of 13.9 and 13.0%. At the same time, the macroscopic economy became overheated rapidly with soaring prices. In 1993, the GDP deflator increased by 15.2% and the CPI grew by 14.7%. In 1994, the GDP deflator increased more by 21.7% and the CPI, 24.1%. Now China was faced with the worst inflation since the reform and opening-up. 11 Refer

to Wu, Jinglian, A Textbook of China’s Modern Economic Reform, Shanghai Far East Publishers, 2010, pp. 343–344.

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The previous three rounds of economic overheating were marked more by characteristics of the command economy, but this round was primarily catalyzed by the market-oriented reform. In the beginning of 1992, Deng Xiaoping delivered his southern talks and called for acceleration of the Reform. In October, 1992, the Party’s 14th National Congress passed the resolution that set the goal of China’s economic system reform as the socialist market economic system. In November, 1993, the Third Plenary Session of the 14th CCCPC passed the “Resolution of the CCCPC Regarding Several Issues about Establishing the Socialist Market Economic System”. The resolution laid out the overall framework for the economic system reform, which mainly include the following: The reform of SOEs would be focused on establishing modern enterprise institutions, the reform of market mechanisms on price reform, the reform of the labor market on encouragement of the rural surplus laborers to flow to the non-agricultural sector and to urban areas and across regions, the reform of the real estate market on establishing the institutions of marketed transfer of commercial land use and improving the price-setting mechanisms on the secondary market, the reform on the financial system on establishing the taxation system centered on value-added taxes and the institutions to divide taxes between the central and regional governments, and the opening-up focused on a floating exchange rate based on the market and with proper management as well as a unified foreign exchange market. The reform measures since the southern talks greatly released the energy of the Chinese economy. While the State-owned economy continued to develop, the nonState-owned sector, primarily composed of village and township collectively-owned enterprises, private enterprises, individual economy and foreign-capital enterprises, also developed quickly. Rural surplus laborers moved to the coastal area in large scales, and the efficiency of resource allocation was greatly improved and was still growing. The “increment reform” continued to thrive, the non-State-owned sector and the resources allocated by the market kept growing, and both the factor input and the total factor productivity (TFP) increased rapidly, laying the foundation for continuous rapid development in the next decade or. The 1990s saw the fastest progression of marketing reform during the 40 years of the reform and opening-up, as well as the fastest growth of the economy. From 1991 to 1999, the real GDP growth rate in China averaged at 10.6% annually, which was 1.4 percentage points more than the average annual rate from 1978 to 1990, 9.2%. The fast-moving marketing reform also gave this round of economic fluctuation characteristics evidently of a market economy. The most remarkable feature is that the non-State-owned sector played a significant role in overheating the investment. In 1993, the investment in fixed assets made by the non-State-owned economy increased by 99% compared to the previous year and was 55% more compared to the investment in fixed assets made by the State-owned sector. Meanwhile, the investment in fixed assets made by the non-State-owned economy also accounted for a much larger percentage of the society-wide investment in fixed assets, going rapidly from 32% in 1992 to 39% in 1993. In the subsequent few years, the growth rate of the investment by the non-State-owned sector was easily higher than that of the State-owned, and by 1996, the investment in fixed assets made by the non-State-owned economy had

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already accounted for 48% of the society-wide investment in fixed assets, almost half of the whole. Meanwhile, the price reform also took big strides, and the prices of most means of production and of substance were set by the market with only a few exceptions such as electricity, communications and oil, which were priced by the government. Now the dual-track price system started the transition to the single, market price-setting. As a result, the most remarkable macroeconomic characteristic of this round of overheating was not severe shortage, but great inflation. In fact, shortage was generally eliminated in the Chinese economy after this round of economic fluctuation. In response to this round of overheating, China showed considerable changes in its macroeconomic management measures. Direct measures to control the sizes of investment and credit were lessened, contractionary fiscal and monetary policies were effectively applied, and the Chinese economy made a “soft landing” without the acute shrinkage of investment and the abruptly chilled economy seen in the previous rounds. In 1996, the real GDP growth rate after the economy was cooled down was still as high as 9.9%. This round of reform improved the economic growth rate and changed the characteristics of the macroeconomic fluctuation and the macroeconomic management measures while at the same time laying the system foundation for future macroeconomic stability. Among the reform measures, the reform on the treasury system in 1994 led the proportion of the central treasury of the total government revenue to increase from 22% in 1993 all the way to 55%, putting a stop to the continuous decreasing proportion of the government revenue out of the GDP since 1978 in 1995. This ensured the fiscal stability of the Chinese government, especially the central government, and prevented fiscal crises that were easily seen during reforms and the resulting socioeconomic and political instability. The reform on the foreign trade and exchange rate systems helped China go quickly from trade deficits to surpluses and China’s foreign exchange reserves to rapidly increase from 21.2 billion USD in December, 1993 to 120 billion USD in June, 1997, lending a hand to ensure that China was immune to the Asian financial crisis that broke out in July, 1997 and that the RMB did not devalue during the crisis. Although the Asian financial crisis did not lead to currency or financial crisis in China, external demands were heavily affected and so was China’s economy to a degree. In 1997, the real GDP growth rate fell to 9.2%, and it went further down to 7.8% in 1998. In response, China took the initiative to adopt expansionary fiscal and monetary policies for the first time, among which the fiscal policy was based on issuance of treasury bonds in support of infrastructure investment and the monetary policy included measures such as lowering the reserve deposit ratio and the interest rates of deposits and loans and increasing the money supply. These measures were relatively effective in preventing the economy from further decline and stabilizing investment and economic growth, but not in bringing economic resurgence. The expansionary monetary policy in 1998 did not speed up the expansion of money supply. In the end of 1998, the growth rate of the remaining broad money (M2) in China was 15.3%, two percentage points lower compared to the same period of the previous year. The expansionary money policy did not lead to money expansion

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because loans shrank at the time. In the end of 1998, all the remaining loans in the financial institutions increased by 15.5% on a year-over-year basis, but decreased by 10 percentage points compared to the same period of the previous year. In 1999, money supply and the growth rate of total loans kept decreasing. Why did the expansionary monetary policy fail to stimulate expansions of money and credit supply? This is due to the transitionary system during the economic reform in China. The rapid growth of the non-State-owned economy promoted the entire economy to grow in large scales while at the same time exacerbating the business of the SOEs that had large numbers of labor surplus and low efficiency. SOEs usually have limited room to lay-off employees or lower their salaries in response to market changes in a downward economy, and at the time there was no mechanism for a SOE to go bankrupt, so there were a large number of SOEs with deficits and poor performance. In addition, State-owned commercial banks were in charge of credit supply in China, and they primarily provided loans to SOEs. At the time when SOEs were in huge deficits, the non-performing loans ratio of the commercial banks soared up rapidly, severely affecting their profitability and capacity to increase credit supply. The commercial banks became reluctant to initiate increases in the loans given to SOEs in deficit out of concern for their own performance, and that is why there was credit shrinkage when the central bank adopted an expansionary monetary policy. Policy to manage the total demand fell short before credit shrinkage, but SOE reform and systematic reform of commercial banks did it. China initiated the reform scheme on SOEs with Zhuada Fangxiao (grasping the big and letting go the small) and strategic reorganization of the State-owned economy and made a three-year plan to lift SOEs out of troubles in 1998. Meanwhile, four asset supervision companies were established, which took over the non-performing assets detached from the four Stateowned banks, and the governance system of commercial banks was reformed to align with the standard joint-stock banks, laying financial and institutional foundations for commercial banks to run themselves. Starting from 2002, the credit shrinkage gradually underwent fundamental changes, and money supply and the growth rate of the total credit of financial institutions both started to increase again. China thus saw the fifth round of economic boom since the reform and opening-up. In 2002, the real GDP growth rate of China was 9.1%, 0.8 percentage points more than the previous year. In the subsequent five years, the real GDP growth rate kept increasing and reached 14.2% in 2007. This was the longest prosperous time since the reform and opening-up. Five reasons underlay the relatively long-term growth with a high speed from 2002 to 2007 in China. First, the prior reforms on SOEs and on the financial system eliminated the SOEs with low efficiency from the economy to quite a large degree, and all those that survived were the economic components with relatively high profitability and efficiency. Thus the efficiency of resource allocation had been overall improved. Second, China was rapidly urbanized and industrialized during the period. From 2001 to 2007, China’s urbanization level increased from 37.7 to 45.9%, with an average annual increase of 1.37 percentage points, i.e., 18 million people moved from rural to urban areas every year. The industrialization level also increased during this

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period, by 2 percentage points. Urbanization and industrialization boosted productivity and the growth potential through clustering effect, scale economy, technological advancement and re-allocation of factors. Third, China officially became a member of the World Trade Organization (WTO) on December 11, 2001, and the growing external demand of China now had a stable external environment. Fourth, the housing reform that monetized houses and allowed house loans and installment payments activated the real estate market and greatly promoted the real estate investment. Fifth, to manage the economy on the macroscopic level, the “fine-tuning” monetary policy that was moderately contractionary was implemented at the very beginning of the economic boom. For example, starting in September, 2003, the People’s Bank of China raised the legal reserve deposit ratio from 6 to 7%, and subsequently raised it 20 times with 0.5 or 1 percentage-point rise each time until the U.S. financial crisis broke out in 2008. During this period, the base interest rates of deposits and loans were also increased multiple times and the goal of money supply was also set to be moderately contractionary. These macroscopic policies ensured that no severe inflation occurred during the period with a continuously increasing growth rate of the economy. In 2007, the CPI was only 4.8% more than the year before. Put in other words, the sustained prosperity of this period was based on the institutions and development that made possible the rapid growth of both supply and demand, as well as the effects of macroeconomic management. However, the development of the real estate market during this period accumulated asset bubbles, posing a major threat to the future economic stability. After the 2008 U.S. financial crisis, China’s real GDP growth rate went down to 9.7%. In response, China took relatively highly expansionary fiscal and monetary policies. In 2009, China released the “four-trillion-RMB” plan of expanded fiscal expense and loosened up the money supply by a large scale, leading to 32% growth of the remaining broad money in that year. The real GDP growth rate stabilized at 9.4% in 2009, and even grew a little to 10.6% in 2010. It’s fair to say that China’s macroeconomic policies contained the acute plunge of the economy that would have otherwise resulted from the external blow. However, starting from 2011, the real GDP growth rate decreased again, which lasted until 2016 when reaching 6.7%. It was during the course of responding to the continuous slowing down of the economy that China gradually developed a macroeconomic policy framework with its own characteristics. While exploring the policies, China drew on two internationally available schools of thoughts and practical experiences. The first was the postfinancial crisis reflection made by the macroeconomic theorists and policy scholars on the macroeconomic policies previously deemed mature with efforts to establish a new policy framework. The other was the warning of “middle-income trap” that reminded China of learning the lessons from middle-income countries of their improper macroeconomic management during development. In these two settings and combining its own conditions, China reached a judgement that its economy was now in a “new normal”. In response to the “new normal” economy, China made a three-in-one policy framework of structural reform on the supply side, management of overall demand and financial stabilization policies.

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2 Limitations of Total-Demand Management: Reflection on the Global Macroeconomic Policies The international community started to reflect on the macroeconomic policies after the U.S. financial crisis from three perspectives. First, macroeconomic policies usually aim at flattening economic fluctuations, but the overall macroeconomic policies mainly based on monetary policy cannot prevent big economic fluctuations due to events such as financial crises. Second, a rules-based monetary policy can usually “fine-tune” the macroscopic economy, but after the financial crisis, it did not show much effect on the economy rushing downwards, giving rise to the need to consider reusing fiscal policy. Third, in response to the potential decline in the economic growth rate after the financial crisis, policies to manage the total demand could only manage to stabilize the economy around the potential growth rate, but fell short of improving the potential rate, suggesting the need to reconsider economic policies that could improve the potential growth rate. Among the three perspectives, the first and the third were particularly important for China to form its own macroeconomic policy framework. After the Great Recession in the 1930s, Keynes raised some consensus with his book, The General Theory of Employment, Interest and Money, i.e., commercial cycles and economic recessions are caused by lack of total demand, and since fiscal and monetary policies can maintain an adequate demand, periodic economic fluctuations can be avoided. Inflation comes with economic growth according to the Phillips Curve, and what a macroeconomic policy essentially aims at is to find the optimal point that balances the benefits of high output and low unemployment and the cost of inflation. However, both theories and realities started to change after the end of the 1960s. Phelps and Friedman both claimed that there is no stable compromise between inflation and unemployment.12 In the late 1970s, developed economies such as the U.S. started to experience stagflation as both inflation and unemployment rose. Subsequently, the mainstream macroeconomic ideas started to change and claimed that demand management should be able to control inflation and decrease the fluctuating degree of the economy, but could not improve the average output. They also claimed that to achieve a good economy with low inflation, low fluctuation and no loss of production, the use of discretion in monetary policy should be lowered to give way to a three-in-one combination policy, i.e., a politically independent central bank, clear inflation goals and policy rules, and fiscal policy with a smaller role. From the 1980s to the early 2000s, developed economies such as the U.S. achieved “great stability” of the macroscopic economy, which was taken as a hugely successful production-stabilizing monetary policy. However, the U.S. financial crisis in 2008 exposed the defect that the macroeconomics and macroeconomic policy had ignored the risk of financial crises and thus failed to prevent it. Therefore, macroeconomic 12 Phelps, Edmund, Philips Curve, “Expectations of Inflation and Optimal Unemployment over Time”, Economica, 1968, pp. 254–281. Friedman, Milton, “The Role of Monetary Policy”, American Economic Review, 1968, pp. 1–17.

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policies should include prevention of financial crises and stabilization of finance as part of their objective.13 Then should monetary policy play a role in stabilizing the finance? It is in fact very difficult. Charlie Bean, ex-Deputy Governor of Bank of England for Monetary Policy, said in his speech at the London School of Economics and Political Science,14 “Moderate monetary contraction can hardly have any meaningful effect on the credit expansion. It is a brave banker who would deliberately induce a recession in order to head off the mere risk of a future financial correction.” Blanchard also argued that the policy rate is not the proper instrument to address problems such as excessive leverage, excessive risk taking, and deviations of asset prices from fundamentals, and they should instead be used to maintain the real economy and stable prices.15 Some specific cyclical regulatory tools are more appropriate to deal with financial instability. For example, excessive leverage can be addressed by increasing regulatory capital ratios, excessively low liquidity may be addressed by introducing regulatory liquidity ratios, housing prices can be dampened by decreasing loan-to-value ratios and stock price increases can be limited by increasing margin requirements. New consensuses were reached during the post-crisis discussion on policy to stabilize finance and practice of policies: Macroeconomic policy should include financial stability in the policy goals, and the proper instrument for financial stability is not fiscal or monetary policy, but a good regulatory system and discretionary macroeconomic policy based on a series of contracyclical regulatory tools. Macroeconomic management organs need to coordinate various agencies and policies, especially coordinate the monetary policy and the discretionary macroeconomic policy. Central banks should also play a role in stabilizing the finance in addition to their role in stabilizing prices. China also drew on these latest discussions on financestabilizing policies and practice of implementing the policies when forming its own macroeconomic management framework. For a long time after the crisis, developed economies took expansionary policy to manage the total demand, but failed to boost their economies until 2017 when things started to pick up. Their economic growth rates had failed to improve partially because it took time to repair the damages done by the financial crisis and partially because the long-term economic growth rates of the developed economies had decreased. According to the IMF, the average 10-year growth rate of the developed economies had continued to decline since 2007, from around 3% all the way down to about 1% in 2016, the historical low after the Second World War. Why did the developed economies have such a low growth rate for such a long time?

13 Blanchard, Olivier & Summers, Lawrence, “Rethinking Stabilization Policy”, Back to the Future,

October. 8, 2017. Charlie, “The Future of Monetary Policy”, Comparison, 2015, vol. 1. 15 Blanchard, “Rethinking Macroeconomic Policy”, Comparison, 2010, vol. 1. 14 Bean,

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The concern over a “secular stagnation” of the economy that had been prevalent during the Great Recession in the 1930s16 is still present today.17 “Secular stagnation” has been attributed to decreases in spending. On the one hand, both capital and the rich accounted for growing proportions of national incomes, which both led to insufficient spending, and on the other hand, declines in population growth and productivity growth led to inadequate investment. Meanwhile, the real interest rate to reach full employment decreased, and the real interest rate in the real world could not be lowered to a level to stimulate investment due to the limit of a zero interest rate and low increases in prices or deflation. An easy-money policy would have little effect on stimulating investment and consumption growth, and would instead bring bubbles threatening the economic stability. Thus the best way to push an economy out of “secular stagnation” was probably to expand public-sector expenditures.18 However, spending more on the public sector did not actually solve inequality issues; nor was it effective in promoting population or productivity growth. As a result, fiscal policy could not eliminate the factors that might have trapped the economies in “secular stagnation”, and was logically unable to drag the economy out of it. Moreover, developed economies generally had a large government debt, and there was not much room for fiscal expansion. The long-term declining growth rates of developed economies are not just about low demand, but about declines in potential growth rates, which is generally attributed to declines in labor growth and productivity. All developed economies are faced with decreased labor supply due to population aging and decreasing birth rates. The growth theory holds that decreases in labor growth in a country will inevitably lead to decreases in the long-term economic growth, but it was contradicted by U.S. economists Acemoglu and others whose study showed that population aging was not negatively, but positively to a degree, correlated with the per capita GDP growth rate. Their study also showed that a higher level of automation was associated with a more rapidly aging population.19 These results suggest that automated machines will be in place when labor supply decreases. The negative effect of decreased labor supply on the long-term GDP growth rate is cancelled out to a degree by adoption of automated machines. Therefore, a slowed labor growth does not always bring slowing down in the economic growth. As for the decreases in the labor productivity of developed economies, it is generally attributed to the decreased growth of the TFP. The growth of the TFP is primarily driven by technological advancement, which is mainly nourished by research and development (R&D). In recent years, the R&D expenditure accounted for about 2.7% of the GDP in the U.S., about 2.1% in the Euro zone, about 2.9% in Germany 16 Hansen, Alvin, “Economic Progress and the Declining Population Growth”, American Economic Review, vol. 29, no. 1, 1938, pp. 1–15. 17 Summers, Lawrence, “Why Stagnation Might Prove to Be the New Normal”, The Financial Times, December 15, 2013. 18 Summers, L., “US Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound”, Business Economics, vol. 49, no. 2, 2014. 19 Acemoglu, Daron & Restrepo, Pascual, “Secular Stagnation? The Effect of Aging on Economic Growth in the Age of Automation”, NBER Working Paper 23077, 2017.

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and about 3.6% in Japan, which represent the highest level of R&D expenditure in their history. Why was the historically high level of R&D expenditure accompanied by a low long-term growth rate? Has R&D failed to advance technologies, or technological advance failed to promote economic growth? In fact, the technological advance stemming from R&D is well observed everywhere. Technological development in information and communications has changed human lives and business mode profoundly and the development of energy technologies, genetic technologies and artificial intelligence is also rapid. So the problem is not the failure of R&D to generate technological advance, but the failure of technological advance to bring rapid economic growth. How did this happen? It happened because technological advance is innovative as well as destructive, and only when the innovative effect of technological advance exceeds the destructive effect can the advance stimulate economic growth. It is possible that the current technological advance in developed economies has been quite destructive while innovative at the same time. Advances in general technologies are applicable in a large range and thus have quite an innovative effect. In comparison, advances in specific technologies of specific companies are only applicable in a small area and, while bringing considerable innovation-based profits for the companies, may sometimes bring destructive effects to peers with older technologies. Recent studies have found that U.S. companies are spending a decreasing percentage of money on R&D for publication but a growing percentage on R&D for patent although the ratio of R&D investment to their sales revenue is increasing.20 This shows that advance of general technologies due to increases in the investment in R&D is declining. Developed economies have released quite a few effective policies to encourage innovation and translation of innovations. However, these are not enough in the current situation. Future innovation policies should also encourage those innovative activities that have larger innovative than destructive effects, such as those leading to advances in general technologies. However, advances in general technologies have a large externality, and the gains of investment in R&D do not always go to the investors and thus a large amount of public funds are needed for this kind of R&D, which is extremely challenging to developed economies. There might have been some other structural factors leading to declines in the TPF growth in developed economies, such as decline in the laborers’ motivation to participate in production and hence decreased productivity due to over-protection of labor and excessively high welfare, decelerated accumulation of the human capital due to factors including inequality and unreasonable education systems, and excessive flow of resources to low-efficient bodies due to high debts. Policies of total-demand management fall short regardless of the cause of the decreases in the TFP and potential growth rates, be it innovation or other structural factors. To handle the problem, one way is to resort to a structural reform that includes encouragement of innovations. China actually made an effort to call for a structural 20 Arora, Ashish, Belenzon, Sharon & Patacconi, Andrea, “Killing the Golden Goose? The Decline of Science in Corporate R&D”, NBER Working Paper No. 20902, 2015.

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reform to promote global economic growth during the Hangzhou Summit of Group of Twenty (G20) in 2016. Another way is to resort to the policies of the school of supply side. Policies of the school of supply side that are centered on tax reduction have limited effects on improving the TFP, but they boost the return on capital and labor income and are effective in encouraging investment and labor participation, and they may improve the supply capacity and potential economic growth rate by stimulating factor input. U.S. adopted the idea of the school of supply side when they passed the Tax Cuts and Jobs Act in December, 2017 to improve the potential growth rate. The decline in the economic growth in China stemmed from different reasons than those in the developed economies, but their discussions and practice of policies to improve the potential economic growth rate were very helpful for China to form its own macroeconomic policy framework.

3 Lessons of Instability: The Warning of the Middle-Income Trap In 2007, the World Bank used the term “middle-income trap” in a report.21 At the time, China was already a middle-income country,22 and with China’s continuous downward growth of the economy, the “middle-income trap” gradually became a central piece of academic and policy discussion. However, there are still considerable controversies over a series of questions such as whether there is a middle-income trap, what a real middle-income trap is and what causes the middle-income trap. A normally slowing down economy is by no means a trap. The real middle-income trap describes the situation where the per capita national income of a middle-income economy cannot grow faster than that of developed high-income economies, leading to an income gap between the middle- and high-income economies that cannot be narrowed, trapping the middle-income economy at the level of middle incomes for a long time. Alternatively, the per capita national income of a middle-income economy stops growing or even grows negatively, leading to failure of the economy to achieve income growth or to break through a certain fixed range of middle incomes to reach the next level up of income.23 Based on long-term observations, have all middle-income economies stopped growing in their income levels or grown at a lower rate than high-income economies? The middle-income economies, according to the classification of the World Bank, 21 Gill, Indermit & Kharas, Homi, An East Asian Renaissance: Ideas for Economic Growth, The International Bank for Reconstruction and Development/The World Bank, 2007. 22 According the World Bank, China was a “low-income country” before 1997, became a “lower middle-income” country in 1997, downgraded to a “low-income country” again in 1998, was a “lower middle-income” country from 1999 to 2009, and has been a “upper-middle-income” country since 2010. 23 For definition of the middle-income trap, refer to Yao, Zhizhong, “What Is a Real Middle-Income Trap?”, International Economic Review, 2014, vol. 6, pp. 75–88.

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have actually seen an overall continuous growth and their per-capita GDP growth rate is higher than that of high-income countries. Recent world development indices have shown that from 1960 to 2014, the per-capita GDP growth rate of middleincome economies grew by 3.2% annually and their per capita GDP in 2014 was 5.4 times that of 1960 based on constant prices. In contrast, the per capita GDP of high-income economies grew by 2.3% annually during the same period, and their per capita GDP in 2014 was 3.4 times that of 1960. Apparently, the overall growth shows that the middle-income economies have grown at a rate higher than the highincome economies, and the income gap between the two parties has been narrowed constantly. Middle-income economies grew faster than high-income ones over a long time, but often more slowly if observed in a short period of time, and the average growth of middle-income economies are often slower than high-income ones in an economic cycle or longer. According to “What Is a Real Middle-Income Trap”,24 an economy with a per-capita national income of 4–64% of that of the U.S., a representative highincome economy, has a 41–48% probability to have the seven-year average growth rate of per-capita GDP lower than that of the U.S. even though its overall growth rate of per capita GDP is higher than the U.S. In other words, an economy with a per capita GNI of 4–64% of that of the U.S. will see its seven-year average growth rate of the per capita GDP lower than the U.S. for 41–48% of the time during its economic development. In addition, it is exactly because these middle-income economies often show a lower economic growth rate than high-income ones that it is extremely difficult for them to narrow their gap with high-income economies although their long-term growth is faster than the latter. If the situation where its economic rate is lower than that of high-income economies is eliminated for an economy, it will take a lot less time, from several hundred years shortened to decades, for the economy to increase its GNI from 4 to 64% of that of the U.S. In summary, understanding the causes of the middle-income trap is essentially based on the understanding of why middle-income economies often show a slower growth rate than high-income economies in an economic cycle or longer although they usually have a higher growth rate over a long period of time. Let us assume there are two economies with synchronized cycles and the average long-term growth rate of one economy is higher than the other. If the two economies have the same growth-rate fluctuations, the growth rate of the higher-rate economy will be always above that of the other one. If the higher-rate economy often shows a lower growth rate than the other one, the only reason is that the former has larger fluctuations of its economic growth rate than the other one, or put in other words, it is because the higher-rate economy is less stable than the other one. The global economy has been led by the U.S. since the Second World War, and the economic cycles of countries around the world are generally synchronized with the U.S.’s. In line with the same logics above, middle-income economies often show a lower growth rate than high-income economies despite their higher long-term 24 Yao,

Zhizhong, “What Is a Real Middle-Income Trap?”, International Economic Review, 2014, vol. 6, pp. 75–88.

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Fig. 2 Economic fluctuations of economy groups classified by absolute incomes: 1961–2014. Source Calculations were based on WDI data

growth rates primarily because the middle-income economies are less stable than the higher-income ones with wider growth-rate fluctuations. As shown in Fig. 2, among the economies grouped by per capita GNI calculated based on the 2005 purchase power parity (PPP), the economies with an average annual per-capita GNI over 32,000 USD have an average standard deviation of the per capita GDP growth rates at 2.4%, the lowest in all groups. This shows that the high-income economies are the most stable in terms of economic development among all the groups. The economic stability of all income groups can be roughly classified into three categories: One comprises the economies with per capita GNI over 16,000 USD, and the standard deviation of their annual per capita GDP growth rates is 2.4– 2.8%; one comprises the economies with per capita GNI between 4000 and 16,000 USD, and the standard deviation of their annual per capita GDP growth rates is 3.8– 3.9%; and the third category comprises the economies with per capita GNI under 4000 USD, and the standard deviation of their annual per capita GDP growth rates is 4.8–5.1%. These three categories of economies show a trend of decreasing economic fluctuations and increasing stability with increasing national per capita incomes. If economies are grouped based on the ratio of each economy’s per capita GNI to that of the U.S., similar patterns are well observed (Fig. 3): Relatively lowincome economies have a wider range of economic fluctuations, relatively highincome economies have a higher stability, and middle-income economies have a wider range of economic fluctuations than high-income ones. Apparently, middleincome economies are characterized by a less stable and a wider fluctuation range of growth rates compared to high-income economies.

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Fig. 3 Economic fluctuations of economy groups classified by relative incomes: 1961–2014. Source Calculations were based on WDI data

There are, however, a type of economies, such as Singapore and South Korea, that have rapidly grown into high-income countries due to high average growth rates over a long period of time although they each experienced vehement fluctuations during a certain period that resulted in a much lower growth rate of per capita GDP compared to then high-income countries in a short period of time. In fact, the economies that rapidly grew to high-income countries, such as Singapore and South Korea, all had their times of large economic fluctuations. Singapore experienced vehement fluctuations in the 1960s and South Korea, 1980s, and both experienced negative growth. These short-term “traps” did not prevent Singapore or South Korea from becoming high-income countries rapidly. For middle-income countries, another kind of economic instability plays a much more crucial role, i.e., a wide range of growth rate fluctuations averaged over an economic cycle or longer, resulting in frequent occurrence where their average growth rate of an economic cycle or longer is lower than that of high-income economies under the condition that their long-term growth rate is higher than the latter. If changes can be introduced to improve the average growth rate of such an economy’s low-growth period, significant increases will result in the average growth rate of a long time, hence reducing the time needed to escalate the national income of this economy. Therefore, this kind of economic instability is the key to the avoidance of falling into the middle-income trap. Fending off this instability alone may help an economy get out of the middle-income trap effectively. Then what underlies the frequent occurrence where a middle-income economy experiences a lower seven- or more-year average growth rate despite a higher growth potential than high-income economies? The answer is financial crisis. On average, each financial crisis causes economic depression and output loss that lasts for seven to

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ten years. It is exactly because financial crises break out frequently in middle-income economies that they often experience low growth for seven or more years. Financial crises usually come with severe economic decline, which is easily observed. What is more important is that they also lead to prolonged losses of output and income. Ben Bernanke studied the Great Recession in the 1930s in depth and argued that collapse of the financial system was the main reason why the Recession lasted for ten years and that an average recession would only last for one to two years.25 A more rigorous quantitative study showed that both monetary and banking crises would lead to output losses lasting ten years, among which the annual output loss due to a monetary crisis would be as high as 4% and that due to a banking crisis, 7.5%.26 Such a long-term suppression of a middle-income economy’s potential growth caused by a financial crisis is exactly why the middle-income economy would experience a lower growth rate over an economic cycle or longer than high-income economies. Reinhart and Rogoff estimated the impacts of 100 financial crises around the world from 1857 to 2013,27 and their results showed that each financial crisis, on average, led to shrinkage of per capita GDP for three years, with a cumulative amount of shrinkage of 11.5%, and another five years, i.e., eight years in total, before the per capita GDP could reach the pre-crisis peak. Their study also showed that among the 100 crises, 45 recorded double dips of the per capita GDP. For emerging economies, financial crises were more devastating and recovery took longer. On average, each financial crisis led to about four years of per capita GDP shrinkage in emerging economies, with a cumulative shrinkage of 14.8%. It took emerging economies another six years, i.e., a decade in total, to bring the per capita GDP to reach the pre-crisis peak, while at the same time, the percentage of double dips was also increased to 49%. A large body of studies have demonstrated that financial crises lead to sustained losses of output and income as well as economic depression, and it has also been gradually acknowledged by research that middle-income economies also experience frequent financial crises. In fact, financial crises are not proprietary of high-income economies and middle-income economies are more prone to and have more frequent financial crises. Reinhart and Rogoff studied data of financial crises of 800 years and argued that for a middle-income economy, inflation, monetary crises, external and domestic debt crises, and banking crisis could all occur frequently while most high-income economies could fully avoid inflation and monetary crises, with a few even fully free of external and domestic debt crises.28 Apparently, middle-income economies have 25 Bernanke, Ben S., “Nonmonetary Effect of the Financial Crisis in the Propaganda of the Great Recession”, The American Economic Review, vol. 73, 1983, pp. 257–276. 26 Cerra, Valerie & Saxena, Sweta Chaman, “Growth Dynamics: The Myth of Economic Recovery”, The American Economic Review, vol. 98, no. 1, 2008, pp. 439–457. 27 Reinhart, Carmen M. & Rogoff, Kenneth S., “Recovery from Financial Crises: Evidence from 100 Episodes”, American Economic Review, American Economic Association, vol. 104, no. 5, 2014, pp. 50–55. 28 Reinhart, Carmen M. & Rogoff, Kenneth S., This Time is Different: Eight Centuries of Financial Folly, translated by Qi Xiang, Liu Xiaofeng, & Liu Na, China Machine Press, 2012.

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more types of financial crises than high-income economies, and that is why their financial crises are more frequent. Argentina is a typical example to prove the existence of the middle-income trap. According to the WDI of the World Bank, the per capita GNI of Argentina was 1110 USD in 1964, 31% of the U.S. per capita GNI. Forty years later, in 2004, the per capita GNI of Argentina grew to 3770 USD, but its ratio to the U.S. decreased to 8.6%. Although Argentina saw rapid development in the next decade and its per capita GNI reached 14,160 USD in 2014 and the ratio to the U.S. also increased to 25%, the gap of per capita incomes between Argentina and the U.S., a typical high-income country, was not narrowed, but widened over the 50 years. In fact, Argentina was not without a high-speed growth during this period as its potential growth was still above the advanced economies. However, the per capita GNI in Argentina during this period fluctuated greatly, with the highest fluctuation of 11.1% and the lowest of −11.9%, the standard deviation of which was as big as 5.6%. Such an instability was caused by financial crises that broke out time and again. According to the data provided by Reinhart,29 13 financial crises broke out in Argentina in the mere 40 years between 1964 and 2004, among which three were external debt crises, three domestic debt crises, five banking crises and two hyperinflation crises. Of course, some of the crises of different types actually overlapped with each other. For example, during the external debt crisis that lasted for 12 years between 1982 and 1993, two domestic debt crises and three banking crises also broke out, and the two hyperinflation crises both happened in this period. The frequent financial crises kept trapping Argentina in a new crisis when it had not fully recovered from the last one. Middle-income economies experience frequent financial crises because their economic and social transitions have led to a series of structural problems, which may be attributed to two fundamental factors: economic and political factors. The economic factor is primarily manifested as lack of fiscal and financial capacities resulting from the structural transition of middle-income economies. When it progresses to a certain phase of middle incomes, a middle-income economy does not have the fiscal structure of revenue or expenses that is adaptive to the structural change in the economic growth, which will easily lead to lack of fiscal capacity. For example, a middle-income economy, if it achieved prior rapid growth primarily through industrialization, will see an increasing proportion of growth coming from services instead of industry once it enters the middle-income phase. The taxation system based on the previous industrial structure, if failing to be adjusted in time, will probably lead the tax revenue to grow more slowly than the economy. The following scenario is another example. When the investment- and trade-dependent rapid growth gradually transitions to reply primarily on consumption, government revenue will decline if the government fails to adjust the sources of its revenue. At the same time, the adjustment to the fiscal expense may be quite prompt. With increases in the per capita income, residents start to have more demand on public expenses such as elderly care, health and education, and the government, 29 Reinhart, Carmen M., “This Time is Different Chartbook: Country Histories on Debt, Default and Financial Crises”, National Bureau of Economic Research, 2010.

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in order to adapt to people’s demand, will promptly increase such public expenses. A latent response to adjusting the government revenue with a prompt response to adjusting the fiscal structure of expenses will lead the government revenue to grow more slowly than the government expense. If a short-term economic decline happens to occur at this point which demands expansionary fiscal policy to stimulate the economy, the government’s debt will rapidly soar up, and a government debt crisis will probably break out. If the government debt mainly relies on foreign funds for financing, it is more likely that an external debt crisis will break out. If the government tries to pay the debt through issuing money or through monetary ways to lower its debt, an inflation, even hyperinflation, crisis will break out quite easily. Economic transition also comes with incapacity of financial services. It is because economic transition leads to new economic operation modes and growth points, which find it difficult to obtain financial support from conventional financial services. At this point, either the government loosens up its control over financial institutions to allow for development of new financial services of these institutions, or these new financial needs voluntarily seek new financial services, even from financial institutions overseas, which will break the conventional mode of financial services de facto. Both options will in fact lead to financial liberalization except that the former is active financial liberalization initiated by the government and the latter is passive. Financial liberalization, however, may easily lead to financial crises. Kaminsky and Reinhart studied the relationship between the financial crises and financial liberalization since 1970,30 and they concluded that many cases of liberalization were accompanied with various degrees of financial crises except for only a few countries that safely progressed through financial liberalization. In the 26 banking crises covered in their study, 18 took place within five years of liberalization of financial institutions. Reinhart and Rogoff also noted in their book, This Time Is Different: Eight Centuries of Financial Folly, that in the financial history after 1800, the degree of freedom of the international capital flow was positively correlated with the number of banking crises. The more freely international capital flew, the more banking crises broke out around the world. Apparently, middle-income economies are faced with potential risk factors of financial crises while liberalizing their capital accounts and financial institutions during development. In addition to the economic factor, the political factor plays an indispensable role in financial crises. Niall Fergusson wrote in The Ascent of Money, “Inflation is a monetary phenomenon, as Milton Friedman said. But hyperinflation is always and everywhere a political phenomenon, in the sense that it cannot occur without a fundamental malfunction of a country’s political economy.”31 This statement reveals the relationship between the political factor and financial crises. Hyperinflation and politics are associated because the political system places no constraints on the monetary bureau, which can then issue money at its will and in satisfying the political needs

30 Kaminsky,

Graciela L. & Reinhart, Carmen M., “The Twin Crisis: The Causes of Banking and Balance-of-Payment Problems”, The American Economic Review, vol. 89, no. 3, 1999, pp. 473–500. 31 Fergusson, Niall, The Ascent of Money, translated by Liu Cheng, Citic Press, 2012.

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of some interest groups without considering the damages that inflation may bring to the whole society. Hyperinflation often brings monetary and banking crises. For economies with frequent sovereignty debt crises, the political factor is also essential. The contrast between a slow response to adjusting the government revenue structure and a quick response to adjusting the government expense structure, as described above, is essentially due to the political factor. For the economies where the political systems do not authorize the governments any means to control financial institutions, excessive debt and sovereignty debt crises also easily occur. The more important impact of the political factor is shown by lack of an effective financial supervision and a mechanism to maintain the financial stability and failure to establish a good fiscal principle and a mechanism to maintain fiscal stability. The lack and the failure originate from the constraints of interest groups or political pattern, as well as the overlook of political leaders or political leaders carried away by short-term interests, which together prevent the establishment of a mechanism with lasting effects. In addition, political instability itself is an important inducer of financial crises and sustained economic depression. Middle-income economies do not really have a lower growth rate than highincome economies over a long period of time, but they often experience low-growth traps for seven or more years due to large economic fluctuations, which drags down the long-term growth rates of the middle-income economies to a large degree. Successfully avoiding such low-growth traps will improve the long-term growth rates of middle-income economies significantly and shorten the time needed to upgrade their income levels. As these low-growth traps are usually caused by financial crises that frequent middle-income economies, the key to avoiding the middle-income trap is to avoid financial crises. This has been immensely inspiring to China that is now a middle-income economy.

4 A New Era and New Regulation and Control: The Macroeconomic Policy in Response to the New Normal Faced with the sustained decline in China’s real GDP [growth] after 2011 and the warning about the middle-income trap, China had to meet a major challenge of how to comprehend the macroeconomic situation at the time and what policy to take to cope with the situation. Was the sustained decline in the real GDP growth rate caused by a sustained depression of the total demand? In the framework to analyze the total demand and supply, if the curve of the total demand declines, both the output and the prices will also decline, thus the depressed total demand leads to reduced GDP growth rate and inflation rate. In 2012, the real GDP growth decreased by 1.6 percentage points, and the growth rate of the GDP deflator also declined from 8.2% in 2011 to 2.4% in 2012, a reduction of 5.8 percentage points. The CPI growth rate also declined, from 5.4% in 2011 to 2.6% in 2012, a reduction of 2.8 percentage points. The GDP growth rate

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Table 2 China’s macroscopic economy, 2012–2015 Metrics supporting lack of total demand

Metrics supporting decreases in the potential growth rate

Change in real GDP growth rate

Change in inflation rate

Change in selection ratio

Change in monthly income of peasant workers, RMB

2012

−1.6

−5.8

+0.04

+241

2013

−0.1

−0.2

+0.02

+319

2014

−0.5

−1.4

+0.05

+255

2015

−0.4

−0.7

−0.05

+208

Note All “changes” are the difference of the value of a given year subtracting the value of the preceding year. The inflation rate is expressed as the growth rate of the GDP deflator. The selection ratio of each year is based on the data of the fourth quarter; however, if the mean of all four quarters of a year is used, the selection ratio change will not affected in terms of whether they are positive or negative and its trend Source Calculated based on the Wind data

and the inflation rate indeed both declined at the same time, and the macroeconomic metrics also showed clear evidence of a sleepy total demand. In 2013, the growth rates of the real GDP and the GDP deflator declined by 0.1 and 0.2 percentage points, respectively, and the reduction of the two rates continued until 2015 (Table 2). At the same time, however, some other macroeconomic metrics showed characteristics that suggested the opposite of a lack of total demand. Usually, when there is an inadequacy in the total demand, the supply side will cut production and demand for labor, resulting in simultaneous increases in unemployment and decreases in salaries. Back then in China, there was no released data on employment surveys, and there was no way to learn about the changes in the employment rate. However, we can get an estimate of the changes on the labor market and in the employment rate indirectly from the selection ratio. Selection ratio is the ratio of the number of job positions available to the number of job applicants. When the selection ratio is greater than 1, there are more vacant positions than job seekers or a greater labor demand than supply, and it’s relatively easy for job seekers to find a job, but relatively difficult for enterprises to fill their vacancies and they probably have to offer higher rates to get the right people. When the selection ratio is smaller than 1, the opposite is true. Increases in the selection ratio translate into increases in job vacancies relative to job seekers and increases in the success rate of job seeking, an indirect indicator of a declining employment rate. If there is a reduction in enterprise production due to inadequate total demand, the labor demand and the number of job vacancies will decline, as well as the selection ratio. From 2012 to 2014, the selection ratio kept growing in China, and in 2015, despite a little reduction, its numerical value was as high as 1.10, suggesting that for every 100 job seekers, there were 110 jobs waiting. In addition, the wages of peasant workers continued to increase from 2012 to 2015. All these characteristics of the labor market did not show any sign of an inadequate total demand.

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Declines in the economic growth rate usually come with decreases in the demand for labor. Then why did the selection ratio and salaries both increase? The primary reason is that the labor supply was also decreasing in China. The working-age population of China reached the peak in 2010, while the labor force participation rate was also declining, both of which had synergistic effect on the decreases in the labor supply.32 The labor supply decreases showed that China had decreases in the potential economic growth rate. In fact, given the factors such as narrowed room for improving the TPF productivity through labor reallocation due to a significantly declining rate by which rural laborers moved out and the slowed accumulation of human capital due to a smaller size of the new labor pool, the potential economic growth rate in China may further decrease by an even larger scale. A comprehensive consideration of these very factors led Professor Cai Fang to the estimation that China’s potential GDP growth rate was about 10.3% from the mid-1990s to 2010 and about 7.6% from 2011 to 2015, and that it would further decline to 6.2% from 2016 to 2020 if no major reform policy were to be released.33 Of course, some studies found other reasons underlying the declining rate of China’s potential economic growth in the current phase; for example, improvement of economic development has reduced the room for further imitation-dependent rapid technological advance and future technological advance will rely primarily on independent research and development, leading the growth rate of the TFP due to technological advance to slow down.34 Under these new macro-economic conditions, the central economic working meeting in 2013 reached a judgement that China’s economy was in a “tri-phase” period with the growth rate gear-shifting phase, the structural adjustment pain phase and the prior stimulant policy digesting phase all overlapping together. This “triphase” term actually showed that the decision makers for China’s macro-economic regulation and control had already realized that China’s economy did not just have a problem of inadequate total demand. At the meeting of the Political Bureau of the CCCPC in 2014, President Xi Jinping officially named the economic status at the time as the “new normal” and described three major characteristics of the “new normal”, which are speed change, structural optimization and driver transition.35 The “speed change” describes the change of the economic growth rate from the high-speed of about 10% to turn to a medium–high rate of about 7%; the “structural optimization” refers to the transition of the demand structure from investment and exports to domestic consumption, the transition of the industrial structure from industry to services as the majority and the transition of production means from laborto capital- and technology-intensive; and the “driver transition” is the transition of the 32 Refer

to Cai, Fang, Understanding China’s Economy, Citic Press, 2017, pp. 196–198.

33 Ibid. 34 Eichengree,

Barry, Park, Donghyun & Shin, Kwanho, “When Fast-Growing Economies Slow Down: International Evidence and Implications for China”, Asian Economic Papers, MIT Press, vol. 11, no. 1, February 2012, pp. 42–87. 35 “The Economic Work Should Adapt to the New Normal of the Economic Development”, in Xi Jinping on Governance of China, vol. 2, Foreign Languages Press, 2017, p. 229.

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economic growth drivers from increasing factor investment to increasing factor efficiency. Taking a medium–high growth rate as the normal showed that China’s macroeconomic decision-makers had realized that China’s potential economic growth rate was declining. When 2016 came, China’s macroeconomic data further confirmed that China’s slowing growth rate was not due to an inadequate total demand, but a declining potential growth rate. In 2016, China’s real GDP growth rate decreased to 6.7%, 0.2 percentage points less than the last year. Meanwhile, the inflation rate increased instead of decreasing. The GDP deflator growth rate increased to 1.1% from 0.1% of the last year and the CPI growth rate increased to 2.0% from last year’s 1.4%. If the potential economic growth rate is taken as the GDP growth rate under zero inflation, then China’s potential economic growth rate in 2016 was in fact lower than 6.7%. In response to the economic growth that kept slowing down at the time, excessively expansionary fiscal and monetary policies in attempts to stimulate the total demand might have resulted in rapid increases in the inflation rate, leading to a new round of macroeconomic instability or financial instability due to the building up of capital bubbles and an increased leverage ratio. However, if the total-demand management policy couldn’t be taken, was there any other way? Economic theories and economic activities in all countries had shown that policies targeting the supply side should be considered at the time. One option was to take the tax-reduction policy by the school of supply and another option was to take a structural-reform policy to primarily reform the labor market and lower the debt level. Which option did China take? China released an innovative solution of “structural supply-side reform”. The structural supply-side reform was aimed to push forward the structural adjustment and to improve the TFP and economic growth by means of reform. It is focused on addressing the structural issues, stimulating economic growth drivers and driving the economic growth by optimizing factor allocation and adjusting the production structure to improve the quality and efficiency of the supply side.36 The structural supply-side reform is not entirely the same as the structural reform policies implemented internationally, but it also drew on the advantage of those policies, i.e., focusing on the TFP. China proposed the goal of the structural supply-side reform to be “three cuts, one reduction and one strengthening”, i.e., overcapacity cut, excessinventory cut, leverage cut or deleverage, cost reduction and strengthening weak links. Among these, overcapacity cut, excess-inventory cut, deleverage and strengthening weak links are all useful to reduce the low-efficiency allocation of resources and to improve the TFP while the cost reduction was aimed to lower the cost of starting up and running business for enterprises, which is different from the practice of lowering the cost and increasing the profit for enterprises only by tax cuts but which has the same effect of the tax-cut policies held by the school of supply side. In addition, “cost reduction” includes the option of tax cut. Therefore, China’s “structural supply-side reform” is different from the tax-cut policies preached by the school of supply side and the structural adjustment policies used internationally; 36 “Advancing the Structural Supply-Side Reform”, Xi Jinping on Governance of China, vol. 2, Foreign Languages Press, 2017, pp. 252–253.

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instead, it has combined the advantages and effects of both types of policies, and it is a policy instrument targeting the supply side and is applicable to China’s realities. Of course, the structural supply-side reform wasn’t the only policy that China took. As put by President Xi Jinping, the supply side and the demand side are the two basic instruments for macroeconomic management and regulation, and whether the economic policy is focused on the supply or demand side relies on the macroeconomic situation of a country.37 In addition, given that big bubbles had built up on the real-estate market during the economic expansion before 2007 and that expansionary fiscal and monetary policies in response to the external blow caused by the 2008 financial crisis had further built up bubbles with an overall excessively high leverage ratio, as well as the lesson of the destructive financial crisis in the U.S. and the warning of the middle-income trap, China also paid close attention to the financial stability. That is why deleverage was listed as one of the major tasks in the structural supply-side reform, and preventing financial risks was further taken as one of the three tough battles before 2020.38 More importantly, China set up the Financial Stability and Development Committee under the State Council and on the institution level, separated financial stability from total-demand management and structural supply-side reform in the macroeconomic policy. By that time, China had explored and set up a preliminary, but relatively complete, framework for macroeconomic management.

5 Insistence in the Overall Principle of Advance in Stability: China’s Macroeconomic Policy Framework Based on the economic management experiences across 40 years, China has come to form its own macroeconomic policy framework, which has three pillars of macroeconomic management, i.e., the total-demand management policy, the financial-stability policy and the structural supply-side reform. The total-demand management policy aims at maintaining the stability of the economic growth and prices and ensuring adequate employment and resorts primarily to fiscal and monetary policies. The policy logic of total-demand management comes from the development of macroeconomics and the practice of macroeconomic policies in various countries, i.e., the resources in an economy will be fully employed if the macroscopic economy runs at the potential growth level, with adequate employment on the labor market as well as rapid increases in the general prices. Fluctuations in the total demand may lead the economy to derail from the potential growth level, and when the total demand is less than the potential output, unemployment will 37 “Advancing

the Structural Supply-Side Reform”, Xi Jinping on Governance of China, vol. 2, Foreign Languages Press, 2017, pp. 252–253. 38 The three tough battles refer to preventing major risks, precision-alleviation of poverty and pollution prevention and management. These were proposed in the report on the 19th National Congress of the Communist Party of China.

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increase while the prices will keep rising if the total demand is greater than the potential output, both of which will harm the entire social welfare and even lead to social instability. Thus the total-demand management policy seeks to stabilize the total demand growth at the potential growth rate through fiscal and monetary policies. When the total demand is less than the potential output or inadequate, expansionary fiscal and monetary policies may be taken to stimulate the total demand, and when the total demand is greater than the potential output or the economy is overheated, contractionary fiscal and monetary policies may be taken to suppress the total demand. China has practiced its total-demand management policy differently from advanced economies. First, China puts more weight on fiscal policy. On the one hand, this is because China’s fiscal decision-making is more efficient than advanced economies and China can respond to the macroscopic economy in a very short period of time. On the other hand, the central government debt in China is not high and there is much room for fiscal policy to play its role. Second, China’s monetary policy is not a rule-based interest rate policy. Drawing on the inflation targeting regimes is advantageous in bringing stable expectations and China also announced inflation goals as a macroeconomic policy. In 2018, for example, it was proposed in the Government Work Report to increase the CPI by 3%. However, China’s monetary policy is not only targeted at the inflation goal, but also takes into account growth and employment goals. Neither is China’s monetary policy targeted at the interest rate only. It also includes quantitative instruments such as the required reserve ratio and the standing lending facility. This is also related to the lack of a base interest rate in China. The total-demand management policy may maintain the macroscopic economy at the level of the potential economic growth, but it has two defects. One, it cannot suppress the bubbles on the financial market or systemic financial risks effectively, and two, it cannot change the potential growth rate. The financial-stability policy may be used to make up for the first defect, and the structural supply-side reform, the second. The financial-stability policy is primarily aimed to prevent systemic financial risks and maintain the financial stability and mainly includes the tools of improving financial supervision and implementing discretionary macroscopic policy. As shown by the lesson of the U.S. financial crisis and the practice of various countries, the financial supervision needs to establish a full coverage of supervision and to prevent regulatory arbitrage. The discretionary macroscopic policy values recognition of systemic financial risks from the macroscopic perspective and the perspective of cross-market transmission and adopts contracyclical policy instrument to prevent systemic financial risks. China had fully learned all these lessons and, based on the lessons and its own realities combined, established the Financial Stability and Development Committee under the State Council and eliminated the problems due to implementing financial stability policy in individual bodies and industries, including the regulatory blind spots, regulatory arbitrage and difficulty in recognizing the systemic risk of cross-market transmission. The structural supply-side reform is primarily aimed at improving the economic growth rate and resorts to structural reform as the main tool. A structural reform may

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cover a wide range of areas, including adjusting innovation policies and improving innovation start-up system to speed up technological advancements, reforming the education and training systems to accelerate the human capital accumulation, reforming the household registration system and adjusting the fertility policy to increase the labor supply, increasing the efficiency of resource allocation and the capital accumulation through “three cuts, one reduction and one strengthening”, etc. In addition, the structural reform may focus on different things in different periods. After all, the structural problems that prevent further increases in the potential growth may change with development of the economy and changing conditions and may even become entirely different from the current problems, and the structural reform will certainly change its focus accordingly. This macroeconomic policy framework with the total-demand management policy, the financial stability policy and the structural supply-side reform as the three supporting pillars has come from China’s practice as well as the lessons and experiences of other countries around the world. It suits China’s real conditions and is self-consistent logistically while the three pillars all possess their own function and at the same time are complementary to each other. The three pillars are all parts of a whole and no one is more important than the other two while they are all subjective to continued improvement and development of their policy contents. Among the three pillars, the total-demand management and the financial stability policies both highlight economic stability and bear the mark of “stability” while the structural supply-side reform highlights further increasing the economic growth rate based on the economic stability and hence bear the mark of “advance”. Therefore, it is quite appropriate to summarize this macroeconomic policy framework of China with “advance in stability”.

Regional Development: From Gradient Advance to Coordinated Development Houkai Wei

Over the 40 years of the reform and opening-up, China’s regional economies were developed in gradients in the early years and then reached coordinated development through a major strategic transition. To realize this strategic transition, the Chinese government had initially encouraged the eastern area to develop first, and based on this development, implemented the strategies of large-scale development of the west, the rise of central China and revitalization of the old industrial bases including the northeast one by one while at the same time pushing for the integration of Beijing, Tianjin and Hebei (Jingjinyi) and development of the Yangtze River Economic Belt with the establishment of functional areas, and proactively supporting the acceleration of the development of old revolutionary base areas, areas with concentrations of ethnic minorities, border areas, and areas with relatively high incidences of poverty (old-minority-border-poor areas), resulting gradually in a multi-layered strategic framework for regional development and offering a strong hand to the coordinated development of regional economies. After the practice of the reform and opening-up for 40 years with numerous explorations, China has now found a path with Chinese characteristics to diverse, gradual and coordinated regional development, achieved great effects in promoting coordinated regional development, laid a solid foundation for common prosperity of all regions and offered the China wisdom, the Chinese approach and generally applicable helpful experiences for other developing countries to realize their own coordinated regional development.

H. Wei (B) Rural Development Institute (RDI), Chinese Academy of Social Sciences, Beijing, China © China Social Sciences Press 2021 F. Cai (ed.), The Chinese Approach, https://doi.org/10.1007/978-981-16-1899-4_4

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1 The Gradient Advance Strategy in the Early Phase of Reform When the People’s Republic of China (PRC) was established, the productive forces were distributed in a severely unbalanced pattern, on top of which there were people impatient to see achievements with a harsh international environment, thus China implemented the strategy of balanced development that was mainly aimed to balance the distribution of productive forces and to narrow regional gaps and started a largescale three-frontline development. To be fair, this balanced development strategy in the conditions of the time gave a strong push to the industrialization in the central and western areas, accelerated the economic development in these areas, and fundamentally changed the extremely unbalanced distribution that the old China had left behind. However, the principle of national defense and the balance of regional development were given so heavy weights, regional economies were so indulgent in setting up their own independent systems, and the strategic industrial locations were dispersed so widely that it was overlooked to make full use of the industrial foundations in the coastal area. As a result, the strategy failed to contain the widening gap between regions while holding the potential development of the coastal economies and affecting their growth. This led to inefficient macro- and microeconomic development and the strategy did not meet its goals. In the early phase of the reform and opening-up, China adopted an unbalanced development strategy to advance regional economies in gradients in order to promote the national economic growth and close the gap between China and developed countries as soon as possible. State investment planning and regional policy started to emphasize efficiency as a goal and leaned in favor of the coastal area with proper conditions, initiating the high-speed growth and prosperity of the coastal economies. After the reform and opening-up, China decided to take the strategy of unbalanced development to drive the economy in gradients, which was a strategic choice based on the summary of regional development experiences since the founding of the PRC. On the Third Plenary Session of the 11th Central Committee of the Communist Party of China (CCCPC), it was decided to turn the focus to developing socialist modernization, which was a major strategic decision. With the economic development strategy switching to a different track, theorists came to criticize the previous balanced regional development strategy on the cost of efficiency after summarizing the lessons of productive force planning since the establishment of the PRC, and they also revisited the principles of planning the socialist productive forces with the conclusion that efficiency as the principle or goal should be the first priority. Thereafter, a school of thoughts gradually arose that valued unbalanced regional development. The coastal area with favorable conditions was first developed, followed by other areas, resulting in a gradient of development. This was suitable with the phased characteristics of China’s economy at the time, as well as the right choice based on domestic and international lessons throughout history. In terms of the guiding principle, the idea Deng Xiaoping proposed in the beginning of the reform and opening-up, that “those who get rich first shall propel others to

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get rich next to eventually realize common prosperity”, had profound impact on the strategic transition. As early as the end of 1978, Deng Xiaoping already talked about economic policy: “We should allow some regions, enterprises and some workers and peasants to earn more and enjoy more benefits sooner than others, in accordance with their hard work and greater contributions to society. If the standard of living of some people is raised first, this will inevitably be an impressive example to their neighbors, and people in other regions and units will want to learn from them. This will help the whole national economy to advance wave upon wave.” “Of course, there are still difficulties in production in the northwest, southwest and some other regions, and the life of the people there is hard. The State should give these places many kinds of help, and in particular, strong material support.”1 This idea of the first and next rich with final common prosperity by Comrade Deng Xiaoping greatly impacted the subsequent regional development strategy and policy in China. This is exactly why China took the unbalanced development strategy that prioritized efficiency and gradient progression in the initial phase of the reform and opening-up. The first of the important measures to support the gradient progression was to change the national principles for the regional economic development. Starting from the sixth Five-Year Plan (FYP), China’s principles for the planning of the productive forces and regional economic development gradually transitioned to focus on improving economic benefits and to favor the coastal area from the previous focus on war preparation and narrowing regional gaps. In “The Sixth Five-Year Plan for the National Economic and Social Development of the People’s Republic of China”, it was specified to “make active use of the current economic foundations of the coastal area, allow them to fully play their roles and bring the inland areas on board for further economic development” and for the inland areas to “accelerate development in energy, transportation and raw material industries to support the economic development in the coastal area.”2 In “The Seventh Five-Year Plan for the National Economic and Social Development of the People’s Republic of China”, the entire country was further classified into three economic zones of the eastern coastal, central and western areas, and it was stated to “accelerate the development of the eastern coastal zone while the focus of energy and raw material development should be put in the central area and preparation should be in place for further developing the western area.”3 In early 1988, the Central Committee of the CPC and the State Council analyzed the new development in the international economies and summarized the experiences of the opening-up, and then came up with the strategy of economic development in the coastal area that was focused on the township and village enterprises (TVEs) in the coastal area and “two ends on the outside with wide entrance and exit”. At the opening-up meeting in the coastal area held in March, 1 Research

Office of the Secretariat of the Central Committee of CPC & Central Archives, Always Reform, Open up and Boost up: Selected Excerpts of Important Documents since the Third Plenary Session of the 11th CCCPC, People’s Publishing House, 1987, p. 13. 2 The Sixth Five-Year Planning for the National Economic and Social Development of the People’s Republic of China, 1981–1985, People’s Publishing House, 1983. 3 The Seventh Five-Year Planning for the National Economic and Social Development of the People’s Republic of China, 1986–1990, People’s Publishing House, 1986.

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1988, the strategy to develop the coastal economy was officially publicized as the national principle. The second important supportive measure was to gradually shift eastward the investment planning of the country. During the sixth FYP, China’s productive forces were generally distributed in a way to improve the economic benefits and the focus started to shift to the coastal area. In the national distribution of infrastructure investment, the proportion invested in the coastal area increased from 42.2% during the fifth FYP to 47.7% and that in the inland, decreased from 50 to 46.5%, while the investment in upgrading construction during the same period in the entire country weighed 51.5% in the coastal area and only 45.8% in the inland.4 By the early phase of the seventh FYP, China’s productive forces had further shifted to the coastal area. From 1985 to 1988, the distribution of infrastructure investment in the coastal area increased from 48.4 to 53.2%, but it decreased from 45.0 to 39.9% in the inland area, leading the ratio of coastal to inland investment to increase from 1.07:1 to 1.36:1. During the three-year rectification period, 1988–1990, the national investment increased its proportion in the inland to support the development of major industries such as energy and raw materials. In 1990, the infrastructure investment in the coastal area accounted for 50.9% out of the national total and 40.1% in the inland area, leading the coast-to-inland ratio to decrease to 1.27:1. However, during the entire seventh FYP, the coast-to-inland ratio of infrastructure investment was still as high as 1.29:1, much higher than that of the sixth FYP, 1.03:1 and far higher than that of the fifth, 0.84:1. The third important supportive measure was to advance the reform and openingup in gradient. At the Third Plenary Session of the 11th CCCPC, it was decided that China should take the major strategic principle to open up to the outside and to develop the economy on the inside. To accelerate the opening-up, in July, 1979, the CCCPC and the State Council officially approved special policies and flexible measures to be implemented in the Guangdong and Fujian provinces for economic activities involving parties overseas. Starting from 1980, five special economic zones, i.e., Shenzhen, Zhuhai, Shantou, Xiamen and Hainan, were established in turn in the coastal area, where special economic policies and a special management system were implemented. In 1984, China decided to further open up fourteen coastal harbor cities, including Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai, and allowed them to set up their own economic and technological development zones where policies similar to those of the special economic zones were implemented. Subsequently, China took turns to develop the Yangtze River Delta, the Zhujiang River Delta, the Minnan Delta of Xiamen, Zhangzhou and Quanzhou, the Liaodong Peninsula, and the Jiaodong Peninsula in coastal economic development zones and set up a Taiwan region investment zone in Fujian. In June, 1990, 4 The sum of investment in the coastal and inland areas is not 100% due to investment of unspecified

areas. The coastal area includes twelve provinces and cities of Liaoning, Hebei, Beijing, Tianjin, Shandong, Shanghai, Jiangsu, Zhejiang, Fujian, Guangdong, Guangxi and Hainan, and the inland includes the remaining provinces and cities. The same applies hereafter.

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the CCCPC and the State Council officially approved the development of Shanghai and the opening-up of the Pudong New Area, where some policy incentives in the special economic zones were implemented. Now an open zone stretching from the southern to the northern end of the coastal line was formed. Overall, China pushed advances in gradient in investment distribution, openingup, system reform and policy incentives in the beginning years of the reform and opening-up with the transition of both the economic development strategy and system, and encouraged the coastal area with favorable geographical and economic conditions to develop first. The implementation of this strategy greatly improved the investment environment in the coastal area and strongly pushed the coastal economy to develop quickly. In particular, the coastal area gradually developed into the major base for direct foreign investment, foreign trade and exportation based on its geographical advantages, economic conditions and the policy incentives granted by the government. From 1983 to 1991, the direct foreign investment and other investment in the coastal area accounted for 90.6% of the national total, and in 1994, the exports from the coastal area already accounted for 86.7% of the national total. Through sustained, high-speed development for more than a decade, the coastal area had become the most important force to drive the national economy to speed up in China and made important contributions to the improvement in China’s international competitiveness and the continuously narrowed gap between China and developed countries. From 1980 to 1992, the gross regional production (GRP) of the eastern area grew by 11.1% every year, which was higher than the mean growth of all areas by 1.3 percentage points, and by 2.2, 2.1 and 3.0 percentage points compared to the central, western and northeastern areas, respectively.5 However, during the double transition, regional gaps, particularly the gap between the east and the west, were also widened due to defects in the system and policies and the market force that played its due role. From 1980 to 1992, the difference in the per capita GRP of the eastern area relative to the central area grew quickly from 38.9 to 49.4%, while that between the east and the west grew from 44.7 to 51.0%, indicating increases in the gaps by 10.5 and 6.3 percentage points, respectively. When the absolute values are concerned, the widening gap between the east and the west is even more obvious. In fact, the increasing gap of the absolute values of the per capita GRP between the east and the west is quite evident even after the price increases are adjusted for. Meanwhile, China had long implemented the policy to “whip the fast cows” in old industry bases and ignored to update the technologies and upgrade the industrial structure of the preexisting enterprises, resulting in outdated technological equipment, aging structure of the industries and products, sustained depression in the industrial economic growth and lack of potential in future development in the old industrial bases. From 1979 to 1990, the emerging industrial zones in the coastal 5 The

eastern area includes ten provinces and municipalities of Hebei, Beijing, Tianjin, Shandong, Shanghai, Jiangsu, Zhejiang, Fujian, Guangdong and Hainan; the northeastern area includes three provinces of Liaoning, Jilin and Heilongjiang; the central area includes six provinces of Shanxi, Henan, Anhui, Hubei, Hunan and Jiangxi; and the western area includes twelve provinces, regions and municipality of Inner Mongolia, Guangxi, Shaanxi, Gansu, Ningxia, Qinghai, Xinjiang, Chongqing, Sichuan, Guizhou, Yunnan and Tibet Autonomous Region. The same applies hereafter.

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area largely had an annual growth rate above 12%, among which it was 16.4% in Zhejiang, 14.3% in Guangdong, 13.8% in Fujian, and 12.7% in Jiangsu while in contrast, it was only 6.6% in Shanghai, 6.4% in Liaoning, 7.0% in Tianjin and 5.8% in Heilongjiang, all of which were old industrial bases. In this period, the growth in the old industrial bases was only about one third to half as much as that of emerging industrial areas.

2 From Gradient Advance to Coordinated Regional Development In the 1990s, with the deepening reform and opening-up and the increasing national strength and faced with the widening regional gaps, especially the gap between the east and the west, the Chinese government officially raised the coordination between regional economic development to the level of important strategies and established the principle for coordinated regional development. During this period, the government sequentially opened up to the outside the cities along the Yangtze River and border cities and capitals in the inland, released the resolution to accelerate the TVEs in the central and western areas, and implemented the seven-year program to help 80 million people out of poverty, marking the transition in China’s regional development strategy from the early support to the development in the coastal area as the priority to the focus on coordination between regional development. However, due to lack of strong policy instruments and specific measures, the promotion of development coordination between regions was not much more than a guiding principle. As a result, the regional imbalance in China was further worsened, with an acutely widened gap between the east and the west. From 1990 to 1999, the relative difference in the per capita GRP between the eastern and central areas increased from 42.8 to 52.6% and that between the east and the west, from 46.4% quickly to 60.2%, representing increases by 9.8 and 13.8 percentage points, respectively. In this background, the Chinese government officially issued the “strategy of large-scale development of the west” in September, 1999, decided to “implement the strategy to revitalize the old industrial bases in the northeast” in October, 2003 and stated in January, 2004 to “promote the rise of the central area”, while at the same time proactively helping the old-minority-border-poor areas to speed up in development, which altogether marked the entry of China’s coordinated regional development strategy into the phase of full implementation. Overall, the Chinese government took the following policies and measures to promote coordination in regional development. First, the Chinese government pushed for the implementation of and improvement in the strategy of coordinating regional development. As early as March, 1991, the Chinese government first proposed in the eighth FYP to promote the coordinated development between all regions and said, “The reasonable planning of the productive forces and the coordinated development of regional economies are one of the issues in our country’s economic and social development that are of vital

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importance.”6 This shows that the Chinese government started to raise the coordination in regional development to the importance of national strategy. In the “Report on the Ten-Year Plan for the National Economic and Social Development and the Outline of the Eighth Five-Year Plan”, it was further specified to “promote regional economies to march forward in the direction of reasonable division of labor, full play of each role, advantages complementary to each other and coordinated development”.7 In September, 1995, the Fifth Plenary Session of the 14th CCCPC passed the “Suggestion by the CCCPC Regarding the Making of the Ninth Five-Year Plan for the National Economic and Social Development and the Prospective Goals for 2010”, in which it was specifically set as one of the major principles for the national economic and social development that must be implemented in the future to “persist with coordinated development of regional economies and gradually narrow the gaps between regional development”.8 In September, 1997, Jiang Zemin took special care to emphasize in the Party’s 15th National Congress Report to “promote the reasonable planning and coordinated development of regional economies” and to “close regional gaps by all means with multi-lateral efforts”.9 To fully promote the coordinated regional development, the Fourth Plenary Session of the 14th CCCPC officially stated to “implement the strategy of largescale development of the west” in September, 1999, and in October, 2000, the State Council released and distributed the “Notification on Several Policies and Measures Regarding the Implementation of the Strategy of Large-Scale Development of the West”, while pertinent agencies subsequently made and implemented a series of policies and measures to support the large-scale development of the west and increased capital input in the western area. In October, 2003, the CCCPC and the State Council, after their decision to implement the strategy to revitalize old industrial bases such as the northeastern area, jointly released the “Several Opinions on Implementing the Strategy to Revitalize the Old Industrial Bases including the Northeastern Area”, and the pertinent agencies made and implemented a series of policies and measures regarding investment, revenue and taxes, financing, State-owned enterprise (SOE) reform, social security trial sites, transition trial sites of resource cities, opening-up to the outside and infrastructure.10 In January, 2004, the working meeting of the Central Committee proposed to “promote the rise of the central area”, which resulted in the 6 Li,

Peng, “Report on the Ten-Year Planning for the National Economic and Social Development and the Outline of the Eighth Five-Year Plan”, Communiqué of the State Council of the People’s Republic of China, 1991, vol. 12. 7 “Report on the Ten-Year Planning for the National Economic and Social Development and the Outline of the Eighth Five-Year Plan”, Communiqué of the State Council of the People’s Republic of China, 1991, vol. 12. 8 “Suggestion by the CCCPC Regarding the Making of the Ninth Five-Year Plan for the National Economic and Social Development and the Prospective Goals for 2010”, People’s Forum, 1995, vol. 10. 9 Compilation of Files of the 15th National Congress of the Communist Party of China, People’s Publishing House, 1997, pp. 27–28. 10 Wang, Luolin & Wei, Houkai, “Major Policies and Measures to Revitalize Old Industrial Bases in the Northeast”, China Economic Times, July 18, 2005.

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“Several Opinions of the CCCPC and the State Council on Promoting the Rise of the Central Area”, released in April, 2006. Now an overall strategy with a complete plan for regional development was formed through these steps based on the development of the eastern area that had been encouraged to take off first in the economy since the reform and opening-up. It was then specifically stated in the planning outline of China’s 11th FYP to be “persistent with the overall strategy of regional development to advance the large-scale development of the west, revitalize the old industrial bases including the northeastern area, promote the rise of the central area and encourage the eastern area to develop first”.11 In the 12th FYP outline, it was further specified to implement the overall strategy of regional development and the strategy of functional zones, and in the 13th FYP, it was emphasized to “go deep with the overall strategy to develop the west, revitalize the northeast, bring the central area to rise and let the east develop first”.12 Then in the report of the Party’s 19th National Congress, it was stated to implement the strategy to coordinate regional development, and in the strategic framework, the overall strategy of regional development, support of development in the old-minority-border-poor areas, establishment of a scientific and reasonable urban pattern and facilitation of the integration of Beijing, Tianjin and Hebei and the development of the Yangtze River economic belt were all included. Second, an all-round opening-up policy was implemented. As early as November, 1988, the State Council already passed the “Minutes of the Discussion on Opening up the Xinjiang Uygur Autonomous Region”, which granted the Xinjiang Uygur Autonomous Region a series of policy incentives to expand the opening-up there. In April, 1991, the General Office of the State Council distributed the “Opinion on Proactively Developing the Border Trade and Economic Cooperation to Promote the Prosperity and Stability in the Border Areas” made by ministries including the Ministry of Foreign Economic Relations and Trade (now the Ministry of Commerce), and determined the principles and policy incentives for border trade. Since the southern talks by Deng Xiaoping in 1992, China has further consolidated the achievements of the opening-up in the coastal area, and based on that, taken steps to accelerate the opening-up in the central and western areas. A group of border port cities, cities along the Yangtze River and capitals in the inland area were opened up to the outside one by one, the Three Gorge Open Economic Zone was set up, and a series of functional zones were established in the central, western and northeastern areas including national economic and technological development zones, high-tech industrial development zones, economic-cooperation border zones, export processing zones, bonded (harbor) zones, national pilot zones with integrated and comprehensive reform, national new zones, national innovation demonstration zones and free trade pilot zones (Table 1). Foreign investing enterprises were encouraged to invest in the central, western, and northeastern areas, and support was given to border 11 “Outline of the Eleventh Five-Year Planning for the National Economic and Social Development of the People’s Republic of China”, Communiqué of the State Council of the People’s Republic of China, 2006, vol. 12. 12 “Outline of the Thirteenth Five-Year Planning for the National Economic and Social Development of the People’s Republic of China”, Communiqué of the State Council of the People’s Republic of China, 2016, vol. 7.

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Table 1 Distribution of major national economic functional zones (as of mid-2017) Zone type

National Northeast East West Central

National high-tech industrial development zones

156

16

67

35

38

National economic and technological development 219 zones

22

98

49

50

4

43

8

8

Export processing zones

63

Bonded zones

12

1

11

0

0

Comprehensive bonded zones

65

4

33

16

12

Bonded harbor zones

14

1

11

2

0

Economic-cooperation border zones

17

5

0

12

0

Pilot zones with integrated and comprehensive reform

12

2

5

2

3

National new zones

19

3

8

6

2

National innovation demonstration zones

17

1

9

3

4

Free trade pilot zones

11

1

5

3

2

Source Based on the data from the websites of pertinent government bodies

areas for expansion of opening-up. With all these efforts, a nation-wide opening-up structure was in place that integrated areas along the coastline, the border, the Yangtze River and transportation lines and that was multi-layered, multi-channeled and all round. In particular, since the multi-department program was initiated to bring prosperity to the border areas and wealth to the people by the State Nationalities Affairs Commission and others in 1999, relevant government bodies organized the preparation and implementation of three FYPs to facilitate the border areas to prosper and the people there to get rich, resulting in measures in multiple fronts to support the speedy development and opening-up in major areas along the borderline. Third, China adjusted the policy regarding State investment and industrial planning. To speed up the economic development in the central and western areas, China gradually shifted its investment scheme to focus on the central and western areas starting from the 1990s. During the implementation of the eighth FYP, the Chinese government required to give priority to the western area in programs of resource development and large- and medium-scale infrastructure and to improve the proportion of investment in the west. During the implementation of the ninth FYP, China further added to the investment in the major constructions in the central and western areas in order to accelerate the construction of energy and raw material projects there. Since the tenth FYP, the Chinese government has escalated its support to the large-scale development of the west, the revitalization of the northeast and the rise of the central area in order to help the implementation of the overall strategy of regional development. With the help of State investment, the proportion of the society-wide investment in fixed assets in the central and western areas grew rapidly. From 1995 to 2016, the east-to-west ratio of society-wide investment in fixed assets dropped from 1.87 to 0.80. Meanwhile, China took multi-lateral measures to actively push the

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industries along the coastal line to transfer to the central and western areas. As early as 1993, the State Council already issued the “Decision Regarding Accelerating the Development of Township and Village Enterprises in the Central and Western Areas”, and implemented the “Demonstration Project of Cooperation between Eastern and Western Township and Village Enterprises”, with a group of demonstration zones set up to demonstrate the cooperation between eastern and western TVEs. Starting from 1998, the Chinese government, taking the opportunity of the reformation in the textile industry to reduce the number of spindles, made plans to guide the initial cotton processing capacity in the coastal area and metropolitans to move to the central and western areas where cotton was produced, and issued policy and capital incentives to facilitate large and medium cities, including Beijing, Tianjin, Shanghai and Guangzhou, to move their spindles to Xinjiang. To help the central and western areas receive the transferred industries, the State Council approved the “Planning of the Demonstration Zone for in Wanjiang River Cities to Receive Transferred Industries” in January, 2010, and in August, issued “Guidance Opinions Regarding the Reception of Transferred Industries in the Central and Western Areas”. The National Development and Reform Commission subsequently set up a series of national demonstration zones for reception of transferred industries in Southern Hunan, Jingzhou of Hubei, Southern Jiangxi, Eastern Guangxi, the areas along the Yangtze River in Chongqing, the Yellow River delta of Shanxi, Shaanxi and Henan, Yinchuan-Shizui Mountain of Ningxia, the Lanbai Economic Zone in Gansu and Guang’an of Sichuan. Fourth, the Chinese government made active efforts to support the development in the old-minority-border-poor areas. The Chinese government never neglected the development in the old-minority-border-poor areas from the beginning of the reform and opening-up. Regarding the policies concerning the old revolutionary base areas, the central treasury set up a transfer payment mechanism for the old revolutionary bases to subsidize the series of districts and counties (cities, districts) that had made major contributions but had fiscal difficulties; the National Development and Reform Committee set up a designated fund within its State budget in 2005 to support the infrastructure in the major red tourism attractions. Since 2012, the State Council sequentially approved the “Plan to Revitalize the Old Revolutionary Bases in Shaanxi, Gansu and Ningxia”, the “Plan to Develop and Revitalize the Former Central Soviet Districts in Jiangxi, Fujian and Guangdong”, the “Plan for the Revitalization of the Old Revolutionary Bases of the Zuoyoujiang River”, the “Plan to Develop and Revitalize the Old Revolutionary Bases in Dabieshan Mountain”, and the “Plan to Develop and Revitalize the Old Revolutionary Bases in Sichuan and Shaanxi”, with corresponding policy supports. From 2001 to 2015, the central treasury transferred payments of a collective 41.2 billion RMB, among which the payment reached 7.8 billion RMB in 2015 alone. Regarding the policies in the ethnic minority areas, the central treasury set up a designated fund for development of ethnic minority groups in 1992, and in 2000, the mechanism of transfer payments to ethnic minority areas to support the development there. Starting from 2007, the State Council released opinions to promote the social and economic development in the Xinjiang Uygur Autonomous Region, Ningxia, Guangxi, Inner Mongolia, Tibet Autonomous Region

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and Qinghai to expand its support to the ethnic minority areas. Aside from the preexisting national one-to-one support to Autonomous Region, the Central Committee decided on a major strategic planning in 2010 to initiate national one-to-one support to the Tibetan area in Qinghai province and Xinjiang. Regarding policies in border areas, the central treasury set up the mechanism to transfer payments to border areas in 2001 to subsidize 250 counties and cities along the inland border and the coastal line. The central government also initiated programs to vitalize the border areas and help the people there to get rich with increased capital and policy investment, and a group of major projects were in place for the prosperity and wealth in the border areas. From 2001 to 2015, the central revenue transferred a cumulative total payment of 72.3 billion RMB to border areas, among which the payment was as high as 13.6 billion RMB in 2015 alone. As far as poverty-lifting policies, the State Council made and implemented the “National Seven-Year Program for Lifting 80 Million People out of Poverty” in April, 1994, in which it was planned to generally free the 80 million people in poverty in rural China from concerns of basic living needs over seven years. In October, 1996, the CCCPC and the State Council issued the Decision on Addressing the Basic Needs of People in Poverty in Rural Areas as Soon as Possible to call for a party-wide mobilization and a society-wide action to help those in poverty and to focus resources on addressing the basic needs of rural people in poverty. Then during the ninth FYP, it was proposed to eradicate poverty. In order to facilitate the poverty-lifting efforts, the Chinese government added to the funds for poverty lifting and by 1998, the central poverty-lifting fund had totaled to 18.3 billion RMB. After 2000, the Chinese government issued and implemented the Outline for DevelopmentOriented Poverty Alleviation for China’s Rural Areas (2001–2010) and Outline for Development-Oriented Poverty Alleviation for China’s Rural Areas (2011–2020) and further increased the support in funds and policies. In 2008 and 2011, the rural poverty line was raised twice. From 2013 to 2017, the cumulative amount of povertylifting funds allocated from the central treasury to subsidize local treasuries was 278.7 billion RMB, with an annual increase of 22.7%. By 2017, the total amount of central and regional designated poverty-lifting funds had exceeded 140 billion RMB, among which 86.1 billion RMB was from the central treasury to subsidize local treasuries for poverty alleviation. Fifth, China proactively pushed for national functional zones. Functional zones represent a unique feature and innovation of China. In the 11th FYP outline, it was specifically stated to “classify the national geographical space into four types of functional zones with development as the priority, development as the focus, development with limitations and development prohibited, based on the capacity of resources and environment, preexisting development density and development potential with comprehensive consideration of the future population distribution, economic structure, land use and urbanization layout in our country, to adjust and improve regional

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policies and performance assessment based on the zone function”.13 To speed up the progress of planning for and establishing functional zones, the State Council issued the Opinion on Compiling the Plans of National Functional Zones in July, 2007. In June, 2010, the “Planning for National Functional Zones” was reviewed and passed in principle at the State Council executive meeting, and the range and development goals, directions and principles of the four functional zones were all determined. In March, 2014, the National Development and Reform Committee and the Ministry of Environmental Protection (now Ministry of Ecology and Environment) jointly issued the “Notification of Well Completing the Demonstration Work of Pilot Functional Zones of the Country”, and it was decided to choose the national key eco-function zone as the focus and select some cities and counties to carry out the demonstration work for this functional zone. Meanwhile, the central treasury increased the extent of transfer payments and compensated for the people in exchange for the ecological protection in forests, grasslands, wetlands, waters and key eco-function zones. Since 2008, the central treasury has set up transfer payments to key eco-function zones and taken steps to include in the places eligible for subsidy the zones with development limitations and those with development prohibited defined in the “Planning for National Functional Zones”, the three-river origin in Qianghai and the water origin areas for the middle route of the south-to-north water diversion project. In 2017, 62.7 billion RMB of transfer payments made by the central treasury reached the key eco-function zones and a total of 819 counties and cities were subsidized, accounting for more than 50% of the national land area.

3 Achievements of China’s Coordinated Regional Development In the early 1990s, the Chinese government already published an overall guiding principle for promoting the coordination of regional development. Overall, however, the State investment layout and policy support were still mostly concentrated in the coastal area throughout the entire 1990s, and they only started to shift step by step to the central, western and northeastern areas after 1999 when the strategies of large-scale development of the west, revitalization of the old industrial bases including the northeast and promotion of the rise of the central area were implemented one by one. Now with the strong support of State policies, a relatively balanced growth pattern emerged between regional economies and the gap between the east and west in development stopped widening and began to narrow. Meanwhile, the poverty alleviation efforts in rural areas progressed steadily, and coordinated regional development achieved marked accomplishments. Of course, we cannot ignore that the poverty line in rural China is still low and the gaps between regions are still wide, 13 “Outline of the Eleventh Five-Year Planning for the National Economic and Social Development

of the People’s Republic of China”, Communiqué of the State Council of the People’s Republic of China, 2006, vol. 12.

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which altogether show that it is still challenging and there is a long way to go to realize the goal of complete coordination of regional development.

3.1 Relatively Balanced Growth Pattern of Regional Economies After the reform and opening-up, the regional economies in China had always grown fast in the east, but disproportionally slowly in the central and western areas. From 1980 to 2006, the annual GRP growth rate in the eastern area was 12.1%, but only 9.2% in the northeast, 10.3% in the central area and 9.9% in the west. The growth in the east was higher than that of the northeast, central area and the west by 2.9, 1.8 and 2.2 percentage points, respectively (Table 2). In these 27 years, the east showed the highest growth in 21 years, but the northeast, central area and the west ranked the highest for only 2, 3 and 1 years, respectively. In the subsequent years when the strategies of the large-scale development of the west, revitalization of the old industrial bases including the northeast and promotion of the rise of the central area were implemented one by one, and with the strong support of state policies, the economic growth in the central and western areas finally sped up and there emerged a relatively balanced growth pattern where the eastern growth was relatively slow while the growth in the central and western areas was relatively fast. From 2007 to 2012, the annual growth rate of GRP in the east was 11.5%, and it was 12.8% in the northeast, 12.7% in the central area and 13.7% in the west, all of which were higher than that in the east. During these six years, the west had the highest growth rate for 5 years and the northeast, 1 year (2008). This shows that the regional economies in China have become relatively balanced in growth instead of the previous imbalance. This relatively balanced growth is not equal growth, but an accelerated growth rate in Table 2 Changes in the GRP growth rates of all regions after reform and opening-up (%) All-region mean

Eastern

1980–2006

10.9

12.1

Northeastern 9.2

Central 10.3

Western 9.9

2007–2012

12.2

11.5

12.8

12.7

13.7

2013–2016

8.3

8.2

5.3

8.7

9.1

1980–2016

10.9

11.6

9.4

10.5

10.4

Note The GRP growth rates of the four regions were based on the actual the GRP values and their actual growth rates of all relevant provinces, autonomous regions and municipalities Source of data Regional Economies in China during the 17 Years of reform and opening-up, Statistical Year Book of China (of all years) and Key Statistical Data in China 2017, compiled by the National Bureau of Statistics

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the areas with less development that has exceeded the growth rate in more advanced regions.14 However, in the recent macroscopic background of the national economic growth slowing down and the severely excessive capacity of industrial production, the economic growth in the northeast was trapped in difficulties once again due to many reasons, and showed a low growth rate. From 2013 to 2016, the mean annual GRP growth rate of all the 31 provinces, autonomous regions and municipalities in China was 8.3%, among which it was 8.2% in the east, 8.7% in the central area, and 9.1% in the west, but it was only 5.3% in the northeast, the lowest among all the four regions. In particular, the GRP of the northeast in 2014 grew only by 5.9%, 4.5% in 2015, and further down to 2.5% in 2016, showing apparent depression in growth. During the same period, however, the growth rates in the central and western areas were still higher than that of the east, rendering a relatively balanced pattern of regional economic growth.

3.2 Formerly Concentrated Industrial Distribution Became Dispersed The change in the growth pattern of regional economies led to spread and dispersion of the industries that had been concentrated in the east to the central and western areas in China. For a rather long period of time after the reform and opening-up, the regional economies in China did not grow in a balanced way and the economic activities in the entire nation kept clustering to the eastern area. From 1980 to 2006, the GRP of the east accounted for growing proportions of the total GRP of all regions in China, from 43.6 to 55.7%, which was an increase of 12.1 percentage points. At the same time, the proportion of the northeast declined from 13.7 to 8.5%, that of the central area, from 22.3 to 18.7%, and that of the west, from 20.4 to 17.1%, representing reductions of 5.2, 3.6 and 3.3 percentage points, respectively (Fig. 1). A study showed that during the period of 1985–2003, manufacturing industries such as steel, petrochemistry, electronic communication and textile all clustered in the east except for tabacco.15 These data show that economic and manufacturing activities in China gradually travelled to and clustered in the eastern area under the impact of the market after the reform and opening-up. Such a clustering trend resulted from the transition of China’s economy to a market system, and it was mostly manifested as the concentration of 14 The pooled GRP data of regions across China cannot be compared with the national GDP data released by the National Bureau of Statistics. Therefore, when comparing the GRP growth rates of regions, one cannot draw a direct comparison between the regional GRP growth rates with the national GDP growth rate, but should instead use the pooled GRP growth rates of all regions. A detailed discussion on this is given in Wei, Hougai, “Analysis of Differences between GRP and GDP growth rates in China”, Academic Journal of Zhongzhou, 2009, vol. 2. 15 Wang, Yeqiang & Wei, Houkai, “Temporal and Spatial Analysis of the Geographical Concentration of Industries: 28 Two-Digit Manufacturing Industries in China as Examples”, Statistical Research, 2006, vol. 6.

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Fig. 1 Proportions of regional GRN of the national total, 1980–2016. Source Calculated based on the data from Regional Economies in China during the 17 Years of Reform and Opening-up, Statistical Year Book of China (of all years) and Key Statistical Data in China 2017, compiled by the National Bureau of Statistics

various productive factors and industries, especially the manufacturing industry, in the eastern area. To some extent, such a concentration was beneficial to improving the overall efficiency of resource allocation, but it also widened the gap between regional economies and was thus unfavorable to coordination of regional development. After 2000, enterprises in the coastal area began to take faster steps to move to the central and, in particular, western areas with changes in the development stage and State policies regarding regional development. Let us take Jiangxi as an example. In 2001, investment in Jiangxi from Guangdong, Fujian, Jiangsu, Zhejiang provinces and Shanghai was 13.939 billion RMB, and it reached 142.606 billion in 2010, with an average annual increase of 29%. Another example of dispersion of economic activities is the rapid increases in the scale of investment in the central and western areas made by merchants in Zhejiang province. According to the data jointly published by the Office of Economic Cooperation of the Zhejiang Provincial Government and the Editorial Office of the magazine, Zhejiang Merchants, in 2006, Zhejiang enterprises had investment of more than 1.3 trillion RMB in all regions, among which the investment in the central, western and northeastern areas exceeded 275.2, 299.0 and 93.0 billion RMB, respectively, accounting for 20.9%, 22.7% and 7.0%, respectively, of the extra-provincial investment made by Zhejiang merchants.16 A survey in 2010 showed that more than 6.4 million people from Zhejiang had invested to start business in places other than Zhejiang, created 264 thousand enterprises, and invested more than 3.89 trillion RMB, which was 6.3 times more than the amount in the 2005 survey. The most of Zhejiang merchants were in the western area and 16 Shen,

Haixiong & Hu, Zuohua, “Decoding the Distribution of Investment Made by Zhejiang Merchants”, Economic Information Daily, June 12, 2006.

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they numbered 1.90 million, with the biggest number, 630 thousand, of enterprises created by them, followed by the central area with 1.10 million Zhejiang merchants and 610 thousand enterprises created by them.17 As shown in Fig. 1, the eastern GRP has a gradually decreasing proportion of the national total starting from 2006 while the proportions of the central and western areas steadily go up. In 2013, the proportion of the eastern GRP of the national total already declined to 51.2%, 4.5 percentage points fewer compared to 2006, while those of the central and western areas increased to 20.2% and 20.0%, respectively, with increases of 1.5 and 2.9 percentage points, respectively. The proportion of the northeastern GRP fluctuated between 8.5 and 8.8%. These demonstrate that the national economic and manufacturing activities kept spreading and moving to the central and western areas with the increasingly rapid economic growth in these areas. It is noteworthy to point out that the recent slowing down of the national economic growth has led to marked differences in the slowing-down of the economic growth in different regions. The economic growth in the northeast fell by a big scale and its GRP proportion of the national total dropped acutely, from 8.6% in 2013 to 6.8% in 2016, a reduction of 1.8 percentage points, while during the same period, the eastern share increased by 1.1 percentage points and the central and western, 0.4 and 0.3 percentage points, respectively.

3.3 The Ever-Widening Gap Between the East and the West Narrowed For quite a long time after the reform and opening-up, the gap between the eastern and western development kept widening with the unbalanced regional economic growth as the economic activities across the country clustered in the east. Although the gap did not start to widen after the reform and opening-up, the policies that favored the east and foreign investment and exportation highly concentrated in a few places in the east after 1978, together with the transition of China’s economy towards a market system, all gave a strong push to it. From 1980 to 2003, the relative per capita GRP only grew consistently in the east, but showed a declining trend in all the other three regions. During this period, the relative per capita GRP (based on the mean of all areas as 100) in the east increased from 128.7 to 159.8, but it declined from 150.8 to 109.3 in the northeast, from 78.6 to 65.7 in the central area and from 71.2 to 59.2 in the west. After 2004, things changed fundamentally as the relative per capita GRP in the east began to decrease while those in the central and western areas kept climbing up. By 2014, the relative per capita GRP in the east had declined to 133.6 while those in the central and western areas increased to 76.1 and 74.6, respectively. Meanwhile, the relative per capita GRP in the northeast also kept increasing from 2006 to 2012, from 101.9 to 107.5. However, with the accelerating transition and 17 Xu,

Yiping, “Nearly 4 Trillion Yuan of “Capital of Zhejiang Descent” Rages Outside Zhejiang”, East Morning Post, January 5, 2011, p. A20.

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upgrade of the economy in the east and the slumpy economic growth in the northeast in recent years, remarkable changes occurred again as the relative per capita GRP in the east increased by a large scale and that in the northeast plummeted down acutely, reaching 85.7 in 2016, far lower than the national average level. During the same period, the relative per capita GRP in the central area maintained small increases in growth, but that in the west showed small scales of fluctuation. It is noteworthy to add that the increases in the relative per capita GRP in the central and western areas in recent years were not only due to the increasingly rapid economic growth in these areas. Another important reason is the change in statistical management of demographic characteristics with the impact of population migration. Previously, the population information in each region had been collected against the Household Registration (Hukou) data in China, but in 2005, population migration and the migrant population were taken into consideration during the 1% sampling of demographic survey in each region, and the resident population was used for statistical analysis. Thus from 2005 to 2015, the resident population in the east accounted for an increased proportion of the national population, from 36.1 to 38.3%, and among all places in the east, Guangdong province, Shanghai, Beijing, Tianjin and Zhejiang province all had large scales of increases in their proportions. Meanwhile, the proportion of residents in the northeast of the national population decreased from 8.4 to 8.0%, and from 27.4 to 26.6% and from 28.0 to 27.1% in the central and western areas, respectively. Among the places in these areas, Henan, Sichuan, Anhui, Guizhou, Hubei and Heilongjiang provinces all had large scales of decreases in their proportions. These data showed that people were moving from the central, western and northeastern areas to the east in recent years. In summary, the gap in the relative per capita GRP between the east and the central and western areas stopped widening and began to close bit by bit, and 2003 was an important turning point, showing an inverted U-shaped change as depicted clearly in Fig. 2.18 Before 2003, the difference in the relative per capita GRP between the east and the centrowestern area kept enlarging except for a few years. From 1980 to 2003, the coefficient of the relative per capita GRP between the east and the west increased from 44.7 to 63.0%, while that between the east and the central area increased from 38.9 to 58.9%, representing increases of 18.7 and 20.0 percentage points, respectively. During this period, the coefficient of variation (CV) of the relative per capita GRP among the four regions showed multiple fluctuations, but the overall trend showed increases, which were 0.334 in 1985 and 0.465 in 2003.19 The widening of the east–west gap was more evidently shown in four periods of 1986–1989, 1991–1994, 1997–1999 and 2002–2003. After 2004, the coefficient of their relative differences started to decline year by year despite the increasing increases in the absolute value of the differences in the relative per capita GRP between the east and centrowest. By 18 The “inverted U-shaped” change of the regional differences in China was elaborated on in Zhang,

Yan & Wei, Houkai, “Analysis on the U-Shaped Transition and Stability in China’s Coordinated Regional Development”, Jianghai Academic Journal, 2012, vol. 2. 19 Coefficient of variation (CV), the ratio of standard deviation to mean, is an important indicator for regional differences. The larger the CV, the greater the differences between the regions.

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Fig. 2 Changes in the relative differences of the per capita GRP in the four regions in China, 1980–2016. Source Calculated based on the data from Regional Economies in China during the 17 Years of Reform and Opening-up, Statistical Year Book of China (of all years) and Key Statistical Data in China 2017, compiled by the National Bureau of Statistics

2014, the CV of the relative differences between the east and west had declined to 44.1%, while that between the east and the central area, 43.0%. The CV of the per capita GRP in the four regions declined to 0.287. Of a special note, the difference coefficients of 2001–2008 were revised based on the data of the economic census, and were larger than before the revision. The revision led to a marked increase in the 2001 coefficient compared to the year before,20 but it did not affect the trend in changes. Second, the gap between the east and the west in China had been widening since the 1960s, even during the construction of the three frontlines. It is fair to say that the widening of the gap between the east and the west after the Reform and Opening-up was a continuation of the historical trend. After 2015, the gap between the east and the centrowest, especially that between the east and the west in the per capita GRP started to widen slightly again, and it was expected to be a transient fluctuation and would not alter the long-term narrowing trend in the gap. However, the transient fluctuation should not escape our attention and deserve close attention in the regulation and control policies.

20 Before

revision based on the economic census data, the coefficients of variance of the per capita GRP of the four regions in 2001 through 2004 were 0.431, 0.440, 0.451 and 0.446, respectively, while after the revision, the coefficients of variance increased to 0.450, 0.457, 0.465 and 0.456, respectively.

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3.4 Great Achievements in Rural Poverty Alleviation The Chinese government always paid close attention to alleviating people from poverty in rural areas after the reform and opening-up, and invested large amounts of human, material and money resources every year to help people get rid of poverty and become rich and to facilitate the socioeconomic development in impoverished areas. After 40 years of sustained efforts, the poverty-alleviation development in rural China presented world-renowned achievements. By the poverty standard in 2010 (2300 RMB per person per year, based on the constant prices in 2010), the population in poverty in rural China was 770.39 million in 1978, and reduced to 30.46 million in 2017, with the poverty headcount ratio decreased from 97.5 to 3.1%. During this period, the population in poverty in rural China decreased by 739.93 million, which translates into an average annual reduction of 18.97 million. Among the 31 provinces, autonomous regions and municipalities in China, poverty has been fundamentally eradicated in Beijing, Tianjin, Shanghai, Jiangsu, Zhejiang, Fujian and Guangdong, with their poverty headcount ratios all below 0.5%. The significant achievements in eliminating poverty in China have made great contributions to the world cause of poverty elimination. Studies have shown that the global population in poverty reduced by 1.1 billion between 1981 and 2012, according to the poverty standard of 1.9 USD per day based on the purchasing power parity (PPP) in 2011, and the population in poverty in China reduced by 790 million during the same period, accounting for 71.82% of the global reduction.21 Meanwhile, with the poverty alleviation and development going deep, the socioeconomic development in impoverished areas kept accelerating, narrowing their gaps in development with other regions. From 2013 to 2017, the per capita disposable income of rural residents in impoverished areas increased from 6079 to 9377 RMB, representing a nominal annual growth by 12.4% and a real growth by 10.4% after prices were adjusted for. This real growth rate was higher than the average rural growth rate by 2.5 percentage points. During this period, the per capita disposable income of rural residents in impoverished areas accounted for a growing proportion of the national average of rural areas, from 64 to 70% (Table 3). It is of utter clearance that overall poverty of an entire region must be rooted out across the country and all that live below the current poverty line must be lifted out of poverty if common prosperity is to be realized. At the fifth Plenary Session of the 18th CCCPC, it was specifically stated to “lift all those living under the current poverty standard out of poverty, remove the label of poverty from all counties with the label, and resolve the issue of overall poverty of an entire region” by the end of 2020. With the poverty-alleviation drive now in the sprint finish, the povertylifting effect by economic development will start to diminish, and the difficulty in lifting the poor out of poverty will rocket up. In particular, most of those in poverty in rural areas live in mountainous and remote places with harsh nature, extremely inconvenient transport and frequent natural disasters, and the situation is even more 21 Li, Peilin & Wei, Houkai, Report on China’s Poverty-Alleviation and Development (2016), Social Sciences Academic Press, 2016, pp. 54–55.

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Table 3 Income increases of rural residents in impoverished regions Year

National mean Income, RMB

Impoverished regions Nominal growth, %

Income, RMB

Nominal growth, %

Impoverished regions/national mean

2013

9430

12.4

6079

16.6

0.64

2014

10,489

11.2

6852

12.7

0.65

2015

11,422

8.9

7653

11.7

0.67

2016

12,363

8.2

8452

10.4

0.68

2017

13,432

8.6

9377

10.5

0.70

Source Results were registered and calculated based on the data of the National Bureau of Statistics

so in the minority and border areas in the central and western parts of China. In 2017, there were still 11.12 million people in poverty in central rural areas, with the poverty headcount ratio of 3.4%. In the west, 16.34 million people lived in poverty and the poverty headcount ratio was 5.6%.22 In the five provinces and autonomous regions of Guizhou, Yunnan, the Tibet Autonomous Region, Gansu and the Xinjiang Uygur Autonomous Region, the poverty headcount ratios were above 7%. In addition, some areas were faced with double challenges of ecological protection and development acceleration. All these show that it will continue to be arduous and difficult to lift people out of poverty in rural China in the future. The two biggest challenges before the end of 2020 are to remove the label of poverty from the counties in deep poverty and to lift all people out of poverty in extremely poor places. There are now 592 counties that are the focus of the national efforts of poverty alleviation, and 680 districts and counties that are clustered and connected and have special difficulties, which represent a total of 832 counties in poverty after the overlapping ones are accounted for. The label of poverty needs to be removed from these 832 counties in time. On top of label removal, there is another arduous task to lift the places in extreme poverty out of it. In 2016, the population in poverty in the “three regions and three prefectures” accounted for 8.2% of the total population in poverty in the entire country, with a poverty headcount ratio of 16.69%, 3.7 times the national average.23

22 Data

were based on the classification of the three economic zones of the east, central area and west. Refer to Wei, Houkai & Huang, Bingxin, Analysis and Prediction of the Economic Pattern in Rural China (2017–2018), Social Sciences Academic Press, 2017, p. 48. 23 The “three regions” are Tibet Autonomous Region, the region of the zang people in the four provinces [Qinghai, Sichuan, Yunnan and Gansu] and four areas/prefectures in southern Xinjiang. The “three prefectures” are the Liangshan Prefecture in Sichuan, Nujiang Prefecture in Yunnan and Linxia Prefecture in Gansu.

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4 Taking the Path with Chinese Characteristics to Coordinated Regional Development After the reform and opening-up, China carefully learned and summarized the experiences and lessons of its own and of other countries around the world, and based on these experiences and lessons, decided not to copy and paste any mode of any country, but instead adapted to its own national conditions and took a gradient approach to successfully switch the strategy from the early unbalanced to the subsequent coordinated regional development. This strategic transition, from unbalanced to coordinated regional development, achieved significant effects although it came along through a prolonged historical course. The transition ensured the high-speed growth and prosperity of the Chinese economy for as long as 40 years and promoted the common development of all regional economies, with the reginal gaps narrowed in all aspects. It’s fair to say that through prolonged and persistent efforts, China has found a path with Chinese characteristics to coordinated regional development. At the core of this a path with Chinese characteristics to coordinated regional development are diversity and gradualism. The path has three basic characteristics. The first is the top-down design for the regional development. The two concepts by Deng Xiaoping, that “those who get rich first shall propel others to get rich next to eventually realize common prosperity” and “the two general interests”, provided the direction and top-down design for the regional economic development in China. These two concepts in nature represented the idea of non-equalized coordinated development, which broke the traditional framework of balanced versus unbalanced development. The second characteristic is the strategy of multi-layered regional development. The coordination of regional development was advanced in joint efforts from multiple layers, including the overall regional-development strategy of the large-scale development of the west, the revitalization of the northeast, the rise of the central area and the east as the priority, the integration of Beijing, Tianjin and Hebei, the development of the Yangtze River economic belt, the three great strategies of the “Road and Belt”, and the strategy of functional zones and the strategy of land development with multiple centers in a network. The third characteristic is to make differential regional policies with customized management. Differential regional policies were implemented with differential management for different economic zones, functional zones and special-type zones, which embodies the principle of differential management and guidance and helps maximize the policy effects.

4.1 The Path with Chinese Characteristics to Coordinated Regional Development As early as 1978, Deng Xiaoping already targeted the wide-spread concept of balanced development and the “great pot” (daguofan) situation prior to the reform and opening-up and clearly stated the famous idea that “those who get rich first shall

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propel others to get rich next to eventually realize common prosperity”. In the late 1980s, Deng Xiaoping further specified the strategic concept of the “two general interests”: One general interest is that the coastal area in the east should make full use of its favorable geographical conditions to speed up opening-up and to develop first. The central and western areas should serve this general interest. The other general interest is that more resources should be invested when we have developed to a certain degree, say, at the end of the twentieth century when the country is in common prosperity, to help the central and western areas to speed up in development, and the east should serve this general interest.24 The strategic concept of the “two general interests” by Deng Xiaoping further deepened and concreted the idea that “those who get rich first shall propel others to get rich next to eventually realize common prosperity”. After the reform and opening-up, the regional development in China was indeed pushed forward according to the concept of Deng Xiaoping. Before 1990, the Chinese government focused its resources in the eastern area with favorable conditions to help the development there first. In 1991, the overall principle of coordinated regional development was proposed, but no concrete and effective policies or measures were made. After 1999, the Chinese government took turns to implement the strategies of the large-scale development of the west, revitalization of the old industrial bases including the northeast and facilitation of the rise of the central area, and added to its support in the poor, old revolutionary, minority and border areas. The widening gaps that had long evolved in different regions in China, especially between the east and the west, were contained and a transition to coordinated development began. It’s fair to say that the concepts that “those who get rich first shall propel others to get rich next to eventually realize common prosperity” and the “two general interests” are not only the important theoretical foundation of the path with Chinese characteristics to coordinated regional development, but also its top-down design. From the perspective of regional development, these two concepts aimed to realize the long-term goal of “common prosperity” of all regions by “allowing some to get rich first and then the others subsequently” in a gradient or non-equalized growth mode. As put by Deng Xiaoping, “to build socialism it is necessary to develop the productive forces. Poverty is not socialism.”25 “If the rich keep getting richer and the poor poorer, polarization will emerge. The socialist system must and can avoid polarization.”26 Therefore, from those getting rich first and those subsequently to common prosperity, or from gradient advance to coordinated development, there existed a concept of nonequalized coordinated development. The non-equalized coordinated development here is to realize the long-term goal of coordinated regional development through non-equalized growth. 24 The strategic concept of the “two general interests” were first clearly made by Deng Xiaoping in September, 1988 when he was briefed on the price and salary reform plans, which was later called the “view of the two general interests”. 25 Research Office of the Secretariat of the Central Committee of CPC & Central Archives, Always Reform, Open up and Boost up: Selected Excerpts of Important Documents since the Third Plenary Session of the 11th CCCPC, People’s Publishing House, 1987, p. 411. 26 Selected Works of Deng Xiaoping, vol. 3, People’s Publishing House, 1993, p. 374.

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Apparently, people kept understanding the concept of coordinated reginal development in greater depth with changing ideas of development. Initially, people mostly approached the idea of coordinated regional development from the perspective of balanced development or spatial equalization. Balanced planning, balanced growth and narrowing gaps between regional economies, especially a narrowing gap between per capita GRP values, were once the focus of the academics and government bodies. However, a simple perspective of production or output like this had great limitations. After all, in a market economy, economic production and industrial activities are in nature uneven in spatial distribution. In light of this reason, people then gradually widened their minds to include the fronts such as social development, ecological environment and all-round development of people, and the focus shifted to narrowing gaps in resident income, consumption level, public services and quality of life. Now the regional development in China has entered a stage of high-quality development. Under the new principle of people-oriented development, coordinated regional development is no longer simply coordination in economic development or pursuit of a narrowing gap in economic development, but the comprehensive coordination in development of the entire economy and the society, sustained coordinated development with the current and long-term interests both covered and economic development and ecological protection integrated organically. Therefore, aside from the coordination of economic development previously focused on, the focus should also include the coordinated development of social cultures, the quality and sustainability of the development and the all-round development of people. Therefore, under the new circumstances, the criteria for coordination of regional development should not be based just on a single indicator such as economic growth or resident incomes, but on the rich connotation of coordinated regional development to include economic, social and ecological indicators for comprehensive assessment. This transition in people’s understanding of coordinated regional development has promoted the transition from single indicators to complex indicators as criteria. These criteria include the following27 : One, the advantages of each region are employed to the fullest and an industrial structure with reasonable division of labor and unique characteristics is in place; two, each region has gradually formed a pattern with tight integration of economic development and ecological protection and harmony between humans and nature; three, the gap in the per capital resident income between regions keeps closing and is maintained within a reasonable range that is generally acceptable to people; four, people in all regions may enjoy equal public services and the quality of life of equivalent value; and five, the coordination in the development of population, economy, resource and environment of all regions should be maintained. On the one hand, the geographical distribution of population should be coordinated with the economic distribution to promote the synergistic clustering of population and industries, and on the other hand, the regional population, economy, resources and environment should be coordinated to ensure that the regional population and economic distribution are accommodated by the resource and environment capacity. 27 Wei, Houkai, et al., Study on the Coordinated Regional Development in China, China Social Sciences Press, 2012, pp. 20–22.

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Overall assessed from a large region, there should maintain a moderate spatial balance in the national economy to avoid over-clustering and excessively sparse distribution so that no areas decline or are marginalized. Among all these criteria, a closing gap between regional incomes and the equivalent access to basic public services are the most essential.

4.2 Establishing a Multi-layered Strategy Framework for Regional Development After the reform and opening-up, in order to promote the coordination of regional development, China made and implemented regional development strategies one by one with each targeted at the real conditions of a region. The strategies were based on the “four great plates” as geographical units with unique focuses in each unit. These strategies constitute the overall regional development strategy that includes development of the west, the revitalization of the northeast, the rise of the central area and the east as the priority. The effective implementation and continuous improvement of the overall strategy of regional development strongly promoted the formation of the pattern of coordinated regional development. Based on the overall strategy of regional development, China then pushed for the implementation of the “three great strategies” in recent years of the integration of Beijing, Tianjin and Hebei, the development of the Yangtze River economic belt, and the “Belt and Road” Initiative, resulting in the development strategy framework of “three great strategies and four great plates”. In this framework, the “four great plates” cover the entire land and constitute the foundation of the strategy framework of regional development, and they thus comprehensively manage and plan the development of all regions in China at the national strategic level. In contrast, the “three great strategies” are from the perspective of global and national governance, centered on the humanity with a common future and focused on the cooperation and coordinated development domestically and overseas, and they thus play the role as a guidance, support and bridge. Implementation of the integrated “four great plates” and “three big strategies” was a major action to realize the Chinese dream of common prosperity and the great revitalization of the Chinese nation, as well as a must to realize sustainable, full coordination of regional development. First, integration of the “four great plates” and the “three great strategies” has an additive effect. The “four great plates” and the “three great strategies” cover different ranges and types of regional development. In the spatial coverage, the “four great plates” cover regions and zones, while the “three great strategies” differ significantly in spatial coverage as Beijing, Tianjin and Hebei are in the east, the Yangtze River economic belt runs through the eastern, central and western areas, and the “Belt and Road” Initiative links the continents of Asia, Europe and Africa. In terms of the strategy type, the “four great plates” cover the entire land of China and aim to coordinate the eastern, central and western areas as well as the north and the

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south, and they thus constitute a full-coverage development strategy framework; in contrast, the “three great strategies” focus on breaking the blockade between regions, establishing and strengthening the regional and international connections and establishing economic support based on axes and belts (metropolitan groups), and they thus constitute an axis-belt framework of development strategies. Coordinated advance of the “three great strategies” and the “four great plates” may ferment the additive effect of strategies of multiple layers and types, push for the multi-centered, network development pattern with individual points, lines and planes all connected and efficiency and fairness integrated, fully stimulate the energy for development in all regions and cultivate new energy for development. Second, integration of the “four great plates” and the “three great strategies” has a synergistic effect. Now there are still relatively large gaps in development between the “four great plates”, and the gap in the development levels between the east and the west has not been closed completely, while the difference between the north and the south is emerging with increasing intra-plate spatial differences. The full coordination of reginal development is still challenging in the new situations. In this background, it will facilitate all regions to complement each other with their respective advantages and to have reasonable division of labor among themselves if coordinated progress is made in the development of the “three great strategies” and the “four great plates” based on the overall strategy of regional development and led by the “three great strategies” to build a system with columns and rows of economic belts centered on the economic zones along the coastal line, the Yangtze River and transportation lines. This will also accelerate the integration of regional economies and bring the synergistic effects on regional development such that one plus one is greater than two. This synergistic effect of regional development is turned on through intra- and inter-regional sharing of resources, division of labor and collaboration, and coordinated actions. It is not only manifested on the division and collaboration of industries or economic integration, but on the coordinated development of the society and the coordinated management of the ecological environment as well. Third, integration of the “four great plates” and the “three great strategies” has an integrating effect. In the past, the “four great plates” were separate from each other and the large-scale development of the west, the revitalization of the northeast, and the rise of the central area were more or less independent of each other. There lacked a strategic channel to link them all. The Yangtze River economic belt covers 11 provinces and municipalities from the east to the west, the “Belt and Road” Initiative connects China with the rest of Asia, Europe and Africa, covering all of China, and the Beijing-Tianjin-Hebei region sits at the hub of the “four great plates”. Therefore, if the “three great strategies” are implemented based on the overall strategy of reginal development, the “four great plates” will be connected to each other as well as to other countries, which will then promote domestic and international factor flow, strengthen economic, scientific and cultural collaborations, and push for integration and interaction of socioeconomic development, so that cost will be lowered, efficiency improved and innovation stimulated. This integrating effect is the vital foundation for promoting the integration of regions.

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In summary, integration of the “four great plates” and the “three great strategies” has multiple effects. It will stimulate the intrinsic energy of regional development, promote a group of new growth spurts, growth poles and economic axes and belts, and thus expand the space for new economic development and improve the potential economic growth rate of the Chinese economy. Based on the “four great plates” and the “three great strategies”, it was clearly stated in the report of the Party’s 19th National Congress to implement the strategy of coordinated regional development with more tasks included such as support to speed up the development of old revolutionary districts, regions of ethnic minorities, border areas and impoverished areas, support the transition of resource cities, establishing a coordinated urban layout with coordination between large, medium and small cities and small towns centered on metropolitan groups, and persistence in coordinating territorial seas and lands. In January, 2017, the State Council approved the National Land Use Planning (2016–2030), in which it was specified that a new development pattern of spatial land use in a network with multiple centers and with “four columns and four rows” as the frame. The “four columns” are four longitudinal pathways along the coastline, including the Beijing/Haerbin–Beijing/Guangzhou, Beijing/Kowloon, and Baotou/Kunming railways, while the “four rows” are the four horizontal pathways including the Lanzhou/Lianyungang–Lanzhou/Urumchi railway, the Yangtze River economic belt, and the Shanghai/Kunming and Beijing/Lanzhou railways. Apparently, this multi-centered, network pattern of spatial land development will give a strong push for the moderate spatial balance in the Chinese economy and the full coordination between regional development, which will lay a solid foundation for high-quality development.

4.3 Differential Regional Policies with Customized Management China has a vast land with substantial regional differences and natural conditions and economic societies differ from place to place. If these differences are ignored and unified or the so-called “one-cut” measures are taken, no policy, be it macroeconomic regulation and control at the State level or regional policy-making, will have much effect no matter how good it may look. To avoid the “one-cut” situation and to truly improve the effectiveness, precision and sustainability of policies, China gradually explored and established differential regional policies with customized management based on economic zones, functional zones and special-type zones. These differential regional policies embody the principle of differential management and customized guidance and are beneficial to the effectiveness of policies. One type of the differential policies are those for economic zones. After the reform and opening-up, China set up a large number of economic zones of several types to promote further opening-up and to deepen reform. These include special economic zones, the open economic zones along the coastline, economic and technological

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development zones, Taiwan investment zone, export processing zones and high-tech industrial development zones in the early years, and the subsequent economic cooperation border zones, bonded (harbor) zones, new areas, pilot zones with integrated and comprehensive reform, independent innovation demonstration zones and pilot zones of free trade. China defined specific functions for all these zones and based on the functions offered corresponding policy incentives to support the speedy opening-up and development of these zones to deepen the Reform in all fronts. The second type comprises the regulation and control policies for functional zones. Starting in 2005, the Chinese government proactively pushed for the planning and establishment of functional zones. In December, 2010, the State Council issued and implemented the Planning for National Functional Zones and classified the land of the country into four types of functional zones of development as the priority, development as the focus, development with limitations and development prohibited to define the order of spatial development, optimize the spatial structure and promote the harmonious development of humans and nature. For the functional zones of each type, the Chinese government specified their functions and direction of development and made local policies with differential management in finance, investment, industries, land, agriculture, population, ethnic groups and environment, together with differential criteria for testing and assessment. The goal was to push for a spatial development pattern consistent with the population, economy, resources and environment. The third type includes subsidy policies for special-type zones. International experiences have shown that the regional policies in most countries are targeted at specific problems in each type of regions and the problems include under-development, economic depression and inflation regions.28 Among these three types, the problems that need to be addressed are the “under-development disease” in regions with economic under-development, the “depression disease” in regions with economies in depression and the “inflation disease” in regions with inflation. China took a series of relief policies in old-minority-border-poor areas after the reform and opening-up to help speed up the socioeconomic development there. In the outline of the 13th FYP of China, the old revolutionary districts, regions of minority ethnic groups, border areas and places with difficulties were collectively called “special-type regions” and it was specified to “support the development in the special-type regions”. In the report at the Party’s 19th National Congress, it was stated to “raise the level of support to speed up the development in old revolutionary districts, regions of minority ethnic groups, border areas and impoverished places” and “support the transition and development of resource regions”. Although old revolutionary districts and regions of ethnic minority groups are not typical regions with problems in a strict sense, these “special-type regions” embody the understanding of regions with problems to a degree. From the perspective of development, the regional policies made by the central government should be adjusted and optimized with the changing development stage and economic situation. First, with improvement in the economic development and 28 Zhang,

Keyun, Regional Economic Policies, The Commercial Press, 2005, pp. 19–20.

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the formation of the all-round opening-up, the policy incentives initially granted to the economic zones should phase out and the focus should be transferred to encouraging systemic and mechanistic innovations to gain reform dividends. Second, the policy support in the special-type regions by the State should gradually transition to the support in regions with key problems. In recent years during the transition of socioeconomic development in China, there emerged a group of regions with key problems, such as the impoverished areas with underdeveloped economies, old industrial bases that had been in recession, the single-structured resource cities with resources depleted, crop-producing areas with a heavy fiscal burden, border areas with various conflicts integrated with each other, regions with sudden natural disasters and metropolitan areas that had been over-expanded.29 These areas, faced with various problems, are all in urgent need of great support in money and policy from the central government. The decision of the central government to offer relief plans to these areas should be based on the following two criteria: one, these areas must have problems and the problems must be severe, and two, these problems fall beyond the capacity of local governments and must be addressed by the central government. Future relief plans of the central government should target these regions with problems, offer real help to the difficulties faced by these regions of problems, and strengthen their abilities to develop on their own and to sustain development. Old revolutionary districts and regions of ethnic minority groups should be treated as priorities among their respective groups of regions. Therefore, the current “four great plates”-related policies should be adjusted following the principle of differential management with customized guidance. The “four great plates” are the geographical units in the strategic planning and the specific policies should be made according to the specific type of regions. In fact, the state policy support to the “four great plates” recently took a turn to policies targeting region types. For example, the Chinese government first extended the policies to revitalize the old industrial bases in the northeast to 26 cities of old industrial bases in the central area, and later issued the Plan to Adjust and Remodel National Old Industrial Bases (2013–2022) to include the cities (prefectures) of old industrial bases in the west and the east. The government also extended the policy that had been trialed to help the transition of resource-depleting cities in the northeast to 69 such cities across the country and identified nine county-level places in the Greater and Lesser Khingan Ranges to be qualified for the policy of transfer payment for resource-depleting cities. Further, the policies regarding the large-scale development of the west were expanded to 243 counties (cities and prefectures) in the central area. Future practice should continue to follow the principle of differential guidance to integrate the policies of “four great plates” and form a policy framework with differential management of differentiated regions.

29 Wei,

Houkai, et al., China’s Regional Policies: Prospects and Evaluation, Economy & Management Publishing House, 2011, pp. 38–44.

The “Sannong” Policy: Starting with Integrating Urban and Rural Development Xiaoshan Zhang

1 The Household Contract Responsibility System The reform in China started in rural areas and originated with the innovation of the household contract responsibility system.

1.1 History of the Household Contract Operation The household contract responsibility system allows individual families to contract and run pieces of land on their own, and the key to this system is the “contract”, which represents the contracting relationship between the collective body at each level of the People’s Communes and other levels (groups or peasant families). The specific levels and the details included in specific contracts differed from place to place. In fact, household contract practices were not new or only began after the reform and opening-up. It had been explored for multiple times and to multiple extents in multiple rural regions since the People’s Republic of China was established. On April 29, 1956, a short piece of article, authored by He Cheng, was published on the People’s Daily, which was titled “Production Teams and Commune Members Should Contract Labor and Production”. This article sharply revealed the root of the problems in production and management of high-level cooperative communes by saying, “It is absolutely correct to contract a certain load to production groups and every member. In some cooperative agricultural production communes (mostly the high-level ones), only production teams, but not production groups or commune members, are contracted with labor and production, and that is problematic. Commune members are only concerned with earning labor scores and show no X. Zhang (B) Rural Development Institute (RDI), Chinese Academy of Social Sciences, Beijing, China © China Social Sciences Press 2021 F. Cai (ed.), The Chinese Approach, https://doi.org/10.1007/978-981-16-1899-4_5

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interest in the production of their communes. This is a crucial reason why the production is still a mess in many cooperative agricultural production communes despite establishment of labor organizations with production and labor contracted.” In May, 1956, the county committee of the Communist Party of China (CPC) of Yongjia County in the Wenzhou area of Zhejiang Province started a trial of a responsibility system of agricultural production yield in the Liaoyuan Commune of the Xiongxi Village, the first “household contract” in China. This trial established the responsibility system of “three contracts with teams, responsibility assigned to households, specific quota allocated to field patches and unified operation”. Specifically, “a team signed a contract with the commune for production and yield, and each household was responsible for the quota allocated by the team on their field”. The allocated quota were calculated and verified by patch, and the total quota of all patches were the quantity contracted by the team. Li Yunhe, CPC Deputy Secretary of the county in charge of agriculture named this system “contracting down to households”. After the implementation of this management system, the commune members were all motivated to engage in production. The methods and experiences of the household contract system in the Liaoyuan Commune were highly valued by the CPC Committee of the Yongjia County, who organized a multi-site trial across the county to practice the household contract system. By the summer of 1957, the method had been implemented in a total of 1000 cooperative agricultural communes in the Wenzhou area, but they were subsequently criticized for the practice.1 In 1958 when the entire country had been engaged in the “Great Leap Forward” movement, people in some areas seized the opportunity while the People’s Communes were adjusted to seek reformation of the operation system at rural grass roots and asked for contracting with households. However, due to the overall political environment in China at the time, only a small group of areas tried the household contract method for a mere period of three to four months. After the Lushan Meeting, the practice of household contract was affected under the impact of the erroneous “anti-rightist” movement, and became once again a target of criticism and strike. During the “three years of natural disasters” in the 1960s, there emerged five malpractice styles in rural areas, i.e., the “communism” style, the pretentiousness style, the commanding style, the blind production-commanding style and the cadreprivilege style, which all became hardcore problems in rural areas and severely held peasants from motivating themselves to engage in production and the productive forces from developing. Thus various means were explored in all places to restore production as soon as possible. Now the household contracting method that had been practiced in the 1950s became visible to many and seemed to be the first option for those hoping to break the egalitarianism that had long been prevalent in People’s Communes. Deng Zihui, then Minister of Agricultural Work of the Central Committee reckoned the practice of the household contracting method based on surveys and investigations as well as opinions of the people. He believed that as the land and means of production were still owned collectively in the household 1 “Li

Yunhe, the First Experimenter with ‘Household Contract’ System in China”, Baidu Encyclopedia, http://baike.baidu.com/item/Liyunhe/57989?fr=aladdin.

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contracting system with unified production and yield-based compensation, the system did not qualify for individual business. However, the system was still criticized by some as showing a capitalist tendency for its four concepts of a free (zi) market, a self (zi)-retained field, self (zi)-responsibility for gains and losses and contracting (bao) down to households, namely the “three ‘zi’s and one bao”.2 The household contract system, which was born in the 1950s, survived harsh conditions and revived after over 20 years. However, it was never properly acknowledged, which was due to the long-term command economic system and the conventional socialist ideologies. In contract, after the reform and opening-up, the household contract responsibility system successfully spread across the country from a few initial holds because there was a wide-range discussion about the criteria of truth in May, 1978. In this discussion, “two whatevers” that had long shattered people’s minds were smashed and a nationwide Marxian mind-liberating movement was started. On December 22, 1978, the Communiqué of the Third Plenary Session of the 11th Central Committee of the CPC (CCCPC) stated, “The discussion about practice being the criterion of truth was highly acclaimed at the session and it was considered to be of vital historic importance to liberating the minds of all comrades of the Party and all people of the country and to setting right the direction of our thoughts. No party, country or nation may march forward or survive if everything has to follow the book. Our Party and our country will die if this is the case.” Now that people’s minds were liberated, system innovations originated at grass roots such as the household contract responsibility system could finally find a way to deepen, develop and thrive in practice.

1.2 Increasingly Deepened Exploration in the Household Contract Practice In September, 1978, the local Party Committee of the Chu County held the four-level cadre meeting of the entire region. At the group discussion, some Communes from the Lai’an and Tianchang Counties introduced their responsibility system including contracting with groups, calculating work scores based on yields, identifying the responsible persons for patch management of small-scale crop fields and offering rewards for extra yields, as well as the mechanism of performance-based rewards for grassroots cadres, which inspired a great interest among the cadres at the meeting. In fact, the local Party Committee already found a way in from the year-end distribution to promote the responsibility system of “one grouping with four assignments” in the entire region, i.e., “dividing work groups to assign tasks, time, quality and work scores”. Such a responsibility system played a positive role at the time, but peasants were not generally satisfied with it because it could not resolve the issue of egalitarianism in distribution due to lack of linkage to output. Soon the 2 “The

Story of the ‘Household Contracting’ System with Three Zi’s and One Bao”, Baidu Zhidao, http://zhidao.baidu.com/question/1607652163911057227.html.

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Weiying production team of the Yanchen Commune in the Lai’an County started to contract with work groups, calculate work scores based on yields, reward those with extra yields, and charge compensation fees for reduced yields, which considerably promoted the yields. At the end of March, 1978, the production teams that practiced group contracting of yields and production with joint cultivation and calculated compensations accounted for 68.3% of all the production teams in the entire region. The practice of “double-contracting with groups” with joint cultivation and calculated compensations resolved the “empty talk” of the collective labor and broke the “great pot” of production teams, but there emerged a “secondary pot” of work groups, which was manifested as unclear individual responsibilities, failure to reflect the interest of laborers and lack of motivation for laborers. What the peasants really wanted was to contract with households with joint production. The promotion of “double-contracting with groups” was not important just because it landed the transition from non-joint to joint production. It was important because it paved the way in ideologies and practice for household contracting to emerge in the area of the Chu County. It was the Xiaogang production team of the Fengyang County that first implemented the responsibility system of contracting with households. In early 1979, 18 peasants of the Xiaogang production team met in secret and decided to divide the land evenly among their families based on the number of people in each family, calculate the share of each family of the price of cows and big agricultural tools and split among their families the produce submission task, loan payment, money withheld for the collective, and various subsidies. They also agreed that if the production team leader was prisoned for this, the other 17 families would support his family. This responsibility system of big production contract, invented by the peasants in Xiaogang, made one step further compared to contracting of yields with households. In the spring of the same year, the practice in Xiaogang did not attract much attention, but it soon showed superb advantages and quickly attracted peasants from other places to follow suit.3 In the practice of the previous contracting systems, peasant households or work groups promised to deliver a certain yield to the collective, and they would be awarded if extra yields were to be produced, which was in nature a way of distribution of surplus between peasant households and the collective. The peasants’ share of the surplus was fixed and limited, thus there was limited motivation for peasants to participate in production. The responsibility system with joint production evolved from contracting with groups, through contracting with households, finally to contracting production with households, which laid the foundation for the household contract responsibility system. The mechanism of production contracting with households was called “the big production contract” (dabaogan) by peasants. It was described by peasants as such: “A portion is submitted to the state, a portion is retained for the collective, and all that is left is our own.” The nature of this system is to directly link the labor motivation of peasants to the surplus labor yield. Now peasants enjoyed the right to claim all the surplus value after necessary withholding, and that is why they described the system by saying, “Big production contract, big 3 Chen,

Dabin, “How ‘Production Contracting with Households’ Obtained its ‘Hukou’”, Xinhua Daily Telegraph, April 27, 2018.

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production contract, straight in, straight out, there are no turns.” The big production contracting system was particularly welcomed by peasants with its unique advantages and eventually became the major form of the household contract responsibility system.4

1.3 Flexibility in Policy and Measures Fermented in Increasingly Deepened Exploration China started its gradual economic reform without an overall blueprint. The reform was first aimed to address the imminent issue at the time (that peasants must be fed), sought direct effects (the big production contracting method) and was carried out in steps.5 The major reform measure of “the big production contracting” had no topdown design and was entirely an innovation at the grass roots. In fact, this innovation was initially negated by a policy file during the practice of rural development, and with stepwise loosening up and widening (flexibility) of policies, it was eventually acknowledged and fully backed by a file of the central government. In the Decision by the CCCPC on Several Issues of Promoting Agricultural Development (Draft), which was deliberated at the Third Plenary Session of the 11th CCCPC in 1978, “two disallowances” were stipulated, i.e., “to disallow individual cultivation on divided lands” and “to disallow contracting production with households”. In the Decision by the CCCPC on Several Issues of Promoting Agricultural Development (referred to as the Decision hereafter) that was officially passed at the Fourth Plenary Session of the 11th CCCPC in September, 1979, the following was stipulated: “Individual cultivation on divided lands is not allowed. Do not contract production with households except for the special needs of some side-production and isolated households in remote mountainous regions or in areas with inconvenient transport.” The Decision changed the “two disallowances” to one “disallowance” and one “don’t”, and left “a small opening” for some special cases,6 showing an evident relaxed tone. On the one hand, this showed that the overall background of restoring the right and liberating people’s minds was making the previous policies loosen up little by little, and on the other hand, it was also suggestive of the difficulty to break out of the bondage of the “leftist” ideologies and flexible measures must be taken to overcome the difficulties step by step. In September, 1980, the CCCPC printed and distributed Several Issues Regarding Further Strengthening and Improving the Production Responsibility System in Rural Areas, and stated the following: In the remote mountainous areas and areas in poverty and underdevelopment, “it is allowed to contract yields with households, and it is also allowed to contract production 4 “Production

Contract with Households”, Baidu Encyclopedia, https://baike.baidu.com/item/ baogandaohu/1906448. 5 Refer to the page 15 of the Preface of this book. 6 Wu, Xiang, “From the Two ‘Disallowances’ to a ‘Great Invention’”, Communications of Rural Work, 2008, vol. 11.

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with households, which should be maintained stable in a prolonged period of time.” The No. 1 file of the central government in 1982 expounded the various ways of contracting in theory and in policy, and two points were emphasized. About the first point, that all contracting forms belong to the production responsibility system of the socialist collective economy, the following was stated in the file: “Now all responsibility systems implemented, including the small-job contract with compensations calculated at fix rates, professional contract with joint work and calculated compensations, contracting with individual laborers with joint cultivation (lianchandaolao), contracting yields with households and groups, contracting production with households and groups, etc., are all forms of the production responsibility system of the socialist collective economy. No matter what system form has been adopted, it should remain unchanged unless the people want to change.” The second emphasis was on differential measures accommodated to local conditions. “Officials at all levels, when deciding with people on the production responsibility system to choose, must make a great effort to learn from practice and the people and respect the innovation spirit of the people in order to find the best system for the local conditions. It is absolutely prohibited to force or twist a system based on personal likes and dislikes, to make the mistake of “one clear cut” again, or do nothing and leave it as is.” The file cleared the names of all forms of the responsibility system in theory and in policy, and called for a working style to always respect the truth and accommodate to local conditions in all practices. After the test in the rural economic development over several years, the contract responsibility system, as put in the No. 1 file of the central government in 1983, “was a great invention of the peasants in our country led by our Party, as well as a new development of the Marxian theory of agricultural cooperation in the practice in our country”. In August, 2002, the Law of Contracting Rural Land was promulgated, and became effective on March 1, 2003. Article 3 of this law specifies, “The state implements the system of contracting rural land for operation”, and “the contracting of rural land takes the form of household contracting within the rural collective economy”, which cleared the name of the household contract responsibility system and standardized its practice in law. This happened more than 20 years after the reform and opening-up. In fact, after people’s innovations at the grass roots have withstood the test of practice, laws often come late compared with policy adjustment promoted by acknowledgement of the innovations by decision makers following loosening-up of previous policy restraints. Flexibility in the policies in this background responded to people’s demand, kept in the direction of historical development, motivated people and improved the efficiency of resource allocation and employment. Here a gradually evolving and relaxed policy language reflected the political wisdom and great vision of the rural policy makers.

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1.4 Messages from China’s Household Contract Practice and the Chinese Approach 1.4.1.

It was not an accident for the market-based reform to initiate in a rural area.

Why did China’s reform and opening-up start in a rural area? Many comrades have said that it was because people in rural areas, who had been fed up with hunger and poverty, all possessed a simple desire for a good life with abundant food and that reform was forced out of them when they set aside all concerns.7 Three conditions must be met in order for the initial reform to be politically and practically feasible. First, the reform must bring benefits for specific laborers, microscopic units and social groups in order for the reform to have a basic motive. Second, the reform cannot challenge the interest of any other social groups, i.e., it must be so-called Pareto improving. Third, the reform potentially turns on a key cog of the reform wheel, which drives the reform in other fields of the logic wheel. However, the last condition is usually unpredictable in advance. Meanwhile, the agricultural reform that launched the household contract system and abolished the People’s Communes met perfectly the first conditions of reform above. Some people thought that the contracting of production and yields with households was only a change in operational mode and it would have also been successful had it been implemented within the system of People’s Communes. In fact, however, the household contracting system with the big production contract as the major form was not simply a change in the mode of operation and management, but a change in the fundamental mechanism of agricultural operation. It was the first fire of the cannon of the socialist market economy towards the command economy that had consolidated itself for decades. The success of household contracting operation increased the agricultural economic surplus significantly and provided the necessary primitive accumulation of capital for the industrialization of China. The increased labor efficiency in agriculture led the recessive issue of the long-suppressed agricultural laborers to become public and provided a large number of laborers to speed up industrialization. That is exactly why this reform then drove the reform of other areas along the same logic wheel. 1.4.2.

Grassroots-originated system innovations like the household contracting operation could only take roots, develop and thrive in the background of the reform and opening-up with people’s minds liberated.

The major reform measure of the “big production contracting” had no top-down design at the time and was entirely an innovation at the grass roots. The innovation did not go smooth in the practice of agricultural development as it was first negated by policy files and, with the stepwise loosening up of policies, eventually acknowledged and fully backed by a file of the central government. The loosening-up and flexibility of policies then became an example of the gradual reform. 7 Si, Xiong, “From the ‘Big Production Contract’ to the ‘Big Collective’: A Sketch of the Xiaogang

Village”, People’s Daily. Overseas Version of People’s Daily, July 8, 2017.

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Agricultural household operation has a strong vitality and needs innovation in a stable environment.

The household contracting system increased the yields of crops and incomes of peasants, but it also created a large number of small-sized agricultural households and fragmented arable lands. Then how would the moderate-sized cultivation be developed to increase the efficiency of agriculture? How would the large number of small-sized agricultural households in China step into the scale economy and modernization? Would the agricultural households be still viable in the progression of globalization and modernization? In 1998, Jiang Zemin, then Secretary General of the CCCPC, said, “In practice, household operation with social services can accommodate agricultural productivities at various levels, and can adapt to both traditional and modern agriculture. It is widely adaptive and strongly tenacious, and there is no such thing as changing the household contracting system just because we have improved the productivity.” We believe that the judgment is still not obsolete now. Due to the basic national condition of a large population with a small land, the nature of resources and the progression of urbanization, the diverse operational modes of agricultural will coexist with the agricultural mainstay based on the household contracting system for a long time. However, the household contracting system must keep innovating based on a stable environment, and in recent years, some big specialty households, cultivation experts and other agricultural mainstays bought the operational right of lands from other households to carry out moderate-scaled operation in a way that was willing, legal and compensation-based. In October, 2016, the General Office of CCCPC and the General Office of the State Council printed and distributed the Opinion on Improving the Mechanism to Divide the Rights of Ownership, Contracting and Operation of Rural Lands, in which it was proposed to deepen the reform of rural land mechanism at the current stage, implement the division mechanism of the three rights of ownership, contracting and operation of rural lands and make an effort to push for agricultural modernization. It was an innovation of the household contracting system. Household operation is not only about production and operation of the land contracted to each individual; nor is it another name for natural agriculture or traditional agriculture; and it is not equal to small-scaled economy. Agricultural households may contract lands in the household contracting system, and agricultural households or other mainstays may also contract lands with transferred right of operation. Household operation can be big- or medium-scaled economy, and it can be the medium of modern agriculture, as well as the mainstay of moderate-scaled operation. Based on this, China has walked a walk of agricultural modernization and has offered developing countries a Chinese approach to the transition from traditional to modern agriculture.

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2 The Rise and Fall of Township and Village Enterprises The township and village enterprise (TVE) is a familiar but strange concept. The rise of TVEs since the reform and opening-up was once acclaimed as another great invention of peasants in China after the big production contract, and they represented a logo for the modernization in rural areas. The reform on the property right of TVEs also offered beneficial experiences and lessons for the current reform on the institutions regarding the rural collective property right.

2.1 Development History of Township and Village Enterprises According to the Law of Township and Village Enterprises of the People’s Republic of China that was passed at the National People’s Congress in October, 1996, TVEs are “all kinds of enterprises that are established in towns and villages to take the responsibility of supporting agriculture and that are primarily invested by rural collective economic organizations or peasants”. The development of China’s TVEs went through three special historical stages. First, in the “Great Leap Forward” period, several slogans were proposed, such as “Intensively Develop Industries” “Intensively Develop the Steel Industry” and “Intensively Develop Transport”. In December of the same year, the Resolution on Several Issues Regarding the People’s Communes was passed, in which the guiding principle was further proposed to modernize China, industrialize People’s Communes, mechanize and electrify agriculture and that People’s Communes must develop industries with all means. The commune and team enterprises (CTEs), which were the primitive form of TVEs, were set up in this background. The second stage was the period of 1966–1976, during which China’s CTEs entered the second phase of intense development. The third period started from the reform and opening-up when TVEs developed. The significant development of TVEs as a unique form of enterprises started in the end of the 1970s when the reform and opening-up was kicked off. After the Third Plenary Session of the 11th CCCPC in December, 1978, TVEs began to develop rapidly and their name was officially made as township and village enterprises to replace the previous commune and team enterprises. The reformation of the urban– rural economic system resulting from rural reforms was of major significance to the development of CTEs in the early 1980s because the spread and popularity of the rural household contract responsibility system considerably boosted up the rural efficiency, which led to two consequences. First, the surplus of the rural economy increased, which provided the necessary primitive accumulation of capital for the development of the CTEs then. Second, the increased rural production efficiency led the recessive issue of the long-suppressed agricultural laborers to become public, and as the structural division within the agricultural sector alone could no long address the problem of labor surplus, there emerged a demand for extra-agricultural jobs. In the beginning years of the Reform, the traditional urban–rural economic system

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continued to block the transition of rural surplus laborers to the urban sector, and under this background, developing TVEs was the only option to transfer the rural surplus laborers to another industry within rural areas. Thus the invention of TVEs was rather a way out with no alternatives than a great invention of peasants. As shown in Table 1, China’s TVEs had already developed to a certain degree before the reform of the economic system. According to statistical data, by the end of 1978, the collectively-owned enterprises (i.e., CTEs) at the two levels of country (xiang) and village (cun) had reached 1.524 million with fixed assets worth 22.95 billion RMB. With subsequently deepened reform of the economic system, TVEs also leapt in development more and more quickly, and in 1996, the number of TVEs reached 23.36 million. After the 1990s, TVEs showed a pattern of diverse development: The original country- and village-run collectively-owned enterprises underwent property-right reform and were transformed from only peasants as the investing mainstay in the beginning stage to a variety of investing mainstays including the township and village governments, the village collective, individual peasants, businessmen, legal persons and foreign investors. From the mid-1980s to the mid-1990s, the development of TVEs had the following characteristics: the TVEs were dominated by local governments, oriented with a mechanism with a high proportion of market factors, and driven by job creation and community benefits, positioned themselves to serve the local market, had a highly overlapping industrial structure, were of low cost due to low transaction fees and low salaries, were managed roughly, had simple technologies, and grew mainly by increasing input and expanding horizontally. Table 1 Numbers and assets of TVEs by type Year

No. TVEs (’10,000)

Among all TVEs: Collective TVEs (’10,000)

Sub-village TVEs (’10,000)

Original Value of Fixed Assets (‘100 million RMB)

Among all TVEs: Collective TVEs (’100 million RMB)

Sub-village TVEs (’100 million RMB)

1978

152

152

230

230

1986

1515

152

1363

1212

947

265

1995

2203

162

2041

12,841

9123

3718

1996

2336

155

2181

106,050

11,149

4901

1997

2015

129

1886

19,427

12,539

6888

1998

2004

107

1897

21,566

13,443

8123

Note The Yearbook of Township and Village Enterprises of China included private enterprises run by several households or by individuals for statistical analysis starting in 1984, but comprehensive statistical indicators were not available for these two types of enterprises until 1995 and 1996. After 1997, the statistical standards were changed again, making it impossible to include them in the comparison with other types Source The Yearbook of Township and Village Enterprises of China across the years. The “enterprises run by sub-village units” were renamed as “private enterprises” in 1997 and were further divided into two categories of “private enterprises” and “individual enterprises” in 1998.

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After the mid-1990s, many external factors for the development of TVEs such as the institution background and market conditions had profound changes, and in particular, the Chinese economy that had formed by the early 1990s went from overall shortage to relative surplus and a seller’s market gradually became a buyer’s. Accordingly, the lack of effective demand in the domestic market was consolidated while the international market grew increasingly difficult to manage due to changes in the global economic growth and the Asian financial crisis, leading to more restraints of TVEs levied by the market. Meanwhile, State-owned enterprises (SOEs) went deeper in reform, and TVEs lost their previous system advantages completely. In addition, the reform of the financial system and the sped-up progress of commercialization of banks further worsened the financing conditions for TVEs. All these posed an unprecedented challenge for TVEs.

2.2 The Historical Position of Township and Village Enterprises TVEs were of a unique existence in a unique historical period and a unique macroscopic background. During the two to three decades after the reform and opening-up, the thriving TVEs not only contributed to the growth of the national economy, but also changed the employment structure of China’s laborers and the scale structure of industrial enterprises and improved the rural industrial structure of China, thereby contributing to the adjustment of the rural economic structure. In addition, TVEs’ property-right reform, such as adoption of the contracting system and the joint stock system, offered valuable experiences for China’s economic system reform, especially the system reform of urban and township collective enterprises and SOEs. More importantly, TVEs played a role as a special channel of resource allocation between the command and market systems within the traditional dual structure of urban and rural areas in China. However, with the steps of China’s transition from the command economic system to a market one being taken one after another, TVEs’ special role in channeling resource allocation diminished little by little while its defects as serving only communities and being isolated became increasingly prominent. Therefore, the unique existence of TVEs started to lose its significance as an independent organ, and the unique identify of TVEs met its end while their industrial characteristics eventually replaced their geographical characteristics. In fact, in recent years, there was quite a controversy about whether or not the Law of Township and Village Enterprises of the People’s Republic of China should be abolished.

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2.3 The Joint-Stock Reform of Township and Village Enterprises The joint-stock system is a reform product, and it originated in the practice of rural reform. In 1985, in response to the economic demand to combine the rural productive factors that dispersed after the implementation of the household contract responsibility system for scale operation and based on some explorations, the idea of “joint stock” was first proposed in the No. 1 file of the central government in that year, which was thought to be worth trying. Subsequently, enterprises with a joint-stock mechanism started to emerge in Zhejiang, Anhui, Shandong, Fujian, Henan and Guangdong. In February, 1990, the Ministry of Agriculture issued the Temporary Regulation of Peasant Joint-Stock Enterprises (referred to as the Regulation hereafter) and the Demonstration Charter of Peasant Joint-Stock Enterprises based on the relevant regulations that had been implemented by the government of Wenzhou, Zhejiang. These two files affirmed that joint-stock enterprises were qualified as legal persons, which differentiated themselves from partnership enterprises, and stipulated that all enterprises must set aside a portion of their after-tax profit to contribute to the public accumulation fund. The files also defined these enterprises as the “cooperative economy of worker peasants as well as the economy collectively owned by socialist workers”. After the southern talks by Deng Xiaoping in 1992, joint-stock enterprises were acknowledged and accepted by more and more local governments and enterprises as a widely tolerating and feasible combination of the productive factors, and they were practiced in a highly diverse ways in the economic activities, which broke out of the bounds set in the original policies. In this background, the Ministry of Agriculture issued the Notification of Implementing and Improving Joint-Stock Township and Village Enterprises (referred to as the Notification hereafter) in December, 1992, which allowed the separation of enterprise owners (investors) from laborers, changed the distribution mechanism of enterprises from “labor-based distribution as the main form” to “a combination of labor- and stock-based distribution”, and dropped the language that enterprises’ contribution to the public accumulation fund as being indispensable. Now the connotations and denotations of the definition were both extended with the cooperation-orientation transitioned to stock-orientation. In 1997, Jiang Zemin stated in the report at the Party’s 15th National Congress that the large variety of urban and rural joint-stock economic activities were new in the reform and must be supported and guided, with constant summary of experiences and lessons to keep improving them.

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2.4 The Property-Right Reform of Rural Collective Enterprises In the late 1990s, amidst the joint-stock reformation of TVEs, rural collective enterprises that were characterized by their “southern Jiangsu mode” started a propertyright reform that was centered on “sale”. The origin of the reform involved the relationship between local governments and enterprises shaped by the characteristics of rural industrialization in China. A marked feature of China’s rural industrialization is that local government led or promoted the establishment of rural collectively-owned enterprises. These enterprises were all characterized by two features. First, they were all community facing and did not seek maximal profits as their only goal for they needed to create jobs for surplus laborers and to offer benefits for residents in the communities while making profits. Second, they were all dependent on the government administration and the township and village governments must control and manage them. Some foreign scholars attributed the success of TVEs to this mode, which they named “local state corporatism”. In their opinion, local governments in China took the enterprises in their administrative regions as part of a big corporation, the governments and enterprises had a relationship like one in a corporation, with the local governments playing the role of the board of directors, and the government intervention in enterprises was indispensable for the success of the enterprises.8 Some domestic researchers also reckoned the indispensable role of rural community governments in the development of TVEs and argued that the “exclusive property right” was not entirely suitable in the economic reality of China’s rural areas at the current stage. The origin of the “local state corporatism” mode had profound roots in the economic system. During the reform of the fiscal system, the division of the authority of office between the central and all levels of the regional governments was left behind and the government budgets came from multiple channels; as a result, the revenue of regional governments within their budgets was often “feeding treasury”, and the administration and personnel expenses had no guarantee in some places even with the government functions impaired, leading to separation of the authority of treasury and authority of office. In order to maintain normal operation, play their due roles, complete all tasks assigned to them from the upper levels, and master and expand the revenue of their own, regional governments at all levels had to introduce extra-system sources (extra-budget incomes and self-raised funds by all governments) to add to their revenue. The profits turned in by TVEs, especially the industrial enterprises run by villages (towns), thus became the major source of the extra-system revenue. This is the historical background of the development of the “local state corporatism”, as well as the direct motive of local governments to establish TVEs. When evaluating the historical progress of regional industrialization, we should not hold what is thought correct today to negate the past. Instead, we should analyze the historical background and causes at the time of what happened objectively. When 8 Oi,

Jean C., “Local State Corporatism: The Organization of Rapid Economic Growth”, Chinese Rural Industry Takes Off: Incentives for Growth, University of California Press, 1995.

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the command economy was transitioning to the market economy, the market order was not perfect, and regional governments or community organizations would do a much better job than enterprises when dealing with the non-local government organs such as the commerce, tax, transport supervision and ecology branches of the government. In addition, governments or village collectives could also obtain loans from banks or credit institutions on behalf of enterprises. In this background, TVEs had the internal drive to seek protection from local governments and communities to save the cost of their external transactions. In a report on the survey of China’s TVEs by the World Bank, TVEs were described to be faced with adverse conditions and settings in terms of obtaining loans and market entrance, but it was also found that lack of separation between politics and business was exactly the wisest way of the enterprises to survive in such a background. Meanwhile, as the profits submitted by collectively-owned TVEs were the main source of the self-raised revenue of local governments, rural collective enterprises were a big part of the economic base of the village and community administrative functions, and that is also why the leaderships at these two levels, despite mistakes from time to time, could effectively avoid shortsighted behaviors and asset losses. This is also the fundamental reason why the rural collectively-owned enterprises were still efficient and developed despite the unclear property right. However, it must be noted that the twisted budget mechanism with the authority of treasury separated from the authority of office had held regional governments from transitioning their roles as the township and village governments and rural community organizations were in control of enterprises and grabbed from them while protecting them, resulting in the following ailments. First, administrative interference in the economy with blind decision-making and arbitrary leadership led to declines in the profits of rural collectively-owned enterprises and increases in their bad debts. Second, township and village governments and the authoritative bodies in all industries charged enterprises in various names, and many charges were society expenditures with no fiscal authority basis. Such non-standard, extra-system revenue was quite irregular and non-transparent, lacked effective supervision, and could easily become the hotbed of corruption. In fact, many people complained that TVEs had become a “small gold reserve” for cadres, and that is just one example of the corruption. Third, the direct interest relationship between rural grassroots governments and collectively-owned TVEs led the former to protect the latter in all aspects, making it difficult to prevent the behaviors of enterprises that held the establishment of the socialist economic system. TVEs sometimes did not pay back loans when they were due or held the payment of interest to banks, and such behaviors that tried to evade the debts owed to banks were silently acknowledged by the local governments in many circumstances, and local governments sometimes also loosened up on supervision over enterprises in order to maintain the stable growth of the local government revenue and tolerated enterprises when they transformed their internal costs into social costs by damaging the environment. As for the problem of fake and shoddy products, countless efforts were made to crack them down and failed, and the failures were directly associated with local protectionism. Reform was inevitable when the cost to contain ailments exceeded the benefit of protection.

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2.5 Messages from the Rise and Fall of TVEs and the Chinese Approach First, China’s gradual reform has an important feature, i.e., new bodies with a strong vitality grew and thrived on the side of the previous system and bodies, such as TVEs and individual private economies. These new bodies created considerable economic increments, which cut down the proportion of the economic activities created by the traditional sector, thinned the cost of reform and provided economic support for the Pareto improvement. This is an important message from China’s reform. However, with the stepwise completion of China’s transition from the command to market economic system and the continuously deepening reform of SOEs, the unique role of TVEs as a channel for resource allocation diminished while their defects of administrative dependency and unclear property right became increasingly prominent, and the property right reform of TVEs had to be scheduled. Second, the property right reform of collectively-owned TVEs that were widely promoted in the late 1990s were quite controversial both in theory and in practice, but there were two consensuses. First, the reform defined the property right of collectively-owned enterprises clearly and guided these enterprises to transition to a modern corporation mechanism. Second, during the property right reform of collectively-owned TVEs, the leaders of the collectively-owned enterprises on one side were not up against the community members of the entire villages or towns, but against rural cadres. Thus the reform was a negotiation game between the two parties and the outcome depended on the relative strength and negotiating status of the two. The nominal owners (community peasants) were not part of the negotiation and the ultimate gains were only divided between the two negotiating parties. In some developed areas, there was a rural development mode characterized by rural community corporatism, where some rural community organizations with a strong collectively-owned economy did not quantify their assets through the property right reform, and the community leaders possessed the residual control rights despite their lack of residual claims, who kept the control within their own families through transferring to the next generation (shanrang). Once the chain was broken, they must fight for gains through defining the property right, which would lead to the kind of negotiations where most owners of the collectively-owned TVEs were excluded, as described above. Under the essential precondition that the benefit of changing a system exceeds the cost, the key question is who shall get the reform dividends of the system change. Whether or not the cost of system change is evenly distributed among pertinent parties and whether or not the dividends are reasonably shared among them are the historical lessons for the ongoing property-right reform of the village collectives.

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3 Peasant Workers and the Progress of Urbanization Since the reform and opening-up, several hundred million peasants have come to work in the non-agricultural sector from the agricultural and have moved to cities and towns from villages. The great tide of peasant-worker migration pushed the progression of industrialization and urbanization forward, and it has become a strong force to drive the urban and rural integration.

3.1 History and Characteristics of the Rural Labor Transfer Over the 40 years there were three tides of peasant migration in China. The first migration was mostly local, with peasants working in TVEs. They “left soil but not villages and entered factories but not cities”. In the second migration, peasants “left soil and villages and entered factories and cities”, and it was migration to different places with cities as the destination. In October, 1984, the Chinese government lifted some restrictions that had prevented peasants from going to cities following strengthened supply of non-staple food in cities. This drew the curtain of a largescale migration of peasants to move to cities for work. In 1984, the term “peasant workers” was officially coined on Sociology Communications. There were only two million rural laborers who left their villages or towns to work elsewhere in 1982, but the number reached 30 million in 1989 (see Table 2). The third tide of migration was characterized by long-term residence in the cities of jobs, with some peasants having moved their whole families into cities. The migration characteristics of the three tides were not distinctively separable as there was local migration and non-local migration in each tide. In fact, even in the first tide, there were already peasants who went to the coastal area or special economic districts to work. For a long time, China has created an economic miracle that is acclaimed worldwide. Analysis and interpretation of the origins of China’s economic miracle should first land on China’s grand policy and guiding principle of the reform and openingup. Other factors include the competition of regional governments, innovations in the system at the grass roots, improvement of infrastructure, and improvement of the market mechanism among others. There are two essential factors: cheap land and cheap labor. Land comes from rural areas and labor is offered by peasant workers. China is now at the time of industrialization and informatization, and the adjustment and upgrade of the industrial structure has made it increasingly clear that capital and technology are replacing labor and that the demand for general labor (nonexperienced workers with a low level of education) is gradually decreasing. How to handle the relationship between capital and the simple labor that is adequately supplied but is in limited demand needs more exploration in theory and in practice. We should acknowledge that capital is still a scarce productive factor compared to cheap labor and that a good return is needed if the marginal efficiency is high.

The “Sannong” Policy: Starting … Table 2 Rural laborers working in non-hometown regions after the reform (‘10,000 people)

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Year

Working in a strange region

Mean annual migration

1978

–

–

1982

200

50

1989

3000

400

1993

6200

800

1995

7000

400

1996

7223

223

2001

8961

348

2002

9430

479

2003

9820

390

2006

13,181

1120

2008

14,041

430

2009

14,533

492

2010

15,335

802

2011

15,863

528

2012

16,336

473

2013

16,610

274

2014

16,821

211

2015

16,884

63

2016

16,934

50

2017

17,185

251

Source The data after 2008 were from each year’s peasant worker observation survey report by the Bureau of Statistics. The 2006 date were from the second agricultural census, and the data before 2006 were from the Ministry of Agriculture

At present, capital-oriented private enterprises, family or partnership enterprises, and Sino-foreign joint-stock or foreign stock enterprises still have a great potential for development, and should be encouraged to further develop. Among all the enterprises, capital is still dominating labor in most cases, and that is something no one should deny. According to the reports on salaries of peasant workers by the Institution of Labor Wages of Ministry of Human Resources and Social Security, peasant workers’ wages increased rapidly over the past few years. However, the increases began with a very low rate, and the current wages of peasant workers are still low, roughly 60%, as compared to urban employees. The absolute rate of peasant workers’ wages has not narrowed its gap with the average wage of urban employees. In 2011, the annual salary of the two groups had a difference of 17,864 RMB, and in 2014, the difference reached 21,970 RMB.9

9 “Are

the Wages of Peasant Workers Growing Rapidly?” People’s Web, http://politics.people.com. cn/n1/2016/0429/c1001-28313088.html.

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Starting in 2003, there emerged a “lack of peasant workers” in some enterprises based in developed areas, giving rise to discussions on questions such as whether rural labor would be an unlimited supply or a limited surplus during urbanization and industrialization in China and whether China had reached the Lewis turning point. The new pattern of demand and supply of rural labor gave peasant workers some bargaining power for the first time after the reform and opening-up. They could now use various ways such as “voting by feet” to defend their lawful rights and benefits and promote the labor price to shift to the real value. In addition, enterprises, out of concerns over their own economic benefits, had to pay much attention to improving the working environment and wage rates of peasant workers and offer more technical training and some basic benefits for them while upgrading the industries and accelerating structural adjustment. These measures created conditions for peasant workers and their families to settle down in cities and for urbanization to speed up. Several hundred million peasant workers and their families who left their homes to work in urban areas and whether or not they can successfully integrate in the urbanization will impact the future development of villages and agriculture.

3.2 Reforming the Household Registration System Will Definitely Promote the Urbanization Progress According to the 2017 Statistical Communiqué of National Economic and Social Development by the National Bureau of Statistics, the total number of peasant workers in the entire country was 286.52 million in 2017, increased by 1.7% compared to the previous year. Among them, 171.85 million peasant workers went to places other than their own home villages to work, which increased by 1.5%, and 114.67 million worked locally, representing an increase of 2.0%. Did these over 200 million peasant workers in China integrate in the progress of urbanization? Under the real-world conditions of a dual urban–rural structure, most of peasant workers who had gone to cities to work remained marginal in cities as the migration population. They had low wages and did not have basic social benefits, and most of them could not afford to settle down in cities and do not have access to the social benefits available to urban residents. They thus could not move their whole families to cities and settle down and their living standards, conditions and consumption methods were still way behind urban residents. This did not represent a real urbanization even though they were counted as urban population in the current statistical analysis. In 2017, the urbanization rate of residents was 58.52%, which was increased by 1.17 percentage points compared to the previous year, while the urbanization rate of registered residents was 42.35%, representing an increase of 1.15 percentage points compared to the previous year. There was a difference of 16.17 percentage points between the two rates. Among the urban residents in China, in addition to the local population with a rural household registration, a considerable proportion was the migration population

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from non-local rural areas who had a rural household registration. They had lived and worked in cities and towns for a long time and contributed greatly to the local economies, but they often did not have access to public services available to other local residents. Their household registration was still with their original villages, where they still had contracted lands, houses and housing lands, and their incomes were still an important part of the per capital net income of peasants. Most of them still belonged to the migration population, or put it in a more vivid expression, they “made money in cities and spent it in villages” “rent in cities and built houses in villages” and “lived in mouse holes while their new houses in villages were inhabited by mice”. They could not move to or settle down in cities with their whole families although they, together with those urban residents with a local household registration record, were counted as urban population in statistical analysis. In addition, they were not covered by the social security network in the cities they lived in, and they would “go back” once there was something unusual. They were marginalized, swaying population in migration, and they represented a type of urbanization that still clung to the dual urban–rural structure, or put in another term, incomplete urbanization or urbanization-to-be. Therefore, while it was important to increase the urbanization rate, it was imminent to make the qualified, rural immigrants who had been counted as urban residents in statistics truly urban residents. Entrance of large numbers of migration population composed mostly of peasant workers into cities and towns necessitated the reform of the household registration system. In 2014, the State Council issued the Opinion on Further Pushing the Reform of the Household Registration System, in which it was proposed to land a new household registration system by 2020. On September 30, 2016, the General Office of the State Council issued the Notification of Printing and Distributing the Plan to Push 100 Million Non-Registered Population to Register in Cities (State Office File [2016] No. 72). As stated in the Notification, “facilitating rural immigrant population capable of maintaining a stable job and life in cities to move their whole families to the cities to settle down is an internal requirement of common prosperity that covers more population, the primary task to push for the new urbanization and a major measure to expand the domestic demand and improve people’s lives.” In terms of population management, it was specifically required to “establish a household registration system that is unified between urban and rural areas. The rural and non-rural types of registration, together with the derived types such as the blue-print registration type should no longer be differentiated. All shall be registered as residents alike to embody the population registration nature of the household registration system.” The reform of the household registration system has since gone on a fast track. On September 19, 2016, Beijing officially issued the Opinion on Implementing Further Reform of the Household Registration System, by which time all 31 provinces, municipalities and regions of China had their own reform plans for the system and all had cancelled the rural type, marking the exit from the historical stage of the dual urban–rural household registration system that had been implemented in China for more than half a century and providing the institution basis for bridging the two types of urbanization rates.

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The household registration is just a piece of paper and changing the system only seemingly changes statistical items. But in fact, the change underscores a switch in regions and identity, and the associated changes in access to basic public services including housing, education and social security are why the household registration system reform is important yet challenging. China now takes a differential urbanization policy measure based on the reality that peasant workers have become a highly heterogeneous group. According to the 2015 peasant workers observation survey and report by the National Bureau of Statistics, 14% of the peasant workers who worked in a place other than their home villages went back home in 2015. It’s fair to say that the over 130 million peasant workers who are now living in their home villages will realize in situ urbanization through the development of counties, small towns and central villages. According to the 2014 peasant workers observation survey and report by the National Bureau of Statistics, 35.78 million peasant workers brought their families to work in other places in 2014, and these over 30 million peasant workers should be the focus of the efforts to help immigrant rural populations settle down in cities and towns. Differentiation should be made between urban peasant workers, individual businessmen and TVE employees and sort out the channels to include each type into the social security and public service network. Reforming the household registration system does not mean abolishing it, but to come up with a differential registration mechanism designed from the top down with full consideration of each city’s planning and positioning, the socioeconomic development level, overall capacity, public services and a clear idea of the maximum population affordability, especially for extra-large cities. Specifically, the registration limitations should be lifted away all at once in established towns and small cities and gradually in order in medium-sized cities, while the qualifications to register household in big cities should be reasonably determined and the population scales of extra-big cities must be strictly controlled. The cities with at least five million urban residents should remodel their current registration system to establish a comprehensive score-based registration mechanism. For the immigrant peasant workers who are not yet qualified or unwilling to register household, the resident card should be used as the basis for a comprehensive provision mechanism of basic public services that are linked to the length of residence. The whole set of policies should reflect the following key points. First, the residents with their households registered with their residence cities and those without should have differential access to public services to some degree. The difference is mainly in the access, or the level of it, to subsidies for middle vocational education, employment facilitation, housing security, old-age services, social welfare and social relief as well as the qualification of children to participate in the entrance exams for high school and colleges in the residence cities. Second, the residence card holders have the same access to basic public services as registered residents in a large area of rights such as employment, basic public education, basic health services, family planning services, public culture services and services of permits, licenses, certificates and identification documents. In addition, the city administrative bodies should keep expanding the services available to residence card holders. Third, big and extra-big cities should make clear the criteria

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for household registration and establish a comprehensive score-based mechanism for people to register with the cities. The whole set of policies should make it clear for immigrant residents who want to register households with their residence cities where their strength and weakness are and where to direct their efforts to qualify so that they may have a reasonable expectation for the future. The immigrant residents who cannot qualify or do not want to obtain the registration may enjoy the same basic public services with those registered in the cities so that they can still integrate into the life of their residence cities. When some peasant workers who are willing and qualified to settle down have a stable job and house and are covered by the social security network of their residence cities, social justice is greatly promoted. Now the cost of settling down and daily lives will decrease considerably for them, and they may spend more to improve their living conditions. This is also an important way to expand domestic demand and promote economic growth in the economic new normal. Meanwhile, since these emigrant rural people are no longer concerned with their future and do not need to keep a way out in their home villages, the reform of rural land management system is now possible and this population possessing the property rights by law may transfer their rights to hold, use and collect benefits of their contracted lands and housing lands to other people for monetary compensations. The development of urban and rural areas is then easier to coordinate, the great strategy to vitalize villages may be implemented with greater weights and faster paces, and the promotion of moderatescale operation, development of modern agriculture and establishment of socialist new villages are all firmly grounded.

3.3 The New Trend in the Employment of Peasant Workers In development economics, the Todaro migration model holds that the population migration from rural to urban areas is a response to the expected income difference between urban and rural jobs, not to the actual difference. The expected income (post-migration income minus the cost of migration) depends on two factors. One is the actual difference between the urban and rural rates, and the other one is the probability of a new immigrant getting a job in the city. In the real economic activities in China, when rural emigrant laborers become relatively scarce instead of surplus in some regions and in some industries and they can choose jobs, they must consider not only the difference of actual incomes between an urban and rural job and between an industrial and agricultural job and the living and migration costs, but also the differences in working and living conditions (an industrial job usually comes with a relatively adverse working and living condition, frequent over-time work, etc.). In addition, industrial jobs have a far higher risk than agricultural ones, the cost of which (the risks of work injuries, major diseases and accidental physical damages) must be paid by the workers if they are not covered in the basic social security network. Therefore, rural laborers who want to leave their villages to work may have several

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different directions and options. (1) Emigrant laborers must flow to places with favorable working and living conditions and social welfare. For example, in recent years in China, areas such as Beijing and Shanghai proactively promoted some measures to ensure the rights of peasant workers, such as provision of work insurance and establishment of primary schools for children of peasant workers, which improved the overall condition for peasant workers, who would certainly flow to these attractive areas to work; (2) within one area, emigrant laborers must flow to enterprises with favorable working and living conditions and social welfare. The big enterprises with a large scale and better standardization and cultures offer good monthly pays, and the monthly pays are paid in the full amount on time. In addition, all workers get labor contracts and the “new hands” who just join in get some compensations to cover living costs while still on training. Workers certainly want to joint these enterprises; (3) with economic development across areas, some provinces with a large number of emigrant laborers have all developed labor-intensive industries, and have a growing demand for laborers. If the salaries they offer are not significantly lower, some rural laborers who originally wanted to emigrate to other places may choose to take a job in their local provinces when considering a short distance from home, similar dialects, similar climate and living habits, and lower costs of moving; and 4, with the implementation of the village vitalization strategy, the Chinese government issued policies to encourage emigrant peasant workers to go back to their home villages to start up new business, and some capable, experienced ones may choose to go back to their home villages to start up business after comparing the cost and benefits between working elsewhere and starting up business or participating in agriculture back home.

3.4 Messages from China’s Peasant-Worker Issue and the Chinese Approach 4.1.

One major change brought by the reform and opening-up is the free flow of labor. Large numbers of rural laborers moved to the coastal area and big cities, which was an optimized allocation of resources under the market forces. While the demographic dividends were gained, the years of education of China’s adult population grew rapidly.10 The best laborers in rural areas, who were most adventurous and dared to pioneer, left their homes. During the migration, not only had the peasant workers increased incomes, which contributed an important part to the increased incomes of all peasants, but more importantly, peasant workers who left their homes to work elsewhere were actually learning while working in the big school of a market economy as well. The course was cruel and full of tears and sweats, but the vast majority of peasant workers opened up their minds, learned techniques and knowledge, and became innovating talents. Many peasant enterprises and capable people who went back

10 Refer

to the “Preface” section of this book on p. 9.

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141

to their home villages and started up their own business were able to achieve what they had achieved because they replied on the experiences, techniques, and capital they saved over the years when they were working in a strange place. Where and how peasant workers work is decided by the market, but issues such as the working and living conditions and delayed payments and arbitrary deduction of their wages must be addressed by local governments. The government must truly transit its functions from an alley of capital to an impartial adjudicator and coordinator to address the disputes between capital and labor to protect the lawful rights and benefits of peasant workers. The ultimate goal is to enable peasant workers to have the same access to the basic public services as other residents of the same cities. The government should also strengthen supervision, surveillance and law enforcement to protect the lawful rights and benefits of laborers. The reform of the rural collective property rights should interact in a positive way with the household registration of non-registered rural migrant populations in cities.

4 Urban Versus Rural: From the Dual-Structure to Integrated Development The dual urban–rural structure that had long existed was the major obstacle of the integrated development of urban and rural areas. Only by deepening the reform could the system shackles leading to the dual urban–rural structure be broken and common prosperity realized.

4.1 The Evolving Policies The development of agriculture and villages has been closely associated with that of industry and cities. After the establishment of the People’s Republic of China, in order to establish a complete national industrial system as soon as possible, the Chinese government levied agriculture taxes and employed the “price scissors” of industrial and agricultural products, which provided a large accumulation for industrial development and accelerated the progress of industrialization. After the reform and opening-up, the government expropriated the lands that had been collectively owned by villages to be state-owned, which provided important support of lands and capital for industrialization and urbanization. A few hundred million peasants left their home villages and worked in cities and towns, which provided low-cost labor resources for speedy urban development and industrialization. With economic development, the “three rural (sannong) issues” became increasingly visible, and as they became the focus of the important work for the entire Party, the basic principle of integrating urban and rural development was determined. In

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2013, it was pointed out at the Third Plenary Session of the 18th CCCPC to “improve the mechanism of integrating urban and rural development. The dual urban–rural structure is the major obstacle holding the integrated urban and rural development. The mechanisms and system must be improved for a new-type industrial-agricultural and urban–rural relationship where industry promotes agriculture, cities facilitate villages, industry and agriculture benefit each other and urban and rural areas are integrated. The vast majority of peasants shall be included in the course of modernization with equality and share the achievements of modernization together.” The Central Committee made clear the concept of the new-type urban–rural relationship and set the ultimate goal of this relationship to be integration of urban and rural areas. In 2015, President Xi Jinping proposed at the 22nd collective study of the Political Bureau that industry and agriculture as well as urban and rural areas should be taken as a whole for planning, that the new village plan should continue to be carried out to integrate it with the new-type urbanization for coordinated and mutually beneficial development of the two, leading to a two-wheel driving pattern. In the report of the Party’s 19th National Congress, it was first stated to “persist with agricultural and rural development as the priority” and “establish and improve the system and mechanisms of integrating urban and rural development and policy framework to accelerate the modernization of agriculture and rural areas”. In the report, the order of priorities was set in order to promote the integrated urban and rural development and it was emphasized to combine both agricultural and rural development and modernization for consideration. These views are of important theoretical and practical relevance. Review of the evolution of the urban–rural and industrial-agricultural relationships over the past decades clearly reveals the track of policy evolution. With the establishment and improvement of the system and mechanisms to integrate urban and rural development and the policy framework, the pattern of income distribution implicated in the urban–rural and industrial-agricultural relationships will further favor agriculture and rural areas, as well as the pattern of resource allocation across the country and basic public services, leading to a positively interactive pattern of agricultural and rural modernization that influence each other and are integrated together. After 2000, particularly after the Party’s 18th National Congress, the policies and measures to break the dual urban–rural structure were landed in practices, which was evidently a move along the track of policy evolution.

4.2 The Stepwise Closing Gap Between Urban and Rural Incomes In the beginning of the twenty-first century, the Chinese economy was faced with an inadequate domestic demand and an imbalance of development between the urban and rural areas. According to statistical data, investment and exports contributed almost 60% to the growth of the national economy in 2004, while consumption only contributed 40%. The inadequate consumption was essentially due to the low

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consumption by peasants and that the rural market had not been initiated. The rural population made up of nearly 70% of the national population, but their savings only accounted for 18% of the total savings of urban and rural residents combined and they only consumed about 36% of the retail sale of social consumables. Longitudinal comparison with historical data shows that the rural areas once spent as high as 56.5% of the society-wide retail consumables in 1985 when the urban-to-rural ratio of income was 1.86:1, the lowest after the reform and opening-up. Inadequate consumption of peasants led directly to over-production of industry and the economic growth lost its solid ground. This is what we often say that the unemployment of urban workers was essentially due to the excessively low incomes of peasants. At the economic work meeting of the Central Committee in 2005, it was specified to make all efforts to adjust the relationship between investment and consumption and to treat increasing residential consumption, especially those of peasants, as the focus of expanding consumption demand. It was also noted that pushing for the establishment of new villages, implementing the guiding principle that industry turns around to nourish agriculture and cities support villages, setting up a long-lasting mechanism to increase peasants’ incomes, and narrowing the gap of development between urban and rural areas could all initiate and expand the consumption demand of the rural population, the largest domestic population with consumption potential, and promote the economic growth. Subsequently in 2006, the Chinese government abolished agricultural taxes, which was one of the increasingly supportive measures to agriculture and rural areas. From 2006 to 2009, the central treasury spent 26.7% more every year on the “sannong” expenditure, which was 15.2 percentage point more than the annual increase from 2003 to 2005, 11.5%. Meanwhile, the higher growth in the expenditure on “sannong” than that of the total expenditure of the central treasury during the tenth FYP was kept during the 11th FYP (see Table 3). From 2006 to 2009, expenditure on “sannong” accounted for on average 15.7% of the total expenditure of the central treasury, which was 1.4 percentage point higher than that from 2003 to 2005, 14.3% (see Table 3). In 2013, the central treasury spent a total of 1.3763 trillion RMB on “sannong”, representing an increase of 11.2%. Among the expenses, 540.2 billion was spent to support agriculture, 170.1 billion on subsidies for crops directly, agricultural supplies comprehensively, good seeds and agricultural equipment purchases, 604.0 billion on social causes such as rural education and public health, and 62.0 billion on produce storage and relevant interest.11 The income gap between urban and rural areas reached 3.33:1 in 2009, after which year the gap kept narrowing every year and it was 2.71:1 in 2017 (refer to Table 4). 11 Note: From 2008, a statistical algorithm started to be implemented that used a standardized way across the central and regional governments to calculate the expenditure on the “three rural issues” The “three rural issues” did not constitute a separate budget category, and all involving agriculturesupportive and-beneficial expenditure were reflected in the “three rural issues”, which included the expenditure to support agricultural production, to provide subsidies to peasants and to support the social causes in rural areas. However, after 2014, no data were provided regarding the expenditure on the “three rural issues”, and the data on agriculture, forest and water budgets of the central public treasury were provided instead, so the data were no longer comparable.

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Table 3 Support of the central treasury to the “sannong” issues Central expenditurea

Central expenditure on Sannong

Amount, ‘100 million RMB

Growth, %

Amount, ‘100 million RMB

2003

15,681.5

–

2145

–

13.7

2004

18,302.0

16.7

2626

22.4

14.3

2005

20,260.0

10.7

2975

13.3

14.7

2006

23,492.9

15.9

3517b

18.2

15.0

2007

29,580.0

25.9

4318

22.8

14.6

2008

36,319.9

22.8

5955.5

37.9

16.4

2009

43,901.14

20.8

7253.1

21.8

16.5

2010

48,322.52

10.3

8579.7

18.3

17.8

2011 (budget) 54,360

12.5

9884.5

15.2

18.2

2003–2005

54,243.5

–

7746.0

–

14.3

2006–2009

133,257.8

–

20,951.9

–

15.7

2003–2005 mean annual growth

–

8.9

–

11.5

–

2006–2009 mean annual growth

–

23.1

-

26.7

–

Year

Growth, %

% Central expenditure

Note a Central expenditure = expenditure spent at the central government level + expenditure on subsidies to regions b Includes 12 billion RMB of comprehensive subsidies for agricultural supplies offered to peasants growing crops, arranged through the special oil gain levy that had been newly set up Sources The central fiscal expenditure from 2001 to 2007 came from the Finance Yearbook of China, 2008, and that of 2008–2009, Central and Regional Spending of the Budgets in 2007 and Report on the Draft of Central and Regional Budgets of 2008 and Central and Regional Spending of the Budgets in 2008 and Report on the Draft of Central and Regional Budgets of 2009. The central expenditure on the “three rural issues” was based on the Central and Regional Spending of the Budgets and Report on the Draft of Central and Regional Budgets across the years

4.3 Developing Social Causes in Rural Areas Promoted the Peasant Human Capital to Increase If efficiency is what it matters the most at the primary distribution of national incomes, equality and justice are the most important at the secondary distribution, which relies on the role the government plays to the fullest in removing the dual urban–rural structure of social causes and closing the gap of access to basic public services between urban and rural areas, between workers and peasants, and between different regions. While the new socialist villages are being developed and the recent strategy of rural vitalization being implemented, compulsory education, public health, medical services and cultural causes should be developed in rural areas, and the cultural and ethical progress in rural areas should be pushed. These are in essence the efforts

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Table 4 Income gaps between urban and rural areas Year

Urban dispensable income per capita, RMB

Rural net income per capita, RMB

Income ratio, urban:rural

1978

343.4

133.6

2.57:1

1980

477.6

191.3

2.50:1

1985

739.1

397.6

1.86:1

1990

1510.2

686.3

2.20:1

1991

1700.6

708.6

2.40:1

1992

2026.6

784.0

2.58:1

1993

2577.4

921.6

2.80:1

1994

3496.2

1,221.0

2.86:1

1995

4283.0

1,577.7

2.72:1

1996

4838.9

1,926.1

2.51:1

1997

5160.3

2,090.1

2.47:1

1998

5425.1

2,162.0

2.51:1

1999

5854.0

2,210.3

2.65:1

2000

6280.0

2,253.4

2.79:1

2001

6859.6

2,366.4

2.90:1

2002

7703.0

2,476.0

3.11:1

2003

8472.0

2,622.0

3.23:1

2004

9422.0

2,936.0

3.21:1

2005

10,493.0

3,255.0

3.22:1

2006

11,759.0

3,587.0

3.28:1

2007

13,786.0

4,140.0

3.33:1

2008

15,781.0

4,761.0

3.31:1

2009

17,175.0

5,153.0

3.33:1

2010

19,109.0

5,919.0

3.23:1

2011

21,810.0

6,977.0

3.13: 1

2012

24,565.0

7,917.0

3.10:1

2013

26,955.0

8,896.0

3.03: 1

2014

28,844.0

10,489.0 (9892.0)

2.75:1 (2.92:1)

2015

31,195.0

11,422.0 (10,772.0)

2.73:1 (2.90:1)

2016

33,616.0

12,363.0

2.72:1

2017

36,396.0

13,432.0

2.71:1

Note After 2014, the per capita disposable income was used for both urban and rural residents. The statistical communiqués of 2014 and 2015 also published the per capita net income of peasants, which were listed in parentheses in the table Source National Bureau of Statistics, Statistical Communiqué of the National Economic and Social Development, all relevant years

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to help peasants increase their abilities and improve their all-round development. The government should not only invest in the infrastructure to better the public services in rural areas, but spend the public funds directly on peasants when trying to improve their lives as well. Peasants are most concerned with difficulties to get medical services, cost of seeing a doctor and the education cost, while the underprivileged have no guarantee to be fed or to keep warm and the old-age peasants may lose support of life. Recently, the Chinese government implemented a series of policies and measures to escalate its support to the education, new-type cooperative health services, subsistence allowance system and new-type old-age social insurance system in rural areas. These life-improving measures gave benefits to peasants directly, and they usually had a clear orientation and simple operation and were implemented in a transparent, open way with limited middle steps. Therefore, the funds involved were usually all used properly and the effects of the measures were significant.

4.3.1

Rural Infrastructure and Public Service System Were Strengthened

The No. 1 file of the central government in 2009 specified that “water, electricity, roads, gas and houses” should be taken care of with the utmost efforts in 2009. The Chinese government arranged for removal of the county- and lower-level co-funding for public-interest projects in the central and western areas, such as risk removal and consolidation of defective or risky reservoirs, ecological projects and reformation of large- and medium-sized irrigation areas, resolved the security issue of drinking water for 60 million peasants, completely implemented the policy to provide the same electrical grid for urban and rural areas at the same price, increased the proportion of the central treasury’s investment in the roads in central and western areas, increased the investment in the rural biogas projects, expanded the trial sites for solidifying and gasifying straw, and sped up to build houses in rural areas. From 2013 to 2017, 1.27 million kilometers of roads were built or remodeled, 122 major water irrigation projects were started, and a new round of electrical grid reformation was completed in rural areas. The cultural service system was further strengthened, and the project to connect each village with radio and television broadcasting covered all natural villages with 50 households or more and started to extend to those with 20 households or more.

4.3.2

The Compulsory Education in Rural Areas

In 2007, the tuition and miscellaneous fees for the years of compulsory education were waived with free provision of school books in all rural areas across China, benefiting nearly 150 million rural primary- and middle-school students. Boarding students whose families were economically challenged were offered living subsidies, and about 1.1 million students benefited from this measure. On November 25, 2015, the State Council printed and distributed the Notification on Further Improving the

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Mechanism to Ensure the Urban and Rural Education Funds (Guofa [2015] No. 67), which required to establish a fund-security mechanism for compulsory education that was unified across urban and rural areas with focus on the latter, unify the policy of “two waivers and one complement” for compulsory education in urban and rural areas and optimize the policy framework of subsidy provision to students with economically challenged families based on integrating the fund-security mechanism for rural compulsory education and the reward and subsidy policy for urban compulsory education.

4.3.3

The New-Type Rural Cooperative Medical Insurance System

To lessen the burden of seeking medical services for peasants, China started the trial of the new-type rural cooperative healthcare system based on counties as the unit in 2003. The standard fiscal subsidy at all government levels increased from 20 RMB per person per year in 2003 to 380 RMB per person per year in 2015, and the individual premium increased from 10 RMB per person per year in 2003 to 120 RMB per person per year in 2015. On January 12, 2016, the State Council issued the Opinion on Integrating the Urban and Rural Systems of Basic Medical Insurance (Guofa [2016] No. 3), which required all regions to integrate the current basic medical insurance system for urban residents with the new-type rural cooperative medical insurance system to generate the basic medical insurance system for all urban and rural residents. The implementation of this measure would break the dual urban–rural structure of the basic medical insurance system and render fairness and unification for urban and rural residents to participate in the basic medical insurance plans, and it was a solid step towards equalizing basic public services in urban and rural areas. In the end of 2017, as many as 873.43 million people joined the basic medical insurance plan for urban and rural residents nationwide, among whom 52.03 million people obtained subsidies. This number was 424.83 million more than 2016, and was far greater than the number of people in the basic medical insurance plan for employees, 303.20 million. In 2017, the standard fiscal subsidy for urban and rural resident medical insurance at all government levels increased from 420 RMB per person per year to 450 RMB per person per year. In 2018, integration of urban and rural medical insurance systems were fully pushed forward, and the standard fiscal subsidy for urban and rural resident basic medical insurance was once again increased by 40 RMB, 20 out of which was used to increase the level of insurance for severe diseases, reaching 490 RMB per person per year, with corresponding increases in individual premiums. The standard of per capita fiscal subsidy for basic public health services was also increased by 5 RMB, reaching 55 RMB per person per year.

4.3.4

The New-Type Rural Old-Age Social Insurance System

Based on the Opinion on Setting up Trial Sites for the New-Type Rural Old-Age Social Insurance System by the Ministry of Human Resources and Social Security,

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the State Council decided to set 10% of the national counties (cities and prefectures) as the trial sites for the new-type rural old-age social insurance system in 2009. In the beginning of 2014, the State Council issued the Opinion by the State Council on Establishing the New-Type Rural Old-Age Social Insurance System, which implemented the integration of the new-type rural old-age social insurance system and the old-age social insurance system for urban and rural residents to establish a unified old-age social insurance system for urban and rural residents across the country. The system name, policy standard, management services and information system were all unified, making an important step towards total smack of the dual urban–rural structure. By the end of December of 2017, as many as 512.55 million people joined the basic old-age insurance system for urban and rural residents, among whom 155.98 million people received old-age pension, with the average pension of 125 RMB per person and 113 RMB of it was the base pension.

4.3.5

The Rural Subsistence Allowance System

In August, 2007, the State Council issued the Notification on Establishing a Nationwide Subsistence Allowance in Rural Areas, in which it was decided to establish a nationwide subsistence allowance in rural areas in 2007. In 2017, the standard allowances for urban and rural residents were 534.1 RMB/person/month and 350.9 RMB/person/month, respectively, and a total of 40.47 million people nationwide enjoyed the subsistence allowances for rural residents and 4.67 million people received relief provisions for rural residents in deep poverty.

4.3.6

The Rural Medical Relief System

The rural medical relief system offers social relief for the rural peasants in deep poverty who have not joined or are incapable to join the rural cooperative medical insurance system or who are unable to afford the premiums after joining the new-type rural cooperative medical insurance system. In 2009, the Ministries of Finance, Civil Affairs, Human Resources and Social Security, and Health jointly issued the Opinion on Further Improving the Urban Rural Medical Relief System (Minfa [2009] No. 81). In the Opinion, it was pointed to explore the establishment of a medical relief system that was unified in urban and rural areas. In 2015, it was specified in the Notification on Further Improving the Medical Relief System and Fully Implementing the Relief Work of Major and Severe Diseases issued by Ministries of Civil Affairs and Others and Distributed by the General Office of the State Council that all regions should integrate the urban medical relief system and rural medical relief system to be the urban–rural medical relief system. In 2017, 52.03 million people were subsidized to join the basic medical insurance and 35.36 million people received medical relief services.

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4.4 The Difficulty of Removing the Dual Urban–Rural Structure is to Consolidate the Land Property Rights for Peasants 4.4.1

Revenue from the Sale of the Land-Use Rights Became the Main Revenue Source of Regional Governments

According to the rough estimation by relevant bodies, the state revenue from selling the rights to use the expropriated rural land assets exceeded 2 trillion RMB after the reform and opening-up. From 1987 to 2001, the non-agricultural construction occupied 33.946 mu of arable land, 70% of which were expropriated. In 2017, the revenue from selling the rights to use the state-owned lands in China were 5.205901 trillion RMB, which increased by 40.7% compared to the previous year. In 2017, the revenue in the general public budgets of regional governments was 15.666564 trillion RMB, among which the local government revenue in the general public budgets was 9.144754 trillion RMB, representing an increase of 7.7%. The revenue from selling the rights to use the state-owned lands accounted for 57% of the local government revenue in the general public budgets and 33% of regional revenue in the general public budgets. With the economic growth and urbanization speeding up, some agricultural lands will inevitably be changed into non-agricultural construction lands. While fully aware of this, we should direct one of the focuses to how to share with peasants the valueadded revenue of selling the land-use rights whose interests were involved to speed up urbanization. This will be of significant importance to the future planning for urban and rural development. In the next ten and a few more years, changes in the distribution method and pattern of the land capital will cover the cost necessary for breaking the dual urban–rural structure and promoting the coordinated socioeconomic development of urban and rural areas.

4.4.2

The Big Policies that Touched the Vested Interest Were Usually Difficult to Implement After Issuance

The Decision at the Third Plenary Session of the 17th CCCPC declared to “take steps to establish a unified market for construction lands in urban and rural areas”, after which the following was reiterated by a comrade leader of the Central Committee in his speech: We cannot rely on peasants’ sacrifice of their land property rights to lower the cost of industrialization and urbanization and we must and now can increase the proportion of the profits from the land added values distributed to peasants by large scales.12 The Decision at the Third Plenary Session of the 18th CCCPC specifically required to “establish a unified market for construction lands in urban and rural 12 Wen, Jiabao, “A Bright Future for Agriculture and Rural Areas Is Fundamentally Due to A Good

Policy”, December 27, 2011, Sina Web-page, http://www.sina.com.cn.

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areas, and to allow sale, leasing and stock-sale of the use-rights of the operational construction lands of the rural collectives, provided that the sale, leasing and stock sale comply with the planning and the use limitations, with the same conditions to enter the market, the same rights and the same prices with the state-owned lands.” The Decision offered policy foundation for regional explorations. The No. 1 file of the central government in 2018 talked about expanding the channels for fund raising and adjusting and improving the range to use the lands whose use-rights had been sold, and said, “Improve the management of balancing and compensating for the occupation of arable lands, set high-standard indicators for additional arable lands such as agricultural land improvement and an inter-provincial coordinating mechanism for indicators for increases in, decreases in, linking to and surplus of urban and rural construction lands, and use all the profits gained to consolidate the poverty-alleviation achievements and support the strategy of vitalizing villages through expenditure budgets.” This was a major adjustment in the policy, but the key was whether and how to implement it. In 2018, the budget revenue of regional government funds assigned to the regional governments was 6.030181 trillion RMB, representing an increase by 4.6%. Among this, the revenue of selling the rights to use state-owned lands was 5.4661.7 trillion RMB, representing an increase by 5%. The relevant expenditure of regional government funds was 7.47827 trillion RMB, representing an increase of 28.9%, among which the expenditure related to the revenue of selling the rights to use state-owned lands was 6.693208 trillion RMB, an increase of 29.3%. In the first half of 2018, regional governments obtained 2.6941 trillion RMB by selling the land-use rights, increased by 43% compared to the same period of the last year. A large-scale increase in the proportion of the land gains given to peasants would mean a large-scale decrease for regional governments, which would inevitably involve key issues during the progress of integrating urban and rural areas, such as the distribution of the authority of treasury and the authority of office between the central and regional governments, land treasury and land finance. Only comprehensively deepened reform can push such adjustment forward. A big policy, once released, will not be implemented if there is no practical and feasible rules for the policy.

4.4.3

Gradual Reform in a Flexible Way

The No. 1 file of the central government in 2017 stated, “Explore means for rural collective organizations to re-activate and re-use the rural empty houses and housing lands by ways such as renting and cooperation to increase the monetary incomes of peasants” and “allow stock-share selling and cooperative management for the construction lands released by village remodeling and housing-land clean-up, provide major support to rural industries such as village leisure-provision, tourism and oldage services and the integration of the primary, secondary and tertiary industries in rural areas, and real estate development and personal estate and clubs are strictly prohibited.”

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In April, 2017, the Ministries of Housing and Urban–Rural Development and Land and Resources (now Ministry of Natural Resources) jointly issued the Notification on Strengthening Management, Regulation and Control of Recent House and Land-Use Supplies, in which it was stated to set up trial sites for rent-housing construction on collectively-owned construction lands in extra- and extremely big cities where the demand and supply of house renting were intensively unbalanced. In fact, even before this policy was issued by the central government ministries, similar efforts had been explored in various rural communities. Peasants joined hands together and voluntarily developed property renting economies or joint-stock economies on the construction lands collectively owned by the villages. Through the flexible means such as leasing, cooperation, selling stock shares and joint operation, the area of government-expropriated lands was gradually reduced, and peasants were able to decide to a degree how to distribute the benefits gained from non-agricultural construction lands. They obtained their monetary incomes and eventually, their share of the land gains was increased.

From Large-Scale Poverty Reduction to Targeted Poverty Alleviation Guobao Wu

Since the reform and opening-up, China’s world-renowned accomplishments in poverty-reduction and development has lifted more than 700 million peasants out of poverty. It is a miracle of the global history of poverty reduction and has been widely recognized by the international community as an example of successful poverty alleviation of humanity. Over the 40 years of the reform and opening-up, China was led by the Communist Party of China (CPC), relied on the socialist system with Chinese characteristics, worked hard and tirelessly to reform and open up, and reduced poverty based on development with targeted poverty alleviation in large scales with plans and organization. Now absolute poverty as defined in the current standard has generally been extinguished. After the People’s Republic of China was founded in 1949, a series of movements were first carried out in rural areas that were aimed to narrow the gap between rural households in resource possession and income, such as the land reform and cultivation cooperation, which basically extinguished the factor that was the major cause of poverty in rural areas of other developing countries, i.e., possession of no land. This laid the foundation in property institution favorable to the subsequent success of poverty alleviating campaigns in rural China. Then, a nationwide largescale infrastructure project was implemented in rural areas that was based on the effective control of resources by the government and the advantages in land use and labor use of the collective ownership characterized by the “three-level ownership with production teams as the basis”. This project promoted the development of education and public health and improved the water irrigation, transport, basic education and basic medical services in rural areas. Meanwhile, a promotional network of agricultural technologies was established that reached every village and new technologies including quality seeds, artificial fertilizer, agrichemicals, soil improvement and agricultural machines were introduced in a wide area to a degree. Also established was G. Wu (B) Rural Development Institute (RDI), Chinese Academy of Social Sciences, Beijing, China © China Social Sciences Press 2021 F. Cai (ed.), The Chinese Approach, https://doi.org/10.1007/978-981-16-1899-4_6

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G. Wu

a nationwide network for rural credit cooperative and supply and marketing cooperatives, as well as a security system to guarantee qualified peasants food, clothing, medical care, housing and burial expenses (or education for orphans) based on the rural collectively-owned economy at the time, which provided basic social security for the rural population that had lost working capabilities and established a system to provide living supplies by government treasury for peasants with extreme difficulties in life due to severe natural disasters or other particular reasons. Since the reform and opening-up in 1978, the Chinese government has focused on the all-round rejuvenation of China and the great revitalization of the Chinese nation through reforming, opening-up and development. Over the 40 years, the CPC and the Chinese government always treated poverty reduction as a critical strategic objective of the national development and revitalization, and, by employing the system and political advantages of the socialist system with Chinese characteristics to the fullest and by establishing the socialist market system and continuously modernizing the national governance system and capability, steadily pushed forward the national modernization, urbanization and development of the economy, society, culture and ecology, with proactive efforts to reduce poverty. Since the mid-1980s, China has continued to make plans and organize for large-scale poverty-reducing development efforts in the entire country, and implemented mid- to long-term poverty-alleviation programs one by one, including the “National Seven-Year Program to Help 80 Million People out of Poverty (1994–2000)” “National Program for Rural Poverty Alleviation and Development (2001–2010)” “National Program for Rural Poverty Alleviation and Development (2011 – 2020)” and “Poverty Alleviation Program of the Thirteenth Five-Year Plan”, which gave a strong push to the progress of rural poverty reduction in China. Since the Party’s 18th National Congress, the Central Committee has placed poverty alleviating development in an important position of national governance and to a new level of importance that affects the realization of comprehensive prosperity and the goal of the first centennial anniversary. It was included in the overall planning of “economic, political, cultural, social and ecological development as one” and the “Four-Pronged Comprehensive Strategy”, and the basic principle of targeted poverty alleviation was proposed, marking a whole new stage for China’s poverty alleviation and development progress. The tremendous achievements in poverty reduction over the 40 years of reform and opening-up in China were certainly marked by a unique temporal and spatial setting and the impact of the political and governance system characteristic of China, but there must be some factors that may be shared with other countries, and these factors should become precious knowledge and treasury for China’s future efforts and the global efforts to reduce poverty. Over the 40 years of the reform and openingup, China made two critical leaps in poverty reduction. One was the reduction of rural poverty population by 671.40 million, based on the current poverty standards in China, from 1978 to 2012, leading the poverty incidence in rural China to decrease from 97.5 to 10.2%. This was a critical leap that eliminated extreme and absolute poverty and such a large-scale poverty reduction usually took most industrialized countries a century to achieve. The other leap was the further reduction of rural

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155

poverty incidence to 3.1%, based on the current poverty standards in China, through targeted poverty-alleviating efforts from 2013 to 2017. This important leap in poverty reduction usually took about 50 years for most industrialized countries to achieve. In this chapter, the course of China’s large-scale poverty reduction and targeted poverty alleviation in the 40 years of reform and opening-up is analyzed, basic experiences and lessons of the poverty reduction efforts are discussed, and a brief prospect is provided for the strategic options for China’s poverty reduction efforts in 2020.

1 Large-Scale Poverty Reduction in China: 1978–2012 From 1978 to 2012, China reduced the population in poverty by a large scale based on the current standard of poverty. This course are made up of two stages. The first stage, from 1978 to 1985, was mainly driven by the economic system reform in rural areas, and the second, by industrialization and urbanization from 1986 to 2012 with support and facilitation of regional development.

1.1 Poverty Reduction Mainly Powered by Rural Economic System Reform, 1978–1985 In this period, China finished the economic system reform in rural areas that was centered on the household contract responsibility system, which allowed peasants, who had been bound by the old system, to contract lands for their own families and have autonomy over labor and most gains, thereby greatly motivating peasants to invest labor, money and intense management in their own contracted lands. From 1978 to 1985, the nationwide amount of artificial fertilizer used in agriculture doubled, the total power of agricultural machines increased by 78%, crop yield per unit area increased by 40%, and the agricultural labor productivity increased by 40.3%.1 The increases in the agricultural labor productivity led what had restrained labor in the old system to be abolished and the government to loosen up its control over the rural cultivation and husbandry structure and the rural market, while at the same time, pushing some production surplus and agricultural surplus labor to move to township and village enterprises (TVEs). In fact, the total number of rural laborers working in the non-agricultural sector increased by 41.50 million nationwide during

1 National

1999.

Bureau of Statistics, Statistical Yearbook of Rural China, 1999, China Statistics Press,

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this period,2 accounting for 11% of the rural laborers at the time and becoming one growth point of peasant incomes. In this period, the Chinese government also improved the convenience of produce trade through measures such as increasing the prices of produce and removing some of the restraints on the non-monopoly purchased produce. From 1979 to 1985, the purchase price index of produce in China increased by 66.8%, and the income increases due to the price increases accounted for 15.5% of the total income increases of peasants. Under the play of all the above factors, the net income per capita of Chinese peasants increased by 132%. The calorie uptake per capita of peasants increased from 2300 kcal/day/person in 1978 to 2454 kcal/day/person in 1985, and 50% of the peasants who had had difficulties keeping themselves fed or warm became free of the difficulties in this period. Based on the current standards of poverty, over 100 million rural population got out of poverty in this period, and the poverty incidence dropped to 78.3%.3 While poverty was reduced mainly by rural economic system reform, the Chinese government started agricultural development-based efforts in Dingxi and Hexi in Gansu Province and Xihaigu region of the Ningxia Autonomous Region (collectively called the “three western” areas) by implementing the “Agricultural Development Project in the ‘Three Western’ Areas” in 1982, which was aimed to solve the problem of extreme regional poverty. This was the first of a series of efforts to alleviate poverty by resource development in specific regions, and it lent precious experiences for the subsequent large-scale efforts of development-based poverty alleviation.4 In 1984, the Central Committee of the CPC (CCCPC) issued the Notification on Helping Change the Outlook of Impoverished Areas As Soon As Possible and proposed to rely on the people in each region and base on local characteristics to develop commodity production, inspire the internal energy of regional economies and change the outlook of impoverished areas, laying the policy foundation for the subsequent nationwide large-scale poverty alleviating campaigns in 1986.

1.2 Poverty Alleviating Development in Rural China, 1986–2012 Starting from 1984, the system reform in China shifted its focus from rural to urban areas. Based on continuous trials and experiences accumulated and lessons learned, China gradually explored and established a preliminary socialist market economic 2 Department of Population and Employment Statistics, National Bureau of Statistics & Department

of Finance, Ministry of Labor and Social Security, Statistical Yearbook of Labor of China, 2003, China Statistics Press, 2003. 3 Office of Residential Survey, National Bureau of Statistics, 2015. 4 Several measures adopted in the agricultural development project in the “three western” areas, such as alleviating poverty based on development, establishing profiles for people in poverty with cards issued, help offered to households, management of project funds and relocating entire villages, were inherited and further developed in subsequent nationwide poverty alleviating projects.

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system with Chinese characteristics, defined a comprehensive national strategy based on reform, opening-up and development and pushed fast the industrialization and modernization in China. During the transition of both the system and development, the national economy achieved a long-time, high-speed development, and a considerably large proportion of rural residents in poverty got out of it through active participation in industrialization and urbanization. Meanwhile, in response to the widening gap of incomes between urban and rural residents after the reform and opening-up, the Chinese government initiated a specialized program to alleviate poverty based on development in rural areas that was of unprecedented scale in the Chinese history, and took a series of special policies and measures to improve the abilities of the population and areas in poverty to develop on their own. These policies and measures, while facilitating the impoverished areas to develop fast, helped the people in poverty make good use of the opportunities created in the national and regional development to stabilize, reduce and eliminate poverty. Sustained development of the whole country, together with the development-based large-scale, well-planned and organized poverty alleviating campaigns, reduced rural poverty in this period.

1.2.1

Reduction of Rural Poverty Promoted and Supported by Industrialization and Urbanization

From 1985 to 2012, the proportion of urbanized population based on the household registration data increased from 23.7 to 52.6%, an increase by a factor of 1.2. The proportions of employees in the secondary and tertiary industries increased from 37.6 to 66.4% nationwide, and the number of people employed in the nonagricultural sector in the entire country increased by 201.12 million, of which as many as 140 million additional rural laborers left their home villages to work. Industrialization and urbanization promoted the economic growth of the entire country and also offered opportunities and drivers for poverty reduction. During this period, the per capita domestic gross product (GDP) grew on average by 8.9% annually while the per capita net income of all peasants in the country grew by 6% annually, and the rural population in 1985 who were in poverty based on the current poverty standards (accounting for 78.3% of the rural population in 1985) saw an overall increase in their net income per capita of 3.5 times. In this period, the rural population in poverty, based on the current poverty standards, reduced by 562.02 million, accounting for 76% of the total population lifted out of poverty since the reform and opening-up. Although it is difficult to quantify the contribution of industrialization and urbanization to the reduction of rural poverty or to obtain an accurate estimation of the contribution by dedicated poverty-alleviating development projects to the industrialization, urbanization and poverty reduction in impoverished areas, it is without doubt that sustained industrialization and urbanization has made important contributions to the reduction of rural poverty in the country.

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Improving the Rural Human Capital to Support Poverty Reduction

Starting from the mid-1980s, especially after 1996, the Chinese government added to its support to education and medical and health services in the entire nation with particular focus on rural areas. According to the population censuses, from 1982 to 2010, the proportion of the population with at least junior middle school education increased by a large scale, from 25 to 62%. The total number of rural laborers who had finished at least junior middle school accounted for nearly 70% in 2010. The national average life expectancy increased by 7.1 years in 2010 compared to 1982 due to the overall coverage of medical and public health services, advance of medical technologies and improved nutrition, and the overall health of rural residents had also improved greatly. The improvement in the rural human capital spoke for an improvement in education, health and welfare, while at the same time, supporting the industrialization and urbanization of China and facilitating the rural population in poverty to make use of the employment opportunities created by industrialization and urbanization, thereby promoting rural poverty reduction.

1.2.3

Implementing Peasant-Supportive and Beneficial Policies and Establishing a Social Security System to Reduce Poverty

Starting from 2002, the Chinese government implemented a series of policies one by one that directly increased peasants’ incomes and decreased their expenses, which included tens of policies that “gave more and took less”, such as abolishing agricultural taxes and the compulsory-education student fees and subsidizing peasants for agriculture, arable land protection, farmlands returned to forests or grasslands and ecological protection. These policies played a significant role in reducing poverty in rural areas. Statistical data have shown that in 2010, on average, each peasant in the counties heavily supported in poverty-alleviating projects obtained additional 174 RMB and spent 70 RMB less from the “giving-more-and-taking-less” policies,5 which contributed 15.8% to the reduced population in poverty in those counties based on the poverty standards at the time. In addition, China took steps to establish a nationwide rural new-type cooperative medical system (new rural cooperative), a subsistence allowance system and a new-type rural old-age insurance system in this period, which improved the social-security coverage for peasants, directly increased the incomes of low-income and vulnerable rural households, supported the national efforts to reduce rural poverty, and remained strong as a complement to the development-based poverty alleviation projects. In 2012, a total of 53.44 million people in China enjoyed the rural subsistence allowances, nearly 100 million rural 5 Wu, Guobao, Guan, Bing & Tan, Qingxiang, Policies that Give More and Take Less Have Directly

Impacted the Increased Incomes and Poverty Reduction of Peasants in Impoverished Areas; Department of Rural Surveys, National Bureau of Statistics, Poverty Surveillance Report of Rural China, 2010, China Statistics Press, 2011.

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population received social old-age pensions and a total of 240.8 billion RMB were reimbursed by the new rural cooperative system for 1.745 billion cases.

1.2.4

Regional Development-Based Poverty Alleviation to Promote and Accelerate Poverty Reduction in Rural Areas

China started large-scale poverty-alleviating projects based on development with plans and organization in the entire country in 1986. Although the dual goals were set in the beginning to lift rural people out of poverty and to promote the development of impoverished areas, the poverty-alleviating efforts were mainly focused on regional projects in this stage due to lack of a good mechanism to identify people in need of help, means to deliver help to households and effective organization and supervision, and development in selected impoverished areas was supported with policy incentives and special measures to reach indirect effect of poverty alleviation. From 1986 to 2012, the Chinese government included poverty alleviation in six consecutive Five-Year Plans (FYPs) for the nation, and made and implemented targeted development-based poverty alleviating plans, such as the “National Seven-Year Program to Help 80 Million People out of Poverty (1994–2000)” “National Program for Rural Poverty Alleviation and Development (2001–2010)” and “National Program for Rural Poverty Alleviation and Development (2011– 2020)”, which set the goals and focuses of poverty alleviation efforts for each period. In 1986, the Chinese government set a goal to ensure the basic living needs of the majority of the people in impoverished areas during the seventh FYP. In 1994, the Chinese government made the “National Seven-Year Program to Help 80 Million People out of Poverty (1994–2000)” that was aimed to solve the basic living needs of the remaining 80 million rural population in poverty. In 2001, in the “National Program for Rural Poverty Alleviation and Development (2001–2010)” made by the Chinese government, the goal of poverty alleviating campaigns was modified to “solve the basic living needs of the very small population still in poverty as soon as possible and to further improve the basic living and productive conditions in impoverished areas to consolidate the previous success that ensured the basic living needs of the people there”, which was aimed to create conditions for common prosperity. In 2011, the “National Program for Rural Poverty Alleviation and Development (2001– 2010)” was released, in which the poverty alleviating goal was set as follows: “By 2020, the subjects of poverty alleviation efforts should be steadily free of worries about food and clothes while their compulsory education, basic medical insurance and housing needs should be secured. The growth of the net income per capita of the peasants in impoverished areas should exceed the national average and the major services of in the basic public domain should approximate the national average to reverse the trend in the widening development gap.” (1)

Major Policies and Measures

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To realize the goal and complete the tasks for each phase of poverty alleviation, the Chinese government made and improved a series of polices and measures to alleviate poverty based on development, which supported and ensured that the plans and programs of poverty alleviation were well implemented. First, agencies to lead and handle issues involved in the poverty-alleviation work were established to ensure the regular activities of the work in order. In 1986, China started to establish a leadership system and working organization from the central to the country and town levels for poverty alleviation, i.e., the Leading Group for Development-Based Poverty Alleviation (formerly the Leading Group for Economic Development in Impoverished Areas before 1994), with an office. The group is responsible for making and implementing poverty-alleviation policies, defining and identifying subjects of poverty alleviation, making and implementing mid- to long-term annual plans for poverty alleviation, distributing povertyalleviation funds, planning and launching poverty-alleviation programs, coordinating with relevant organs and examining and supervising the poverty-alleviation work. Second, the subjects of poverty alleviation were defined and identified. The first task was to define and identify the counties in poverty. In 1986, the central government outlined 18 areas and districts and identified 331 state-level impoverished counties and provinces and autonomous regions identified 368 province-level ones. In 1994, the central government modified the standard of impoverished counties and based on it, identified 592 state-level impoverished counties. In 2001, the central government renamed the state-level impoverished counties as the key counties of national development-based poverty alleviation efforts, and while maintaining the total number of the impoverished counties nationwide, made adjustment to key counties in that the central government took away the slots for 33 counties in 6 eastern province and the counties in Tibet and redistributed the slots to other provinces and autonomous regions in central and western areas. In 2011, the central government identified 14 contiguous impoverished areas such as the Liupanshan Mountain area as well as 680 extremely impoverished contiguous areas and counties (abbreviated as contiguous-area counties which included 440 key counties of national developmentbased poverty alleviation efforts), and made adjustment to the original 592 key counties following the principle of “wide entrance with narrow exit, one out and one in, self-adjustment and total number control”. In the end, 680 contiguous-area counties and 152 key counties not in the contiguous areas constituted a total of 832 impoverished counties that were the key subjects of the national efforts of poverty alleviation after 2011. These impoverished counties remained the basic units of resource and project distribution in China’s poverty alleviating campaigns and an essential piece of planning, implementing and managing the poverty-alleviating projects in this period. While the “National Program for Rural Poverty Alleviation and Development (2001–2010)” was implemented, the Chinese government also identified 148 thousand key villages as the subjects of poverty alleviating campaigns through participation planning, and these villages were the focus of the poverty alleviating efforts at the time. In addition, the Chinese government made and kept adjusting the standard of poverty. In 1986, the central government set the national rural poverty standard as

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200 RMB of annual net income per capita based on the constant price in 1984, and the population in poverty accounted for about 15% of the total rural population. In 2008, the standard was modified from 895 to 1196 RMB of annual net income per capita, an increase by more than one third, which allowed an additional 30 million people to be eligible for poverty-alleviation policies. In 2011, the Chinese government further improved the standard to 2300 RMB based on the constant price in 2010, an increase by 80.5%, allowing 100 million more rural people to be eligible for poverty-alleviation policies. Third, the guiding principles of development-based poverty alleviation work were determined and development projects were planned according to the tasks in each poverty-alleviation period and customized to each type of poverty. The large-scale, well-planned poverty alleviation programs based on development the Chinese government implemented had a clear guiding principle from the beginning that people should be lifted out of poverty by development,6 i.e., help would primarily be offered to impoverished areas and people to make use of their own resources and improve their development abilities to get out of poverty. Development-based poverty alleviation was initiated by the Chinese government based on comprehensive and careful summarization of the development experiences and lessons in impoverished areas and the new situations of China’s reform and opening-up combined with the real conditions of impoverished areas at the time. The core was to make a holistic, fundamental transition from simple, individual relief offers to economic development,7 i.e., a transition from blood-transfusion to blood-making type of poverty alleviation. The Chinese government also made specific development projects to alleviate poverty according to the task and focus of each poverty-alleviation period. In 1986, it was decided that the focus of development-based poverty alleviation was to help impoverished areas make use of local resources to improve the agricultural productive conditions to develop agriculture. Accordingly, the major way to help people out of poverty was to promote science and technology and to create jobs instead of giving relief. During the implementation of the “National Seven-Year Program to Help 80 Million People out of Poverty (1994–2000)”, the focus of poverty alleviation had been decided as developing cultivation, husbandry and relevant processing, transportation and distribution industries that could directly help feed and warm people, with active efforts to develop township and village enterprises (TVEs) that could create large numbers of jobs for laborers in impoverished households. Accordingly, the major means of poverty alleviation included industry development, promoting science and technology, creating jobs instead of giving relief, transferring laborers to non-agricultural sectors to work, and relocation. From 2001 to 2010, China promoted 6 In

1984, the CCCPC released the “Notification on Helping Change the Outlook of Impoverished Areas as Soon as Possible”, in which it was specified that the fundamental way to change the outlook of impoverished areas was to rely on the local people to develop commodity production and boost the local economic energy by combining the local characteristics. 7 Office of the Leading Group of Economic Development in Impoverished Areas under the State Council, A Brief Overview of Economic Development in Impoverished Areas in China, China Agriculture Press, 1989.

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poverty alleviating campaigns to lift entire villages out of poverty, to develop agricultural industries, to train laborers to work in non-agricultural sectors, to promote science and technology and to relocate people for better living conditions. In fact, three major transitions occurred in China’s poverty-alleviating efforts in 2011. One was to transition from the basic living needs to comprehensively solving the needs of peasants for living and development, a second one was from focusing on peasants’ material needs to simultaneous satisfaction of their demands for both materials and social services, and the third one was to include in the strategic goals of poverty alleviation to reverse the trend in the widening development gap. In addition, two years before the targeted poverty alleviation strategy was proposed, contiguous impoverished areas were added to the preexisting scope for development-based poverty alleviation campaigns in China. Overall, the key aspects in the regional development-based poverty alleviation work during this period included improving the infrastructure such as roads, irrigation, drinking water and electricity supply in impoverished areas, supporting impoverished areas to develop husbandry and processing industries based on local resources, and improving education and public health in impoverished areas. Fourth, funds were dedicated to poverty alleviation to increase input of capital in impoverished areas. From 1986 to 2012, the central government arranged for three funds to be dedicated to poverty alleviation, namely, the development fund to support the underdeveloped regions (abbreviated as the development fund), the fund to create jobs instead of offering relief, and loans dedicated to poverty alleviation with interest subsidy. During this period, the central government allocated a cumulative poverty-alleviation fund of 270.4 billion RMB, and issued a cumulative loan with interest subsidy of 268.5 billion RMB. Fifth, a series of other benefit measures were adopted to lessen the burdens of impoverished areas and to increase their competitiveness in attracting business and capital. The policy benefits in the early time included reduction of contract crop amount after verification, reduction or removal of agricultural taxes as appropriate, waiving the enterprise income taxes of newly established ones in impoverished areas and fiscal quota and dedicated and difficulty subsidies to impoverished areas. Subsequent incentive policies expanded coverage to include measures to increase the development opportunities and competitiveness for external resources of impoverished areas. Although there is still a lack of accurate assessment, it is reasonable to acknowledge that these policy benefits and incentives have offered far greater benefits to impoverished areas than the funds dedicated to poverty alleviation. (2)

Impact on Poverty Reduction by Regional Development-based Poverty Alleviation

Due to lack of reliable data, there has been no rigorous assessment on the impact on rural poverty reduction of the regional development-based poverty alleviating campaigns China carried out from 1986 to 2012. Based on the mechanism of action,

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the regional development-based poverty alleviating efforts mainly impacted the poverty reduction in rural China through three ways. First, impoverished areas were supported to make use of their local resources to enrich and develop characteristic, advantageous industries to promote faster development, and by expanding demands and introducing industries, rural impoverished households obtained more incomes while more jobs were created for those in poverty. Second, the infrastructure in impoverished areas was improved, which directly increased the material benefits for the people in the areas while releasing a large amount of labor by bettering the transport and supply of electricity and water so that people could leave their homes worry free and find jobs in other places to earn more money and to get out of poverty. Third, education, public health and technical training offered to laborers in impoverished areas helped improve their overall capacity and more and more of them were able to make use of the jobs created in national industrialization and urbanization to increase their incomes and get out of poverty.

2 Targeted Poverty Alleviation and Poverty Lifting Since 2013 After 2013, China’s macroeconomic growth was faced with great pressure to transition the growth mode. The national economy slowed down significantly in growth, with the average annual growth of per capita GDP dropping from 8.9% in 1985–2012 to 6.4% in 2013–2017. The labor transferred from agriculture that had supported the rapid increases in peasants’ income showed an evident downward trend in growth, which dropped by a large scale from the average annual 5.3% in 1985–2012 to 1.6%. The produce prices that had overall benefited producers showed a reverse trend, and the average increase in the agriculture producer price index (PIN) was lower than the rural consumer price index (CPI) by 1.3 percentage points between 2013 and 2017, while in comparison, the average annual increase in the PIN surpassed that in CPI by 3.9 and 0.9 percentage points from 1978 to 1985 and from 1985 to 2012, respectively. These factors, which all affected peasants’ income, did not impact all rural households equally. From 2013 to 2017, the national disposable income per capita of peasants grew by 7.5%, but the 20% rural households with the lowest incomes only saw a growth of 1.3%. Had the government not increased the transfer payments to peasants by large scales in recent years, the low-income peasant households might have seen a decrease in their absolute incomes. In addition, by the end of 2012, the incidence of rural poverty had dropped below 10.2% and the impoverished population became even more dispersed in distribution and an increased proportion of them lacked working capacity. This situation carried a message that the way to reduce rural poverty by driving economic growth and promoting regional development would no longer work. In light of the changes in the macroeconomic situation and poverty characteristics, the rural poverty alleviation campaigns took a turn for targeted poverty alleviation

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and poverty lifting in 2013, and a complete chain of targeted poverty alleviation was in place from identification of the subjects, through project arrangement, use of funds, supportive measures and responsible persons to verification of extinguishment of poverty. In some sense, targeted poverty alleviation is a revolution in the field of poverty reduction and even in the development of impoverished rural areas. It did not just change and innovate the way to reduce poverty. It has brought revolutionary changes in many aspects such as the governance structure, resource integration, allocation and use, supervision and verification. In the international practice that aimed at poverty reduction, targeted efforts are usually faced with problems such as missing and asymmetric information of the impoverished population, increased political and social cost due to mobilization and collection of resources to reduce poverty, difficulties in supervision and lack of proper means to reduce poverty.8 Targeting these factors that affected the precision of poverty lifting efforts, the Chinese government and various organs issued a long list of new policies and measures in a short period of time in 2013 and the subsequent years, and established a policy and intervention system for targeted efforts to reduce and alleviate poverty, which solved the issues of how to land the targeted poverty alleviation efforts rather satisfactorily.

2.1 Identification and Dynamic Modification of Poverty Alleviation Subjects to Solve the Issue of Asymmetric Information In 2014, China started to make profiles and cards for people who needed help to get out of poverty. Through four years of exploration and summarization, China established a general system and methodology to identify people in need of povertyalleviating support with dynamical adjustment. This was the first time in the history of poverty alleviation in China to achieve the household- and individual-level accuracy of poverty information, the first time to analyze the cause of poverty and demand in alleviation by household, and the first time to have a uniform nationwide information system in place that included the data of all people needing poverty alleviation help, laying the foundation in information that was important to the targeted poverty alleviation and reduction work. Through a series of institutions, China made the system increasingly accurate to identify and adjust people needing help. First, the system of poverty alleviation is “overall planned by the central government, led by provinces as the level in charge and carried out by counties” so that all levels of Party committees and 8 William Easterly, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good, Citic Publishing Group, 2008. Collier, P. and Dollar, D., “Development Effectiveness: What Have We Learned?” Economic Journal, vol. 114, no. 496, 2004, pp. F244– F271. Coady, David, Grosh, Margaret & Hoddinott, John, Targeting of Transfer in Developing Countries: Review of Lessons and Experience, World Bank, 2004.

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governments from provinces to counties can and must follow the plans made by the central government to identify and adjust people in need of poverty alleviation while taking on their respective responsibilities. Second, a mechanism was established to identify people needing help and for those to withdraw from the poverty-alleviation system once lifted out of poverty on public platforms. As a result, identification of poverty-alleviation subjects and withdrawal of those lifted out of poverty are not only monitored by peer villagers, but acknowledged by themselves and the upper-level organs. This mechanism prevents arbitrary determination of the subjects in the form of an institution. Third, supervision, inspection and auditing mechanisms are in place to monitor the results and processes of accurate identification of poverty-alleviation subjects. Finally, a system to assess and examine the withdrawal of people lifted out of poverty that involves independent third parties has been established, and it has also acted back on the identification process and pushed it towards accuracy. After several years of repeated exploration and summarization, China innovated the methodology to identify poverty alleviation subjects in a vast land. The basic contents include the following. First, the national and by-province populations in poverty were deduced based on the large-sample surveys of residential expense and income across the country, and after the data of the population in poverty were dissected, the accurate identification of poverty-alleviation subjects was initiated. Second, the identification became more and more accurate by combining top-down and bottom-up means based on a multi-dimensional observable indicator of poverty and participatory methods. The data of the population in poverty were first dissected level by level and a preliminary result of the number of impoverished people in each village was obtained. At the village level, the village and group cadres could identify the subjects of poverty alleviation based on their personal information of the wealth in each rural household. This was the end of a top-down identification of people in poverty. Subsequently, a nationwide campaign was initiated to make a profile and card for each subject to “look back”. A complexity of methods were made in each area to identify people in real need of poverty alleviation support by combining the actual local situations based on multi-lateral definition of poverty and observable indicators with verification of indicators and participation of rural households.

2.2 Establishing and Improving the Governance System and Institutions to Ensure Targeted Poverty Alleviation While the provincial leadership and working bodies were strengthened and the responsibilities made clear for each industrial sector and regional government in the developed eastern area, the governance system at the grass roots was also established and consolidated. First, the system to evaluate the performance of poverty alleviation and adjust the examination items with a corresponding accountability mechanism was strictly enforced for all Party committees and governments. As a

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result, all Party committees and governments of the impoverished counties truly treated the development-based poverty alleviation as a major piece of their work and that poverty alleviation efforts should be “carried out by counties”, as stipulated in the working mechanism of poverty alleviation, was ensured of organization and personnel. Second, the working bodies and personnel in the respective countries and towns were reinforced. Third, while the Party committees and village committees of the impoverished villages were all trained for increased capacity and performance, all impoverished villages were equipped with a First Secretary with a working team for poverty alleviation. According to statistical data, a total of 775 thousand cadres were dispatched nationwide to help with the poverty alleviation work in impoverished villages, among whom, 195 thousand excellent cadres were selected by the Organization Department of the Central Committee and sent to impoverished villages and villages with weak and unorganized Party committees to take the responsibility as the First Secretary. As a result, all key villages of poverty alleviation were deployed with working teams and First Secretaries. The First Secretaries and working teams had not been existent in the previous governance system of poverty alleviation,9 and their entrance into the system strengthened the weak pieces that had held the poverty alleviation management in counties, villages and households to a degree. After all, it had been difficult to carry the poverty alleviation efforts into each household due to lack of staff, overload of work or other reasons, but this situation was now changed profoundly. These cadres deployed in villages were sent by governments higher than the villages, and they were authorized by counties and proper organization bodies, while at the same time, they had the time and conditions to check and survey the poverty status and causes in individual households. They also played an important role in accurately arranging for poverty-alleviation funds and projects with proper supportive measures. In 2013, the CCCPC and the State Council started to include the improvement of the governance system and capacity of poverty alleviation as the focus and the major leverage to realize poverty alleviation. First, through accountability mechanisms and corresponding administrative rules, the system and mechanisms of poverty alleviation became more institutionalized and operational. The specific measures include the following. First, the “Implementation Methods of Poverty Alleviation Responsibility System” was made to institutionalize the mechanisms of poverty alleviation that would be “overall planned by the central government, led by provinces as the level in charge and carried out by cities and counties”. Now a responsibility poverty alleviation system was established with clear responsibilities on each level that joined hands in alleviating poverty. Second, all relevant organs of the central government were given a part with clear responsibilities of implementing the important policies and measures made by the Central Committee and the State Council so that each organ had a basis to land their responsibilities and to supervise and assess their performance. Third, the primary responsible 9 Wu,

Baoguo, “Innovating the Governance System of Poverty Alleviation, Pushing the Targeted Poverty Alleviation to Walk up a New Step”, September 9, 2016, Guangming Web—Theory Channel, http://theory.gmw.cn/2016-09/09/content_21904122.htm.

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comrades of the Party committees and governments of 22 provinces (municipalities and autonomous regions) signed responsibility commitments with the central government (Leading Group for Development-Based Poverty Alleviation under the State Council) to vow to take on the responsibility so that the part of the poverty alleviation working mechanism that was led by the provincial level became assessable and accountable. Fourth, the first secretaries and government leaders of impoverished counties were kept in position throughout the period of poverty alleviation so that the responsibility of poverty alleviation was directly linked to the major leaders who would now feel the pressure and the responsibility to alleviate people out of poverty. Fifth, the First Secretaries and working teams of the impoverished villages had intensive responsibilities and assessments and the governance of poverty alleviation that extended to villages was realized through an accountability system. During the governance of poverty alleviation, China made full use of its political and system advantages to standardize and land the responsibilities of each level of governance of poverty alleviation. Second, supervision, inspection and assessment mechanisms were in place to improve the capacity and quality of poverty alleviation governance. The poverty alleviation subjects, projects and funds were all publicized and shown for public supervision, which was included as an item of performance assessment on fiscal funds dedicated to poverty alleviation. Therefore, social supervision including the poverty alleviation subjects was internalized as part of poverty alleviation.

2.3 Establishing a System of Resource Input and Mobilization that Could Meet the Demand of Targeted Poverty Alleviation Targeted efforts to alleviate poverty and lift people out of poverty need adequate investment of multi-channeled resources as a guarantee. Since 2013, the Chinese government, through increasing the investment in funds dedicated to poverty alleviation, integrating the existing agriculture-related specialty funds, levering financial resources and mobilizing social resources, has established a preliminary system of resource investment and mobilization for poverty alleviation that satisfies the demands of the combat against poverty. The first measure was to increase the poverty-alleviation funds by large scales. From 2013 to 2017, the total funds dedicated to poverty alleviation from the central treasury increased from 39.4 to 86.1 billion RMB, amounting to a cumulative sum of 282.2 billion RMB with an annual increase of 22.7%. With inflation not accounted for, the central treasury invested more funds over the four years than the total amount of the 27 years from 1986 to 2012. Together with the direct increases in the central funds for poverty alleviation, the Chinese government also arranged for 120 billion regional-government debt to be input in the improvement of the living and production conditions in impoverished areas, as well as for 99.4 billion regional-government debt

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and 50 billion funds dedicated to construction to be used for relocation-based poverty alleviation from 2013 to 2017.10 The second measure was to integrate the funds dedicated to agriculture in impoverished areas to increase the financial support for poverty alleviation. In April, 2016, the General Office of the State Council released the Opinion on the Support to Coordinated and Integrated Use of Agriculture-Related Fiscal Funds in Trial Sites of Counties in Poverty, and by the end of 2016, the total amount of agriculture-related funds of various levels included in the integrated use had exceeded 320 billion RMB.11 In a short period of eight months, the fiscal funds integrated in the trial sites were more than three times as much as the national input in poverty-alleviating funds for the entire year of 2016, increasing the pool of resources available for poverty alleviation by a large degree. The third measure was to boost financial means in coverage and intensity through financial innovations and adjusted policies. These innovations and policies include re-loans for poverty alleviation to increase the financial resources in impoverished areas, increased small-amount credit for the households needing help to get out of poverty, which amounted to a cumulative 338.1 billion RMB by the end of June, 2017 in support of 8.55 million households in poverty,12 large-scale increases in the loans for targeted poverty alleviation used for industrial development, relocating people and infrastructure in impoverished areas that were all aimed at poverty alleviation, and financial tools including securities and insurance for poverty alleviation. The fourth measure was to mobilize social resources to participate in poverty alleviation. While making further use of the government’s role in increasing input in the poverty-alleviating resources, the Chinese government also made use of its strong capacity to mobilize the society born in its political system to integrate and mobilize all forces from all sectors. First, the central government adjusted the pairing between the eastern and western areas based on the changes in the pivotal and challenging areas of poverty alleviation in the poverty-lifting period and the characteristics of targeted poverty alleviation, and switched the focus of coordinated poverty alleviating efforts between the east and west to the areas of minorities in deep poverty. The 30 autonomous prefectures of minority ethnic groups were all covered in the network of poverty-alleviating system. The coordinated poverty alleviating efforts between the eastern and western counties and cities were further strengthened, and 267 counties (cities, districts) of

10 Liu, Yongfu, “The State Council Report on the Poverty-Alleviation Work: At the 29th Meeting of the Standing Committee of the 12th National People’s Congress”, August 29, 2017, the webpage of China’s NPC, http://www.npc.gov.cn/npc/xin-wen/2017-08/29/contet_2027584.htm. 11 Department of Agriculture, Ministry of Finance, “The Central Treasury Has Arranged 640 Million Yuan of Reward Funds for the Trial Sites of Integrating Agriculture-Related Funds of Counties in Poverty of Eight Provinces and Municipalities in 2016”, June 5, 2017, http://nys.mof.gov.cn/zhe ngfuxinxi/bgtGongZuoDongTai_1_1_1_1_3/201706/t20170605_2615272.html. 12 Liu, Yongfu, “The State Council Report on the Poverty-Alleviation Work: At the 29th Meeting of the Standing Committee of the 12th National People’s Congress”, August 29, 2017, the webpage of China’s NPC, http://www.npc.gov.cn/npc/xin-wen/2017-08/29/contet_2027584.htm.

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advanced economy in the east paired up with 434 counties in poverty in the west in a campaign of “marching to common prosperity hand in hand”. Second, the targeted poverty-alleviation efforts were further pinned down so that help from government bodies, military units and armed police forces of various levels could reach the villages in poverty directly. Third, private enterprises were also enrolled in targeted poverty alleviation campaigns with guidance and support provided, resulting in innovative modes of poverty alleviation by private enterprises. In 2015, All-China Federation of Industry and Commerce, office of the Leading Group for Development-Based Poverty Alleviation under the State Council and China Society for Promotion of the Guangcai Program jointly launched a targeted poverty alleviation act of “ten thousand villages helped by ten thousand enterprises” to guide the vast majority of private enterprises to offer targeted help to the villages and households in poverty with established documents and cards through ways such as industrial development, employment and charity. This act mobilized and supported central enterprises to set up an industrial investment fund in impoverished areas for a campaign of lifting “one hundred counties with ten thousand villages” out of poverty. By the end of June, 2017, 34.3 thousand private enterprises had joined the targeted poverty alleviation act of “ten thousand villages helped by ten thousand enterprises” according to the account management system of the campaign, which offered targeted help to 35.7 thousand villages (including 25.6 thousand villages with established poverty documents and cards) and 5.3872 million people with established poverty documents and cards.13 Fourth, technologies and professional human resources were integrated and mobilized to participate in the national poverty alleviation campaign. In addition to dispatching First Secretaries and village cadres to villages in poverty in direct support of the human resources in poverty alleviation, the Chinese government and relevant government bodies also mobilized and integrated technologies and professional human resources to help lifting impoverished areas out of poverty based on the needs of the national campaign. Fifth, land policies were also offered to help with poverty alleviation. In 2016, the Ministry of Land and Resources (now Ministry of Natural Resources) released the “supra-conventional policy” concerning the linked land increases and decreases for regions in poverty. The policy allowed the counties in poverty to trade their remainder increases or decreases of linked land in their own provinces and the trading price in the regions in poverty were elevated from 50 to 100 thousand RMB per mu to 200– 300 thousand RMB per mu within counties. Statistics have shown that from February, 2016 to June, 2017, the gains over the trade of linked-land increases and decreases reached 33.5 billion RMB (excluding the land ticket trades in Chongqing), adding to the funds available for poverty alleviating efforts, especially for relocation-based alleviation.

13 Xie, Jingrong, “Helping the Targeted Poverty Alleviation act of ‘Ten Thousand Villages Helped by Ten Thousand Enterprises’ to Improve the Quality in Support of the Victory over the National Poverty-Alleviation Campaign”, China Poverty Alleviation, 2017, vol. 16.

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2.4 Innovating and Implementing a Poverty Alleviation Mode Tolerant of Various Poverty Types Based on the Characteristics and Needs of the Remaining Population in Poverty Since 2014, a variety of intervention measures of targeted poverty alleviation and their batteries have been invented through explorations and trials in various regions in China that were tolerant of multiple types of poverty. In addition to making use of the opportunities created by national development to help improve the capacities of people in poverty, which was carried forward from previous practices, a diversity of targeted poverty alleviating measures were developed to directly create opportunities and conditionally transfer payments.

2.4.1

Industry-Based Poverty Alleviating Measures Providing a Bridge to Stock Shares, Product or Employment

Agricultural households were included in the production and operation system of a much larger scale by means of stock shares, products and jobs under the support of the government and intervention of the external market organizations so that the resource allocation for poor agricultural households were restructured and their position in the decision-making for production and operation and other aspects was partially or completely changed. Accordingly, the sources and structure of the poor household’s incomes, as well as the security system, were reconstructed. Such kind of industry-based poverty alleviation that offers a bridge to shareholding, product or employment includes three basic types. In the first type, poor households buy stock shares of professional mainstays of agricultural production and operation (such as companies involved in agricultural business, professional cooperatives, family-based agricultural households or big agricultural households) with their contracted lands or poverty-alleviation funds provided or backed up by the government, or lease them to the mainstays. In return, the poor peasants obtain dividends or rent while taking on the risks accordingly. In the second type, poor agricultural households contract with companies involved in agricultural business to sell them their products so that they get price protection by which they share the market risks. In the third type, industrial organizations provide year-round or seasonal jobs to people needing help to get out of poverty to increase their job incomes. This industry-based poverty alleviation by means of stock shares, products and jobs is highly valued and strongly supported by regional governments.

2.4.2

Employment-based Poverty Alleviation Aligned with Demands

A good proportion of the laborers in poverty needing help cannot or are unable to leave their homes to work in a place far away due to family or personal reasons,

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or cannot find a proper job on their own. These laborers have little chance to get out of poverty under the normal market circumstances. In recent years, a variety of employment-based poverty alleviation measures were developed in many regions that targeted these people, including job arrangement in the east–west cooperation, creation of workshops in impoverished areas to lift people out of poverty, arranging for laborers in impoverished households to take a job nearby, and provision of public service jobs such as environment cleaning and road maintenance.

2.4.3

Poverty Alleviating Measures Combining the National Industrial Policies and Regional Resource Advantages

Regional advantage resources were combined with industrial development compliant with the national industrial policies for targeted poverty alleviation, and a variety of measures, such as tourism, asset-gains and photovoltaics, were explored and established for poverty alleviation, which has promoted the resource and industrial development in regions in poverty while benefiting those in need of help to get out of poverty.

2.4.4

Health-Based Poverty Alleviation Combining Medical Care and Burden Reduction

In the health-based poverty alleviating efforts in China, people with severe, major and chronic diseases were treated and the cost on their families reduced, so that the long-term difficulty of medical care was resolved for them. In terms of medical care, the national system of family planning and health investigated the background of all those needing help for poverty and established the disease type and severity and made health profiles for them, while arranging through contracts for rural doctors to provide routine healthcare services to those falling into poverty due to diseases, so that these people could now afford medical care. In addition, the 3A hospitals across the country established direct connection to all counties in poverty to provide remote diagnosis and consultations so that the counties are no longer heavily bothered by lack or low levels of medical technologies. In terms of burden reduction, those in need of help for poverty were given reduced rates and increased proportions of reimbursements for the new rural cooperative medical insurance and offered insurance for major diseases and medical relief plans so that their cost of medical care has been significantly reduced.

2.4.5

Ecological Protection-based Poverty Alleviation Combining Ecological Protection and Compensation with Public-Service Jobs

In regions where the ecological environment is vulnerable or key protection is needed for the environment, a battery of measures, such as increasing the compensation for

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environment protection and providing ecology-related public-service jobs, have been developed in these regions to enlist those in poverty within the regions in environment protecting efforts while their incomes are increased and poverty reduced with no need to move out of their living places.

2.4.6

Relocation-Based Poverty Alleviation Combining Immigrant Settling Support and Livelihood Support

According to demands of the poverty alleviation campaign, more than 10 million people with established poverty documents and cards have been or will be relocated to be lifted out of poverty. While ensuring that the movers may effectively “move out and settle down”, the individual regional governments have combined the efforts to settle the immigrants in their new places with the support for their livelihood. While helping the immigrants to settle down, the regional governments have given more weight on how to help them make more money through industrial development and employment support. As a result, a poverty alleviation method based on relocation has been developed that settles immigrants down while providing livelihood support.

2.4.7

Differential Bottom-Line Poverty Alleviation by Social Security

Social security as the bottom line of poverty alleviation is an international challenge in terms of how to keep it as the bottom protection while preventing people from heavily reliant on it. In the recent couple of years, some good measures in using the social security system as the bottom line were developed in various regions. For example, in Qinghai Province, the subsistence allowance recipients are classified based on the labor capacity of the family members as the following types with differential allowances, households needing major allowances due to complete loss of working ability of major family members or loss of self-care abilities, households needing basic allowances due to partial loss of working ability of major family members or partial loss of self-care abilities, and households needing average allowances with incomes below the local standards of subsistence allowances due to other reasons. In some regions, there developed measures that helped those with some working abilities in the households in poverty to be connected with welfare jobs or other development-based poverty alleviation projects.

3 Basic Experiences of China’s Poverty Reduction Efforts Over the 40 years after the reform and opening-up, China lowered its poverty incidence (PI) to below 3% in a vast country with more than one billion population, creating a miracle in the global history of poverty reduction of the humanity. Historical data show that the economically developed countries, such as the U.S., Germany,

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Table 1 Time some developed countries took to reduce poverty incidence (PI) from 10% to below 3% (based on the poverty line of one USD per day) Year when PI = 10% Year when PI < 3% Time elapsed (year) Australia, Canada and New 1900 Zealand

1970

70

US

1920

1980

60

Italy

1955

1990

35

Japan

1960

1970

10

UK and Ireland

1940

1970

30

Germany

1910

1960

50

Source Franc, Ois Bourguignon & Morrison, Christian, “Inequality among World Citizens: 1820– 1992”, American Economic Review, September, 2002

U.K., Japan, Italy, and Australia, all spent more than 100 years to lower their PIs to below 10%,14 and another 30–70 years to further lower the rates from 10% to below 3% except for Japan where it took approximately 10 years (Table 1). In addition, statistical analysis on the changes in poverty after 1981 in the 137 countries with complete data based on their world development indicators issued by the World Bank has shown that, based on the standard of 1.9 USD per person per day according to the 2011 purchase power parity, among these 137 countries, only 29 maintained a PI below 3%, 65 had a rate always over 10%, 21 saw rates below 10% at times, which failed to stay below 3% all the time, and only 22 made a plummet from 10% to below 3% in their PIs, which took most of them more than 10 years (Table 2). Compared to other big countries, China’s success in poverty alleviation in 40 years is without the question a great miracle. China’s efforts to reduce poverty based on development since the reform and opening-up constituted a progressive course that accompanied the dual-transition from the command to socialist market system and from the traditional agricultural to modern industrial society and it was based on China’s preexisting political, economic, social and cultural foundations as well as the planning, leadership, coordination and support of the CPC and government, during which the areas and people in poverty worked hard to improve their abilities to participate in and share the reform and development of the country to increase their incomes, welfare and capacities. Over the 40 years of reform and opening-up, China basically extinguished absolute poverty in rural areas according to the current poverty standard and accumulated a large amount of Chinese experiences in large-scale poverty reduction and targeted poverty alleviation through explorations. The basic experience of China is as follows: poverty reduction should always be based on development, efforts should be directed to improve the self-developing abilities in regions and populations in poverty, targeted poverty alleviation with innovative measures should keep running, a system of poverty alleviation that is “led by the government, centered on 14 Franc, Ois Bourguignon & Morrison, Christian, “Inequality among World Citizens: 1820–1992”, American Economic Review, September, 2002.

174 Table 2 Time some developing countries took to reduce poverty incidence (PI) from 10% to below 3% (based on the poverty line of 1.9 USD per day by 2011 PPP)

G. Wu Year when PI stabilized at 10%

Year when PI < 3%

Elapsed time (years)

Thailand

1990

1996

6

Mongolia

2002

2007

5

Costa Rica

1990

2007

17

Armenia

2004

2008

4

Sri Lanka

1990

2009

19

Bhutan

2007

2012

5

Cambodia

2008

2013

5

Kyrgyzstan

1988

2013

25

Chile

1987

2003

16

Iran

1986

1998

12

Tunisia

1990

2010

20

Moldova

1988

2006

18

Argentina

1986

2010

24

Jamaica

1988

1999

11

Kazakhstan

1988

2005

17

El Salvador

2004

2014

10

Belarus

1988

2002

14

Dominica

1992

2010

18

Ukraine

1988

2002

14

Romania

1989

2013

24

Paraguay

1990

2013

23

Source Populated by the authors based on the country-specific world development indicator data

the people, and participated by the society” should be in place, and persistent efforts must be made.

3.1 Poverty Reduction Always Based on Development At the beginning of the reform and opening-up, China was overall a poor country. Out of the rural population that accounted for 80% of the entire country, 97% of them were below the current poverty line and one third did not have enough food or could keep themselves warm. There was no other way than development of the national economy to solve the poverty issue of such a huge population. From this perspective, it was a historical choice that China decided to take the strategy of development-based poverty reduction when the reform and opening-up was initiated. More importantly,

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China never dropped the strategy or idea of development-based poverty reduction as the scale of poverty kept reducing. China’s economic development has been basically synchronized with the reduction of the population in poverty, and the former is an important cause of the latter. In every stage, the number by which the population in poverty was reduced was highly consistent with the growth of the economy. From 1978 to 1985, the average annual growth of the per capita GDP was 8.33% and the population in poverty decreased by 15.63 million every year on average; from 1985 to 2012, the average annual growth of per capita GDP was 8.9% and the average annual reduction in the population in poverty, 20.82 million; and from 2013 to 2017, the average annual growth of per capita GDP was 6.4% and the reduction, 13.71 million (Table 3). Of course, the absolute number of reduction is associated with the baseline number of the population in poverty, and a less biased approach is to use the average annual reduction rate of the population in poverty, which was 2.2% in 1978–1985, 6.8% in 1985–2012 and 21% in 2013–2017, a side line of evidence that targeted efforts to alleviate poverty contributed significantly to poverty reduction. The economic growth rate and the scale of reduction in the population in poverty at each stage after 1978 showed a strong correlation (with the coefficient of correlation of 0.67). In the periods when the economy grew at rates below 7%, the annual reduction in the population in poverty was always less than the other periods, which indicated, to some degree, that the reduction rate of the poor population would be Table 3 Poverty reduction and development since 1978 1978–1985

1985–2012

2013–2017

Poverty reduction, ’10,000 people

10,938

56,202

6853

Mean annual reduction, ’10,000 people

1562.6

2081.6

1370.6

Annual reduction rate, %

2.2

6.8

21.0

Annual growth rate of agricultural productivity, %

6.50

3.98

3.75

Annual growth rate of per capita GDP, %

8.33

8.86

6.39

Growth rate of rural non-agricultural employees, %

17.42

5.26

1.60

Production price of produce, %

7.59

6.41

0.32

Rural consumer price index (CPI), %

3.71

5.62

1.65

Net income per capita of rural households, RMB

12.7

5.9

7.5

Net salary income per capita of rural households, RMB

−6.3

9.3

6.6

Net business income per capita of rural households, RMB

30.4

4.0

7.0

Net property income per capita of rural households, RMB Net transfer income per capita of rural households, RMB

9.8 13.4

6.4

Source Calculated based on the relevant data from the National Bureau of Statistics

10.3

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affected if the per capita GDP grew below a certain speed in absence of any other interfering factors. However, analysis of the tracks of the changing economic growth and the poverty reduction reveals periods when the two are not consistent, indicating that economic growth is only one of the important factors affecting the poverty reduction. In fact, the mode of economic growth, distribution of the benefits of growth and the pattern of income distribution of the nation all impact the reduction of the population in poverty.

3.1.1

Choosing an Appropriate Path of Development to Increase the Impact of Economy on Poverty Reduction

After the reform and opening-up was initiated in 1978, the Chinese government evaluated the difficulties of various reforms and the impacts on people and chose to open up the labor market first and the capital and land markets next. This factorreform path made the best use of the labor market to create jobs (Fig. 1), which promoted the economic growth while making significant contributions to reducing the rural population in poverty by sustained increases in jobs. From 1978 to 2012, the non-agricultural laborers in rural China grew by 246.43 million or 11.3 folds while the proportion of non-agricultural laborers out of the national rural laborers increased from 7 to 50%. According to the poverty surveillance data of the National Bureau of Statistics, the proportion of rural laborers in impoverished regions who moved to other places for work is slightly lower than the national average; however, the changes in this proportion from 1996 to 2009 showed that the increases in the number of peasant laborers in impoverished regions were at the same level as the national average

Fig. 1 Numbers and proportions of laborers in non-agricultural sector in rural China, 1978–2012

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Fig. 2 Proportions of the peasant laborers emigrating from regions in poverty

(Fig. 2). The landscape of non-agricultural labor changes above mirrors the changes in the employment structure during the dual-economic transition in China, and these historical changes also changed the landscape of employment of the rural laborers in the country, including the regions in poverty and released the underlying energy of the large-scale reduction of poverty in rural China. During the progress when the national employment structure became increasingly non-agricultural, the average wage rate of employees in China also increased moderately based on the changes in the supply and demand on the labor market. According to the National Bureau of Statistics, the real average annual increase in the salaries of urban employees was 11% from 2001 to 2015 while during the same period, the real average annual increase of peasant workers was 8.7%.15 In some sense, the Chinese government chose to leave it to the market to set the wage rate for a long term instead of boosting it manually out of political concerns, which in fact played a positive role in the increases in the non-agricultural workers.16 In addition to the increasing employment in the private sector, the Chinese government helped create large numbers of jobs while stabilizing and accelerating the national economic growth by maintaining a fairly high speed of growing government investment in infrastructure for a long time. Peasant workers working in construction have always taken up about 20% of all of them, which is way higher than the

15 The data on the incomes of national urban employees were from the web site of the National Bureau of Statistics, and the data of the incomes of peasant workers were from the relevant observation reports of peasant workers made by the National Bureau of Statistics. 16 It is controversial about whether China should have implemented the system of minimum wages earlier in the academics both domestically and internationally. However, from the perspective of reducing poverty, the government chose to leave it to the market to decide wages for a long time and it actually promoted the laborers in poverty to take jobs and thus played a positive role in reducing poverty.

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Fig. 3 Sources of incomes of the lowest-income quintile of rural households in 2002 and 2012

proportion of those working in construction out of the total working population in the country.17 The increases in the number of people working in the non-agricultural sector and wage rates have improved the incomes of rural residents in China, which is the most important source of the reduction in the rural population in poverty. From 1985 to 2012, the real average annual growth in the net income per capita of the nationwide peasants was 5.6% while the real average annual growth of the wage incomes of peasant workers was 15%, with the latter exceeding the former by 9.4 percentage points. The proportion of wage incomes of the net incomes of peasants also increased, from 18% in 1985 to 43% in 2012. According to surveys made by the National Bureau of Statistics, the rural households in the lowest 20% income range had an increasing proportion of wage incomes out of their net incomes, from 26 to 43% from 2002 to 2012 (Fig. 3), the increase scale of which was equal to that of the national average. This demonstrates that the low-income rural households also benefited from the employment increases during the industrialization and urbanization of China.

17 According

to the observation reports of peasant workers from the National Bureau of Statistics, about 17% of peasant workers worked in construction from 2008 to 2012, and over 21% from 2013 to 2015. The average proportion of those working in construction out of the total working population in cities and towns was approximately 12% from 2008 to 2015.

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179

Coordinating Regional Development to Promote Poverty Reduction

The Chinese government has always taken regional coordination of development as an important strategy to strengthen the driving force of sustained economic development and reduce regional poverty. Since 2000, the Chinese government, by adjusting the regional configuration of infrastructure, environmental development, industries and social and development investment, has facilitated the speedy development of the western area with relatively underdeveloped economies and clustered population in poverty. These efforts improved the coordination of economic development between regions and brought under control and narrowed the development gap between eastern and western areas, while at the same time directly facilitating poverty reduction. For example, the increased investment in infrastructure in the west directly and indirectly offered a large number of jobs to rural laborers there, including those in regions in poverty,18 and ecological projects such as quitting cultivation to restore forests were poverty reducing per se. According to the poverty surveillance data of counties in poverty from the National Bureau of Statistics, peasants in impoverished counties obtained 70 billion RMB from 2002 to 2004 as subsidies for quitting cultivation to restore forests, which was equal to a quarter of the total amount of poverty-alleviation funds from the central treasury and possibly more than the amount of money that was available in the poverty-alleviation account of the central treasury during the same period.

3.1.3

Reducing Poverty Through Policies Supportive and Beneficial to Peasants

In 2002, the Chinese government started to issue a series of policies supportive and beneficial to peasants that were aimed to increase the incomes and decrease the expenses of peasants, which had direct impact on the reduction of rural poverty. Statistics have shown that in 2009 alone, every peasant in the key counties needing poverty alleviating support earned 174 RMB more and spent RMB less on average due to the policies that “gave more and took less”.19

18 According

to the observation reports of peasant workers from the National Bureau of Statistics, 37% of people took a job in their resident provinces in the west in 2009, and this figure increased to 46.5% in 2015. 19 Wu, Guobao, Guan, Bing & Tan, Qingxiang, The Direct Impact of Policies that “Give More and Take Less” on Increasing Incomes and Reducing Poverty for Peasants in Impoverished Areas”; Department of Rural Surveys, National Bureau of Statistics, Poverty Surveillance Report in Rural China, 2010, China Statistics Press, 2011.

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3.2 Always Help Regions and People in Poverty Improve Their Self-Developing Capacities To help the impoverished areas and population to improve their self-developing capacities, China adopted development-based poverty alleviating measures with predetermined targets, and the major measures covered three dimensions: transferring some benefits to impoverished areas and population through policy incentives, improving the material infrastructure and public services in impoverished areas, and boosting the self-developing capacities of the people in poverty.

3.2.1

Helping Impoverished Areas to be More Competitive Through Policy Incentives

By offering policy incentives, the Chinese government helped counties in poverty obtain special development conditions to partially offset the limitations holding their development due to adverse natural conditions or underdeveloped economies. The local policy advantages were created by offering different incentives in different periods to impoverished regions such as land, export, import and agricultural-tax exemption policies and giving up on part of the central- and local-government gains and transferring it to impoverished regions and poor households to either improve their development environment and their competiveness and development capacity or to add to their welfare directly.

3.2.2

Improving the Infrastructure and Public Services in Impoverished Areas

The Chinese government improved the infrastructure and public services in impoverished areas mainly through planning of national infrastructure and public services, extra weight of investment in impoverished areas and development plans dedicated to impoverished regions. Since the National Seven-Year Program to Help 80 Million People out of Poverty (1994–2000) was issued, the Chinese government has always encouraged and added to investment in national infrastructure and public services in impoverished regions. Through preferential development of transportation, irrigation, energy and environment infrastructure in the central and western areas with clustered population in poverty, China greatly relieved the infrastructure stress that had held the development of impoverished regions. In fact, improving the infrastructure and public services in impoverished areas has always been the preference and focus of China’s dedicated poverty-alleviating efforts. According to the monitoring surveys on the funds invested in poor counties by the National Bureau of Statistics, the input in infrastructure and public services continued to account for at least 50% of the entire

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external funds for poverty alleviation in poor counties,20 and about 80% of the fiscal poverty-alleviation funds were also spent on improving the infrastructure and public services in impoverished regions. Among the dedicated poverty-alleviating projects, those offering “jobs instead of relief” and “village-scale implementation” have taken the role of improving the infrastructure and public services in impoverished regions.

3.2.3

Boosting the Self-developing Capacities of the People in Poverty

The Chinese government has helped those in poverty gain better self-developing capacities mainly through offering improved opportunities for poor households to get financial services, labor training and industry- and technology-based poverty alleviation. Relocation-based poverty alleviation has also been employed in China as one way to improve the self-developing capacities of those in poverty.

3.3 Targeted Poverty Alleviation Since the initiation of development-based poverty alleviation in 1986, the Chinese government has always promoted effective use of the limited poverty-alleviation resources to help the areas and households in real poverty to improve their living and production conditions and self-developing capacities in order to realize targeted poverty alleviation. During the development-based poverty alleviating practice over more than 30 years, the Chinese government, together with the various participating bodies, never stopped exploring for methods and ways to optimize the effectiveness of targeted poverty alleviation.

3.4 Innovative Poverty Alleviation When alleviating poverty in rural areas over the past more than 30 years, China kept improving the effectiveness of poverty alleviating efforts and the efficiency to use poverty-alleviation resources through trials and innovations that continuously improved and adjusted the strategy, management structure and financial management of poverty alleviation projects based on the poverty-alleviation situations, characteristics and national development strategies. The poverty-alleviation strategies went through the following transitions. First, a transition was made from the strategy to reduce poverty based on economic growth with no specific objective in poverty reduction to development-based poverty alleviation targeted at pre-set objectives. Second, poverty alleviation was transitioned 20 The Poverty Surveillance Reports in Rural China by the National Bureau of Statistics has offered the sources and uses of the external funds for poverty alleviation in poor counties since 2000.

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from relief- to development-based projects, and, in 2007, further to a strategy that combined social security and development for poverty alleviation. Third, the strategy of supporting big regions in poverty was transitioned to supporting impoverished counties and then to offering focused support to impoverished villages, and starting in 2011, to a strategy that combined developing big regions in poverty with povertyalleviation resources entering villages. Fourth, a transition was made from single projects to comprehensive ones to reduce poverty. Fifth, the strategy was transitioned from poverty alleviation with no targets to the targeted alleviation. Innovations in the management structure improved the efficiency and effectiveness of poverty alleviation. Major innovations include the following. First, the decisions for poverty-alleviation plans and projects were made at increasingly lower levels. From 1986 to 1995, the central Leading Group for Development-Based Poverty Alleviation made almost all the plans for rural poverty-alleviation plans and was the authority to assign resources in China; in 1996, the Chinese government implemented the “four-delegations-to-provinces” policy for poverty alleviation and started to grant provinces the autonomy to decide for poverty-alleviation tasks, funds, responsibilities and project decision-making, which were subsequently dissected and further delegated to counties with the provincial governments retaining the decision-making power for the investment above a certain scale and cross-regional projects. In 2002, whole-village alleviation was promoted and the planning and implementation of poverty-alleviation projects were de facto at the hands of the village administrations under focused support. Second, poverty-alleviation efforts were originally entirely dominated by the government, and gradually transitioned to government-guidance with social participation, and further to government guidance with participation of social organizations and people benefiting from them. Before 1996, all poverty-alleviation projects were dominated by the government, and there was little room for other organizations and people in poverty to speak up. The social poverty alleviation initiated in 1996 granted participating social organizations lawful and reasonable rights to some degree, marking a profound transition in China’s poverty-alleviation history. The whole-village alleviation that was promoted after 2002 improved the status of rural community organizations and impoverished individuals as the mainstays in the poverty alleviation efforts. Innovations in financial management mainly involve the two aspects of treasuryand credit-based poverty-alleviation funds. The innovations in the management of treasury-based poverty-alleviation funds primarily include the following. First, the funds were originally distributed between regions in a vague mechanism, which was later changed to distribution based on factors. Second, dedicated accounts were established for treasury-based poverty-alleviation funds together with a reimbursement mechanism. Third, an information system was established to monitor the treasurybased poverty-alleviation funds. Fourth, a mechanism of performance examination and assessment was established for the treasury-based poverty-alleviation funds. Fifth, a multi-facet monitoring system was in place involving auditing, treasury departments, business departments and social public opinions. The innovations in the management of credit-based poverty-alleviation funds primarily include the following. First, the mainstays of loans not only included direct

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loans, but was also innovatively expanded to support real economies and dominating local industries and leading enterprises. Second, innovations in methods of loans were made in that trials with loans by economic entities with government credit, small-amount loans based on social credit and enterprise or government loans based on mortgage and warrant were carried out after 1986. Third, interest deductions were innovatively made with trials in offering interest deductions to loaning banks and to loaners. Fourth, trials were made with commercial banks, policy banks and regional governments as the loaning institutions.

3.5 A System of Poverty Alleviation “Led by the Government, Centered on the People, and Participated by the Society” China’s development-based poverty alleviation has always been led and organized by the government, with the society participating in it, and directed to the impoverished regions and populations. The poverty-alleviation system that is “led by the government, centered on the people and participated by the society” is the basic characteristic of China’s poverty alleviation, as well as the basic institutional guarantee for its success.

3.5.1

Led by the Government

China’s development-based poverty alleviation has always been led and organized by the government. The leadership of the Chinese government in poverty alleviation is mainly reflected in the following aspects. First, the Chinese government designs, regulates and controls poverty-alleviating projects as part of the national reform and development. In fact, it is already clear in the analyses above that poverty reduction has always been a theme of the entire reform and development history that is planned, regulated and controlled by the Chinese government, and reform and development have also created favorable environments and conditions for poverty reduction. Second, by establishing a leading system with coordination and organization, the Chinese government has integrated poverty alleviation in the national plan for socioeconomic development, making it an important part of the government work and ensuring the support in organization for it. Third, the Chinese government has used its administrative systems and resources to mobilize and arrange resources for poverty alleviation, ensuring the necessary input in the cause. Statistics show that from 1980 to 2018, the central treasury invested a cumulative 664.6 billion RMB in poverty alleviation as dedicated funds. Fourth, the government keeps adjusting relevant policies or make necessary regulations and institutions based on the needs of poverty alleviation to provide institutional support for poverty-alleviation projects to run in order.

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3.5.2

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Centered on the People

During the progression of reducing poverty since the reform and opening-up in China, the populations in poverty were always in the center. The government and society have helped impoverished populations to get out of poverty and become rich through their own efforts by creating a macroeconomic society that is favorable to poverty reduction, improving the conditions and capacities of impoverished regions and populations to develop themselves and making policies that stimulate impoverished regions and populations to get out of poverty. The more than 700 million rural population that were lifted out of poverty after 1978 got out of poverty because they worked hard and made use of the favorable conditions created by the national reform and opening-up and development.

3.5.3

Social Participation in Poverty Alleviation

Social alleviation of poverty is a Chinese way to reduce poverty. Since the mid1990s, poverty alleviation with social participation has always been an important part of China’s efforts to reduce poverty, and it belongs to a broad concept of social poverty alleviation that bears Chinese characteristics. It is mainly classified into three categories. The first bears a nature of re-distribution and is organized and coordinated by the government. It involves all levels of government organs and institutions that have designated areas to help poverty alleviation in, coordination between the east and west and the efforts by the armed polices. The second involves enterprises which participate in poverty alleviation to fulfil their social responsibilities and seek to create mutual benefits for both the impoverished areas and themselves. The third comprises pure poverty-alleviating activities by non-profit social organizations and individuals. These three types make up the Chinese social poverty alleviation campaign, which made significant contributions to reducing poverty in China in the past 20 years by mobilizing the society and their affiliated organizations and organizing and implementing projects and innovative ways of poverty-alleviation.

3.6 Persistent Efforts to Alleviate Poverty China has always taken poverty reduction as a goal and important part of development out of its own system, ideal and belief. For 40 years and over seven consecutive fiveyear national development plans, focused and persistent efforts have been made to reduce poverty, which kept all goals and ways of poverty alleviation to be sustained and improved, and eventually, the goals were reached to basically extinguish the absolute impoverished population based on the current standards.

From Large-Scale Poverty Reduction …

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4 Prospects of China’s Future Strategy to Reduce Poverty China is now in the final stage of combating poverty, and will step into a new historical stage after 2020 to build a socialist and modernized power. By the end of 2017, the poverty reducing efforts had achieved a decisive progress in terms of the reduction of impoverished population, with only some 30 million people still in poverty. Now that a relatively complete governance system, policy framework and resource-mobilizing and ensuring system are in place in China, with plenty of targeted poverty alleviation practice and experienced people familiar with the ways and methods of targeted poverty alleviation, China, as a whole, will be able to fulfil the goal to leave poverty behind in 2020 as long as the set mechanisms and supportive policies of poverty alleviation are followed while regions in deep poverty and impoverished people in special situations are given particular attention. From 2020 to 2050, China will need a new poverty-alleviation strategy based on the changes in poverty characteristics and natures. The strategy should cover the following aspects. It should be a tolerant strategy of development to ensure adequate employment and increased proportions of labor compensation out of income distribution. Social security and services should be improved to offer better social services and security levels for all people and to narrow the gap in access to and quality of public services. Development-based poverty alleviation should continue to be carried out, and its quality and sustainability should be improved by integrating it in the village-vitalization strategy. Policies to give special support to relatively underdeveloped regions should be continued. Finally, a governance system of poverty alleviation that is coordinated between urban and rural areas should be in place to further improve the quality and effectiveness of poverty-alleviating work.

Industrial Development: From Big to Strong Qunhui Huang

Over the 40 years of reform and opening-up, the Chinese economy achieved worldrenowned accomplishments, with an average annual growth rate of gross domestic product (GDP) at 9.6% from 1979 to 2016, leading China to have quickly become the second largest economy in the world. This economic growth wonder in China may certainly be interpreted and described in multiple perspectives, but among the many great achievements of this wonder, one deserves intensive documentation with “heavy ink”, i.e., China quickly rose from an agricultural country to the world’s number one industrial and biggest manufacturing country, which may be duly deemed as a great Chinese industrial revolution.1 A search for the secret code of China’s high-speed economic growth or any effort to reveal the nature of China’s experiences is never complete without describing and analyzing the industrial development during the progress of China’s industrialization. In addition, China is now in the late stage of industrialization as the economy increasingly turned to services in recent years,2 and the pattern of the developing and evolving industries in China, as well as the challenges and issues faced in this stage, are of high interest to economic researchers. In some sense, it is an important topic of global interest for the current development economics to well interpret the industrial development over the 40-year reform and opening-up in China and the resulting changes in the pattern of global industrial competition.

1 Wen,

Yi, The Great Chinese Industrial Revolution: An Outline of General Principles and Comments of Developmental Political Economics, Tsinghua University Press, 2017, p. 7. 2 Huang, Qunhui, China’s Industrial Economy in the Late Industrial Stage, Economy & Management Publishing House, 2018, p. 7. Q. Huang (B) Institute of Economics, Chinese Academy of Social Sciences, Beijing, China © China Social Sciences Press 2021 F. Cai (ed.), The Chinese Approach, https://doi.org/10.1007/978-981-16-1899-4_7

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1 China’s Rise as an Industrial Power: Data and Facts In 221 BC, Emperor Qinshihuang unified China and established a uniform feudal and centralized country. Before the rise of the Western industrial civilization, China had remained one of the very few powers in the world with an ancient civilization and advanced productive forces across the long evolving times and dynasties. However, China was left behind the course of modernization in the recent history when the Industrial Revolution empowered capitalism with huge innovation energy. China began its own industrialization after the People’s Republic of China (PRC) was founded. The first moves were made by the agricultural, railway and transport and energy sections of the government, and the northeastern area was the central focus of investment. With the implementation of 156 key projects, China pushed its own structure of modern industries forward albeit great deals of hardship. In 1950, 51.66% of the national investment was made in the northeast, and among the 17 key projects, which included eight electricity and five coal and charcoal projects, implemented nationwide from 1950 to 1952, 13 were in the northeast. By 1957 when the first Five-Year Plan (FYP) was completed, the 156 key projects had gone into operation, with which China laid a preliminary foundation for industrialization.3 During the first FYP, the national economy and industrial economy both grew in high speeds, by 10.9 and 18%, respectively.4 However, the path to the industrial development of the PRC was not without difficulties, and the course of industrialization was interrupted several times, among which, the “Great Leap Forward” movement from 1958 to 1961 brought considerable losses and the ten-year period of 1966–1976 disrupted the industrial network in China to a large degree. In 1978, the gross domestic product per capita in China was only 385 RMB, and the output values of the thrice sectors accounted for 27.7, 47.7 and 24.6%, respectively, of the economy. The agricultural output was high, claiming as much as 70.5% of the national laborers, while services took only a small percentage, showing that China was still a typical agricultural country with a big population. In terms of the specific industrial and agricultural output, in 1978, the crop yields were 310 million tons, with 9.43 million tons of meat, 620 million tons of crude coal, 30 million tons of crude steel, 256.6 billion kilowatt-hours of electricity production, and 183 thousand automobiles manufactured, which altogether constituted a real economy that was not enough to keep a large country with 960 million people fed and warm. The poverty incidence (PI) in rural China was 97.5% at that time per the standard of 2010, which meant that 770 million of the rural population was in poverty. In addition, the Chinese economy had a very low level of exports in 1978, with a total imports and exports accounting for only 9.7% of the national GDP.5 In summary, 3 Ma, Quanshan, Initial Efforts of China’s Industrialization: A Look Back at the Industrialization of

the New China, 1949–1957, China Social Sciences Press, 2015, pp. 51–64. 4 Jin, Bei, The Skeleton of a Big Country: The Course of and Reflections on China’s Industrialization

of 65 Years, Guangdong Economic Publishing House, 2015, p. 17. 5 National Bureau of Statistics, China Statistical Yearbook 2017, China Statistics Press, 2017, pp. 4–

15. All data in this chapter were taken from the 2017 statistical yearbook unless otherwise specified.

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China had a foundation for a big industrial system to some degree in 1978, but it was overall in the primary stage of industrialization, with a rather underdeveloped economy. After the reform and opening-up, China started the great practice of modernization with Chinese characteristics. The 40-year Reform and Opening-up has brought profound, revolutionary changes. The industrial development showed that China transitioned from a large underdeveloped agricultural country to an industrial power,6 and its industrialization course quickly went from the primary stage to the late stage, and in 2020, China will realize general industrialization. As shown in Table 1, the numbers visualize the profound changes in the total industrial output over the 40 years: the total economic value in 2016 was 32 times that of 1978, the average annual growth in China’ economy was as high as 9.6% from 1978 to 2016, and the growth of per capita GDP averaged at 8.5%. In 2016, the total output of the secondary industry was 50 times that of 1978, and the average annual growth of the secondary industry from 1978 to 2016 was as high as 10.9%. From the perspective of international experiences, late-developing economies usually show a long term of high-speed economic growth, which generally last for more than two decades. After the Second World War, the economies that had an economic growth rate over 7% lasting for 25 years and more included Botswana, Brazil, Hong Kong of China, Indonesia, Japan, South Korea, Malaysia, Malta, Oman, Singapore, Taiwan of China, and Thailand, in addition to the mainland of China.7 Among these economies, Japan had an average annual growth of 9.2% from 1951 to 1971, 8.3% in Taiwan, China from 1975 to 1995, and 7.6% in South Korea from 1977 to 1997.8 Looking back now, we have realized that only the mainland of China successfully maintained an economic growth with such a high speed for as long as 40 years. Although we cannot predict whether there will be “a coming one” to achieve a similar great miracle of economic growth, we are certain that we are “unprecedented”! Behind the world-renowned economic growth lies a rising industrial power of global importance. As shown in Table 2, the yields of major industrial and agricultural products all grew by several or tens of times over the 40 years of reform and openingup in China, and most of the products are now among the top few of the world production, among which crops, oilseed crops, meat, crude coal, crude steel, steel and electricity production are all first in production in the world, securing the top seats of both agriculture and industry for China, while at the same time, the size of the service industry in China ranks number three in the world now. To match the status as an industrial power, China became the world’s largest foreign-trading country in 2013. Compared to 1978 when the imports and exports of goods totaled at 20.64 billion USD, China had a total value of imports and exports of 3.68556 trillion USD 6 Chen,

Jiagui & Huang, Qunhui, “Industrial Development, Changes in National Situations and Strategy of Economic Modernization: An Analysis of the National Situations for China to Become an Industrial Power”, China Social Sciences, 2005, vol. 4. 7 Zhang, Xiaojing, “Slowing down Growth is not a “Wolf Coming”: A Prospect for China’s Future Growth”, International Economic Review, 2012, vol. 4. 8 Lin, Yifu, “A Prospect of China’s Economic Development Pattern in the Next 20 Years”, China Business and Market, 2012, vol. 6.

6945

4980

Secondary Industry

Third Industry

385

905.1

1755.2

1018.5

3678.7

–

33,757

22,350

21,496

77,603

53,980

384,220.5

296,236.0

63,670.7

744,127.2

Total Product Value, ’100 million RMB

Source National Bureau of Statistics, China Statistical Yearbook 2017, pp. 4–5

–

28,318

Per capita GDP

40,152

Employment, ’10,000

Primary Industry

2016

Employment, ’10,000

Total Product Value, ’100 million RMB

1978

National

Indicator

–

690.3

321.8

75.9

193.3

Employment, ’10,000

2240.2

4481.7

5015.1

517.0

3229.7

Total Product Value, ’100 million RMB

Indices (2016/1978, %)

–

5.2

8.5

10.5

10.9

4.4 3.1

9.6

1.7

Total Product Value, ’100 million RMB −0.7

Employment, ’10,000

Mean Growth Rates (1979–2016)

Table 1 Changes in employment and output of the thrice industries in China over 40 years (1978–2016) of reform and opening-up

190 Q. Huang

Industrial Development: From Big to Strong

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Table 2 Changes in the production of major agricultural and industrial products during the 40 years of reform and opening-up (1978–2017) Product

1978

Crops, ’10,000 tons

2017

Index (% 2017/1978)

Global rank

30,476.5

61,791.0

202.8

Cotton, ’10,000 tons

216.7

549.0

253.3

1 –

Oilseed crops, ’10,000 tons

521.8

3732.0

715.2

1

Meat, ‘10,000 tons

943.0

8431.0

894.1

1

Water products, ’10,000 tons

465.4

6938.0

1491.0

–

Crude coal, ’100 million tons

6.2

35.2

567.7

1

10,405.0

19,150.6

184.1

4

137.3

1480.3

1078.2

Cement, ’10,000 tons

6524.0

234,000.0

3586.8

1

Crude steel, ’10,000 tons

3178.0

83,172.8

2617.1

1

Steel, ’10,000 tons

2208.0

104,958.8

4753.6

1

14.9

2901.8

19,469.8

–

Crude oil, ’100 million tons Natural gas, ’100 million m3

Automobiles, ’10,000 Metal-cutting machines, ’10,000 Electricity, ’100 million watts

18.3

67.3

367.2

–

2566.0

64,951.4

2531.2

1

Note The data for metal-cutting machines was that of 2016, and the global rank was that of 2015 Source National Bureau of Statistics, China Statistical Yearbook 2017, p. 6; National Bureau of Statistics, Statistical Communiqué of the National Economic and Social Development 2017 and People’s Daily, March 1, 2018; Department of International Cooperation, National Bureau of Statistics, “Significantly Improved Position and Considerably Increased Impact Internationally: Serial Achievements in the Socioeconomic Development since the Party’s 18th National Congress, part 2”, 06-21-2017, http://www.stats.gov.cn/tjsj/sjjd.201706/t20170621_1505616.html

in 2016, which was 178.6 times as much as that of 1978, translating into an average growth of 14.6% over the 40 years, and 5 percentage points more than the growth rate of the total economy. Among the imports and exports, the total value of exported goods grew from 9.75 billion USD in 1978 to 2.09763 trillion USD in 2016, with an average annual growth of 15.2%, 5.6 percentage points more than the growth rate of the total economy. China, without question, is now a great industrial power that has risen based on an export-oriented strategy of industrialization. At the core of China’s achievement as an industrial power is the development of manufacturing industries. As China was industrialized quickly, its manufacturing industries became bigger and stronger. Products made in China became commonly seen in more than 230 countries and regions around the world, and in 2010, China became the largest manufacturer in the world with the highest manufacturing output. In fact, China is the only country in the world that possesses the manufacturing

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capacity in all the industrial domains as specified in the International Standard Industrial Classification (ISIC) by the United Nations (UN), and out of the 500 major industrial products, China leads the world in the production of more than 220.9 According to the database of the UN Statistics Division, the value-added of China’s manufacturing industries reached 3.07985 trillion USD in 2016, accounting for 24.5% of the world total and leading the second place holder, the U.S., which had 2.1830 trillion USD, by nearly one trillion dollars while it was almost as much as the sum of the value created by the second, the U.S., and the third, Japan, manufacturers. In fact, the U.S. once led the world in terms of the value-added of manufacturing output, which reached 29% of the world total in 1984. However, after some ups and downs, the number dropped to 17.3% in 2016. Japan also had its glorious moment when the value-added of its manufacturing industries accounted for 21.5% of the world total in the 1990s, and it dropped to 7.7% in 2016. In fact, it was exactly because of the rapid development of China’s manufacturing sector that led to profound changes in the pattern of the global manufacturing industries. In general, high-income countries still claim about 60% of the value-added of the world’s manufacturing industry, but their share kept decreasing in the last 20 years due to Asia, especially China. China’ share of the global manufacturing industries was negligible in 1970, but it grew to a quarter in 2016.10 While recognizing the great achievements in China’s industrial development over the 40 years of reform and opening-up, we should also be fully aware of the basic condition that industries in China are “big but not strong enough” and that the imbalance and inadequacy problem of development is still prominent. In terms of the manufacturing industries, although China has the largest manufacturing scale in the world, the development of China’s manufacturing industries is still not adequate in many aspects, such as the rate of value-added, labor productivity, innovation capacity, possession of core technologies, manufacturing of key parts, possession of high-end points of the chain of values, proportion of high-end industries, product quality and renowned brands. The problem is manifested, on the one hand, as an unbalanced structure during the development of manufacturing industries with inadequate high levels of the industrial structure as there is an excessive supply of low-end and ineffective manufacturing industries and insufficient supply of high-end and effective industries, and on the other hand, as an unbalanced structure of the industrial organization and inadequate level of reasonable industrial organization for there is a considerable number of “zombie enterprises” with insufficient numbers of quality enterprises and a lack of world-class manufacturing enterprises. In terms of the performance of specific products manufactured, most of the product functional parameters meet the general standards, but there is room for further improvement in the level of functions, reliability, quality stability and efficiency of use while there is a low

9 Wei, Jigang, “On the Strategy of the Long-term Industrial Development”, China Economic Times, May 5, 2015. 10 Hallward-Driemeier, Mary & Nayyar, Gaurav, “The Ever-Changing Global Manufacturing Industry: 12 Facts”, China Economic Report, 2018, vol. 4.

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supply of high-quality, personalized, highly complex and high value-added products and lack of high-end brands, thus failing to meet the demand for consumption upgrade. For example, during the national quality inspection sampling of domestic products from 2013 to 2017, only 88.9, 92.3, 91.1, 91.6 and 91.5% of the inspected products met the quality standards, respectively, which was quite different from the usual qualification rate, 99%, in some countries. Another example is that among the 500 most influential brands of the world, selected by the World Brand Lab, in 2016, there were only 36 Chinese brands, accounting for 7%. In addition, the 100 world’s most valuable brands in 2016, released by a globally renowned brand consultation company, Interbrand, included only two brands of products of the manufacturing industries in China.11

2 Evolution of China’s Industrial Structure: Power and Factors Forty years are a transient moment in the long history of humanity, but the 40 years during which China grew into a global industrial power did not pass without turns or twists. China’s industrialization course wasn’t easy partly because it was difficult per se, and partly because it coincided with the course of the global informationtechnology revolution in that all sorts of complex institution variables, technology variables and various production factors came into play on the economic development of China. The intricacy and complexity of the course have challenged economists, domestic or international, who tried to interpret the story of China’s industrialization on the one hand, and on the other hand, left a huge room for interpretation.12 Here, we aim to classify development periods by the market-oriented reform and sort out the changes in China’s industrial structure and factor revolutions in order to reveal the source of the driving force and evolution of China’s industrialization. The 40-year reform and opening-up may be divided into three gross periods, the first, 1978– 1993, of exploration of the direction of the socialist market economy, the second, 1994–2913, of the improvement in the socialist market economy, and the third, after 2003, of the new phase of comprehensive deepening of the socialist market economic development. The period of 1978–1993 may be further divided by 1984 when the economic system reform shifted its focus from rural to urban areas and from agriculture to industry. In 1978, it was decided on the Party’s Third Plenary Session of the 11th Central Commission of the Communist Party of China (CCCPC) that the Party would start to shift its work focus to socialist modernization in 1979. With the issuance of 11 Huang,

Qunhui, “On the Development of China’s Real Economy in the New Period”, China Industrial Economics, 2017, vol. 9. 12 This is exactly why most domestic and international economists have highly praised the economic miracle in China, but concluded with various theoretical frameworks, and some interpretations are even contradictory to each other. Refer to the relevant discussions in this book for details.

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Fig. 1 Changes in the Thrice Industrial Composition of GDP in China, 1978–2016

the Decision by CCCPC Regarding Several Issues of Accelerating the Agricultural Development (Draft) and the Working Regulations of People’s Communes in Rural Areas (Temporary Draft), the curtain was drawn for the Reform that surrounded the rural economic system reform and the household contract responsibility system was actively promoted. In 1984, the Party’s Third Plenary Session of the 12th CCCPC passed the Decision by the CCCPC on the Economic System Reform, which proposed to further stimulate the economy domestically and open up to the outside and required that the economic system reform be pushed forward as a whole that was based on urban areas and stimulation of enterprise activities. The development of the primary sector of the economy showed that the household contract responsibility played a considerable role in this period, showing a significant driving effect of the system reform and producing a fast growth of labor productivity, which grew from 353 RMB/person in 1978 quickly to 820 RMB/person in 1985, an increase by a factor of 1.3.13 The labor productivity in the secondary and tertiary industries increased by only 0.3 and 0.6 times, respectively, during the same period.14 From 1981 to 1984, the primary industry contributed more than 20% to the economic growth and its contribution was as high as 40.5% in 1981. As shown in Fig. 1, the primary industry accounted for a high percentage of the economy from 1978 to 1984, among which the peak, 32.8%, occurred in 1982 over the 40 years of the Reform and Opening-up. From 1978 to 1984, unit crop yields increased by 42.8% and the total yields, 33.6%, while the real value-added of agriculture increased by 52.6%.

13 The

labor productivity in the primary industry in this period showed sustained growth and it reached 3612 RMB/person in 1995, achieving an increase by a factor of 9.2 over a period of just a few more years than a decade. 14 Zou, Dongtao, Thirty Years of China’s Reform and Opening-up, 1978–2008, Social Sciences Academic Press, 2008, p. 398.

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According to Lin Yifu (1992),15 46.9% of these agricultural output increases was contributed by the reform of the household contract responsibility system. After 1984, the urban economic system reform was continuously deepened surrounding the stimulation of enterprises while China initiated its rapid industrialization at the same time. From 1984 to 1994, the GDP growth rate remained above 10% except for a few special years, and it was even as high as 15.2% in 1984. The industrialization of this period was overall characterized by those of a primary stage of industrialization. In terms of the thrice industrial structure, the proportion of the primary sector stopped increasing and started to decrease continuously in this period, which was indicative of structure upgrading, and the proportion was 32.2% in 1982, but 19.3% in 1993, showing a total decrease by 13.5 percentage points over 10 years. Meanwhile, the proportion of the secondary industry went up steadily and that of the tertiary, increased quickly. The structure of each of the thrice industries showed a quick decline in the proportion of agriculture and a fast increase in that of husbandry within the primary industry, with both the decline and increase by more than 10 percentage points. The changes in the structure within the secondary industry overall reflected a correction to the unbalance due to the strategy of the command economic era that favored development of heavy industries, while light industries grew quickly and claimed more than 50% in the entire industry in 1981, compared to 43% in 1978, which fluctuated around 50% until 1999. In the tertiary sector, commerce, food and beverage services, residential services and transportation developed fast. In terms of the development of enterprises, township and village enterprises (TVEs) grew quickly during this period and individual and private enterprises gradually developed in both rural and urban areas, while State-owned enterprises (SOEs) kept deepening their reform. In 1995, 20.45 million people worked in urban and 35.72 million worked in rural private enterprises or individual business. During the same period, the major task of reform on SOEs was to allow them more autonomy and to keep more profits, and SOEs experienced the reform phases of increased autonomy in operation, improved contract responsibility system and transition of operational modes to explore how to separate the right to run enterprises from ownership to help SOEs adapt to the commercialized business background.16 SOEs gained more profits and energy to a degree during this period. One factor that drove the economic growth during this period deserves special attention, i.e., the emerging transfer of rural surplus labor in quickly growing numbers. According to Cai Fang and Wang Dewen, the early transfer of rural labor from agricultural to non-agricultural sector brought improvement in the total factor productivity (TFP), which contributed as much as 21% to the economic growth.17 15 Lin,

Yifu, “Rural Reforms and Agricultural Growth in China”, American Economic Review, vol. 82, no. 1, 1992, pp. 34–51. 16 Huang, Qunhui, “How the New SOEs Were Tempered: A Review of the 40-Year SOE Reform”, China Economists, 2018, vol. 1. 17 Cai, Fang & Wang, Dewen, “Sustainability of and Labor Contribution to the Economic Growth in China”, Economic Research Journal, 1999, vol. 10.

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In fact, the “demographic dividend” of the dual-economy in this period has been fully recognized for its contribution to the economic growth in China. In addition, the demand for capital of industrialization facilitated the development of diversified financial networks and investing bodies as the reform on the fiscal, financial and investing systems was deepened, which provided corresponding capital security for industrial development. In 1980, the People’s Insurance Company (Group) of China (PICC) resumed domestic insurance services, leading to the development of a group of non-bank financial institutes. After 1990, the Shanghai and Shenzhen Stock Exchanges were established, breaking the ground for the stock exchange market in China. In terms of the society-wide investment in fixed assets, the funds from national budget accounted for 28.1% of the investment in fixed assets in 1981, which plummeted down to 3.7% in 1993, while the proportion of domestic loans increased from 12.7 to 23.5% in 1993, that of self-raised capital and capital from other sources were also increased by 10 percentage points, and that of foreign capital grew from 3.8% in 1981 to 7.3%. In 1993, the Party’s Third Plenary Session of the 14th CCCPC passed the Decision on Several Issues Regarding the Establishment of a Socialist Market Economic System, which proposed to establish the socialist market economic system in which the market would play a fundamental role in resource allocation under the macroeconomic regulation and management by the state with public ownership as the dominating form of ownership in addition to multiple types of economic compositions. It was also proposed to focus on the financial, labor, real estate, technology and information markets as the key parts of the market system. At this point, the comprehensive development was initiated with sustained improvement of the socialist market economy. The market-oriented reform during this period also demonstrated the transition of China’s industrialization from the initial fast progress to the mid-late stage. The thrice industrial structure, as shown in Fig. 1, also illustrated that the proportion of the primary industry out of GDP declined annually during this period while that of the secondary, maintained a high speed in development, with more than 50% contribution to the GDP from 1994 to 2011, which was as high as 66.3% in 1994 alone, and remained above 45% in the other years. The tertiary industry also had increasing proportions over the years. There are several points about this period that need to be highlighted as follows. First, the industrialization in this period was overall dominated by the development of heavy chemical industries, which facilitated the rapid upgrade of the economic structure. Residential consumption needs gradually turned to enduring consumables, and with this trend heavy industries showed a rigorous growth after 1999 and a growing proportion in the entire industry, which rocketed as high as nearly 69% in 2005. Due to a high organic composition of capital, large demand for investment and considerable consumption of energy, heavy chemical industries in fast development supported the high-speed growth of the economy while posing a great challenge to the capacity of the environment and resources. Overall, the domination of heavy chemical industries during this period reflected an upgrade of the industrial structure that accommodated to the upgrade of residential consumption from mostly daily consumables to cars and houses. In 2002, it was proposed at the Party’s 16th

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National Congress that China should follow a path of new-type industrialization in that industrialization should be led by and facilitate informatization to find a path rich in science and technology and economic benefits, low in resource consumption and environmental pollution and favorable to the full play of the human-resource advantages. The Congress also confirmed in guiding principles that the industrialization dominated by capital-rich heavy chemical industries should be further facilitated to upgrade to the domination by technology-rich high-tech industries. Second, China’s economy became much more export-oriented during this period and the export-based industrialization strategy showed immense success. On December 11, 2001, China joined the World Trade Organization (WTO), after which China made full use of its own comparative advantages to participate in the global division of chain of values and became deeply integrated in the economic globalization. Through “learning while working”, China pushed industrial upgrade, which not only accelerated the economic growth and industrialization in China, but made great contributions to the world economy as well. China became the number one engine of the world economic growth. After 2003, the growth rates of exports in China remained above 30% for many years, and China overtook Germany as the world’s top exporting country in 2009 and overtook the U.S. in the total amount of imports and exports in 2013 when China accounted for 11% of the world’s total trade, doubling what was in 2003.18 In terms of the use of foreign capital, an actual amount of 43.21 billion USD was used in 1994, 49.6 billion in 2001 and 117.7 billion in 2011, which was a decade after China joined the WTO, ranking the second in the world and for many years, the first among developing countries. Third, the pattern of public ownership as the dominating form with multiple forms of ownership was formed during this period, which constituted a mixture of diversified driving forces of China’s economic growth at high speeds. SOEs, for example, pushed forward a series of reforms including the establishment of modern enterprise institutions, strategic adjustment of the national economy, and a new management system of State-owned assets that integrated human, affair and asset management. As a result, the total number of SOEs decreased gradually, the layout of the national economy kept being optimized, the total amount of state-owned capital continued to grow and the enterprise governance structure became increasingly standardized. The non-state-owned economic sector also saw great development during this period. In 2002, the Party’s 16th National Congress specified the “two unswervinglies”—unswervingly consolidating and developing the publiclyowned economy and unswervingly encouraging, supporting and guiding the nonpublicly-owned economy, which further consolidated the all-round, multi-layered and operational legal and policy frameworks to support the development of nonpublicly-owned economies. In fact, the non-publicly-owned economies played an important role in stabilizing economic growth, facilitating innovations, increasing jobs and improving peoples’ lives. In 1995, 112.61 million people were employed 18 Liu, Wei & Cai, Zhizhou, “The Industrial Structural Upgrade during China’s Industrialization and the Economic Growth in the New Normal”, Journal of Peking University (Philosophy & Social Science Edition), 2015, vol 3, pp. 5–19.

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by urban state-owned agencies, and the number declined to 68.39 million in 2012, while at the same time, the number of people who worked in individual, private and foreign companies and those established by people from Hong Kong, Macao and Taiwan, China grew from 25.58 million in 1995 to 154.15 million in 2012. Fourth, China withstood the test of the Asian financial crisis in 1998 and the international financial crisis in 2008 while increasing its ability of macroscopic regulation and management of the economy, leading the Chinese economy to mature. During the market-oriented reform and industrialization in China, the two big external economic crises in 1998 and 2008 both greatly affected the Chinese economy, one that was oriented with exports in a developing country. However, although both crises gave the Chinese economy a heavy blow, the economic growth in China soon regained energy and China went back to its own path of rapid industrialization. This was partly due to the appropriate macroeconomic regulation and management and partly due to the resilience of the Chinese economy. The intrinsic engine of China’s marketoriented reform and industrialization was strong enough to withstand the blows from the outside in the background of globalization. After the Party’s 18th National Congress and especially after the Third Plenary of the 18th CCCPC in 2013 that passed the Decision by CCCPC on Several Issues Regarding Comprehensively Deepening the Reform, it was emphasized that comprehensively deepening the Reform should focus on the economic system reform with the core task of properly sorting out the relationship between the government and the market so that the market could play a decisive role in resource allocation and the government could play a better role. The Report at the Party’s 19th National Congress stated that with the socialist society with Chinese characteristics entering a new era, we must always follow with no reservation the development concepts of innovation, coordination, green, openness and sharing, persist with and keep improving the basic socialist economic system, and push for the synergistic development of newtype industrialization, informatization, urbanization and agricultural modernization. Under this background of market-oriented reform, China’s economy is now in a new era. In fact, the Chinese economy had already started to show some characteristics of a “new normal economy” by 2013, including slowed-down growth, optimized structure and transition of driving forces. In terms of the economic growth rate, the previously high-speed growth by 8–10% dropped to the mid-high growth of 6–8% during this period, and the rates were 7.8, 7.3, 6.9 and 6.7% for the years from 2013 through 2017, respectively. In terms of the structure, industries became increasingly leveled up, with the tertiary sector accounting for more and more percentages and those of the secondary and primary sectors continuously dropping. In 2013, the tertiary sector accounted for 46.7%, overtaking the secondary sector, which accounted for 44%, for the first time. In 2015, the tertiary sector claimed more than 50%, reaching 50.2% in this year and 51.6% in both 2016 and 2017. The contribution to the economic growth by the tertiary industries also increased annually, reaching 52.9 and 58.2% in 2015 and 2016, respectively, overtaking the secondary industries by 10 and 20 percentage points, respectively. In terms of the driving forces, as the “demographic dividend” diminished and the return on investment declined, the economic growth was more fueled by technological innovations, which drove the economy to grow

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by improving the TFP. In terms of the driving factors, the evolution of the industrial upgrade in China after the reform and opening-up was actually consistent with the general laws of industrial upgrade: domination by the labor factor—domination by the capital factor—domination by the knowledge factor.19 In this period, it was imperative for China’s industrial upgrade to transition from capital- to knowledgedriven upgrade. In fact, a review on the course of industrialization in China would show that the Chinese economy in this period did show the operational characteristics and upgrading tasks consistent with those of the late stage of industrialization, and China’s industrialization did step into the late stage around 2011. In the new normal of the economy, China’s industries continued to grow in a way that used to seek rapid growth and is now after quality improvement, and the transition was specifically represented by the structural reform on the supply side for improved supply quality of the real economy, active accommodation to the new round of technological revolution and the changing industrial trend and intensive efforts to cultivate new industries and make use of new technologies to remodel the conventional industries. ➀ In terms of agricultural development, the layout of agricultural production was further optimized, the modern industrial, production and operation systems of agriculture were brought on a fast track, the major production sites of crops had stable and increased yields, and the new-type mainstays for agricultural production and operation and services emerged quickly. ➁ In terms of industrial development, the industrial structure kept being optimized and upgraded. Specifically, among the three industrial domains, from 2013 to 2017, the value-added of mining grew by 6.4, 4.5 and 2.7% and declined by 1.0 and 1.5% respectively, that of the manufacturing industries grew by 10.5, 9.4, 7.0, 6.8 and 7.2%, respectively, and that of electricity, heat, heating gas and water production and supply grew by 6.8, 3.2, 1.4, 5.5 and 8.1%, respectively, showing an overall trend of transition and upgrade of the industrial structure from being intensively dominated by resource and capital to technology. The internal structure of manufacturing industries showed a positive progress of the supply-side reform, which had actively eliminated underdeveloped productive capacity and comprehensively resolved the issue of excessive capacity of production. As a result, the extremely excessive productive capacities in industries such as steel, smelting of non-ferrous metals, cement and plate glass were all held back and their growth slowed down significantly. By 2016, the steel industries had reduced production capacity by more than 65 million tons, meeting its original goal by a large margin. At the same time, industrial equipment manufacturing and high-tech industries thrived, from 2013 to 2016, their value-added had average annual increases of 9.4 and 11.3%, respectively, which were higher than that of industries above the designated size by 1.9 and 3.8 percentage points, respectively, with the value-added of industrial equipment manufacturing accounting for 32.9% of that of the industries above the designated size and high-tech industries, 12.4%, showing increases compared to 2012 by 4.7 and 3.0 percentage points, respectively. 19 Su, Hang, Zheng, Lei & Mou, Yifei, “The Nature of Factors and the Upgrade of Manufacturing Industries in China: An Analysis Based on WOID and the Database of China’s Industrial Enterprises”, Management World, 2017, vol. 4.

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The value-added of the top six energy-consuming industries grew by 7.3% annually, slower than that of the industries above the designated size by 0.2 percentage points, and accounted for 28.1% of the latter, showing a decrease of 1.5 percentage points.20 ➂ In terms of service development, all service industries grew fast, with conventional services increasingly and speedily integrated with the internet. Modern types of services prospered and new types kept emerging, showing large-scale improvement in innovative and scientific and research capacities. From 2013 to 2016, the average annual increase in the value-added of services was 8.0%, higher than that of GDP by 0.8 percentage points. A higher proportion of all job holders worked in services, from 35.9% in 2012 to 43.5% in 2016, an increase by 7.4 percentage points. In 2016, the society-wide scale of electronic commerce was as high as 26.1 trillion RMB, which was 2.5 times as much as that in 2013, showing an average annual growth by 36.4%. In 2016, China spent a total of 1.57 trillion RMB in research and development (R&D), higher than that of 2012 by 52.5%, showing an annual growth of 11.1%. In 2016, China accepted 1.193 million domestic patent applications, 128.1% more than the number of 2012.21 Despite all the achievements above that China has made during this period, it is still a whole new period, which not only represents the new normal of the economy, but the late stage of industrialization as well. Some scholars also argue that as the economic structure became dominated by services, this period should cultivate new energy to drive industrial growth and change the previous mode of development driven by factor input. Since the Reform and Opening-up, China has been used to inputting the factors of capital and labor to drive the industrial growth, and the size of capital and the number of laborers once contributed about 70–80% to the economic growth during the 40 years of Reform and Opening-up, while efficiency improvement usually contributed about 20–30%. In particular, from 2008 to 2018, the estimated contribution by the TFP was even below 20%. Therefore, the reform on the driving force must be completed in the new period so that industrial growth will no long be mostly driven by factors, but by efficiency. This reform is immensely challenging and of vital importance. Given the new characteristics of the economic globalization and the international context of the new round of technological and industrial revolutions, China will face many uncertainties on the path to industrial upgrade and technological advancement and of consumption upgrade during its industrial development and economic growth.22 In the report of the Party’s 19th National Congress,

20 All data were from “Department of Industry, National Bureau of Statistics, The Industrial Economy Maintained a Steady Growth, and the New Energy Led the Structural Adjustment: Achievements of Socioeconomic Development Since the Party’s 18th National Congress, part 5”, July 4, 2017, http://www.stats.gov.cn/tjsj/sjjd/201707/t20170704_1509628.html. 21 All data were from “Department of Industry, Bureau of Statistics, Science and Technology Grew Significantly and Innovation Sped up as a Drive Force: Achievements of Socioeconomic Development Since the Party’s 18th National Congress, part 19”, July 4, 2017, http://www.stats.gov.cn/tjsj/ sjjd/201707/t20170727_1517417.html. 22 Zhang, Ping, Nan, Yu & Yuan, Fuhua, “Forty Years of China’s Economic Structural Evolution: From High-Speed Growth to High-Quality Development”, in Theoretical Explorations and Studies

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it was already pointed out that the Chinese economy had transitioned from highspeed growth to high-quality development, that the development concepts of innovation, coordination, green, openness and sharing should guide the establishment of a modernized economic system, that the structural supply-side reform should dominate the quality, efficiency and engine revolutions of the economic development, and that the TFP should be improved. These are, without the question, strategic goals and major requests for China’s industrial growth and economic development in the new period based on comprehensive analysis of the uncertainties.

3 China’s Industrial Policy: Market and Government China successfully grew into a global industrial power over the 40 years of reform and opening-up. As shown by the evolution of the industrial development described above, supply of factors such as the demographic dividend was necessary for this success and the market-oriented reform, which resolved the issue of incentive and resource allocation mechanisms, was sufficient for the success, both of which can be practically attributed to the series of successful economic policies made by the government. In Western classical textbooks, at the core of an economic policy framework lie general fiscal, monetary and financial, income-distribution, internationaltrading, agricultural, labor and anti-monopoly policies, which altogether provide instruments for a government to regulate and manage the economy on the macroscopic level. To China, however, as a socialist developing country that sought to coordinate the progress of market-oriented development and industrialization in the reform, the economic policy framework should include economic reform and development policies in addition to the macroscopic ones above. The economic reform policies refer to the series of policies that were made and implemented in order to land the requirements by the CCCPC to construct and improve the socialist market economic system, and these policies involved various sectors such as the treasury, financial and investment systems, SOEs, market and opening up. As a matter of fact, the 40-year reform and opening-up was made up of continuous exploration of market-oriented reform, which led to reform policies that pushed China to persistently transition from the command to market economic system. The economic development policies refer to the series of policies that China, as a developing country, took to push for rapid economic growth and sustained optimization and upgrade of the industrial structure for industrialization, and these policies were centered on industrial ones although they also involved the policies of macroscopic regulation and management mentioned above in treasury, finance, trade and labor. In fact, there is no need to evade the critical role of industrial policies in the development of China from an impoverished agricultural country to a global industrial power, and the role of industrial policies in the transition from a big to strong industrial power should be of the 40-Year Reform and Opening-up, Volume I, edited by the Academic Committee of Economic Institute, Chinese Social Science Academy, China Social Science Press, 2018, pp. 56–80.

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scientifically recognized and reasonably played. In particular, China is now in the late stage of industrialization under the economic new normal and the socialist market economic system has matured day by day. In this background, how to promote the transition of industrial policies and coordinate them with the competition policy is of major importance. In general, a government makes industrial policies to resolve the issues in economic development such as an unbalanced industrial structure and low levels of industries in order to upgrade and optimize industries for further development. All policies made and implemented for rapid economic growth and development are relatively long lasting and target the supply-side management. The practice in Japan has shown that industrial policies are characterized by government inference with the inter- and intra-industrial resource allocation while all cautions are taken to avoid direct disturbance of resource allocation with the goal to seek rapid economic growth. This characteristic of industrial policies met China’s demand in the reform for speedy industrialization and promotion of rapid economic growth while at the same time, fitting the need for the government to continue dominating resource allocation and managing industries and enterprises after the command economy took steps to withdraw from China’s economic system. Although the government is now heavily criticized for excessive management of factor allocation, the industrial policies that China took represented big leaps from the conventional command system of the economy. For China, introduction of industrial policies played a dual role in the gradual transition of the command economy and rapid development of the national economy. In this background, industrial policies began to be widely implemented while the socialist market economic system was pushed for in the 1990s. Now the industrial policies in China have become an immense policy framework with a wide variety of formats, rich layers and complex contents. Below are some representative ones. In March, 1989, the State Council issued the Guofa [1989] No. 29 file, Decision by the State Council on the Key Points of the Current Industrial Policies, and it stated to make the right industrial polices and clarify the focuses to be supported and restricted in all sectors of the national economy in order to provide crucial basis for adjusting the industrial structure and performing macroscopic regulation and management. It also stated that making and implementing industrial policies would be beneficial to integrating the reform with development and the command with the market, thus playing an important role in promoting the long-term stable development of the Chinese economy. In December, 1997, the State Council authorized the National Development and Reform Committee to issue the Catalogue of Industries, Products and Technologies Currently Supported Heavily by the State (Temporary), which was further modified in July, 2000. In June, 2002, the National Committee of Foreign Economic Relations and Trade, Ministry of Treasury, Ministry of Science and Technology and State Taxation Administration jointly issued the National Industrial and Technology Policy, and another National Industrial and Technology Policy was issued in May, 2009 by the Ministry of Industry and Information Technology jointly with several committees and ministries, which aimed at industrialization and informatization of China, improvement in the independent innovation of relevant

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industries and an optimized industrial structure and upgrade of industrial technologies. In November, 2005, the State Council issued the Decision on Issuing and Implementing the “Temporary Regulation about Promoting the Structural Adjustment of Industries”. In December, 2005, the National Committee of Development and Reform, with the approval of the State Council, issued the Guiding Catalogue of Industry-Structural Adjustment (2005 edition), which was modified in March, 2011, then in February, 2013, and again in March, 2016. From 2008 to 2009 when the financial crisis was intense, the National Committee of Development and Reform and Ministry of Industry and Information Technology, in collaboration with relevant organs, released the planning for industrial adjustment and revitalization of ten key industries including steel, automobiles, ships, petrochemistry, textile, light industries, non-ferrous metals, equipment manufacturing, electronic information and logistics in order to offset the impact of the international financial crisis on China’s real economy, which became an important measure to combat the financial crisis, stabilize growth, expand domestic demand and adjust structures. In terms of what are covered by industrial policies, China usually makes use of government subsidies, taxation and legal and administrative tools to lend direct support, help, protection or restriction to some industries in order to facilitate the speedy transition and upgrade of the industrial structure and for the economy to catch up. As a result, the Chinese government often favors support of big SOEs, encourage merger of enterprises to improve the level of centralization, restrict excessive production capacity and avoid overt competition, subsidize strategic emerging industries and stimulate technological innovations. These policies can be classified as selective or longitudinal industrial policies, and they are usually implemented rigorously. Specifically, China’s industrial policies comprise two major types of tools: One is the restrictive review and approval authority that controls the entry into the market, and the review protects some and restricts others and helps what is advantageous and strong, and it covers all important industries and all technological and economic aspects. The other one employs tax exemption and reduction tools and incentives such as land supply to encourage the development of what is deemed as emerging or strategic industries. So far, China’s industrial policies have become a set of dynamic and complex battery of policies through years of practice, including policies about the industrial structure, organization, planning and technology. Among these, the industrial structure policies help leveling up the industrial structure following its development laws to develop the national economy, the industrial organization policies aim to rationalize the organization of industries and to create effective conditions for fair competition on the market, the industrial planning policies promote the rationalization and high effectiveness of regional allocation of productive factors, such as the various policies of economic zones. The industrial technology policies include all the policies of the government to guide, promote and interfere with the advancement of industrial technologies. These four types of policies, although often leading to discrepancies with each other, were designed to work with each other in theory and their mechanisms were compatible with each other. In addition, these four types of industrial policies had different contents and focused on different points during

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different development stages and at different government levels in China, reflecting the dynamics of the battery of industrial policies. In terms of implementation effects, these policies overall played an important role in promoting the rapid progress of industrialization, upgrade of industries and speedy development of the economy in China. Objectively speaking, China developed into a global industrial power largely because it had taken these industrial policies. However, there are issues with the policies in terms of interfering with the market mechanism, and sometimes the implementation of an industrial policies produced results opposite to the original design. The recent policy to subsidize new-energy cars is a good example. In recent years, China released a strong policy incentive for new-energy cars as part of a policy battery to promote the development of strategic and emerging industries and fuel upgrade of the industrial structure. The subsidy is up to 200–300 thousand RMB per car with convenience in applying for registration plates. However, due to the exceptionally strong incentive for new-energy cars as well as some issues with the means of subsidy provision, many automobile enterprises found it easier to find ways to take advantage of this policy than to work on their technological improvement, leading to multiple cases of “subsidy cheating” of quite some automobile enterprises in the recent couple of years. The characteristic of industrial policies, i.e., the government interferes with industrial allocation of resources in order to bring rapid growth to the economy, easily ignites the debate between two ideologies, free market vs. government in dominating the economy. However, no matter how much hatred neo-classic economics followers hold towards the idea of industrial policies, many developing countries have accepted it in order to help their economies catch up with the world. As Rodrik put it, it is obviously exaggerating when one claims that industrial policy is already dead as there are still industrial policies in the real world and they have adequate room despite the restriction of various international rules.23 Therefore, the debate about industrial policy should pivot to design and management, or, the path of implementing individual industrial policies. In fact, “no debate about industrial policy may quiet down just through discussions. The effectiveness of any industrial policy must be demonstrated in practice.”24 Empirical studies have reached different conclusions about the effectiveness of the industrial policies made by China. For example, some concluded that the release and implementation of industrial policy had significantly promoted the regional industrial structures to be more rational and closer to the high end,25 but some argued that industrial policy reduced the efficiency of resource allocation.26 Nonetheless, China has realized rapid industrialization and high-speed 23 Rodrik, D., “Normalizing Industrial Policy”, Commission on Growth and Development Working Paper, No. 3, 2008. 24 Ohno, Kenichi, Learning to Industrialize: From Given Growth to Policy-aided Value Creation, translated by Chen Jingwei, Citic Press, 2015, p. 27. 25 Han, Yonghui, Huang, Liangxiong & Wang, Xianbin, “Did Industrial Policy Promote the Regional Industrial Structures Upgrade?—Theoretical Interpretation and Empirical Test based on Development Regional Governments”, Economic Research Journal, 2017, vol. 8. 26 Wang, Kemin, Liu, Jing & Li, Xiaoxi, “A Study on Industrial Policy, Government Support and Enterprise Investment Efficiency”, Management World, 2017, vol. 3.

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economic growth up until now, which is objective evidence of the overall success of industrial policy in China. It shows that China had a good grip on the relationship between the government and the market and the “balance” between interference with the resource allocation and avoidance of direct action when operating the specific industrial policies. One important reason why China had a good grip on the “balance” of industrial policies is that China had already worked hard to establish an effective market system and to coordinate industrial policies with the competition policy. In other words, China paid close attention to playing the decisive role of the government in resource allocation and the credit of the government while coordinating the policies aimed to realize the market-oriented reform with those aimed at industrialization. The Chinese government kept delegating authorities to lower levels, simplifying administrative procedures and optimizing services in order to create a market for fair competition. In particular, legal tools were used to ensure the uniformity and openness of the market system as well as the fairness of competition on the market. Among various relevant laws, the Anti-Unfair Competition Law and the Anti-Monopoly Law were of prime importance to exclude unfair behaviors that impaired competitions, establish a fair market order and protect the lawful rights of consumers and enterprises. In fact, China started to prepare for the two laws as early as 1987, and in September, 1993, the Anti-Unfair Competition Law was passed on the third meeting of the Standing Committee of the Eighth National People’s Congress (NPC), and was in effect on December 1 of that year. The law was amended at the 30th meeting of the Standing Committee of the 12th NPC. The Anti-Monopoly Law was passed at the 29th meeting of the Standing Committee of the 10th NPC on August 30, 2007 and was in effect on August 1, 2008. By the 40th year of the Reform and Openingup, the Anti-Monopoly Law had been implemented for 10 years. After the Party’s 18th National Congress, two files were released by the CCCPC and State Council which were of vital importance to the enforcement of the two laws above, breakage of administrative monopoly and establishment of a market system for fair competitions. One was the Several Opinions by the CCCPC and State Council Regarding Advancing the Reform of Pricing Mechanism, which explicitly stated to strengthen the supervision of market prices and the enforcement of the anti-monopoly law, take steps to establish the competition policy as the basis and push for mechanisms coordinating the competition policy with industrial and investment ones. This file made the competition policy a basis policy and required that industrial policies coordinate with it. The second file was the Opinion on Establishing the Reviewing Mechanism of Fair Competition in the Market System issued by the State Council, which required that a fair-competition reviewing institution be in place to standardize the relevant behaviors of the government, prevent issuance of policies and measures that would exclude or restrict competition, and remove in steps all regulations and routines that impaired the national uniform market or fair competition. On October 12, 2017, five committees and ministries including the National Committee of Development and Reform issued Implementation Rules for Reviewing Fair Competition (Temporary), which further specified and stipulated the mechanism, procedure, standard and exceptions of the review so that it became more operational.

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The key to the coordination of industrial policies with the competition policy is to keep dynamic adjustment on the contents and means of implementation of industrial policies according to the development stage of industrialization and to choose the right type of industrial policies for each stage. During the course of industrialization in China, selective industrial policies indeed played an important role, especially in promoting the heavy chemical industry-dominated development by helping the big and restricting the small, at the initial and middle stages of industrialization based on the needs of a late-development country. However, after entering the late stage of industrialization, China encountered the economic “new normal” driven by innovation rather than factors where the economic growth slowed down from high to mid-high speeds. The imitation-driven and wave-like consumption was practically over, the comparative advantage of low cost could no longer last, the market competition switched from low costs to differentiation, and advantages of introduction, imitation and learning as a late-development economy would wean off completely with weakened power of factor scale and increasing reliance of the economic growth on the quality of human resources and technological advances. In this background, the competition policy was still the base, and industrial policy needed a transition. China had long been used to strongly selective industrial policies, but they could not adapt to the new economic background, which called for functional industrial policies aimed to stimulate and improve the market competition order and encourage innovations. Among the industrial structure, organization, planning and technology policies, the industrial structural policies that directly get into the formation of the industrial structure became increasingly unimportant, while the industrial organization policies aimed to rationalize the industrial organization and the technology ones aimed to stimulating innovations became more important. Specifically, China’s industrial policies will be more adaptive to pioneering technologies and technological innovations in small enterprises, pay more attention to the ecology of innovation and improve the efficiency and transparency of subsidies, thereby maximizing the effect of public funds on improving the innovation capacity and industrial competitiveness.

4 The “Chinese Approach” to Industrial Development: Experiences and Wisdom Over the 40 years of reform and opening-up, China told a story of the growth of a big industrial power, and China is still writing new chapters on the big power to grow stronger. Can the story of China’s industrial development reveal a Chinese approach for other developing countries to draw on for their industrial development? And if yes, what is the core message and key wisdom of it? China is now a big industrial country of the world, but not yet a strong one. Sorting out the path China took over the past 40 years of industrial development to wrap up into a pack of basic experiences and key wisdom will not only provide reference for other developing countries, but benefit China as well for its further development into a strong industrial country.

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Philosophically speaking, China’s success in the industrial development followed the basic principle of unity between individuality and generality, or more specifically, China followed the general law of the industrialization course of a big country while fully respecting its own unique conditions. To understand the story of China’s growth of industries, one must apprehend the key behind the story of success: China effectively unified the general laws of industrialization and its own national characteristics. The national contexts of China’s industrialization after the reform and opening-up comprise the following three aspects. First, the economic background was that China had some industrial foundation with a huge population and a low income per capita. Second, the social background was that China had a large agricultural population and a typical dual-structured society. Third, the institutional background was that China had implemented a closed command economy for a long time. In terms of the economic background, although China was an underdeveloped country at the beginning of the reform and opening-up with an extremely low income per capita, its industrial foundation was in place due to the development strategy under the command economic system that favored heavy industries, which put China in a favorable position at the initiation of the reform and opening-up for industrial development and industrialization while the huge population had the potential of a large market. In terms of the social background, although the large number of peasants made it difficult to industrialize, they constituted an almost “unlimited supply” of low-cost laborers for industrialization. In terms of the institutional background, the “gradual” reform strategy gave China a peaceful and stable environment for development and the opening-up helped China obtain advanced productive factors (such as technologies and capital) from other countries to make use of the opportunity of a late-development advantages. Meanwhile, the market system was gradually established, which kept improving the incentive mechanisms of the Chinese economy. An industrial foundation, a huge domestic market, “unlimited supply” of low-cost laborers and late-development advantages altogether made up the “factor combination advantage” for China’s industrial development and industrialization.27 However, this “factor combination advantage” did not necessarily lead to successful industrialization or industrial development, and scientific strategies of industrialization and policies for industrial development based on the general laws of industrialization were needed, which altogether constituted important part of the “Chinese approach” to industrial development that shone the wisdom and carried the experiences of China’s industrial development. Specifically, the “Chinese wisdom” of industrial development comprises the following four aspects. First, the relationship of reform and development with stability must be handled properly to ensure continuous development of industries. When a big country begins its journey to modernization and progresses from a developing to developed economy, industrialization cannot be avoided. It is generally accepted that industrialization refers to the course of the economic structure of a country or region to continuously

27 Liu, Shijin, et al., Between the Conventional and the Modern: Transition of the Growth Mode and

Choice of New-Type Industrialization, China Renmin University Press, 2006, p. 445.

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transition from being dominatingly agricultural to industrial. The course is characterized by sustained increases in the manufacturing activities of national income (or regional income) and the proportion of the secondary industries, as well as in the proportion of people working in manufacturing and secondary industries, except for interruptions due to economic cycle or other accidents. However, once industrialization begins, it must be ensured that it is not interrupted by events such as wars, crises and social turbulence because the country or region will be interrupted in terms of its industrial development and upgrading of its industrial structure. History is not short of examples where industrialization was interrupted by crises or wars, and that is one of the important reasons why during the more than 200 years of world history of industrialization, only a few more than 30 countries or regions have been industrialized. Therefore, stable social and political environments are the basic requirements for sustained industrial development and industrialization. In fact, after the PRC was founded, its industrialization was once interrupted by the ten-year period of 1966– 1976. Fortunately, after the reform and opening-up, although faced with crises from time to time, China properly handled the relationship of reform and development with stability, with insistence on “stability to top everything else”, and worked hard to create a harmonious and stable environment for development, thereby ensuring that the industrial development and industrialization were not impacted. Now we are in the late stage of industrialization, and further industrial development is needed to build a strong power of industries while at the same time, various socioeconomic problems are emerging, such as unfair distribution in the society, a wide gap between the rich and the poor, a need for the economic growth mode to transition and restrictive environment and resources. Now crises and crashes are more possible than before, which demands even better management of the relationship between reform, development and stability to ensure the coordinated, sustainable development of the society and economy. Second, the relationship between the market and government must be handled properly to keep promoting the upgrade of the industrial structure. The core of the industrialization is the level of the industrial structure, which is characterized by the changing compositions of the output values of the thrice industries. Usually with the progress of industrialization, the proportions of the thrice industries also change, from the “primary, secondary and tertiary”, through “secondary, primary and tertiary” and then “secondary, tertiary and primary”, to finally “tertiary, secondary and primary” industries with descending proportions. The upgrade of an industrial structure is also accompanied by a progress pattern from light and textile industries, through heavy and chemical industries, to technology-rich industries as being advantageous. For a country to realize industrialization, its industrial structure must be optimized and upgraded, for which the relationship between the market and government must be handled properly so that the market decides resource allocation while the government plays its due role. This requires that an industrialization strategy must be in place for a country that is based on its own national contexts while the progress pattern of industrial structures must be respected to properly handle the relationship between the thrice industries, between light and heavy industries and between urban and rural areas. In the case of China, it based its decisions on economic development

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stages, steered the direction of industrial upgrade, kept making appropriate industrial policies, effectively coordinate them with the competition policy, and made dynamic adjustment to the contents and implementation means of the industrial policies according to the stage of industrialization, thereby successfully pushing the industrial structure to level up. It is worth noting that China’s industrial development highly respected the innovation of regional governments and encouraged them to explore how to scientifically industrialize their regions. With the economic system reform deepened, all regions in China were motivated to develop their economies actively and innovatively, and each region found its own economic development mode based on its own specific conditions. There emerged in China some highly memorable economic development modes that were rich in regional and temporal features, such as the “Zhujiang River Delta mode” “Southern Jiangsu mode” and “Wenzhou mode”, which were all different from each other in terms of initiation conditions, mainstays and capital formation, but which all promoted the industrialization in their respective regions, promoting their respective regions to be highly industrialized and in turn promoting the national industrialization. China has a vast land and each region has its own characteristic resources, economic conditions and cultural habits, which are quite different from each other. Therefore, each region should be allowed to innovate and actively explore the industrialization mode that is suitable for its own conditions, and that is an important piece of experience of China’s industrial development and industrialization. Third, the relationship between marketization and industrialization must be properly handled to cultivate a mechanism of driving force for comprehensive and sustained industrial development. China, based on its own background of socialist command economic system, explored for many years before forming a theoretical framework for a socialist market economy with Chinese characteristics, which holds to unswervingly consolidate and develop the publicly-owned economy while unswervingly encouraging, supporting and guiding the non-publiclyowned economy. China always followed the direction of market-oriented reform and provided a diversity of fully coordinated driving mechanisms for industrial development. Through system innovations of market-oriented reform, a domestic source of rich and strong driving forces was generated. This is specifically manifested by the gradual release of various resources, factors and organizational forces from the conventional command system by the market-oriented reform, the energy of which that had long been suppressed and controlled was unleashed, thereby fully releasing the resources and factors of the non-state-owned systems while fully motivating the stock resources and preexisting organizational and system resources of the conventional state-owned system. Through the “two unswervinglies”, a large number of market mainstays were generated, including SOEs that were pushed to the market by deepened SOE reform, a large number of individual and private enterprises that had grown during the marketization, and foreign enterprises introduced through openingup. The publicly-owned economy, especially SOEs, were advantageous in amending the defects of market, ensuring the common interests of the people and helping China overtake leading countries in important areas such as the major strategies of national development and critical causes relating to the national security and people’s

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lives. Meanwhile, non-publicly-owned economies, such as individual, private and foreign enterprises, had unique advantages in meeting the multi-layered and diversified demands on the market, improving the quality of supplies and promoting balanced development of the productive forces. Therefore, a mixture of diversified driving forces constituted an advantage for China’s industrial development and promoted the rapid growth of China’s industries. Fourth, the relationship between globalization and industrialization must be properly handled to form a modern industrial system that is fully open for development. During the 40 years of opening-up, special zones were first set up, then 14 coastal cities were opened, and eventually China joined the WTO. While opening up the market to the outside, China also attracted large amounts of foreign capital, introduced large volumes of advanced technologies and management knowledge, and made use of the market resources overseas, thus realizing great exports and promoting the industrial development and industrialization in China. The industrial development in today’s world is dominated by the global chain of values. Since the mass production of machines was initiated in the Industrial Revolution, the international division of labor went through the intra-conventional industry division between industrial products and agriculture plus mining, the intra-industrial division between industries and product sectors, and the intra-product division between the value-added stages of one product. After the 1990s, production was increasingly based on modules and production procedures became more divisible while trading efficiency increased and cost decreased due to the “space compressing” technologies such as information technology and transportation technology. As a result, the intra-product division of labor based on processes and procedures of the chain of values developed significantly, and the division of labor of the global chain of values in the manufacturing sector became a dominating form of international division of labor. In addition, there emerged a new pattern characterized by multi-polarization with the accelerating technological revolution, sustained innovations in the business formats, increasing integration of industries and especially the efforts of emerging countries to break their “low-end locks” to move up the global ladder of values. Therefore, a country must open up and integrate into the global chain of values in order to develop its industries. In fact, the 40 years of reform and opening-up in China showed that the development miracle of the Chinese economy benefited a great deal from the opening-up of the manufacturing industries. By 2017, among the 31 broad categories, 179 medium categories and 609 fine categories, 22 broad, 167 medium and 585 fine categories had opened up, equal to 71, 93.3 and 96.1%, respectively. China accelerated its own course of marketization during the opening-up and grew its own forces to drive allround development while accommodating to the global trend of division of labor with mutual wins in the global chain of values of the manufacturing industries, thus contributing greatly to the development of the world manufacturing industries and the global economic growth. The four aspects above constitute the “Chinese wisdom” and important parts of the “Chinese approach” to the industrial development. These “Chinese wisdom” and “Chinese approach” may be borrowed by other developing countries to promote their own industrial development and industrialization, which, while drawing on China’s

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experiences and wisdom, need to innovate for their own development in combination with their own national conditions. In addition, these wisdom and experiences are also useful to China in its future development from a big to strong power of industries and should be inherited, advanced, innovated and improved. For a country to industrialize, the development of manufacturing industries is always at the core, and to push for China to move from a big to strong industrial power, the key is the establishment of a strong manufacturing power. On May 19, 2015, China officially released “Made in China 2025”, which is a comprehensive, systematic, longprojecting and international competing strategic plan. It aimed at the domestic and international socioeconomic development and the overall trend of industrial revolutions, and was planned strategically for a long term with a path for high-end industries and technologies to advance. This plan focused on the new round of technological and industrial revolutions, focused on how to promote the innovative development of manufacturing industries, centered on quality and effect improvement, aligned with accelerating the integration of the new generation of information technology and manufacturing, oriented with intelligent manufacturing and aimed to meet the demand of socioeconomic development and national security for major technological equipment. By implementing the five projects of the national manufacturing industries of innovation, intelligent manufacturing, consolidated industrial foundation, green development and high-end equipment, the plan specified ten key fields for future development, i.e., the new generation of information technology, high-end digital machine tools and robotics, aerospace equipment, ocean engineering and hightech ships, railway equipment, green energy and green vehicles, power equipment, new materials, medicine and medical devices, and agricultural machinery, thereby promoting the industrial transition and upgrade and facilitating China to transition from a big to strong industrial country. China proposed the strategy to make a strong manufacturing country based on the fact that China was a big industrial country as well as the industrialization trend of the world and China’s industrialization stage. It is a major development strategy and it is of vital strategic importance for China to push its industries from big to strong, advance to a strong industrial power and realize modernization.

Leadership of Science and Technology: Beyond the Traditional Late-Mover Advantage Ping Li

Over the 40 years of the reform and opening-up, China’s science and technology grew increasingly stronger and kept breaking new grounds, supporting and leading the steady and high-speed development of China’s economy with a strong hand. In 1978 when the reform and opening-up breezed across the Chinese land like a vernal wind, China’s ship of science and technology set off once again, and ever since that point, those working in science and technology have never stopped exploration or adventure, and by overcoming countless hardships, they’ve finally found the optimal way to liberate and develop the productive force of science and technology, i.e., the development of science and technology must always be tightly associated with the overall goals of the socioeconomic development of the country. The 40 years, from the initial efforts to push for scientific and technological innovations and development, through the efforts to combine science and technology with economy to support and lead the socioeconomic development, the subsequent optimization of the allocation and management of scientific and technological resources to facilitate enterprises to become the backbone of technological innovations, and then the improvement in the capacity to innovate independently to drive the socioeconomic development by innovations, to the establishment of the national innovation system and finally an innovation-oriented country, have walked through the course of sustained innovation and upgrade in science and technology while China moved up the ladder of science and technology. During the whole course, the development of science and technology was always aligned with the overall goals of the national development and integrated increasingly with the economic development, showing a great power in supporting and leading the sustained leaps of the national socioeconomic development.

P. Li (B) Institute of Quantitative & Technological Economics, Chinese Academy of Social Sciences, Beijing, China © China Social Sciences Press 2021 F. Cai (ed.), The Chinese Approach, https://doi.org/10.1007/978-981-16-1899-4_8

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1 The Leaps of Science and Technology The development of science and technology in China has shown remarkable phased characteristics with the increasingly deepened reform and opening-up. The 40 years may be divided into five phases based on the following milestones of the key national scientific and technological planning: (1) The National Science Congress and the issuance of the Outline of the National Scientific and Technological Development Plan 1978–1985 (Draft) in March, 1978; (2) the Decision by CCCPC Regarding the Reform of the Science and Technology System issued by the State Council in 1985; (3) the strategy of reinvigorating China through science and education specifically stated at the National Science Congress and the Decision Regarding Accelerating the Progress of Science and Technology issued by the State Council in May, 1995; (4) the Mid- to Long-term Planning Outline of the National Scientific and Technological Development (2006–2020) issued by the State Council, which proposed to create an innovation-oriented country; and 5, the strategy of innovation-driven development announced at the Party’s 18th National Congress in 2012.

1.1 Restoration and Re-development of Science and Technology, 1978–1985 1.1.1

The Strategy for Science and Technology Development and Policy Background

The entire sector of science and technology in China was disrupted during the tenyear period of 1966–1976, during which period intellectuals and those working in the sector were disgraced, leading to a widening gap in the competitiveness of science and technology from Western countries. After the “Gang of Four” was smashed, the Central Committee of the Communist Party of China (CCCPC), in order to fully motivate all intellectuals to be active and innovative so that the general task of the Party in the new era would be realized, held the National Science Congress from March 18–31, 1978, on which it was specifically stated that science and technology constituted a productive force, that intellectuals were part of the working class, and that the key to the four modernizations was the modernization of science and technology, marking the arrival of spring for science in China. From December 18– 22, 1978, the guiding principle of “taking the class struggle as the key link” was abolished at the Party’s Third Plenary Session of the 11th National Congress, and the strategic decision was made to bring the working focus of the Party and State to the socialist modernization based on the summary of the experiences and lessons of the socialist revolution and development since the People’s Republic of China (PRC) was founded. Also at the Session, the great journey of reform and opening-up was initiated, setting off the historic transition of a comprehensive reform on rigid and semi-rigid systems and opening-up of the previously closed or semi-closed economy.

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With the government’s working focus shifting to economic development, defects of the pre-existing system of science and technology became increasingly visible, and the system started to be reformed, marking a new period for the development of science and technology.1 Now the guiding principle was established that science and technology should serve the economic development, turning to a new page of the development of science and technology.

1.1.2

Focus of the Reform of the Science and Technology System

In 1980, every aspect of the Chinese economy was waiting for reinvigoration. Right at that moment, the CCCPC issued the strategic principle, “Economic Development Must Rely on Science and Technology and Efforts in Science and Technology Must Face Economic Development”, pointing to a specific direction for the transition of the strategic goal of scientific and technological development. The reform goals in this period were to re-build the science and technology system and to explore the reform on the system of science and technology that could adapt to the economic system reform. In this very period, the wrong were corrected and the right were restored while institutions and rules were restructured or developed within the sector of science and technology, making the period important in China’s history of science and technology. Aside from restoring and rebuilding the science and technology system that had almost been completely damaged during the period of 1966–1976, the major guiding principles and policies regarding science and technology evolved in the following few aspects. First, the guiding principle, “science and technology constitute the primary productive force”, was established. Second, the policy of “respecting knowledge, respecting talents” was released, and the Organization Department of the CCCPC released Several Opinions on the Implementation of the Party’s Policy Regarding Intellectuals. Third, by issuing the Outline of the National Scientific and Technological Development Plan 1978–1985 (Draft), the CCCPC set the eight-year goals for China’s science and technology cause: the level of some important scientific and technological fields should near or reach the global top level in the 1970s (i.e., agriculture, energy, materials, computers, laser, space, high-energy physics and genetic engineering) with 108 key research projects established, there should be 800 thousand professionals working in scientific research, a number of modern scientific experiment bases should be functional, and a national research system of science and technology should be in place. Fourth, the strategic principle of developing the science and technology policies was adjusted. In April, 1981, faced with the challenge of the world’s new industrial revolution, the National Committee of Science and Technology announced the new guiding principle of developing science and technology in the “Report Outline of the Guiding Principle for Our Country’s Development of 1 Liao, Tiantu & Dai, Tianfang, “Historical Evolution of the Reform on the Science and Technology

System in Our Country over the 60 Years of PRC, and What We Have Learned”, Acta Agriculturae Jiangxi, 2009, vol. 21, no. 9.

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Science and Technology”, i.e., “science and technology must serve the economic development and coordinate with the economy and society in development.” To better implement this guiding principle, the Chinese Academy of Sciences set up the Natural Science Fund in 1982, which was later remodeled to be the National Natural Science Foundation. In the same year, the first national development plan of science and technology–the “Plan of Overcoming Challenges in Science and Technology” headed by the National Committees of Planning and Science and Technology—was officially initiated. The innovations in this period were mostly aligned with science and technology planning, and the government introduced competition mechanisms in the planning and issued reform policies and measures.

1.1.3

Development of Science and Technology

After the National Science Congress in March, 1978, China’s science and technology entered a brand new phase. From the Third Plenary Session of the 11th CCCPC in 1978 to the eve of the issuance of the Decision by CCCPC Regarding the Reform of the Science and Technology System in 1985, the CCCPC launched actions in all aspects of the front line of science, technology and education to correct the wrong and restore the right in order to turn around the backward development of science and technology in China and to speed up the development, which facilitated the restoration and rebuilding of science and technology, leading to a series of encouraging scientific and technological achievements. (1)

2 “A

Those working in the sector of science and technology were fully motivated to participate in scientific research, leading to large quantities of scientific and technological achievements. For example, the Natural Science Fund supported 7628 academic works (papers) since it first accepted applications in 1982 until the end of 1984, among which 152 passed specialist review or technological review. Out of these works, 2797 were published on influential domestic or international academic journals or meetings, and some were actually leading the world in their respective fields.2 In 1981, for example, Tu Youyou discovered artemisinin, the most attractive scientific achievement of the year; Chinese scientists successfully synthesized the yeast alanine transfer RNA (tRNA) for the first time in the world, marking China’s role in continuing to lead the world in the research of artificial synthesis of macro-biological molecules; and China launched a carrier rocket with three satellites and became the fourth country in the world to possess the technology of “one rocket with multiple satellites” after the Soviet Union, the U.S. and France. These achievements showed that China had neared or reached the top of international research in biology, nuclear, carrier rocket, computation and satellite and communication technologies.

History of China’s Science and Technology Development (preprint)”, Chinese Academy of Sciences, 1989, vol. 94.

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A considerable amount of scientific and technological results were transformed into productive forces in reality and produced remarkable economic benefits. During the sixth Five-Year Plan (FYP) from 1981 to 1985, for example, several Chinese “government organs took turns to issue 12 national plans to develop technologies and commercialize and promote scientific and technological outcomes, among which most were guidance plans, and this showed how planning was combined with marketization to a degree and promoted the transfer, promotion and application of scientific and technological results”.3 Accordingly, China’s technology market started to grow. In 1980, the first “technology service cooperation” in China was founded in Shenyang, and technological results had a way to enter the trading zone. There are data that show the national total amount of technology contract transactions reached 700 million RMB in 1984.4 On January 10, 1985, the State Council issued the Temporary Regulations about Technology Transfer to open up the technology market and facilitate technology trade to prosper in order to promote the production development. The Regulations stipulated that all technologies, as long as they could promote the economic and social development, could be lawfully transferred. The Regulations included technology transactions, which had been born spontaneously, in the standardized management system, giving a strong push to the transfer of scientific and technological results to real productive forces.

The restorations and rebuilding in the beginning of the reform and opening-up created a much wider space for the socioeconomic development for China in the new times, and gradually became a soft power that was indispensable when socioeconomic development was promoted. Science, technology and culture were placed in a much more important position in modernization, and China’s science and technology cause was escalated to a whole new phase of development, which brought out a background full of energy and vitality for the development of science and technology and added to China’s strength in science and technology.

3 Study

Team of “China’s Science and Technology Development Research Report”, Report of China’s Science and Technology Development Research (2000): Scientific and Technological Globalization and Challenges China Is Facing, Social Sciences Academic Press, 2000, p. 37. 4 Editing Office of “Law Yearbook of China”, Law Yearbook of China (1989), Law Press, 1990, p. 858.

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1.2 Reform and Adaptation of the Science and Technology System, 1985–1995 1.2.1

The Strategy for Science and Technology Development and Policy Background

The reform on the science and technology system was officially kicked off when the Decision by CCCPC Regarding the Reform of the Science and Technology System was issued on March 5, 1985. The CCCPC explicitly stated that the fundamental goal of the science and technology system reform was to “facilitate scientific and technological achievements to be rapidly applied in production and the role of professionals in science and technology to be fully played to greatly liberate the productive force of science and technology and promote the development of the economy and society”, while providing specific instructions on the reform measures in the management mechanisms and funding rules in science and technology, marking the full implementation of China’s institutional reform in science and technology with proper leadership, organization and planning. The core task of the system reform of science and technology in this period was to resolve the “double-layer” issue of science/technology and the economy and realize coordinated development and accelerate the integration of science and technology with the economy.5

1.2.2

Focus of the Reform of the Science and Technology System

As the reform in China kept deepening, State-owned enterprises (SOEs) obtained more and more autonomy and the market became increasingly powerful in regulating enterprises. With maturing funding mechanisms and growing market of science and technology, scientific and technological institutions also provided better services to economic development, with more rapid commercialization and industrialization of scientific research outcomes. All these facilitated the stepwise establishment of the system of scientific and technological innovations. In the late 1980s, the market mechanism played a positive role that was greater by the day in the development of socialism, and the market started to account for a bigger proportion in regulating economic activities than the command system. From the promulgation of the Patent Law of the People’s Republic of China in 1985 to the eve of the promulgation of the Law of the People’s Republic of China on Science and Technology Progress in 1993, all laws and regulations involving technology trade started to be amended and improved, the legal framework to protect intellectual properties was constructed, and special attention was given to studies and practice

5 Liao, Tiantu & Dai, Tianfang, “Historical Evolution of the Reform on the Science and Technology

System in Our Country over the 60 Years of PRC, and What We Have Learned”, Acta Agriculturae Jiangxi, 2009, vol. 21, no. 9.

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of law-making planning for science and technology,6 in order to maintain fair and orderly competitions in the market economy, facilitate and protect technological advancement and innovations and to accommodate to the socialist modernization. As a result, China’s science and technology system became scientific and standardized. In this period, a science and technology system with Chinese characteristics was developed by focusing on the integration of science and technology with the economy under the guidance of Deng Xiaoping’s thought that “science and technology constitute the primary productive force” and by focusing on the major issues and respecting the truth as directed by the basic principle that “science and technology must face economic development and economic development must rely on science and technology”. At the end of the 1980s, the “Mid- to Long-term Planning Outline of the National Scientific and Technological Development” and the relevant “Precis” were made, in which 27 fields (industries) that were of overall, directional and imminent importance were specified with goals and measures of deepened system reform set forth in terms of the innovation bodies such as research institutions and enterprises, input and personnel. Meanwhile, a series of national science and technology plans and programs were released in turn in this period, such as the State High-Tech Development Plan (863 Program), the Torch Program that aimed to promote the industrialization of high techs, the Spark Program facing rural areas and the National Natural Science Funds to support basic science, which all made some beneficial exploration of activity management and resource allocation in science and technology in some way while playing the role of the national reform on the science and technology system as the engine to drive innovations across the country. In summary, the science and technology system reform in China that was aligned with economic development managed to accommodate to the demand of commercializing technologies and expanding the technology market as well as strengthened the bond of laws and regulations with science and technology, thereby bridging science and technology with socioeconomic development and promoting the integration of science and technology with the economy and the commercialization of technologies. The promulgation of the Patent Law on April 1, 1985 marked the abolishment of the old concept that “inventions and creations are freely available public goods” and provided legal basis for what would be protected and how to resolve disputes over ownership of inventions and creations, thus facilitating the promotion and communication of intellectual achievements and effectively motivating people working in science and research to invent and create. The subsequent increases in the patent applications were remarkable. The total applications reached 14.4 thousand in 1985, 18.5 thousand in 1986, 26.1 thousand in 1987 and 34.0 thousand in 1988.7

6 Fan,

Xiaofeng, Development of Science and Technology Policies and the Legal Framework of Science and Technology: A Review of Law-Making in Science and Technology and Some Thoughts, Intellectual Property Publishing House, pp. 79–80. 7 Department of Science and Technology Statistics, National Bureau of Statistics, Forty Years of China’s Science and Technology, China Statistic Press, 1990.

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In 1987, the Law of People’s Republic of China on Technology Contracts was promulgated, which promoted the commercialization of technologies. Comparison of data before and after the promulgation of the law showed that the project-specific contracts of national key projects in science and technology challenge-meeting plans amounted to 2759 in 1986 and 4372 in 1988.8 Meanwhile, the Chinese technology market saw an increasing amount of technology transactions annually under the guiding principle of “liberation, activation, support and guidance”. The total amount was 500 million RMB in 1983, and it reached 7.25 million in 1988, 145 times the former. In September, 1986, China’s first market of astronautical technologies was opened in Beijing. This technology market aimed to facilitate the transfer of military technologies into non-military fields and the commercialization and socializatioin of the transferred astronautical technologies, and it was thus a standing economic entity for technology exchanges and transactions. In 1986, the State Council issued the Regulations on Implementing the Hiring System of Professional and Technology Positions, and all institutions in China subsequently initiated the hiring procedures of professional and technology positions. In 1987, a total of 3.85 million people obtained professional or technology titles.9 In 1991, the “normalized phase” was started that professional and technology titles were reviewed and given on an annual basis. The implementation of this hiring system of professional and technology positions continuously expanded the size of people working in science and technology while optimizing the structure of professional and technology positions in all institutions gradually, both of which promoted the conduct of scientific and technological activities. From the issuance of the Temporary Regulations on Funding Procedures in Science and Technology by the State Council until the end of 1988, among all the 5321 natural science research and development institutions that were affiliated with government bodies above the county level, 2188 or 41.1% reduced or stopped receipt of institutional fees from the central government. From 1985 to 1988, these research and development institutions managed to increase incomes through various means such as technology transfer, social services and development of new products, and their cumulative income reached 14 billion RMB, equivalent to 54.0% of the government funds allocated to these institutions over the 4 years.10 After the National Natural Science Fund was set up, a total of 100,362 studies were formulated in 1986 with the total amount of grants at 2.321 billion RMB, and the two numbers were 120,146 and 3.949 billion RMB in 1988.11 The reform on the funding mechanisms in science and technology not only reduced the government expenditure on institutional fees, but strengthened the competitiveness of research and development institutions on the market as well, thereby promoting the effective organization of scientific and technological activities. 8 Ibid. 9 Department of Science and Technology Statistics, National Bureau of Statistics, Forty Years of China’s Science and Technology, China Statistic Press, 1990. 10 Ibid. 11 Ibid.

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Development of Science and Technology

In this period, the State funds for scientific research were mostly organized in the form of national science and technology programs and the management of their allocation was handled by government personnel. The government released a series of programs such as the State High-Tech Development Plan (863 Program), the Torch Program, the Spark Program, the Program to Promote Major Achievements, the National Natural Science Funds and the Climbing Program. Also in this period, China established many high-tech industrial districts, as was done in many other countries, to embrace the global high-tech revolution. In July, 1985, China’s first high-tech district, Shenzhen Science and Technology Park, was set up, after which a total of 52 national high-tech parks and more than 70 provincial and city-level high-tech parks or economic development zones were established in turn.12

1.3 Development of and Taking the Lead in Science and Technology, 1995–2006 1.3.1

The Strategy for Science and Technology Development and Policy Background

From 1995 to 2006, China, based on “facing, relying and climbing top mounts”, proposed to “find something to do and something not to do, follow up in general with efforts to make breakthroughs in key areas, develop high technologies, industrialize, improve the capacity for sustained scientific and technological innovations and leap in technology development” as the guiding principle, and made strategic plans from the two layers of “promoting industrial technology upgrade” and “improving sustained innovations in science and technology”, as specified as follows. First, enterprises were made the backbone of technological innovations. They focused on resolving the critical technologies for industrial development to promote the development of high-tech industries and employed high-tech to transform traditional industries to facilitate industrial technological upgrade and structural adjustment. Second, universities and research institutions were fully employed for their capacities in research on strategic high-techs and original basic research to support sustained innovations in science and technology so that great leaps would be made in critical areas with relative advantages or strategic importance. In 1995, it was explicitly stated at the National Science Congress to “reinvigorate China through science and education”. Thus implementing the strategy of “reinvigorating China through science and education” was the most important guiding principle of the reform in this period. In 1996, the “Technological Innovation Project” was initiated, which was aimed to boost the 12 Zhang,

Junfang & Lei, Jiasu, “A Study on the National Innovation System: Theory Side by Side with Policies”, Science Research Management, 2009, vol. 4.

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innovation capacity of enterprises. In 1998, the State Council decided to reform the management systems of 242 scientific research institutions under 10 national bureaus that were under the supervision of National Committee of Economy and Trade. In 1999, the State Council issued the Decision Regarding Strengthening Technological Innovations, Developing High-Techs and Realizing Industrialization and the Report Outline of Setting (Knowledge Innovation Project) Trial Sites by the Chinese Academy of Sciences, marking the science and technology system reform entering the phase of establishing a national innovation system by implementing system transition and promoting enterprises as the backbone. In 1999, the National Technological Innovation Conference made a series of policies to facilitate enterprises to become the backbone of innovation.

1.3.2

Focuses of the Reform of the Science and Technology System

The reform on the system of science and technology in this period was mainly focused on the following aspects. First, the layout of scientific research institutions was adjusted in a systematic way in that those of technology development were facilitated to transform into enterprises and those of public interests were differentiated and reformed. By 2005, more than 1200 technology development-oriented research institutions had been transformed into technology enterprises. Second, transfer of scientific and technological results was promoted by establishing a scientific and technological service network that was made up primarily of enterprises and based on a system of technological innovations integrating production and research and a system of scientific research that relied on scientific research and higher-education institutions. The reform in this period promoted the industrialization of technologies, resolving the “double-layer” issue of science/technology and the economy to some degree. However, the reform that drove institutions to compete for survival on the market also delivered a heavy blow to the sector of basic studies or of public interest that could produce little economic benefits, thus holding the development of basic-science institutions and the public cause of science and technology. In this period, China made significant adjustment to the means of government funding, and support of scientific research bases was added to the previously simple form of project-based funding format, while the means of support also became increasingly diversified. A number of research institutions were run under the new mechanisms and made remarkable achievements. In addition, a large number of “overseas returners” joined hands in the scientific, technological and educational cause back home, while at the same time, doctorates who had been trained domestically also made to the central stage of scientific research, greatly alleviating the shortage of scientists and researchers. Enterprises also made considerable contributions to technological innovation, and in this period, the goal of the market economy was set, which was to start from enterprises to deepen the reform on enterprise institutions and ownership mechanisms and strengthen the innovation capacity of enterprises. Accordingly, the macroscopic management was also reformed, and major scientific and technological plans that had previously been made by the government

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were then jointly made by scientific/technological and economic parties, while new participants emerged, such as the National Engineering Research Center and centers of productive force promotion, which all further accelerated the commercialization and marketization of technologies.

1.3.3

Development of Science and Technology

From 1995 to 2006, after years of reform, a variety of innovation entities with various characteristics and advantages were formed, such as scientific research institutions, higher-education institutions, enterprises and technology agencies with corresponding innovation modes. Enterprises became increasingly dominant in technological innovation. In 2006, the total expense of enterprises on research and development (R&D) accounted for 71.1% of the national total while the R&D personnel accounted for 73.4% of the national total. China ranked sixth in the world, after the U.S., Japan, Germany, France and the U.K., in terms of total input in science and technology. The total number of scientific and technological papers from China that were included in the three major indices was among the top few in the world, particularly the number of papers included in the Science Citation Index (SCI) was only second to the U.S. and comparable to the U.K., Germany and Japan. Papers increased significantly in mathematics, material science, life sciences and engineering, while the number of papers in nanoscience and nanotechnology was among the top two in the world with the number of citations also among the top few in the world. In 2006, the total number of patent applications in China was 573 thousand, an increase by 97 thousand or 20.3% compared to the previous year. Among the three patent types, 210 thousand were invention patent applications, increased by 21.4% compared to the preceding year, accounting for 36.7% of the total patent applications, and outnumbering that of utility and design patent applications for the third year in a row. Meanwhile, there were 161 thousand utility patent applications, increased by 15.6% compared to the preceding year, and 201 thousand design patent applications, increased by 23.2% from the preceding year.13 The team building of scientists and technicians was continuously strengthened. As many as five million people were working in scientific and technological activities and 1.9 million in R&D. In addition, the transformation of development-oriented institutions into enterprises resolved in the system the long-standing issue of many such institutions that had been excluded from enterprises, and the involved staff in science and technology became much more sensitive to the market and willing to come up with technological innovations. Also in this period, China made breakthroughs in many areas, including manned space exploration, the “Jian-10” fighter, supercomputers, core software, integrated circuit equipment, large gas turbines, super-rice breeding and new-drug development, which altogether provided strong support to the socioeconomic development.

13 Department

of Development and Planning, Ministry of Science and Technology, Statistical Communiqué on National Expenditures on Science and Technology, September 11, 2007.

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1.4 Science and Technology-Supported Development and Independent Innovations, 2006–2012 1.4.1

The Strategy for Science and Technology Development and Policy Background

In 2006, the State Council issued the Mid- to Long-term Planning Outline of the National Scientific and Technological Development (2006–2020). In the Outline, it was stated to establish a technological innovation system based primarily on enterprises and integration of production, study and research and push all aspects of establishing the national innovation system so that China would be an innovation-oriented country in 2020. To land the mid- to long-term planning of science and technology and to build China into an innovation-oriented country as soon as possible, in January, 2006, the CCCPC and State Council made the Decision Regarding the Implementation of the Science and Technology Planning Outline to Improve Independent Innovation Capacities, and immediately after the Decision, the State Council printed and distributed Several Policies to Facilitate the Implementation of “Mid- to Long-term Planning Outline of the National Scientific and Technological Development (2006– 2020)” in February, 2006, followed by the Decision Regarding the Implementation of the Science and Technology Planning Outline to Improve Independent Innovation Capacities by the CCCPC and State Council in March, 2006. To include in the legal framework the promotion of scientific and technologic progress, in 2007, the amendment of Law of the People’s Republic of China on Science and Technology Progress was reviewed and passed at the 31st meeting of the Standing Committee of the 10th National People’s Congress (NPC). In this period, China paid special attention to the application of intellectual property institutions to promote the allround socioeconomic development, culminating in the release of the Outline of the National Strategy of Intellectual Properties. Meanwhile, to promote the development and technological progress of small-scale enterprises and to consolidate innovation entities, the State Council issued Several Opinions Regarding Further Promoting the Development of Mid- and Small-Scale Enterprises in 2009. In 2012 and 2013, the State Council issued the “Opinion Regarding Deepening the Science and Technology System Reform to Speed up the Establishment of the National Innovation System” and “Opinion Regarding Strengthening Enterprises as the Mainstay of Technological Innovations to Fully Improve Enterprises’ Capacities of Innovation”, respectively, marking a new milestone on China’s journal to an innovation-oriented country.

1.4.2

Focus of the Reform of the Science and Technology System

The reform on the science and technology system in this period focused on the following aspects: strengthening the capacity of independent innovation for an innovation-oriented country, for which important legal protection was provided;

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further standardization of the management of science and technology funds; industrialization of independent innovations with faster paces and promotion of the tight integration of science and technology with socioeconomic development; improvement in the core competitiveness of industries, promotion of high-tech industries and emerging strategic industries; and acceleration in building the national innovation system with Chinese characteristics while coordinating innovations with enterprises as the backbone. Through the reform in this period, the organization structure and management system and institutions of the scientific and technological activities were all further improved, but the relationship of the government with the market and scientific community was not fully sorted out, and issues such as excessive government interference, unhealthy governance and unstandardized use and management of scientific and technological funds were all hurdles in front of further development of science and technology. Therefore, resolving these issues remained the major task and direction for the science and technology system reform in the next period in China.

1.4.3

Development of Science and Technology

China’s science and technology made important leaps up in the period of 2006– 2012. The overall capacity to make scientific and technological innovations was greatly improved, the environment for innovations was significantly bettered and science and technology provided increasingly strong support to the economy and society. (1)

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Accelerated Improvement in the Scientific and Technological Innovation Capacity. From 2006 to 2012, the number of patent applications in China grew rapidly, outnumbering that of the U.S. in 2011 for the first time and ranking the first in the world. The number of authorized invention patents also grew significantly, ranking the third in the world. The total number of scientific papers published on international platforms went from the 5th to the 2nd in the world, and the number of citations climbed from the 13th to the 4th. Output of scientific and technological activities increased rapidly, with significant improvement in the quality. Achievements in key areas won world recognition, and some remarkable accomplishments include those in manned space exploration, moon exploration, supercomputers, super-rice hybridization, high-speed rail, experimental fast reactors, quantum communication, iron-based superconductors, manned deep-sea exploration and induction of pluripotent stem cells. Total Resources of Science and Technology Increased Rapidly. From 2006 to 2012, the funds input in science and technology continued to increase steadily. R&D input was added with more intensity. In 2012, a total of 1.02984 trillion RMB was input in R&D across the country in 2012, which was 4.2 times that of 2005, and the intensity (R&D input expenditure as % of GDP) was 1.98%, which was more than the average level of the 28 countries in the European Union (EU). The R&D team grew larger and larger, and in 2012, a total of

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3.2468 million people/year participated in R&D, increased by 138 percentage points compared to 2005 and ranking the first in the world. From 2006 to 2010, 156 national (key) laboratories were built, leading the total of such laboratories to be 333; 114 national engineering (technological) research centers were built, with the new total of 387; 91 national engineering laboratories were built, and national enterprise technological centers totaled at 575. In addition, a group of landmark scientific and technological infrastructure and scientific projects that were of major importance were completed. Therefore, the platform for scientific and technologic development was strengthened, promoting the integration and sharing of resources of science and technology while highlighting the role of science and technology in leading socioeconomic development. The Environment for Independent Innovations Kept Being Optimized. The Law of the People’s Republic of China on Science and Technology Progress was amended and implemented, the accompanying policies of the Science and Technology Planning Outline were put on a fast track to be implemented, national mid- and long-term plans for scientific and technological training and education were released one by one, and the strategy regarding intellectual properties was given more weight in implementation. The science and technology system reform kept being deepened, and major progress was made in the establishment of the national innovation system. The technological innovation projects were brought in deeper layers, efforts in the trial sites of the knowledge innovation project were rewarded with significant effects, regional innovation systems with respective characteristics were improved continuously, science and technology agencies provided increasingly competitive services, and the innovation system of national defense science and technology that integrated military and non-military sectors was being established in order. In addition, science and technology was more tightly integrated with finance. The sector of science and technology was opened up to the outside in expansionary manners, with international cooperation strengthened further. The innovation culture and scientific integrity were more and more recognized, efforts to popularize science and technology were made in a wide range, and a culture was being formed for the entire society to pay attention to, support and participate in innovation.14

14 A note from the author: The analysis of this period was mainly based on the “Twelfth Five-Year Planning for Science and Technology”, and data involved were all updated according to the period of 2006–2012.

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1.5 The National Strategy of Scientific and Technological Innovations and the Leading Role of Science and Technology: Since 2012 1.5.1

The Strategy for Science and Technology Development and Policy Background

In November, 2012, the report at the Party’s 18th National Congress officiated the strategy of innovation-driven development, and it was specified to “deepen the reform on the science and technology system, push for tight integration of science and technology with the economy, speed up in establishing the national innovation system, and focus on the technological innovation system facing enterprises, oriented with the market and integrating production, study and research”. In November, 2013, the Decision by CCCPC Regarding Several Major Issues of Comprehensive Deepening of the Reform (referred to as the Decision hereafter) was passed at the Third Plenary Session of the 18th CCCPC, and in Part 13 of the Decision, relevant issues about deepening the reform on the science and technology system were elaborated on, with further clarification of the goals of the reform in the new era, which was to “remove the institutional and system hurdles deeply hidden, improve the independent innovation capacity, make innovation drive the socioeconomic development, improve the national innovation system and build an innovation-oriented country”. On October 29, 2015, the Suggestions by CCCPC Regarding the 13th Five-Year Planning of the National Economic and Social Development was passed at the Fifth Plenary Session of the 18th CCCPC, in which it was stated, for the first time, that “innovation must be placed at the core of the blueprint of the national development for innovation to be a central piece of all work of the Party and the country and for innovation to be a style in the entire society”. On May 19, 2016, the CCCPC and State Council distributed the Outline of the National Strategy of Innovation-Driven Development, which made comprehensive and systematic plans for implementing the strategy of innovationdriven development in terms of the strategic background, requirements, deployment and tasks, with the emphasis to let “scientific and technological innovations drive innovations in all sectors, system and institutional reform stimulate the innovation vitality and a highly efficient innovation system support the high-level development of an innovation-oriented country”. The Outline also focused on all the aspects in the innovation system and on the chain of innovation, and specified tasks and directions from the perspectives of technological innovations in industrial systems, original innovations, regional innovation planning, integration of the military sector with non-military sectors, innovators, major scientific and technological projects, team building and innovation in start-up. In November, 2016, the General Offices of the CCCPC and State Council distributed Several Opinions on the Implementation of the Policy of Knowledge Value-Oriented Distribution, which motivated all scientists and researchers to innovate and start their own business, thereby giving a strong push to the translation of technological results. Now, the strategy of innovation-driven

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development with science and technology as the pioneer was in full motion, pushing China to realize its “dual centennial” goals.

1.5.2

Focus of the Reform of the Science and Technology System

From the Decision at the Third Plenary Session of the 18th CCCPC to the Outline of the National Strategy of Innovation-Driven Development, not only the goals of the future deepening of the science and technology reform were clarified, but the specific direction of the reform was designed from the top as well. Major highlights of the reform include macroscopic regulation and management in science and technology, allocation of science and technology resources and innovative assessment and tests, collaboration of production, study and research with technology transfer, attraction and training of talents in innovation and start-ups, and risk diversification. The reform on the scientific and technological innovation system kept being deepened and the policy framework became increasingly complete. In terms of the reform measures of the science and technology system and relevant policies made by the central government as well as each government sector, particular attention was given to the macroscopic regulation and management of innovation, establishment of the institutions to integrate production, study and research and to transfer scientific and technological research results and escalation of financial support of innovations; proactive support was given to the development of scientific and technological innovation-rich industries such as the internet, e-commerce, cloud computation and big data, and efforts were made to create a policy and institution background for all to start up and innovate. In the science and technology system, reform measures have now formulated that cover the macroscopic management system of innovations, the allocation mechanism of science and technology resources, the mechanisms of collaboration between production, study and research as well as technology transfer, the training system, the mechanism to manage science and research, incentive mechanisms, evaluation mechanisms, and the system of risk mechanisms. In addition, policies and measures were further amended and bettered in many aspects including treasury, taxation, finance, human resource, external collaboration and industrial development.

1.5.3

Development of Science and Technology

Since the 18th National Congress of the CCCPC, the Central Committee with Xi Jinping as the core has established the new concept of development with innovation as the top priority, made the judgement of great importance that “innovation is the primary force to drive development”, placed scientific and technological innovations at the core of the big picture of national development as the strategic support of improving the social productive forces and composite national strength, required to implement the strategy of innovation-driven development, issued the Outline of the National Strategy of Innovation-Driven Development, made systematic plans

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for scientific and technological innovations that were strategic, comprehensive and long lasting, released a series of fundamental and long-acting policies and broke a new ground for the development of science and technology. As a result, the overall capacity of China’s scientific and technological innovations has been improved significantly, and there emerged a historical transition in science and technology: China, which used to be primarily a follower in science and technology, started to run side by side with the leaders in some areas and take the lead in some areas while staying a follower in other areas. This is something of great importance that was never seen in the recent history, indicating that China has stepped over a brand new historical point in science and technology. Meanwhile, China’s innovation capacity has shown a leap in the nature after increases accumulated over the years and systematic improvements based on individual breakthroughs, thereby accumulating vast energy for shaping the development as a leader with early-mover advantages. In addition, the relationship between scientific and technological innovations and the socioeconomic development has also transitioned from “facing and relying” to “deep integration and leadership with support”, pushing China to climb up the ladder of global industries. The majority of the innovating masses are no longer scientists and researchers who make up only a small fraction of the population, but the public now. Scientific and technological innovations have been integrated with and advanced side by side with “innovation and starting-up”, pooling the efforts of all who are innovating. China is no longer just a follower on the global map of scientific and technological innovations because it has proactively integrated with the world and taken the initiative to plan the global network of innovations, thus becoming an important power in science and technology that is of international influence, with a full speed to march to a strong power of science and technology. (1)

Rapid Development and Jumps in the Level of Science and Technology. In 2016, China jumped to the 15th from 19th in the global ranking of composite national capacity of innovation, while the progress in science and technology contributed 60% and the societal expenditure on R&D accounted for 2.5% of GDP. Scientific and technological output was remarkable. In 2016, a total of 3.465 million patent applications were accepted, topping the world for the sixth year in a row, among which, 1.339 million applications were invention patents, also ranking the first in the world. The number of scientific and technological papers published internationally ranked the second in the world, and the number of citations, the third. Science and technology showed tighter integration with the economy. In 2016, the total monetary amount of contracts on the technological market in the entire country was 1.140698 trillion RMB. The team of science and technology further expanded and strengthened, with the total human resources and number of people in R&D both ranking the first in the world and accounting for 29.2% of the global total. Major breakthroughs were made in core technologies of key scientific and technological fields, and the

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competitiveness of science and technology, as well as the international influence, was strengthened considerably. Industrial innovations showed remarkable consolidation, and milestones were achieved in basic research. Infrastructure for innovation was escalated, and a group of facilities and innovation platforms for major scientific research were completed while mechanisms to open up and share public scientific and technological resources were formulated with satisfactory performance. The reform on the science and technology system has promoted the implementation of the strategy of innovation-driven development, and China’s journey to an innovation-oriented country is accompanied with abundant accomplishments, such as Tiangong, Jiaolong, Tianyan, Wukong, Mozi and big airplanes, to just name a few. Enthusiasm of Innovation and Starting-up and Market Activity. Since the reform and opening-up, especially since the Party’s 18th National Congress, the reform on the science and technology system has been continuously deepened, many policies have been released, the market has become increasingly active, and a consensus has been raised to start up and innovate in the whole society, with hyper-stimulated innovation and start-up activities in Beijing, Tianjin, Shanghai, Zhejiang, Jiangsu and Shenzhen. The emergence of societal innovation and starting-up pushed for the emergence of new industries and industrial patterns, playing a positive role in alleviating the pressure of economic development. In 2016, the market mainstay in China kept its strong growth, and 16.513 million entities entered the market in the whole year, with 4.46 million newly registered enterprises in the tertiary sector of industries. Also in 2016, many areas showed promising development, including information technology, software, energy-saving and ecology, new energy, highend equipment manufacturing, new materials, biology and medicine, cultural industry, financial services, professional and technological services and R&D. What deserves special attention is that social capital has shown large-scale increases in the activity in innovations. According to disclosed data on the venture investment activities in the Wind microscopic database of enterprises, disclosed venture investments increased from 1225 to 2897 from 2013 to 2015, showing an annual increase by 53.8%, and the disclosed scale increased from 63.1 billion to 408.56 billion RMB, an annual increase by 154.4%.

2 The Achievements of Scientific and Technological Innovations Over 40 years of sustained efforts, China made huge leaps of progress in many areas such as basic science, engineering, agricultural technology and information technology. Scientific and technological achievements sprang out, and China’s scientific and technological innovations went faster and faster towards the leading countries in the world while China has become a peer-competitor and pioneer in addition to

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being a follower, with the first two roles covering more and more areas, marking a new historical stage for China’s science and technology. A large volume of innovations emerged, such as “Tianyan”, the space explorer, Shenzhou, the roamer to the far, Mozi, the messenger, high-speed rail, where trains gallop, as well as the networking of Beidou, the mighty power of supercomputers, the debut of a big plane taking to the sky and the birth of a cloned money. Increased capacity of innovation was visible and the team of science and technology kept expanding, contributing to continuously accumulating scientific and research results and driving science and technology to contribute more and more to the economy. China now ranks the 17th among the world in terms of national innovation capacity. Based on the sustained improvements in the scientific and technological strength and innovation capacity, China has now possessed a growing high-tech industry, where emerging strategic industries have shown ever-stronger power to lead the economic development and promotion of the upgrade of the industrial structure. Through sustained exploration over 40 years, China made major progress and achieved considerably in the reform on the science and technology system, with an increasingly complete policy framework. The mechanism of the science and technology system had an important transition where the previously competition-based mechanism changed to rely on the allocation of scientific and technological resources. Encouraging progress was also made in the sub-level reforms, such as the enterpriseoriented reform and the reform of institutions of public interest. Meanwhile, the promulgation of several laws, Law on the Science and Technology Progress, Patent Law and Law of Promoting Technology Transfer, constructed the legal system for science and technology. The science and technology system now has an optimized structure with a variety of innovation entities, including research institutions, highereducation institutions, enterprises and science and technology agencies, all of which have their own advantages and characteristics, with enterprises playing an increasingly bigger role in innovation.15 As a result, the scientific and technological innovation capacity kept improving, and further achievements in science and technology are now backed by institutions and laws.

2.1 Sustained Improvement in Science and Technology 2.1.1

The Input Scale in Science and Technology Among the Global Top Few with a Huge Potential for Increases

Input of funds is the economic base of the development of science and technology, and it supports various scientific and technological innovation activities. With the thriving economy in China and the sustained addition to the support of science and technology 15 Yun, Tao, “Phased Achievements of China’s Reform on Science and Technology System and Measures and Suggestions for Deepening the Reform”, Scientific Management Research, 2009, vol. 27, no. 4.

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by the government, China has become advantageous in terms of input. According to the newest edition of the Science and Engineering Indicators 2018, issued by the U.S. National Science Board (NSB), the total R&B input of the Chinese society in 2015 reached 408 billion USD (approximately 1.4 trillion RMB), accounting for 21% of the global R&D input, which put China only second to the U.S. in terms of R&D input. Meanwhile, according to the Communiqué of National Fund Input in Science and Technology 2016, the input intensity of China’s R&D funds increased steadily, and the ratio of R&D input to the GDP in 2016 was 2.11%, which was the third year with a ratio over 2% in a row and was also higher than the average ratio, 2.08%, of 15 countries in the European Union (EU). Furthermore, China still has a large potential for further increases in the input. Based on the constant price, the average annual increase of the R&D funds in China from 2000 to 2015 was 15.9%, topping the world in terms of the increase rate and making China the largest contributor to the global increases in R&D input. As the second largest economy in the world, China has maintained a mid-high speed in the economic growth, solidifying the foundation for future sustained increases in the R&D funds.

2.1.2

The Intellectual Output Among the Global Top Few with Sustained Improvements in Quality

Since the reform and opening-up, China has made sustained efforts and now shown considerable advantages in intellectual output globally as measured by the scientific and technological papers published internationally and domestic invention patents. In terms of the papers, China published a total of 281 thousand SCI papers in 2015, accounting for 14.4% of the global total, second only to the U.S. and China had held this second position for consecutive eight years. From 2000 to 2015, the SCI papers China published grew by 16.4% per year on average, the fastest in the world. Meanwhile, the numbers of citations of published papers in some areas were also among the top few in the world as China’s scientific research kept being solidified. For example, papers from eight disciplines, including agriculture, chemistry and computer science, were citied the second most in the world during the 12th FYP. In terms of patents, the applications of and the granted invention patents in China both outnumbered all other countries in the world, and they are still growing with a strong potential, contributing significantly to the global increases in the applications of and the granted invention patents. From 2000 to 2016, the number of invention patent applications and the number of the granted in China grew annually by 27.5 and 28.4%, respectively, much higher than the patent-rich countries such as Japan, the U.S. and South Korea. In 2016, the National Intellectual Property Administration accepted a total of 1.339 million applications of invention patents, ranking the first in the world for consecutive six years, and 302 thousand invention patents were granted, keeping China as the world’s number one in terms of domestic invention patents granted. Meanwhile, the total number of invention patents possessed in China exceeded one million in 2016, making China the third country after the U.S. and Japan to come

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to possess more than one million invention patents in the world and consolidating China’s status as a “big patent country”.

2.1.3

Remarkable Achievements in Scientific and Technological Output

While the basic research leapt in progress, original innovations also showed significant improvement. Chinese scientists and technological professionals became more confident than ever and dared to meet all challenges, and they also produced remarkable results, such as the first ever observation of three-dimensional quantum Hall effect and the first quantum communication from earth to satellite. The important contributions made by Chinese scientists to the international scientific frontline and intellectual creations have been highly recognized among the international community, and China is now second only to the U.S. in terms of production of highquality scientific and technological papers. In areas such as quantum communications, quantum computers, high-temperature superconductivity, neutrino oscillation, stem cells, synthetic biology, structural biology, nanocatalysis and polar research, China has made a large volume of major original achievements and won awards of international prestige such as the Nobel Prize for Physiology and Medicine, which was won for the first time, the Matthias Prize for Superconducting Materials and the International Quantum Communication Award, which all drove China to become more influential in the international community of basic research. In addition, major scientific and technological innovations kept springing out, showing China’s advantages as a late mover. In strategic technologies, encouraging results were produced one by one, such as the manned space project and the moon exploration, the “Beidou” global satellite navigation system, the “Sunway TaihuLight” supercomputer that used chips independently designed and developed in China, the first big plane C919, the “Jiaolong” manned deep-sea submersible, nuclear energy technologies developed independently, exploration and development of natural gas hydrates, and the new generations of high-speed rail, cloud computation and artificial intelligence, which all won global recognition.

2.1.4

The World’s Largest Science and Technology Team with Remarkable Progress in Training and Introduction of Scientific and Technological Experts

The science and technology team is an important carrier of knowledge and skills, as well as the core factor of scientific and technological activities, and decides the innovation strength and potential for future development of a country. Through many years of development, China has seen the “gold age” of sustained release of the dividend of scientific and technological human resources. (1)

The World’s Largest Science and Technology Team. In recent years, the number of people involved in scientific research kept growing, and the national total

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R&D staff reached 3.759 million people/year in 2015, accounting for 31.1% of the global total and holding the first place in the world for nine consecutive years since 2007. China is without question a big country with the most human resources in science and technology, which is a strong support to the development of China’s science and technology. Return of Talents Overseas. With the rapid development of the Chinese economy and the continuous optimization of China’s R&D environment, more and more people who went overseas for study and work were drawn by the “big magnet” and returned to China to become part of the great tide of scientific and technological development. Major scientific and technological projects, R&D bases and major infrastructure in science and technology have all played a role similar to the Siphon Effect as they serve as the “nests to attract phoenixes”. Major talents programs, such as the Thousand Talents Plan and Ten Thousand Talents Plan, were coordinated by the central and local governments and multiple government organs and they facilitated the development of various types of scientific and technological talents, laying out a new multi-layered structure where the top layer leads and all layers contribute with system support provided. This has enabled a “returning tide” that is the largest in scale since the PRC was established. By the end of 2016, the total number of people who came back to China reached 2.6511 million, among whom 70% came back after the Party’s 18th National Congress in 2012. A large team of innovative talents with various specialties, reasonable layers and good quality have been gathered and kept expanding, who are dedicated to the cause of building a globally strong country in science and technology.16 In fact, the advantageous scientific research environment and effective incentive mechanism have attracted the return of quite a few senior scientists and iconic figures in science and technology such Yang Zhenning, Yao Qizhi and Shi Yigong, and they have become the backbone and leaders of China’s development of science and technology. Dividend of Science and Technology Human Resources Released by Education Dividend. Now China has entered the period of continuous release of the education dividend. The number of people with higher education increased from 118 million in 2010 to 171 million in 2015, translating into an average annual increase of 10.6 million. The proportion of those with higher education in the population of working age increased from 12.5% in 2010 to 16.9% in 2015, with an average annual increase of nearly one percentage point. Meanwhile, as an important source of the science and technology staff, people graduating from colleges and higher levels majored in science, engineering, agriculture and medicine increased annually, producing an average of 1.6 million backup talents every year to the cause of science and technology in China. The societywide education level in China has also been improved significantly, with an ever

16 Party Group of the CCCPC Department of Science and Technology, “New Glories Enabled by Innovations and a New Chapter of Reinvigorating China with Science and Technology: Major Progresses and Achievements since the Party’s 18th National Congress”, Qiushi, 2017, vol. 11.

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expanding size of the population with higher education and growing graduates from science, engineering, agriculture and medicine majors, laying a solid foundation for the consolidation of China’s science and technology team and its sustained, rapid growth. 2.1.5

A New Layout of National Bases for Scientific and Technological Innovations as the Cradle of Innovations

From the establishment of the first incubator of science and technology enterprises in 1987 until the end of 2016, a total of 4298 co-working innovation spaces, 3255 incubators of science and technology enterprises and more than 400 enterprise accelerators were included in the national Torch Program. Together with 19 national pioneering districts of independent innovation and 156 national high-tech parks, they helped create an increasingly complete ecological chain of start-up incubators. Now China has established collaborations in science and technology with 158 countries in the world and joined more than 200 international organizations or multi-lateral mechanisms. Three national composite science centers were founded in Huairou, Beijing, Zhangjiang, Shanghai and Hefei, Anhui, 483 national key laboratories have been laid out and 346 national engineering technology research centers are in place, all of which constitute a structured system to charge to the world frontline of science and technology and take the high ground of future competitions. Meanwhile, major infrastructure of science and technology has been pushed for to build the “pillars of a great power”.

2.2 The Increasing Role of Science and Technology as a Supporter and Pioneer Scientific and technological innovations have played a positive role in supporting the economic transition, invigorating key industries and effectively responding to international financial crises. The scientific and technological innovations in China have always started from the major demands of the national economy and sustainable social development to promote technology upgrade of and structural adjustment to industries, and they are aligned with major technological issues of social interest to provide technological support to the industrial technology upgrade, sustainable social development and improvement in people’s lives by making breakthroughs in critical technologies, introducing technological innovations and application and industrialization of high techs. (1)

Thorough Implementation of the Technological Innovation Projects and Stepped up Innovation Capacity of Enterprises. Enterprises were strengthened as the main innovators and the provider of guidance, and were encouraged to take on the responsibility of leading major national scientific and technological projects. National centers for technological innovations were initiated, and

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trial sites for the program of one hundred innovation enterprises were implemented, the evaluation methods in centrally-owned enterprises were reformed, and mid-, small- and tiny-sized enterprises were encouraged to coordinate innovative activities. Efforts were made to push for allies in industrial technological innovations and open, coordination platforms were constructed. As a result, a group of innovation-rich enterprises, such as Huawei, Le Novo, CRRC and China Electronics Technology Group Cooperation, made to the Fortune Global 500 list of enterprises. There also rose a group of globally influential innovation-rich enterprises in high-speed rail and smart devices in China. Technological Innovations Kept Incubating New Driving Forces to Lead Industries to Mid- and High-Ends. Technological innovations were sped up and breakthroughs were made, which drove emergence of new driving forces while the conventional driving forces were reconstructed and improved. Many achievements, such as those in the integrated circuit technologies, mobile payment, the fourth generation of high-temperature gas-cooled reactor (HGTR), the third generation of nuclear energy Hualong 1, high-speed rail, new energy automobiles, ultra-high voltage transmission and transformation, key parts and design and manufacturing technologies of wind power and photovoltaic equipment, and the pioneering program of “first generation of numerical control”, all gave a strong push to the transition and upgrade of industries. Scientific and Technological Innovations Ensured Improvement in People’s Lives and Poverty Alleviation. Major breakthroughs were made in critical technologies in agriculture, and the pioneering programs of the crop enriching technologies and Bohai crop storage technologies showed encouraging effects. The 3.0 T superconducting magnet system that was independently developed, the world’s first Ebola vaccine based on genetic mutations, and a new anti-tumor drug, apatinib, have all provided technological support to improve people’s lives. Technology-based poverty alleviating efforts showed significant effects, and technologies have helped alleviate people out of poverty. Technological Innovations Facilitated Formation of Regional Economic Poles to Create Regional High Grounds of Innovations. Beijing and Shanghai took faster steps to create technological innovation centers of global influences, Beijing, Tianjian and Hebei were further integrated, the Yangtze River economic belt sped up in transition, upgrade and innovation in development, the innovation-oriented provinces and cities made encouraging progresses, and regional innovation reform trials were fully initiated. The national pioneering districts of independent innovations and high-tech new zones have become the core carriers of regional innovations and the important engines of industrial transition and upgrade. The innovation pioneering zones were initiated to land China’s 2030 plan for sustainable development, and collaboration between Zhongguancun, Beijing and the big data trial site in Guizhou was promoted.

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2.3 Sustained and Rapid Development of High-Tech Industries China’s high-tech industries started development in the 1980s, and it leapt in progress in the subsequent period of more than 30 years, which may be deemed as the “preparation” phase followed by “thriving” phase, until now when it is in the “gold age” of rapid development. In the 1980s, Deng Xiaoping made a strategic decision and China formulated the Outline of the State High-Tech Development Plan (863 Program), marking the start of China’s high-tech industries. The next 15 years from the mid-1980s to the end of the 1990s was the “preparation phase” for China’s high-tech industries, which emerged from zero ground and became a follower in the world of high-tech industries. The subsequent “thriving” phase saw China’s high-tech industries thrive and get strong, and China was no long just a follower, but a pioneer in some fields. In this phase, the sector of science and technology and that of industries both showed a tenacious vitality for development. The value added of the high-tech industries accounted for 6.23% of that of the manufacturing industries. The percentage grew to 16.52% in 2016, an increase by 10.29 percentage points, and it is expected to exceed 18% in 2020. The high-tech industries in China is now experiencing an unprecedented “up phase”. (1)

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Growth in High Speeds of Both the Value-Added and Employment in HighTech Industries in China. In 2000, the value added of China’s high-tech industries was 181.85 billion RMB, which increased to 340.2756 billion RMB, showing an average annual growth rate of 22.42%. In fact, from the 10th to the 12th FYP, the value added of the high-tech industries grew at a higher rate than that of non-high-tech industries, or, 2.46 times the latter, and it was also higher than the overall rate of the entire industry by 2.25 times. In particular, the growth rate of high-tech industries was 3.59 and 3.18 times those of the non-high-tech and the overall industry, respectively, during the 10th FYP. In 2000, a total of 3.90 million people worked in high-tech industries, and the number grew to 12.94 million in 2013, with 9.04 million more employees and an average annual growth rate of 8.9%, which was much higher than the employment growth rate of the entire industry. China Has Become a High-Tech Industrial Power in the World. In 2000, the value added of China’s high-tech industries accounted for 3.16% of the world total, and it grew to 29.08% in 2015, with the latter being 25.92 percentage points more than the former. In fact, the percentage of 2015 already overtook the U.S. The development of high-tech industries in China was essentially the course of how China progressed rapidly as “someone left behind” and a “late comer” to catch up with the U.S. and overtake it. The total amount of exported high-tech products exceeded that of the U.S. during the 10th FYP, and the value-added overtook the U.S. during the 12th FYP, showing that China is not only a world factory, but also a world factory of high-tech products.

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The Development of High-Tech Industries Improved the Quality of Economic Development and Optimized the Industrial Structure in China. Since the reform and opening-up, high-tech industries in China have made growing contributions to the economy. The direct contribution of high-tech industries reached 4.95% from 2000 to 2014, showing that they were one important engine to drive the economic growth in China. The exports of high-tech products accounted for 18.98% of the total exports of finished industrial products in 2000, and the number grew to 25.37% in 2014, marking a quick improvement in the quality of finished products exported. The development of high-tech industries also improved the structure of China’s manufacturing industries, driving the previously low-end manufacturing industries to transition to high-tech ones, which stimulated a large number of knowledge- and technology-rich industries, including manufacturing and service industries, to rapidly develop and the information and communication technology (ICT) industry to rocket up in development. China shows a strong scale advantage in some areas of the ICT industry, namely, information and communication equipment manufacturing and computer and office equipment manufacturing. In 2014, the two manufacturing industries contributed 52% and 20%, respectively, to the revenue of high-tech industries in China, and they together accounted for more than 70%; the exports of these two industries accounted for 58% and 36%, respectively, of the total exports of high-tech industries in China, with a combined contribution of more than 90%; and their value added accounted for 47% and 43%, respectively, of the global total.17

2.4 National Innovation System Always Optimized In 2006, the State Council issued the Mid- to Long-Term Planning Outline of the National Scientific and Technological Development (2006–2020), in which it was specified that the goal of deepening the reform on the science and technology system was to establish and keep improving the national innovation system. On July 7, 2012, Hu Jintao reiterated at the national conference on scientific and technological innovations, “Our goal for 2020 is to have a national innovation system with Chinese characteristics in place that accommodates to the socialist economic system and conforms to the natural laws of science and technology development.”18 On June 9, 2014, Xi Jinping emphasized at the conference of members of the Chinese Academies of Sciences and Engineering to “establish and improve the national innovation system with faster paces for all innovation sources to flow fully freely” and to “establish a national innovation system with interactive, coordinated and highly effective entities, 17 Hu,

Angang & Ren, Hao, “How China’s High-Tech Industries Overtook the U.S.”, Bulletin of Chinese Academy of Sciences, 2016, vol. 31, no. 12; “China’s High-Tech Industries Have Entered the ‘Golden Age,”, http://www.gov.cn/xinwen/2017-03/02/content_5172385.htm. 18 Encyclopedia of the Scientific Outlook on Development, ed., Xi Jieren, Shanghai Lexicographical Publishing House, 2007, pp. 142–162.

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Fig. 1 Input-connection-output model for China’s national innovation System

fronts and segments”. In 2009, the OECD published the report, “Measuring China’s Innovation System—National Specificities and International Comparisons”, which was an important part to the OECD study on China’s innovation policies. In this report, a model of “input–connection–output” was proposed to describe China’s innovation system at the time,19 the major characteristics of which were thoroughly analyzed through studies on the major scientific and technological measurements such as innovation bodies, input and output (Fig. 1).20 The overall design and requirement of deepening the reform on the science and technology system were specified at the Third Plenary Session of the 18th National Congress of the CCCPC. The reform was always aligned with problems, and institutional and system innovations were guided by the transition of the government roles. Significant effects have been achieved since then. (1)

Improved Governance System of Scientific and Technological Innovations. The national mechanism of consultations for major science and technology decision-making was established, with a national committee of science and technology consultation in place, while the mechanism of national technological predictions was improved, as well as the national investigation system of

19 Wang, Chunfa, Historical Evolution and Development Trends of the National Innovation Systems

of Major Developed Countries, Economic Science Press, 2003, pp. 12–24. 20 Wang, Chunfa, Historical Evolution and Development Trends of the National Innovation Systems

of Major Developed Countries, Economic Science Press, 2003, pp. 12–24.

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innovations. The reform of “delegating, controlling and serving” in the science and technology sector was pushed for to further improve the policy and legal framework for scientific and technological innovations. Fully Reshaping the National Science and Technology Planning System. A new science and technology planning system was formed, with an open and unified platform for national management of science and technology, which strengthened the coordination and allocation of science and technology resources. Also established and improved was a new mechanism to facilitate scientific and technological innovations centered on major tasks. Major Breakthroughs in the Technology Transfer System. A technology transfer system with Chinese characteristics was constructed by making the law, releasing policies to go with the law and planning specific actions as the NPC amended the Law of Promoting Technology Transfer, the State Council issued Several Regulations on Implementing the “Law of Promoting Technology Transfer” and the General Office of the State Council distributed the Action Plan to Promote Technology Transfer. Visible Effects in the Innovation Incentive Policy Framework. Stock shares and dividends were adopted as the means of incentives in state-owned technology enterprises, and incomes from stocks and the stock shares purchased by technology were allowed a late payment of taxes, which helped establish a midto long-term distribution mechanism beneficial to stimulation of innovations. The policies that had been trialed first in Zhongguancun were implemented nationwide, and the policy to calculate expenditure on R&D and the policy to identify high-tech enterprises were made and improved. Distribution policies were made to align with addition of intellectual value while the system to manage the grants of scientific and technological projects was brought under reform. Faster Paces in Establishing the Military and Non-Military-Coordinated Innovation System. A plan was made to integrate military and non-military technologies for the 13th FYP and implemented to establish a new development scheme integrating military and non-military technological innovations with total factors, multi-disciplines and high benefits. A group of major scientific and technological projects and special topics in the strategic high-techs were planned for with both military and non-military involvement to dig deep under the sea and below the earth and to go far into space. The mechanism to deliberate the integration of technologies for both military and non-military uses and to implement the technologies was in place and improved. Platforms for coordinated innovations between military and non-military parties were explored and attempted to escalate the collaboration between military and non-military technological innovations.

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3 Experiences of the Development of Science and Technology Through 40 years of exploration and hard work and after overcoming countless difficulties and challenges, China made great achievements in science and technology and is now among the first-tier countries in terms of science and technology. The great achievements were attributable to continuous strategic planning of the national science and technology development with sustained adjustment, which led the development prospectively. Also importantly, China steered the reform of the science and technology system in the right direction, pooled all forces in the country to achieve big and made good use of the advantages of the market economy, while the big picture of the national development was always taken as the priority with economic and social development as the main battle ground. In addition, imitation-based and independent innovations were both valued, which helped China narrow the gap from the global front line of science and technology, while attention was given to science and technology talents and efforts were made to optimize the setting for all to innovate.

3.1 Leadership of the Strategic Planning After the Second World War, science and technology developed in leaps, and all countries around the world responded actively to this new tide of development. In China, however, caught up the period of 1966–1976; consequently, China missed the opportunity to catch up with the leading countries and saw a widening gap in science and technology compared to Western countries. China would have remained behind and bullied if it had decided at that time to only follow the steps of others without taking any unusual measures to develop its science and technology. Instead, China highly valued the strategic planning for science and technology after the reform and opening-up, and took the initiative to make plans for science and technology development, leading to astonishing achievements in a short period of time. Around the time when the Party’s 18th CCCPC was held, China made a strategic “asymmetric” plan to create advantages in certain areas to accumulate energy for further development driven by innovations. The strategic planning led the development of science and technology, consolidated the prospective structuring of the sector of science and technology, intensified the systematic planning and optimized the national layout of science and technology and its resource allocation. After the reform and opening-up, China made a total of ten important plans for science and technology development, i.e., Outline of National Development of Science and Technology, 1978–1985, Science and Technology Development Plan, 1986–2000, Ten Year Plan for Science and Technology Development, 1991–2000 and Outline of the Eighth Five-Year Plan, The Ninth Five-Year Plan of National Science and Technology Development and Outline of Prospective Goals for 2010, Specific Plans for Science, Technology and Education of the Tenth Five-Year Plan

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of the National Economic and Social Development (Science and Technology Development Plan), Science and Technology Development Plan of the National Eleventh Five-Year Plan, Science and Technology Development Plan of the National Twelfth Five-Year Plan, Mid- to Long-term Development Plan for China’s Science and Technology, and in particular, Science and Technology Development Plan of the National Thirteenth Five-Year Plan and Outline of the National Strategy of Innovation-Driven Development made after the 18th National Congress. The making of these development plans for science and technology and the corresponding policies have all deeply impacted the overall development of science and technology, the rapid development of high-tech industries and the improved innovation independence in China.

3.2 System and Mechanism Reform Reform Serves the National Strategy of Science and Technology Development. The reform of the science and technology system was a revolution in the new era and it was aimed to liberate and develop the productive force of science and technology. Over the 40 years, China established the major strategies for science and technology development of “facing and relying” “reinvigorating China with science and education” and “independent innovation” in turn with the progress of the reform and openingup and the establishment of the socialist market economy. Each of these strategies served as the guiding principle in a period of the reform and opening-up based on the focus of reform in the period, and specific reform measures were aimed to land the requirements of the strategy. In 1985, 1995, 1999 and 2006, China released four decisions about the reform on the science and technology system, and made strategically consistent plans for all periods with specific reform principles, key tasks, policies and measures. Exploration of New Institutions and Mechanisms in the Management of Science and Technology. For the reform to keep moving in the right direction, it must follow the natural laws of the socialist market economy and the development of science and technology. During the reform of all these years in China, the fundamental role of the market in allocating science and technology resources was fully played according to the laws of a market economy and the adequate attention was given to the market value created by science and technology through establishing a fundallocation mechanism based on competition and an incentive mechanism to promote technology transfer and through intensifying intellectual property protection. Meanwhile, the natural laws of the development of science and technology were fully respected and a new system of scientific research was established that was oriented with people and that was “open, free-flowing, competitive and cooperative” to motivate science and technology personnel to innovate willingly and enthusiastically. Meanwhile, the government supported the development of basic research and the research of public interest where the market mechanism fell short by increasing input and building platforms.

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Sustained Improvement in the Policy and Legal Framework of Science and Technology. The policies that had matured in practice were made regulations, and reform achievements were consolidated based on institutionalization with supporting systems. For example, after the reform of transition of development-oriented institutions was fully initiated in 1999, more than 20 policies that went with the reform were released in total, which involved assets, treasury, social security, compensation packages for employees, taxation and cadre management, and they ensured that the reform was pushed forward smoothly and relatively easily. The practice and exploration of reform measures laid the foundation for the making and amendment of the laws such as the Law of Technology Transfer, Patent Law and Law of Progress of Science and Technology. The continuously improved legal framework for science and technology facilitated the standardization and institutionalization of the reform and development of science and technology. Trials First, Followed by Gradually Widened Coverage. Reform measures were always tested in trial sites and then generalized to wider areas after being improved to achieve reliable reform results. It was a whole new adventure to push the reform on the science and technology system under the condition of the socialist market economy, and there was no experiences to draw on. The reform was trialed first to explore measures and learn lessons, which was then followed by gradually widened implementation. Take the transition of development-oriented institutions as an example. In the 1980s, the transition was trialed in individual institutions, then further trialed in groups of institutions of the same type in the 1990s, and eventually implemented in the society when the timing was right in 1999. The trial sites for the reform on institutions of public interest were initiated in the mid-1990s, and in 2000, a plan to fully implement the reform based on differentiating between institutions was formed. In 2001, the reform plan for institutions of four departments was made after application by the departments, joint review by the Ministries of Science and Technology and Treasury and State Commission Office of Public Sectors Reform, and approval by the State Council, during which process the principle was followed that reform was to be initiated on those where conditions were mature. It took a total of 20 years to complete the reform plan for all the 20 departments. Because of the implementation procedure described above, the reform was overall smooth and did not experience major blows or resets.

3.3 Pooling All Forces to Focus on the Main Tasks Socialism is characterized by its system advantages where the State may pool all forces together to achieve big. In fact, China has pooled all forces across the country to overcome challenge after challenge and create achievement after achievement since the reform and opening-up. For example, when trying to fill in strategic blanks in science and technology, China made full use of socialism to pool all forces together with the help of the market economy in order to make breakthroughs in national key projects of science and technology, which were formed based on strategic products,

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key technologies of general use and major engineering projects decided according to the national goals and priorities, so that a leap in the development of science and technology could set forth leaps in development of the productive forces. In 1982, first efforts were made to address directional, key and composite issues involving multi-disciplinary scientific and technological projects in agriculture, electronic information, energy, transportation, materials, resource exploration, environmental protection and healthcare. In March, 1986, the State High-Tech Development Program (i.e., 863 Program, which was aimed to invest the best scientific and technological teams in seven key areas of information tracking, biological, automation, aeronautical, laser, new-energy and new-material technologies) was initiated, followed by the Torch Program, State Key Basic Research Development Program (973 Program), Program of Science and Technology as the Backbone, Science and Technology Outreach Program, and national and regional plans dedicated to key research that were targeted at industrialization and innovation, all of which were consistent with the 863 Program in terms of the vision, design and planning. These science and technology programs integrated the national political, military and scientific strength and they were implemented because of the system advantage in China that was able to pool all forces with the will of the State. As all forces were pooled and directed to the planned priority high-tech areas, important breakthroughs and milestones were achieved in many critical technologies that benefited the public, with a large team of outstanding science and technology talents trained, many high-tech enterprises highly capable of innovation and competitive internationally established, and a group of innovation platforms and application pioneering bases formed. Manned space exploration, high-performance supercomputers of the Sunway series, super-rice and deep-sea robots are just a few examples of the scientific and technological wonders. The manned aeronautical project was officially launched after the approval of the Chinese government in January, 1992, and was named as the “921 Project”. On October 15, 2003, China’s first manned spacecraft, Shenzhou 5, was successfully launched, after which China made a series of shining accomplishments. In the development of high-speed transport, after 2000, the Chinese people in this area worked tirelessly and achieved in six years what had been done over 30 years in Western countries, especially after 2004 when the State Council approved the mid- to longterm railway plan, and now China’s high-speed rail technologies and finished lines were among the top in the world. In terms of the biomedical achievements, China successfully developed important new-drug products such as the Enterovirus 71 (EV71) vaccine for prevention of hand, foot and mouth disease (HFMD), chidamide and icotinib hydrochloride, made breakthroughs in the prevention of AIDS, hepatitis B and tuberculosis and won world acclaims in response to major epidemics such as the H7N9 flu and Ebola. In the research of ocean and resource environments, China developed a series of deep sea submersibles, which drove leaps in the development of the ocean exploration technologies and equipment, and the successful development of high-end equipment, such as Hai Yang Shi You 981 (HYSY 981) for offshore drilling and fracturing unit model 3000, broke the long-term Western monopoly on the international market of oil and gas drilling equipment. All these achievements

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are examples of the advantage of the socialist system with Chinese characteristics that is capable of pooling all forces together to achieve big.

3.4 Introduction, Absorption and Innovation After the reform and opening-up, enterprises made use of various channels and measures to introduce advanced technologies from abroad, such as manufacturing equipment and technological patents, under the guidance of the government policies. The enterprises learned and mastered what had been introduced and started to innovate on their own, improving their abilities to innovate while effectively narrowing the gap in science and technology between China and developed countries. The industrial structure was also definitively optimized and upgraded at the same time. Active Efforts to Release Policies Facilitating Innovation Based on Introduction and Learning. In the various development phases from the beginning of the reform and opening-up in the 1980s when efforts were made to introduce foreign capital until the beginning of the 2000s when China joined the World Trade Organization (WTO) and implemented the new-type industrialization strategy, governments at all levels released a series of policies and measures centered on the basic and development demands of industrialization with the aim of improving the technological and innovation capabilities of industrial enterprises. As early as in 1985, the State Council issued the Regulations of the People’s Republic of China for Management of Technology Introduction Contract in order to expand external economic and technological collaborations and to strengthen science and technology. In 2002, the State Council issued and implemented the Regulations of the People’s Republic of China for Management of Importing and Exporting Technology in order to accommodate to the new situations and to further standardize and improve the regulations involving management of technology introduction. The Regulations stipulated a variety of import and export management measures including patent transfer, patent application transfer, licensing of patent implementation, technology transfer in secret, technological services and technology transfer by other means. In 2006, eight committees and ministries including the Ministry of Commerce jointly issued Several Opinions about Encouraging Technology Introduction and Innovation to Promote the Growth Mode of Foreign Trade, in which it was stated to “combine active introduction of advanced technologies with optimization of the introduction structure and combine technology introduction with development and innovation to strengthen the link between introduction and absorption of technologies while paying attention to the learning and mastering of the technologies introduced as well as the subsequent innovation so that enterprises have more independent intellectual properties of their core products and technologies.” In the same year, the Ministry of Commerce and the State Taxation Administration jointly made the “Catalogue of Technologies Encouraged to be Introduced to China” in order to encourage enterprises to introduce the appropriate technologies. All these policies played a positive role in guidance and facilitation, encouraged innovation entities on all kinds of markets to actively introduce advanced

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international technologies and pushed the sustained transition and upgrade of China’s industrialization. Encouraging Technological Upgrade Promoted by Cross-Border Mergers. Crossborder mergers have become an important way for Chinese enterprises to go abroad and to promote the sustained development after independent innovation by purchasing advanced technologies and management experiences in other countries. During international mergers, most enterprises were able to make direct use of advanced technologies and talents overseas, which narrowed their gaps from the leading enterprises in a short period of time, helped them catch up in technologies, promoted their strategic transitions and strengthened their international standing. For example, Lenovo Group Limited was among the first to establish a global R&D system and strengthen resource integration, which helped it transition from a Chineseborn brand to an internationally renowned brand and from an enterprises capable only of managing the Chinese market to a multi-national enterprise operating globally. In particular, Lenovo, despite its relatively small size, managed cross-border mergers and completed purchases of the entire industrial-level chain, thereby creating a fast track for itself to internationalize to integrate global resources and establishing a global R&D system by stabilizing personnel, especially the science and technology personnel.

3.5 Facing the Main Battlefield of Economy Over the 40 years, China took a series of major reform measures, which include commercialization of technologies, encouraging the development of private science and technology enterprises, establishing high-tech development zones, promoting development-oriented institutions to enter the market and pushing enterprises to become the mainstays of technological innovations, which kept adjusting and improving the system structure, operation mechanisms and management systems to bring tighter and tighter integration of science and technology with the economy and society. In 2016, the total contract amount on the national technology markets reached 1.140698 trillion RMB, showing leaps in the development of technology transactions in China. Technological Innovation Faces the Demand of Consumption Upgrade. After the times of commodity shortage, countless technological innovations were released on the market to meet the upgraded and diversified demand of residential consumption in China. For example, technological innovations in areas such as genetic engineering, biomedicine and smart wear devices promoted the development of medicine and public health, development of critical technologies in areas such as energy conservation, recycled use of resources, new energy development, management of pollution and ecological restoration facilitated the development of ecology and environment protection, development and promotion of new materials and equipment such as nuclear, wind and solar energy, as well as the development of new-energy automobiles, helped with energy transition and revolution, and high-end long-lasting

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consumables, smart cars and home appliances, the internet and modern logistics all saw technological innovations that made life a lot more convenient. Technological Innovation Faces the Development of Emerging Strategic Industries and the Upgrade of Conventional Industries. Advancements in major critical technologies in high-speed rail, mobile communication, integrated circuit and biological technologies have brought up rapid development in emerging strategic industries, while the technological innovations in intellectual manufacturing, flexible manufacturing, scale manufacturing, recycle economies, integrated development, manufacturing services and service manufacturing have boosted transition and upgrade of conventional industries.

3.6 Attentive to Science and Technology Talents and the Innovation Environment Innovative Modes of Education and Training. Innovative methods and means of education were promoted, as well as innovative training methods and a variety of training bases for high-level talents for scientific and technological innovations based on national key scientific and technological projects, engineering projects, disciplines and science and technology bases and international collaboration projects. In addition, high-level scientists and researchers were introduced from overseas through multiple channels and in all areas to lead innovation-oriented scientific research teams. Now a remarkable number of Chinese scientists are among the most cited scientists in the world, and in some areas, Chinese scientists are leading international studies. Strengthened Team Building of High-Quality Professionals in Urgent Need and Shortage in China. Active efforts were made to make coordinated plans for industrial and human resource development and specific plans were made to train people in the key areas of equipment manufacturing, information, biology and new materials. Majors were adjusted in higher-education institutions according to the demand of socioeconomic development, majors related to emerging strategic industries and livelihood of the people were prospectively designed and support was given to the education and training of people in areas with acute shortage. Innovative ways in the education and training of professionals were created. For example, the Ministry of Education, in collaboration of other government organs, implemented the “Education and Training Program of Outstanding Talents” in engineering, law, agriculture and forestry, medicine and education to strengthen the students’ ability in practice and innovation. Increasingly Rich Tools of Major Policies. Policies regarding human resources widened the channels for investment in people and investment and financing of capital for startups. Funds for human development and for venture capital for startups were established, which lent a strong hand to support the startups and innovations.

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Policies regarding talent training encouraged innovative training methods and multilateral training of people and teams for innovation. Some statistical data show that “production study and research” associations have been established in more than 20 provinces and cities, which all have their respective regional characteristics, and they have formed a training network for innovative talents that support and complement each other. Distribution Policies Oriented with Value of Knowledge Gained Ensures the Lawful Rights of Scientific Research Personnel. Those working in scientific research areas are encouraged by central and regional measures to leave their original posts and start up their own business, which has facilitated technology transfer. In 2014, 20 centrally owned institutions were selected by the central government departments as the trial sites for the reform of technology use, disposition and gains. These institutions were allowed autonomy in technology transfer, which greatly motivated those working in scientific research in these institutions to transfer technological results. An innovation culture has been created to “encourage innovations and tolerate failures”. Active efforts have been made to promote scientific integrity with campaigns to promote academic styles and to discipline academic misconduct in order to maintain academic integrity.

Ecological Civilization: From Instrumentalism to Teleology Jiahua Pan

The concept of ecological civilization first appeared in literature in the 1990s and its first use in government documents was in the report of the 17th National Congress of the Communist Party of China (CPC), but its full definition and wide use did not start until after the 18th National Congress of the CPC in 2012, particularly after the Third Plenary Session of the 18th Central Committee of the CPC (CCCPC) during and after which the decision and opinions regarding the ecological civilization were agreed upon. In a narrow sense, ecological civilization means ecological protection, management of pollution and resource conservation, while in a broad sense, it is a status or stage of development, which is marked by or bears the requirement of production development, wealthy life and good ecology; alternatively, it marks a new era in contrast to the agricultural and industrial civilizations, a new morphology of social civilization in the development of humanity. The development of the ecological civilization in China started with focusing on technical tools to transition from damaging the ecological environment before the Reform and Opening-up to protecting it after the Reform and Opening-up; in the 1990s, equal attention was given to ecological protection and pollution control at the same time; in the early 2000s after China joined the World Trade Organization (WTO), pollution control, resource conservation and ecological protection were all focuses; and after 2010, ecological civilization was given priority and it was integrated into all aspects and courses of the economy, society, politics and culture. During the entire course of the development, China approached the concept of the ecological civilization first with instrumentalism and then with teleology and went from efforts to conquer nature to the vision of living in peace with nature. In fact, the milestones of the reform and opening-up also mark the evolution stages of the development of the ecological civilization. The reform in 1978 led China to go on a journey from the unbalanced ecology caused by the bold efforts to conquer nature before the reform and opening-up to restoration of J. Pan (B) Institute for Urban and Environmental Studies, Chinese Academy of Social Sciences, Beijing, China © China Social Sciences Press 2021 F. Cai (ed.), The Chinese Approach, https://doi.org/10.1007/978-981-16-1899-4_9

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ecological balance.1 The entire 1990s was dominated by two contrasting themes, the concept of ecological protection introduced by the opening-up and the pollution by township and village enterprises (TVEs) fostered in the reform. In 2001, China joined the WTO and started rapid industrialization and urbanization based on heavy and chemical industries, and the pollution control, resource conservation and ecological protection in China became increasingly challenging, which attracted global concern. After 2010, the Chinese economy stepped into the new normal, and the ecological civilization was no longer an instrument, but a goal of the socioeconomic development.

1 Beauty and Harmony: From Conquering Nature to Living in Harmony with Nature In 1978, the reform and opening-up that was oriented with the market was initiated, instilling much energy and vitality to the Chinese economy. The relations of production under the command economic system were broken, and the market economy oriented with benefits reshaped the relationship between humans and nature. In the 30 years preceding the reform and opening-up, the industrialization was led by heavy industries and agricultural production was organized in the collective scale. Although people generally hoped to conquer nature through hard work, the scale and level of the hard work were limited at the time, and people mostly adapted to nature while making use of it. With the reform and opening-up, input of a large volume of capital and technologies drove large-scale improvement in the level of productive forces and continuous increases in the production scale, which helped people change and disrupt nature, intensifying the opposition between mankind and nature. Meanwhile, nature had its own way to retaliate against people for their behaviors that had not cherished it. China actually wanted to avoid stepping into the same trap of the severe consequences of damaging nature and hoped to find a new path to harmony between mankind and nature because, as a late comer to industrialization, China had seen the consequences the Western economies had faced during their industrialization courses. Unfortunately, however, reality is not always ideal, and does pursuit of wealth and upgrade in consumption invariably destroy beauty and harmony? What did we experience over the 40 years of reform and opening-up to reach harmony between humans and nature? What affected the course? Have we already broken or are we fighting out of the bottleneck of reaching harmony with nature? The path to the ecological civilization after the reform and opening-up started when people were still unconscious, who were subsequently awaken and then began to act. The course was marked by characteristics of the times as it was influenced by the progress and milestones of industrialization, urbanization and globalization, while at the same 1 In

the beginning of the reform and opening-up, insect ecologist Ma Shijun (1978) and plant ecologist Hou Xueyu (1980) introduced biological concepts into the Chinese society, leading to the concept and raising social awareness of ecological protection that was influential in the 1980s.

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time, the increasing awareness among the society and the active responses from the government consolidated the awareness of and actions for ecological civilization. Before the reform and opening-up, the ecology was unbalanced due to the croporiented efforts that dared to challenge nature. Before 1978, China had a low level and slow progress of urbanization, which was 11% in 1949 and increased to only 18% after 30 years in 1978. More than 80% of the population in China was immobilized in rural areas to work in agriculture where the productive forces were of a low level and they could only work on the ecological environment and natural resources. Therefore, lakes were filled to reclaim land for cultivation, forests were destroyed to make new farmland and water irrigation systems were built, all of which enlarged the area of farmlands in order to reduce the impacts of destructive weather on agriculture and to stabilize and enlarge agricultural production. However, nature was damaged and the ecological system was unbalanced as a result of the efforts, leading to decline in the natural productive forces, marking the major challenge of harmony between mankind and nature in the traditional agricultural society. At the low level of urbanization, the consumption capacity and level of urban residents were relatively limited and of a low level in the supply system of the command economy. In fact, the urban sewage and residential waste were resources to the suburban countryside to a degree, and the pollution of the urban environment had not constituted a challenge for the harmony between people and nature although the quality of the urban environment did not have much to boast about. The State-dominated industrialization was oriented with the industrial systems, such as raw materials and national defense, which China relied on heavily. These industrial systems were not of a large number and in a limited scale and were not highly concentrated. As a result, the small number of industrial and mining enterprises, although relatively heavily polluting due to low levels of technologies, did not cause severe consequences as the pollutants were absorbed and cleansed by the surrounding environment that could still tolerate them. In addition, national funds would not be invested in villages under the command economic system, and industrial development was not allowed in rural villages and towns. The entire society still promoted and believed the idea that pollution and environmental damage were stubborn diseases of capitalism and had nothing to do with socialism. All of these resulted in the situation. In the beginning phase of the reform and opening-up, pollution worsened, but ecological exacerbation slowed down. Pollution caused by rural industries stimulated by the reform was mixed with the concept and technologies of pollution control introduced by the opening-up, leading to actions and institutionalization of environmental protection. The first important phase of the major transition in the development of ecological civilization after the reform and opening-up was from 1978 to 1991. In this phase, reform was first initiated in rural areas to liberate the agricultural productive forces to a large degree and the surplus rural laborers could find jobs in sectors other than agriculture to a certain degree. Urbanization and industrialization in this phase were mainly characterized by the peasants who “left land but didn’t leave villages”2 2 Due to the barrier in the urban and rural household registration (Hukou) types, rural population could not switch from agricultural Hukou to non-agricultural or urban Hukou. In the age of People’s

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and the entry of foreign capital. The most representative industries in this phase were the “southern Jiangsu” TVEs3 that spontaneously developed in agriculture or villages in Jiangsu and Zhejiang provinces and the export-oriented industrialized economy of “three comes and one compensation”4 invested by capital from Hong Kong, Macao and Taiwan, China in the Zhujiang delta. In this phase, China was quickly urbanized due to the labor flow to industry and cities, and urban pollution management was placed on the agenda. The “southern Jiangsu” TVEs developed in a manner of “rapidly flowing water”, which led to water pollution that attracted societal concern, and the rapid industrialization and urbanization of the Zhujiang delta highlighted the lack of resource shortage. Agencies of environmental protection were established everywhere, and some severe pollution events led to societal attention. When the reform and opening-up sped up, pollution worsened; and at the same time, intense efforts were made to manage pollution, and the ecological environment improved. Deng Xiaoping’s Southern Talks in 1992 set a milestone for the reform and opening-up, after which the opening-up was expanded, reform was accelerated, state-owned enterprises (SOEs) and collectively-owned enterprises that had originated in the command economic system were restructured in large scales, and the private economy gained energy for full development. In this stage, both industrialization and urbanization sped up, giving rise to increased pollution sources and widened polluted areas, with resources heavily consumed. Now that the development focus had switched to industry and urban areas, the agricultural productivity was improved. As a result, it was no longer needed to destroy forests or fill lakes to reclaim land for cultivation; instead, a smaller land area was enough for agriculture, and marginal farmlands were returned to forests, lakes and grasslands. This gave the natural ecological environment moments of peace, and the tide of environmental degradation was turned. Also in this stage, the development of TVEs, which had prospered so much that there were sparks in every village and smoke coming out of every household, was held up, and the development of scale enterprises, establishment of industrial parks and end-of-pipe treatment of pollutants all helped lessen the degree of pollution and the loss it caused. However, pollution was overall worsened in this stage.

Communes, peasants were not allowed to leave land, and after the reform and opening-up, they could work in non-agricultural sectors and enter industry and cities, but they “left land and did not leave villages, and entered cities without household registration” due to institutional regulations (Xiong, Chengjia, “It Is Not Appropriate to Talk about ‘Leaving Villages but not Leaving Land’”, Issues in Agricultural Economy, 1986, vol. 1). 3 The “commune team enterprises” originated in the age of People’s Communes in Suzhou, Wuxi and Changzhou of the southern Jiangsu area rapidly thrived and developed into TVEs that were owned collectively. Peasants became rich, industrialization sped up, but pollution was not managed in time, leading to serious pollution. Such a mode of economic development was quite popular in the 1980s, and was named as the “southern Jiangsu mode” by Fei Xiaotong. 4 Coming materials to be processed, coming samples to be processed, coming parts to be assembled and compensation trade, which first appeared in Dongguan in 1978 and were a form of Sino-foreign cooperative enterprises and trade in the beginning of the reform and opening-up. This type of enterprises transitioned and was eliminated after China joined the WTO in 2001.

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When the reform and opening-up soared in development, the overall worsening trend of pollution was brought under control. In 2001, China first joined the General Agreement on Tariffs and Trade (GATT) and then joined the WTO after arduous negotiations and became an important part of the economic globalization, after which its status as the world factory was constantly consolidated and improved. With the development of both the primary and State-owned economies, industrialization in China rose quickly in speed, scale and level, while the emission factor of industrial pollution kept declining with technological advancement although the quickly expanded industrial production scale led to increased emission of industrial pollution and decreased quality of environment. While urban infrastructure was in full construction, cities expanded too quickly and in too large a scale to reshape the overall environment of cities. Around 2008, major air pollutants such as sulfide dioxide, nitrogen oxide and particles all saw peak emissions. Although their emissions all decreased to a degree under intensified supervision and management of pollution, the environmental quality did not really improve fundamentally due to long-term practice that had caused significant pollution. Also in this stage, resource conservation characterized by energy conservation, including water, electricity, land and material conservation, made significant progress in development, and efforts to promote an environmentally-friendly society oriented with resource conservation facilitated the development of ecological civilization. In this stage, consumption of fossil fuels grew acutely while greenhouse gas emission in China climbed to the top position in the world, pressuring China to take certain international responsibility. When the reform and opening-up improved in quality, the environmental quality stabilized and improved, and China walked towards green harmony. After 2012, the Chinese economy stepped into the new normal. China entered the late stage of industrialization and set foot in the progression to a post-industrial society. China’s urbanization rate is now higher than the world average, and more than half of the Chinese people live and reside in cities. Conventional pollutants including sulfide dioxide and industrial sewage are under effective management and control, but fine air particles such as PM2.5 and emission of greenhouse gases such as carbon dioxide are still of concern to people seeking a good life and to the international community. Pursuit of the ecological civilization is not simply control of emission of pollutants, but aims to improve the overall quality of the environment. Ecological improvement isn’t just protection, but requires input and repair. Resource use is not just aimed to save resources, but to increases resources for sustainable development. For example, as far as energy resources are concerned, we must consider that fossil fuels are limited and will eventually be depleted, and it is thus necessary to seek reusable energy for use to replace fossil fuels. Before 2011, China’s efforts to protect the ecological environment attracted global attention and relied mostly on input of international capital and technologies, but since 2012, China’s vision and practice in the ecological civilization have provided experiences and options for the world to transition to the ecological civilization. Over the 40 years of the reform and opening-up, China’s vision in the ecological civilization became reality. All the damages done to the environment before 1978 were checked during 1978–1991 because the reform was first initiated in rural

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areas, but industrial pollution rapidly expanded in the Yangtze and Zhujiang River deltas, causing a series of events of severe pollution. From 1992 to 2001, the private economy and national economy thrived with full vitality or managed to be reborn with the progress of reform and opening-up, and they quickly expanded in scale, which also led polluting emission to quickly increase despite emission standards made increasingly stricter. Meanwhile, the agricultural working population kept migrating in large scales to cities and industry, lessening the pressure on the rural ecology as well as improving the ecology in general by returning farmlands to forests, grasslands and lakes. From 2002 to 2011, as China became the world factory, the total emission of pollutants was brought under control, but the environmental quality of air, water and soil did not improve fundamentally due to historical reasons. In 2012, the Chinese economy stepped into the new normal, and the ecological civilization started to developed in full scale and high quality. Not only has China’s ecological environment improved overall, but China has made positive contributions to the world’s sustainable development as well.

2 Green Development: From Ecological Balance to Ecological Civilization China had an agricultural civilization for several thousand years, during which the productive forces progressed relatively slowly and the overall production level of the society was low. The generation and accumulation of social wealth relied mostly on the increases in the number of laborers, but a growing population needed the support of survival and development resources. While resources were relatively limited and fluctuating with natural events, the fundamental means of enlarging the scale of production was to grab from nature by cultivating natural resources when development was driven by population, given a constant technological level. The marginal productivity of land then decreased progressively, and natural disasters also threatened population survival. Under this circumstance, people had to respect nature, adapt to nature and seek harmony with nature. Historically, however, the ideal harmony with nature was cast into reality with two contrasting images: intellectuals enjoying esteemed mountains and grand waters versus peasants working constantly in farmland with worries of food and clothes, mirroring the unfortunate disparity between ideals and reality in pursuit of beautiful harmony between humans and nature. The environmental pollution in developed countries began to attract attention of the Chinese people in the 1970s, but real actions were not taken until after the reform and opening-up. China’s development concept went through a dynamic evolution and improvement from ecological balance to ecological civilization. The concept of ecological balance was in domination in the 1970s; sustainable development was accepted in the 1980s; both the environment and development were valued in the 1990s; the outlook on scientific development was promoted in the 2000s; and

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after 2010, the new idea of development was proposed and Xi Jinping’s thought system of ecological civilization was formed.

2.1 From Adapting to Nature to Environmental Protection Historically in China, the harmony between humans and nature was somewhat supernatural as people were forced to seek this harmony. In contrast, the ideal of harmony with nature kept growing with the progress of industrialization after the mid-twentieth century, and the harmony between humans and nature was no longer just an ideal, but being made into reality. The idea of protecting and adapting to nature had sustained for several thousand years in China before the reform and opening-up, and it remained the basic concept of harmony between humans and nature that was characteristic of the Chinese philosophy. Old sayings, e.g., “as long as the mountain is here, there’s always firewood” and “depleting the river for fishes costs all the fishes next year”, bear the primitive idea of ecological balance, which had lasted until the beginning of the reform and opening-up. In fact, pollution is the by-product of industrialization, and Japanese use the term, “public hazard”, to describe the negative externality of environmental pollution. Before the 1970s, China had a low level of industrialization, and the industries were distributed only in spots. At the time, everything was aligned with survival and people had a heavy reliance on nature. The theme of agriculture was water management: a lot of rain led to floods and not enough rain challenged survival. The ideal of ecological balance centered on water was cast into reality as the efforts to build irrigation systems: reservoirs were built to prevent flood and drought caused by seasonal rain and yearly fluctuation of rain while agricultural irrigation systems were constructed to stabilize agricultural production. In terms of ecology-preserving actions, growing trees to make forests and re-plant bare hills, which had been caused by loss of water and soil, was the major efforts for water conservation. In the beginning phase of the reform and opening-up, development was the first priority and the focus of agriculture was to liberate the productive forces. Therefore, the base of the green-development concept was still ecological balance. Meanwhile, due to the opening-up, Western ideas were introduced to China while China responded actively to invitations to or volunteered to participate in international affairs. The book, The Silent Spring, by American chemist Rachel Carson in the 1960s altered how the Chinese people understood ecological balance in both physical disruption and chemical damages, at which time agricultural chemicals and chemical fertilizers were deemed as the industrial products of advanced means of agricultural production and highly valued in China. In 1972, The Limits to Growth, by the Club of Rome, was published, from which China learned one more thing when it was still in the starting phase of industrialization: pollution limits growth. After the seat of the United Nations (UN) was restored to PRC, China sent a delegate to attend the UN Conference on the Human Environment that was dominated by developed countries in 1972. Although still a predominantly agricultural country, China accepted the concept of pollution prevention and environment protection. Therefore,

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the concept of green development in the beginning of the reform and opening-up was actually the composite of the traditional Chinese wisdom of ecological balance with the foreign idea of pollution control with environmental protection. At the time, industrial pollution management relied on introduction of experiences of developed countries and included mostly preventive measures.

2.2 Practice of Sustainable Development Integrating Economy, Society and Environment In the 1990s, the dominating idea in the development of ecological civilization in China was sustainable development, with the goal being development provided that the development was sustainable. This idea went beyond ecological balance and pollution control, and aimed at ecological and environmental protection oriented with development. Back in the mid-1980s, the environmental pollution was under good control in developed countries, but was of severe problem in developing countries. Under this circumstance, the World Commission on Environment and Development (WCED) conducted long-term and extensive investigations and proposed the ethnically reasonable concept of sustainable development: the demand of the current generation should be met without endangering the ability to meet the demand of later generations. It was also specifically stated that poverty was also a kind of pollution, and some even argued that “environment [was] a luxury”.5 In 1992, the UN held the Conference on Environment and Development in de Janeiro, Brazil. On the conference, environment was cited side by side with development, the consensus on sustainable development was raised, and Agenda 21 was formulated that was oriented with sustainable development. This concept was actually in agreement with China’s basic guidance of centering on economic development after Deng Xiaoping’s Southern Talks, and China also valued both environment and development and made the world’s first national agenda on sustainable development in 1994. As China had been politically pressured and economically sanctioned by Western countries led by the U.S. since 1989, environmental protection and pollution control became the major field for China’s international collaboration.6 Now the pollution prevention technologies of developed countries helped China improve in its own pollution control through cooperation on environment, while at the same time, they provided technological support for China to land its sustainable development in terms of environmental standards, detection, monitoring and management. In fact, environmental 5 In 1987, the WCED completed its report, Our Common Future (Oxford University Press), in which

the concept of sustainable development was defined, and development was set as the theme which was to be realized through economic efficiency, social justice and environmental protection. 6 China Council for International Cooperation on Environment and Development (CCICED) was established in 1992 with approval by the Chinese government. It is a high-end international nonprofit consulting agency, chaired by leaders in the State Council, and the deputy chairman of China in charge of national environmental protection and the major leaders of the Canadian International Development Agency (CIDA) are responsible for daily operation.

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protection, economic development and social justice were widely accepted in China as the three pillars supporting sustainable development, and overall planning and designs of specific projects for the national economic and social development all included sustainable development as the basic guiding principle, thereby landing this concept. In addition, the pillar of environmental protection was not simply pollution control, but covered ecological improvement as well, which was reflected in practice as the transition from adapting to nature for ecological balance to repairing nature for ecological improvement. To do this, the central and regional treasury allocated funds to restore forests, lakes and grasslands to the farmland on hills with a slope greater than 25 degrees, located in low and easily flooded areas by lakes and dry areas with little rain.7

2.3 The Theme of Scientific Development In the beginning of the twenty-first century, China joined the WTO, after which the scale effect of the economic expansion exceeded the effect of energy-saving and emission-reduction technologies, posing a greater threat to the goal of ecological civilization by the day. The simply extensive and expanding development was the source of pollution and ecological damage, but pollution control and ecological protection could only be achieved by high-quality development. This idea was attested by the global economic integration in the first years of the twenty-first century. After China joined the WTO, developed countries invested in China, which brought new technologies, strict standards and standardized management, leading to the development of productive forces that not only increased people’s incomes, but also protected the ecosystem and improved environment. Meanwhile, China entered the global market, especially the markets of developed economies, as the world factory, which required China to provide products that met the quality specification of the importing parties and met the requirements regarding the product life cycles and the ecology of the entire supply chain. As China traded increasingly frequently with other countries and more and more foreign commodities entered the Chinese market, the good ecology, tidy environment and product quality of developed countries all played a positive role in helping China position its goal for development. In fact, China’s scientific development was also recognized to a large degree globally. Hu Jintao’s judgement on climate change “being an environmental issue, but fundamentally a development issue”8 highly concentrated the relationship between environment and development. Emission of carbon dioxide was the demand of economic development, and cheap 7 The

program to afforest farmland was trialed in Sichuan, Shaanxi and Gansu in 1999, and was officially initiated in the entire country in January, 2002. In April, the State Council issued Several Opinions on Improving the Policy and Measures of Afforesting Farmland, which specified the scope of application and standards of compensation. The programs to return farmland to lakes and grasslands were initiated afterwards. 8 Refer to page 3 of People’s Daily on September 26, 2007. This was part of the speech Hu Jintao made at the UN high-level meeting on climate changes.

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fuel fossils facilitated the rapid growth of the economy and the improvement in people’s lives. At the same time, the increased economic level brought higher efficiency in energy use while the development of zero-carbon energy technologies helped with the replacement of high-carbon fossil fuels. The proportion of coal and charcoal out of the energy consumption in China decreased over the years, from 76% in 1990 to 60% in 2017.9 Meanwhile, the electricity generated by wind power, hydropower and solar photovoltaics exceeded that in the European Union (EU) and that in the U.S., showing that development could indeed generate energy sources for environmental protection and ecological restoration.

2.4 Lucid Waters and Lush Mountains Are Invaluable Assets The concept of scientific development is to improve the quality of environment by development, but when development reaches a certain phase, environment will become the core of development instead of an external variable of development. After 2010, more than 50% of China was urbanized, and China entered the late phase of industrialization. There is now less and less, even none, space for extensive development, and environment per se has become the basis and an important part of social welfare. This is also to say that the idea of green development must escalate. In fact, the concept of ecological civilization has become a consensus in China since 2007. The concept believes that lucid waters and lush mountains are invaluable assets, describing the new idea of development vividly: protecting the environment is to protect the productive forces and improving the environment is to develop the productive forces. After all, there will be no productive forces if there’s no good environment. When ecology fades, the civilization declines. The blue sky isn’t just beautiful; it also means happiness. Fresh air, clean water and unpolluted food are the basic security of people’s lives. However, lucid waters and lush mountains do not exist on their own. They are part of a complete system with a common life comprising mountains, waters, forests, farmlands, lakes and grasslands with biological diversity. Furthermore, the ecological civilization of a country or region is part of the global ecological security, and concert actions of the international community are needed to sustain humanity with a common destiny. Therefore, ecological civilization is not just a step up in the development concept. It pushes humanity to develop and evolve into a whole new stage of civilization by reshaping and improving the concept of the industrial civilization.10

9 Wang,

Qingyi, Energy Data 2017, Energy Foundation, 2017. Jiahua, Environmental Management and Ecological Development in China, China Social Sciences Press, 2015. 10 Pan,

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3 Pollution Control: From Making Emission Standards to Tightening Quality Control of Environmental Media Pollutant emissions and pollution control were both born with industrialization. They appeared with the progress of industrialization and will be resolved through development of industrialization. Measures taken to control pollution are different according to the nature of pollutants in each stage. Over the 40 years of reform and opening-up, pollution prevention and management in China went from rough to fine measures, from management based on emission standards to control of total emissions and from quota of emissions to quality control of emission management.

3.1 Starting to Control Pollution: Making Standards and Prevention In the beginning of the reform and opening-up, people desired economic development so badly that there formed a setting of development that “all work led to wealth”. At the time, there was little input by the State and lack of technologies, and various self-derived means emerged where development was the absolute priority with management to follow later. For example, in the southern Jiangsu area, TVEs emerged in large numbers. They all had low amounts of investment, but quick effects and rapid development. No individual enterprises produced high emissions, but all together, they were of a large number, distributed closely in rows of clusters, and they had simple technologies, leading the regional environmental quality to worsen acutely. In the Zhujiang delta with the mode of “three comings with one compensation”, individual enterprises were of small scale and had limited investment, yet there was lack of supervision in terms of pollution management. The pollution of water in some areas even led to mass events. It is true that development is the top priority, but development should not sacrifice environment. To protect environment, attraction of investment should be accompanied by clear requirement on facilities for environmental protection. Environmental standards that had been widely adopted by developed countries thus became the simple and practical way to manage pollution. However, as developed countries were all in the post-industrialization stage, their emission standards were strict and stringent, which, if applied directly in China under rapid industrialization, would produce either of the following consequences: “loosened” standards to accommodate to the development, and loose enforcement or no supervision or gesture-making collection of emission fees. Such a rough way of management had at least a terrifying effect, but fine management was to become necessary with economic development.

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3.2 Deepening the Pollution Control: Limiting and Controlling the Total Emissions In the 1990s, industrial development increased in scale and environmental pollution worsened, which affected people’s lives more significantly, making it necessary to enforce the environmental standards. Emission of pollutants meeting the environmental standards does not mean that there was no emission or the environment wouldn’t worsen. Due to scale effects, the environmental quality kept worsening instead of improving although all enterprises met the emission standards. The reason was of course the tight limit of the carrying capacity of the environment. The carrying capacity of the water and air environment in a region is a constant, and any emission exceeding the capacity will damage the ability of the environment to clean itself while the capacity will also decline, leading to the degeneration of the environmental quality. Therefore, control of the total emissions becomes the major measure to prevent and manage pollution. The carrying capacity of the environment of a city or water can be estimated according to the self-cleaning capacity of the water or characteristics of the atmosphere, and enterprises in the region are required not to exceed the capacity. Due to the ceiling of total emissions, enterprises have to work on end-point treatment by removing the pollutants in the emission to reduce the emission concentration in order to meet the requirements of total emissions. Alternatively, enterprises may improve their production processes and technologies to reduce the end-point emissions, or alter the raw materials from the beginning, or even change the production or products in order to generate zero or less emission. In the 1990s, urban sewage processing factories and equipment for gas desulphulrization and dust removal in heat-engine plants were effective measures to reduce emissions at the end-point treatment. The use of supercritical and ultra-supercritical steam generators improved the efficiency of coal plants in large scales. The subcritical steam generators produced one kilowatt-hour of electricity with 350 g of coal, and the ultra-supercritical generators, 270 g of coal, showing a reduction in the consumption of coal by ¼. Therefore, the emission of pollutants would drop by ¼ even though the same technologies were used for the end-point treatment. Of course, hydropower or wind power would generate no air pollutants with the same electricity generation.

3.3 Intensified Pollution Control: Challenging Goal of Environmental Quality At the beginning of the twenty-first century, China joined the WTO, and production scale kept increasing, leading to higher pressure on the environment. The environmental quality was overall worsened. Under this circumstance, the total emission of pollutants must be reduced instead of being kept constant to meet the general demand of the environmental quality. That is also to say, pollution control was now in the stage of controlling the total emission and quality, which was characterized

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by reducing the total emission of pollutants. In the 11th five-year-plan (FYP) of the national economic and social development, the goal of sulfide dioxide and nitrogen oxide control was a reduction by 10%. In the 12th FYP, the goal was to further reduce the total emission of the two types of compounds by 8%. In the 1990s, the end-point treatment was mainly achieved by controlling the total emission, while in the beginning of the twenty-first century, the control of total emission was oriented with the environmental quality and measures were taken in multiple aspects: eliminating backward production capacity, intensifying end-point treatment, improving the levels of technologies and processes and improving industries and product structures. In this stage, measures were taken in some regions for “Phoenix Nirvana” and “Emptying Nests for New Birds”, which was the choice of policy to reduce the total emission. Polluting enterprises either closed down completely or upgraded to more advanced processes, making room in the limited space for enterprises with higher efficiency and less pollution. In the Yangtze and Zhujiang River deltas, industrial upgrade and next-generation production took place, which reduced the level and scale of pollutants emitted in large scales, while the economic development was still prosperous.

3.4 Evolution of the Goal of Pollution Control: All-Round Improvement in Environmental Quality As socialism with Chinese characteristics entered the new phase, the principal contradiction facing the Chinese society changed, and the unbalanced and inadequate development could not meet the demand of people with a growing desire for better lives. One of the most important markers of the unbalanced and inadequate development was that the development of the environmental quality was way behind the socioeconomic development. In the 1980s, there was the need to manage sand storms; in the 1990s, controlling sand storms was no longer enough, and the goal was to manage the emission of dusts in the air; in the 2000s, dusts were under control fundamentally, and people’s demand for a happy life required that emission of compounds of sulfide dioxide and nitrogen oxide must be managed; and after 2010, the conventional pollutants such as sulfide dioxide was no longer a challenge for people’s lives, and the new battlefield against pollution was fine particles in the air, urban odorous black water, cleaning of drinking water and heavy metals in the soil. To meet the demand of people for a happy life, the central government made and implemented the “ten air regulations” to prevent and manage air pollution, “ten water regulations” to prevent and manage water pollution and “ten soil regulations” to prevent and manage heavy metal contamination in the soil.11 The goals of the “ten air regulations” made in 11 In

2013, the State Council issued Action Plan for Prevention of Air Pollution, which specified the goals and focuses of air pollution prevention for all cities in China. In April, 2015, the Action Plan for Prevention of Water Pollution was issued. In May, 2016, the Action Plan for Prevent of Soil Pollution was issued and implemented. These action plans for prevention of air, water and soil

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2013 were all met in 2018. For example, the concentration of fine particles, PM2.5, in Beijing decreased to 58 µg per cubic meter in 2017 from 90 µg, realizing the goal of a reduction to about 60 µg.

4 Ecological Protection: From Environment-Dependent Survival to Community with a Shared Life The ecological protection in China was not in place before the reform and opening-up because it was neglected without a red line drawn. As a result, the overall ecological environment was in degeneration before the reform and opening-up. In the 1980s, China started to set up scenic sites and forest parks to meet the demand of tourism and leisure. In the 2000s, in order to protect ecological functions, ecological functional zones were determined and specific zones were protected. After 2010, a red line was drawn for ecology, which further intensified the protection of ecological functional zones. The most representative examples of composite zones are national parks. Before the reform and opening-up, China’s ecological environment was overall being damaged and in degeneration despite some efforts to protect and improve it. The protective efforts were mainly in response to the call by Mao Zedong to “green the country”, to “make our land a park”,12 to grow trees and make forests, and, in particular, to pool all forces in areas with severe ecological degeneration to grow trees and make forests on bare lands and hills. The most representative was the green Saihanba forest on the Saibei Plateau, where there had been no forest and which had degenerated to a semi-dry area with a landscape of grass. However, great efforts were made there to grow trees for several decades, which brought back a forest of 800 km2 .13 In 1958, a movement of “great steel-making” led forests to be cut down, and after the People’s Communes were established, many more lands were cultivated as crop-growing was the top priority, leading to ecological damages. These damages to forests and the ecosystem were systematic and comprehensive, and the rapidly growing population at the time also generated a great demand for firewood, which in turn led to damages to natural vegetation. In fact, the Dinghushan Mountain natural reserve was established soon after the PRC was founded, in 1956,14 but the pollution each had ten articles, hence they were short-named as “ten air regulations” “ten water regulations” and “ten soil regulations”, respectively. 12 In 1955, a 12-year plan to green the country was made from 1956–1967 according to Mao Zedong’s call. In 1979, it was decided on the sixth meeting of the fifth National People’s Congress to set March 12 as the Growing-Tree’s Day in China. Refer to National Bureau of Forestry, Communiqué of Forestry and Ecological Development, January, 2008. 13 In 1962, the former Ministry of Forestry decided to grow a forest in the former Imperial Hunting Park in Hebei of an area of 1.40 million mu with the forest covering an area of 1.12 million mu. 14 In June, 1956, the Dinghushan Mountain in Zhaoqing, Guangdong was approved as a nature reserve at the 3rd meeting of the first NPC based on scientists’ propose. The reserve has an area of 1133 ha. It was first managed by the Chinese Academy of Sciences, and was made a national nature reserve by the National Bureau of Environmental Protection.

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production and supply of crops were not fundamentally resolved in the beginning phase of the PRC and development and employment of natural resources were mainly aimed to obtain more crops or food. If there was any form of ecological protection, it was done for the steady and high yields in agriculture, e.g., conservation of soil and water, management of small river areas, facilities to prevent flood and drought, and even terrace farming. In addition, some mountains that were of importance to Buddhism and Daoism were also well protected out of religious reasons. However, all these efforts that helped with ecological protection were not done for ecological reasons, and there was no red line drawn or any systematic efforts to make protection mechanisms, laws or regulations.

4.1 Ecological Protection for Tourism, Leisure, History and Culture Conservation The reform and opening-up, like a vernal wind, stimulated the market for travels to mountains and waters of historical importance that had long been suppressed, while at the same time, the practice and experiences of defining various conservation lands by international institutions and developed countries were also introduced to China. In the early 1980s, China officially set up the institutions for scenic sites and established national parks to accommodate the development of tourism after the reform and opening-up. In 1982, upon review and approval by the State Council, 44 national scenic sites were officially publicized and established. In September, 1982, the first forest park in China was approved—the Zhangjiajie National Forest Park in Hunan province.15 The State Council subsequently approved 244 national scenic sites in nine rounds, which altogether occupied an area of 100 thousand square kilometers. People’s governments at the provincial level also set up a total of more than 700 provincial scenic sites in their respective regions, which occupied an area of approximately 90 thousand square kilometers and covered all provinces save HKSAR, Macao SAR, the Taiwan region and Shanghai. In the 20 years following 1995, the Provincial People’s Congresses in a number of provinces including Hunan and Sichuan released regulations regarding forest parks, and a total of 3234 provincial and county forest parks were established with a total planned area of 18.0171 million hectares16 in all 31 provinces, autonomous regions and municipalities in China. The reform promoted the establishment of scenic sites and forest parks, while the Opening-up introduced the idea of including heritage sites in reserves. China’s long history, splendid culture and natural wonders became accessible to the world and contributed to it with the progress of reform and opening-up. In 1985, China signed the World Heritage Pact, and started to apply for natural heritage. In 1987, the Taishan Mountain was approved as a world composite cultural heritage site, and the 15 Yang,

Chao, “Forest Parks in China”, Forest and Humankind, 2014, vol. 1. Ruihong, “Forest Parks Have Become the Principal Force of Ecological Tourism”, Ecological Culture, 2016, vol. 4. 16 Wang,

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Huangshan Mountain, Ermeishan Mountain-Leshan Giant Buddha and Wuyishan Mountain were all included in the World Heritage List in 1990, 1996 and 1999, respectively. These sites all have a combination of historical, cultural and religious elements, and the Wulingyuan, Jiuzhaigou and Huanglong, which were approved in 1992 and the tri-river confluence approved in 2003 are entirely natural heritage. By July 2017, a total of 52 sites in China were included in the World Heritage List by the UN Education, Science and Culture Organization (UNESCO).17 Although the world heritage sites were not aligned with ecological protection, the regulations regarding the special range actually helped preservation of the ecological functions within their boundaries. Out of the 18 natural, double- and cultural heritage sites, five were located in the hotspots of global biodiversity, ten were within the protection priority areas for biodiversity defined in “Strategy and Action Plan for Protection of Biodiversity in China”, and five were the UNESCO’s “World Biosphere Reserves”, which effectively protected the habitats of endangered animals such as Giant Panda and Golden Monkeys and their ecosystems.

4.2 Nature Preservation for the Sake of Endangered Animals and Plants and Biodiversity Protecting biodiversity obviously has no commercial value as in cultural and natural landscapes. It requires large input, but produces little output, or what is worse is that there is sometimes only input and no economic output. It is entirely something of public interest. That is why China started relatively late in natural protection, and the intensity of protection only increased with the improved economic development and people’s understanding of it. The rapidly improved efforts in natural protection were mostly made in the 2000s. Although China joined the Convention on Wetlands in 1992, little progress was made in wetland protection in the twentieth century due to the characteristics of the cultural, market and investment management. In order to obtain enough capital for daily maintenance, China protected its wetlands by establishing wetland parks so that development would be bound by protection of the wetlands and the wetlands protected during development. In 2003, the State Council approved the Planning of the National Wetland Protection Projects, and in 2004, the Ministry of Development approved the first national urban wetland park—the Sanggouwan Bay Urban Coastal Wetland Park in Rongcheng city, followed by the approval by the National Bureau of Forestry of the first national wetland park—the Xixi National Wetland Park. Now the development of wetland parks that combined protection and use had a chance to progress rapidly. By 2017, a total of 706 national wetland parks across the country had been approved as trial sites, and the total area of protected natural wetlands exceeded 21.85 million hectares, among which, 49 were assessed and met the standards of national wetland parks and 49 were designated 17 Dong,

Jingwen, Ren, Chenghao, Liu, Bingbing et al., “Protection and Employment of World Heritage in China”, Science Guide, 2016, vol. 6.

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as internationally important wetlands,18 covering the major types of wetlands of swamps (forests, bushes and sedges), rivers, lakes, pools, reservoirs, shallow sea shores, rice lands and redwood forests. After the reform and opening-up, China was integrated more and more in the international progress, with which its natural protection system was developed quickly and improved gradually out of the need of economic and social development. In the 1990s, China started to standardize the management of nature reserves by lawmaking.19 Subsequently, the national and regional nature reserves that had relative defined central and regional financial and administrative powers20 saw rapid development, which stabilized in general after 2010 (Fig. 1), which had totaled at 446 with an area of 96.95 million hectares and 2304 with an area of 50.39 million hectares, respectively, by 2016. The number of national nature reserves was only 16.2% of that of all the reserves in the country, but the total area of the former accounted for 65.8% of that of the latter and 9.97% of the total land area of China. Among the regional nature reserves, there were 870 provincial ones with a total area of 37.56 million hectares, accounting for 31.6% of the total reserves and 25.5% of the total area of reserves in the country. City- and county-level reserves had an advantage in number. They totaled at 1434, accounting for 52.1% of the national number. However, they occupied a smaller area, which was 12.82 million hectares, only 9.7% of the total area of nature reserves in the entire country. The area of land reserves accounted for 14.88% of the land area of China. The previously endangered animal, the Giant Panda, was upgraded to vulnerable as the number of wild pandas exceeded 1800, while other endangered animals, the Siberian tiger, Far Eastern leopard, Asian elephant and Crested Ibis, all had significant increases in their numbers in the wild. In addition, the milu (Elphuru davidianus), which had been extinct in the wild, was re-introduced into nature reserves established for them, and the number of milu in the reserves grew steadily. In fact, more 90% of the land ecosystems in China had their representative nature reserves, and 89% of the wildlife under state-level protection and most of the important natural remains were protected in nature reserves.

4.3 Protection of Ecosystems to Preserve the Complete Ecological Functions By 2009, the trend in the increasing number and area of nature reserves had come very close to an end. There were a total of more than 10,000 nature reserves of various types, among which 3766 were national reserves. All types of land nature reserves occupied a total of 18% of the land area of China, exceeding the world 18 Lv,

Wen, “The Wetland Area Possessed in Our Country will Stabilize at 800 Million Mu”, Land Greening, 2016, vol. 1. 19 “Regulations of the People’s Republic of China on Nature Reserves”, issued on October 9, 1994 as the No. 167 decree of the State Council of the PRC. 20 Jiang, Mingkang, Wang, Zhi, Qin, Weihua, et al., “Optimization of the Management System by Level and Region of Nature Reserves in Our Country”, Environmental Protection, 2006, vol. 11a.

Fig. 1 Yearly dynamics of nature reserves

266 J. Pan

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average percentage, 14%. Among all the nature reserves in China, more than 80% of the area was clearly characteristic of natural protection, which accounted for 14.8% of the national land area, while only 3.8% of the reserves were scenic sites and forest parks that were more oriented with ecological protection. However, many ecological function sites of fresh water sources, oceans and ecosystems were not well protected at the same time. In 2008, the Planning of National Main Function Areas was completed based on the National Ecological Function Classification and the Outline of the Planning of National Vulnerable Ecological Areas, and a strategic design for ecological security that was focused on the “two barriers and three belts” was described in a systematic and comprehensive way, showing the policy direction and resolution of the government to intensify ecological protection with forcible measures of the State,21 and it was the foundation for the mid- to long-term planning of the national economic and social development. Facing with the drinking-water security issues, China made its first plan to protect the environment of the fresh water sources in 2010,22 which required improvement in the environment management of the water sources and the security level of water quality. Afterwards, areas around the sources of surface water were identified across the country, and the sources of surface water that supplied drinking water for more than 200 thousand people and the sources of underground water that supplied at least 200 million cubic meters per year in the entire country were checked (and verified). Surveys in 2016 showed that there were more than 2400 sources of surface water, 618 of which were included in the National Catalogue of Important Sources of Drinking Water (2016) for management. In 2005, China established its first nationallevel special marine reserve, and by 2014, China had set up 56 national-level special marine reserves, with a total area of 69 thousand square kilometers,23 forming a preliminary network system of marine reserves including special geology reserves, marine ecological reserves, marine resource reserves and ocean parks.

4.4 The New Age with Ecological Red Lines After 2010, ecological protection met with a new age, and the previous ecological protection and natural protection were upgraded to protection of the systemic and full functions of ecosystems, while innovative breakthroughs were made to the protection institutions. In the planning of national main function areas, there specified development-prohibited areas, where national parks were established and included for the strictest protection in the red-line area management of national 21 Gao, Jixi, Zou, Changxin, Yang, Zhaoping, et al., “Draw a Red Ecological Line for Ecological Security”, China Environment News, October 18, 2012, page 2. 22 The Ministry of Environmental Protection, jointly with the Reform Committee, Ministry of Housing and Urban-Rural Development, Ministry of Water Resources and Ministry of Health, printed and distributed “Environmental Protection Planning of National Sources of Urban Drinking Water (2008–2020)”. 23 Ji, Yanqing, “Eleven State-Level Marine Reserves Were Newly Established in Our Country”, Fisheries Science & Technology of Guangxi, 2014, vol. 2.

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ecological protection. In addition, the management agencies and the areas covered of the pre-existing reserves of all types, such as nature reserves, geology parks, forest parks and scenic sites, were integrated and unified for the holistic protection of one big ecosystem, achieving the goal of “one reserve, one name and one management agency”. According to the Overall Plan of National Park Establishment Institutions, China will complete its trials of establishing national parks, and a group of national parks will be comprehensively structured, with a unified management system based on differential levels. The comprehensive layout of national parks will be then in place. The current ten trial sites for institutionalizing national park establishment (Table 1) include the Sanjiangyuan Three-River Source, northeastern tiger and leopard, giant panda, Qilianshan Mountain, Hubei Shennongjia, Wuyishan Mountain, Zhejiang Qianjiang River Source, Hunan Nanshan Mountain, Beijing Great Wall and Yunnan Pudacuo National Parks.24 In 2017, the three provinces (municipalities) of Beijing, Tianjin and Hebei, the 11 provinces (municipality) of the Yangtze River economic belt and the Ningxia Hui Autonomous Region started to draw ecological red lines.25 On February 7, 2018, the State Council approved the red-line drawing plan of the above 15 provinces (municipalities and autonomous region). This plan included a total area of approximately 610 thousand square kilometers in ecological protection, accounting for a quarter of the total land area of the 15 provinces (municipalities and autonomous region). The covered regions all have critical ecological functions or are vulnerable ecological environments, and they cover state- and provincial-level nature reserves, scenic sites, forest parks, geology parks, world natural heritage sites and wetland parks, leaving no area unprotected that should be protected. The ecological red lines drawn by the 15 provinces (municipalities and autonomous region) involve 291 counties of national ecological function zones, and more than 40% of the included areas are county-level ecological-protection lands. The other 16 provinces (municipalities and autonomous regions) such as Shanxi will finish their red-line drawing before the end of 2018, and with all the bridging and pooling work with the other 15, a complete blueprint of the entire nation for ecological protection red lines will eventually be made.

5 Resource Conservation: From Resource-Exhaustive Consumption to Recycling Economy Natural resources, when used as an input factor, result in effects in two directions driven by economic interests: one is the direct cost effect in that material consumption, including land, water and energy, is reduced to lower the cost of production. The 24 Wei, Dongying, “Study on the Management Systems of National Parks: An Inter-Country Comparison of 10 Countries of US, Canada, Germany, UK, New Zealand, South Africa, France, Russia, South Korea and Japan”, Journal of Nanjing Forestry University (Social Sciences Edition), 2017, vol. 3. 25 The General Offices of the CCCPC and State Council, Several Opinions Regarding Drawing and Abiding by the Ecological Red Lines (referred to as Several Opinions hereafter), issued on February 7, 2017.

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Table 1 National park trial sites and the protected No.

Name

What are protected

1

Sanjiangyuan Three-River Source National Park

1, Grasslands, forests, wetlands and deserts; 2, glaciers, snow mountains, frozen soils, lakes and rivers; 3, state- and province-protected wildlife and their habitats; 4, mineral resources; 5, geological remains; 6, cultural heritage; 7, traditional cultures; 8, other resources needing protection

2

Northeastern Tiger and Leopard National Park

Siberian tigers and Far Eastern leopards and the large areas of ecosystems such as forests, grasslands and swamps they rely on

3

Giant Panda National Park

Biological and landscape resources and ecological environment

4

Qilianshan National Park

Endangered species such as snow leopards and their habitats

5

Hubei Shennongjia National Park

1, Natural resources, including geological landscapes and wonders, northern sub-tropical primary forests, ecosystems of evergreen-deciduous broadleaved mixed forests and Sphagnum wetlands, ancient few surviving remains of northern sub-tropics, core resources of rare and endangered species as represented by golden monkeys, fur and dove trees and their critical habitats; 2, cultural resources, including the Yandi culture of Shennong, ancient salt roads of Sichuan and Hubei, southern mammal fossil clusters, Paleolithic sites of prehistoric human remains and Han mythology and epics; 3, other resources needing protection

6

Fujian Wuyishan Mountain National Park

1, Forest ecosystem of natural evergreen-broadleaved trees native to the central sub-tropical area; 2, rare and endangered wildlife; 3, world origin of biotype specimens; 4, the longest geological fault zone in Fujian and rich and multiple geological natural landscapes; 5, protected source areas of Minjiang River, Fujiang and Ganjiang River, Jiangxi

7

Zhejiang Qianjiang River Source National Park

Rare, endangered species such as white-necked, long-tailed pheasants and black muntjac and their habitats (continued)

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Table 1 (continued) No.

Name

What are protected

8

Hunan Nanshan Mountain National Park

1, Rare, endangered wildlife; 2, natural mountain-top wetlands; 3, migrating birds and their rest and hunting lands; 4, ecosystem of mountainous-region marshy grasslands

9

Beijing Great Wall National Park

World Cultural Heritage Site of the Great Wall and its surrounding natural ecological environment

10

Yunnan Pudacuo National Park

1, water systems, lakes and wetlands; 2, wild animals and plants; 3, cultural remains and characteristic residential architecture; 4, ethnical and folk cultures; 5, grazing land; 6, geological remains

other is the comparative cost effect in that when the cost of natural-resource input per unit of output is lower compared to the input of labor or capital, which are also input factors of production, the input of natural resources, or consumption of material or energy, will be reduced; otherwise, it will be increased. Due to the market fluctuation of the prices of productive factors, the direction of resource conservation is not clear, which is not a necessary choice from the economic perspective in times of an expansionary economy. Therefore, people have to take the initiative to conserve resources. Meanwhile, exactly because of the market nature of the resource factor during economic development and its protection nature in sustainable development, the use of resources before the reform and opening-up was mostly characterized by the scale expansion of factor input, while resource conservation was dominated by the government and progressed through the force of the market and laws or regulations. This is how China successfully transitioned its economic development from the extensive mode of high resource consumption to the resource-conservative mode with low input and high output.

5.1 Material Conservation: From Reducing Cost to Controlling Pollution The effect of resource conservation is best shown by changes in the input of agricultural factors. Before the reform and opening-up, agricultural productivity was low and the per-area yield was always at a low level despite infrastructure construction such as irrigation systems. In the 1950s, a planning outline was made for agricultural development, in which the goals were set to improve the crop yield per mu in the areas north of the Yellow River from over 150 jin (75 kg) in 1955 to 400 jin (200 kg) by the mid-1960s, that in the areas south of the Yellow River and north of the Haihe River from 208 to 500 jin, and that in the areas south of the Haihe River from 400 to

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800 jin. These goals were captured in a banner, “Learn from Dazhai in Agriculture”, in the 1970s, and the three goals were described as “following the outline, crossing the Yellow River, and traversing the Yangtze River”.26 Unfortunately, however, they had not been realized when the reform and opening-up was initiated.27 As bound by population growth, lack of crops and limited input in capital and technologies, the major way to increase the agricultural production was to enlarge the land of cultivation. In Dazhai that had been set the model for all to learn from, for example, the cultivation land was increased by farming on terrace; in mountainous areas, forests were cut down to make for farmlands; in areas surrounding lakes, some parts of lakes were filled to grow crops; and in dry pasture areas, grasslands were cultivated. After the reform and opening-up, chemical fertilizers were produced in larger scales and higher quality, and they, together with agrichemicals, were used in replacement of increasing cultivation lands to improve the crop production. At the time when the PRC was established, the national production of chemical fertilizers was 0.6 tons, and in the mid-1970s, China introduced 13 big fertilizer-producing equipment, each of which produced 300 thousand tons of synthetic ammonia and 480 thousand tons of urea.28 With these equipment, however, the annual production had only reached approximately 100 million tons by the beginning of the reform and opening-up. Then large numbers of peasants left their villages to work, and many lands were left unattended. In this background, the production of chemical fertilizers reached 703.7 million tons in 2013 (net value). The increases in the unit yield of crops were mostly attributable to chemical fertilizers, the contribution of which was generally over 40%.29 In 2015, the amount of chemical fertilizers used per mu was 21.9 kg, which was much higher than the world average, 8 kg per mu, and was 2.6 times that of the U.S. and 2.5 times that of the European Union (EU). In addition, the utilization efficiency for the three major types of chemical fertilizer, nitrogen, phosphorus and potassium fertilizers, in China reached 33%, 24% and 42%, respectively, which were increased by 5, 12 and 10 percentage points, respectively, compared to 2005. While the utilization efficiency of chemical fertilizers was increased, the increase in the amount of the fertilizers decreased. In 2013, the amount of chemical fertilizers used in the entire country increased by 1.3%, which was 1.1 and 1.5 percentage points lower than 2012 and 2005, respectively. As planned by the Ministry of Agriculture, the annual increase in the chemical fertilizer use would be controlled progressively to be below 1% from 2015 to 2019, and by 2020, the amount used on major crops will have reached zero increase. In 2017, the utilization efficiency of chemical fertilizers applied on the three major crops, rice, maize and wheat, averaged at 37.8%, 26 Planning

Outline for Agricultural Development, 1956–1967, People’s Publishing House, 1960.

27 Li, Ruihuan, “On a Few Issues Concerning the Greening Cause of Our Country”, People’s Daily,

June 26, 1999, page 1; included in Wushi Qiuli, China Renmin University Press, 2010. 28 Among the 13 equipment, three had an annual production of 520 thousand tons of urea, and the rest all produced 480 thousand tons. Refer to “History of the 13 Big Fertilizer-Producing Equipment Introduced in China in the ‘70s and the Current Status”, December 22, 2014, Honggehui, http:// mzd.szhgh.com/maoshidai/2014-12-22/71487.html. 29 Ministry of Agriculture, Action Plan to Reach Zero Increase in the Amount of Chemical Fertilizers Used by 2020.

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which was increased by 7.8 and 2.6 percentage points compared to 2013 and 2015, respectively. By then, the use of agrichemicals had increased negatively for three years, and the use of chemical fertilizers had reached zero increase, reaching the goal three years ahead according to the measurement and calculation by the Ministry of Agriculture.30 From January to May, 2018, the cumulative production of nitrogen, phosphorus and potassium fertilizers (net values) for agricultural use in the entire country was 232.94 million tons, 8.1% less than the same period of the previous year.

5.2 Water Conservation: From “Rapid Water Flowing” to “Water Conservation Protection” In the beginning of the reform and opening-up, China was not much urbanized, and the “theme” of water consumption was to find more water to use despite the large-scale infrastructure building of irrigation systems in the preceding 30 years; after 2000, water conservation was put on the agenda; and in the new era of socialism with Chinese characteristics, the focus was shifted from water conservation to protection of water sources and quality. Xia Jun, et al.31 analyzed the major representative events of all times about the degrees by which water was exploited, based on which the period of 1978–2018 may be divided into three stages in terms of use and protection of water resources, i.e., 1, “development-oriented stage”, 1978–1999, characterized by constructions of irrigation projects and development of water resources; 2, “comprehensive-use stage”, 2000–2012, during which water resources were used with overall planning and the goal was to realize harmony between people and water; and 3, “protection-oriented stage”, 2013–2018, during which water resources were used with the goal of protecting water ecology and developing ecological civilization. In fact, the water consumption per unit product in China kept decreasing with the progress of industrialization. For example, the production of one ton of steel in the major iron and steel enterprises in China consumed as much as 8.63 tons of water in 2005, but after only four years, the water consumption declined to 4.4 tons in 2009,32 showing a decrease of over one ton. In light of this situation, Ministry of Industry and Information Technology distributed the Standard Rules for the Iron and Steel Industry,33 and it was stipulated that the water consumption per ton of steel should not exceed five tons, which was amended to 4.1 tons in 2012 and 3.8 tons in 2015. In 2017, the quota of water consumption for production of one ton of steel for member enterprises of the China Iron and Steel Industry Association (CISA) was 30 Li, Jing, “China Reached Zero Increase in the Amount of Chemical Fertilizers Three Years Earlier”, Changjiang Times, July 30, 2018. 31 Xia, Jun & Zuo, Qiting, “Use and Protection of Water Resources in China (1708–2018)”, Urban and Environmental Studies, 2018, vol. 2. 32 Wang, Weixing, Water Conservation in National Major Iron and Steel Enterprises and Ideas of Saving Water, China Iron and Steel Industry Association (CISA), February, 2011. 33 Announcement of the Ministry of Industry and Information Technology of the People’s Republic of China, no. 105, 2010, no. 35, 2012, 2015 Standard Rules for the Iron and Steel Industry (2015 Amendment).

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2.87 m3 /ton, which was 5.27% lower than 2016, while the amount of repeatedly used water increased by 5.81% compared to 2016. In general, in areas of limited water resources in the northern part of China, the water consumption per ton of steel was usually lower than the national average. For example, it was 0.82 m3 /ton for Shaan Steel Group, 1.20 m3 /ton for Tianjin Rongcheng, 2.05 m3 /ton for Hebei Jingye Group, 2.18 m3 /ton for HBIS Group Tangsteel Company, 2.29 m3 /ton for HBIS Group Chengsteel Company, 2.44 m3 /ton for Guofeng Iron and Steel, 2.52 m3 /ton for Tianjin Iron & Steel Group and 2.55 m3 /ton for Hebei Zongheng Iron & Steel.34 In areas with relatively abundant water resources, of course, some enterprises also delivered good performance in water conservation. For example, the water consumption to produce one ton of steel was 2.38 m3 /ton for Hunan Lianyuan Stee. However, most enterprises did not feel much pressure to conserve water due to economic reasons. Therefore, when more stringent standards were prescribed, the unit consumption of water of these enterprises all showed considerable decreases. For example, the water consumption decreased by 23.55% in Huaigang Special Steel, 31.10% in Jiangsu Binxin Steel Group, 28.23% in Hengyang Valin Steel Tube Co. Ltd., 21.53% in Bao Steel Group in Shaoguan, 22.83% in Pan Steel Group Great Wall Special Steel Co. Ltd., 18.64% in Chongqing Iron & Steel, 18.41% in Nanjing Iron & Steel, and 12.25% in Bao Steel Group.

5.3 Energy Conservation: From Efficiency Improvement-Based Enhancement to Subversive Energy Revolution As far as improvement in the energy efficiency is concerned, China’s energy consumption per unit GDP has been rapidly decreasing in large scales. In the decade of the 1980s, the energy consumption for the output of ten thousand RMB worth of GDP declined from 13.2 to 8.9 tons of standard coal (based on the price of 1980), from 5.12 to 2.89 tons (price of 1990) during the decade of the 1990s, from 1.44 to 1.14 tons (price of 2000) during the decade of the 2000s, and from 0.86 to 0.66 tons (price of 2000) after 2010, showing decreases by 32.6%, 43.6%, 20.8% and 29.1%, respectively.35 The energy consumption per unit product for those that typically consume a lot of energy also decreased rapidly. For example, from 2000 to 2016, the coal consumption of thermal power plants decreased by 19%, nearing to the top level of the world; the comprehensive energy consumption of copper smelting decreased by 72.5%, which was 7.39% better than other international leading manufacturers; the comprehensive energy consumption of petroleum processing decreased 34 CISA collected the data of energy conservation and emission reduction in 122 member enterprises in 2017. Wang, Weixing, “Which Steel Enterprises Consumed Less Water per Ton of Steel in 2017?”, China Steel News, March 31, 2018. 35 The rate of energy conservation from 2018 to 2020 was calculated based on the actual rate, 4%, of the 13th FYP and the period of 2011–2017.

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by 17.8%, but it was still nearly one third higher than international leaders; as the world’s number one manufacturer of synthetic ammonia, China consumed 12.5% less energy per unit production, but the energy consumption was still 50.1% more than that of internationally leading manufacturers. In addition, in some industries such as production of paper and cardboards, China’s energy consumption per unit product was still twice as much as the internationally leading manufacturers due to differences in raw materials, but it decreased by one third in 2016 compared to 2000, showing a rapid and big pace in the improvement in energy efficiency (Table 2). The effect of the reform and opening-up on energy efficiency is well illustrated in the case of the lighting equipment industry. Before the reform and opening-up, most rural areas had no electricity and diesel or vegetable oil was used for lighting. After Table 2 Energy consumption per unit product of some high energy-consuming products Unit

2000

2016

Scale of decrease, %

International top level

Gap from international top level, %

Thermal power

gce/kWh

363

294

19.0

287

2.44

Steel, CEC

kgce/t

1475

898

39.1

Steel, comparable EC

kgce/t

784

640

18.4

576

11.11

Aluminum electrolysis, alternate current used

kWh/t

15,418

13,599

11.8

12,999

Copper smelting, CEC

kgce/t

1227

337

72.5

360

-7.39

Flat glass, CEC

kgce/weight case

25.0

14.4

42.4

13.0

10.77

Petroleum processing, CEC

kgce/t

118

97

17.8

73

32.88

Ammonia synthesis, CEC

kgce/t

1699

1486

12.5

990

50.10

Paper and cardboards, CEC (paper pulp-making enterprises)

kgce/t

1540

1027

33.3

506

102.96

4.63

Note gce, gram of coal equivalent; kWh, kilowatt-hour (electricity); kgce, kilogram of coal equivalent; t, ton; CEC, comprehensive energy consumption. Scale of decrease = (value of 2000 − value of 2016)/value of 2000; gap = (value of 2016 − international top value)/value of 2016 Source Wang, Qingyi, 2017 Energy Data, Energy Foundation, 2017

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the reform and opening-up, electric lamps were popular in these areas in the 1980s for residential lighting, but incandescent light bulbs were used by the majority that had a luminous efficacy of only 15% or so. In fact, the demand for electricity grew wild after the reform and opening-up. In the 1990s, the products and technology of fluorescent daylight light tubes that were advanced and energy saving were introduced to China from developed countries. These light tubes had a luminous efficacy of 30–50%. After 2000, energy-efficient LED bulbs that had a luminous efficacy of as high as 90% were introduced from the international market and produced in China. Now, it is difficult to find an incandescent light bulb on the market in China, while fluorescent lighting tubes are also scarce. What is taking the place on the market is the energy-efficient LED bulb. The efficiency ratio among incandescent, fluorescent and LED bulbs is approximately 10:5:1.5, which is also to say that a 40-W incandescent bulb is equivalent to a 20-W fluorescent bulb or a 6-W LED bulb in terms of lighting. The case of energy efficiency of buildings is another example. Windows were mostly single-layered, wood-framed and thin before the reform and opening-up, which evolved to iron-framed, single-layered thin glass in the 1980s, aluminum-framed, single-layered thin glass in the 1990s, aluminum alloy-framed thickened glass in the 2000s and bridge-cut aluminum-framed, double-layered or even triple-layered glass after 2010. In addition to windows, a thermal insulation layer was added to the wall of buildings in the northern areas. If resource conservation can be achieved by progressive innovations or subversive revolutions, the technologies that reduced the comprehensive energy and water consumption of steel and that were used in lighting equipment were all examples of progressive technological innovations, while many subversive, revolutionary innovations in technology were also made with the progress of the reform and opening-up. Take the industry of communicating phones as an example. In the beginning of the reform and openingup, an average family usually had no phone. In the 1990s, corded phones began to show up in ordinary households. In the early 1990s, the average monthly salary was not quite 200 RMB in Beijing, while a corded residential phone cost 5000 RMB to set up the cable and 300 RMB for installation. Behind the high cost lay the monopoly of state-owned communication enterprises on top of the situation that new technology was introduced with a backward development and research in the industry. After 2000, wireless phones entered the market, which had no demand for spider web-like phone cables or a phone base of a considerable volume. After 2010 when the average monthly salary was 5000 RMB, a portable cell phone only cost about 2000 RMB, and it had multi-functions such as news, videos and video-making. With cell phones dominating the market, cameras and films of the old days were forced to exit the market. In the 1980s, solar water-heaters appeared on the market, and they replaced heaters using firewood or fossil fuels in areas with appropriate conditions. In the 1990s, solar photovoltaic generators made their debut on the market, but they were very expensive. After 2000, the world started to try to reduce green-house gas emission in response to climate change, and solar water-heaters in China entered all households without any subsidy from the government. In fact, cost of electricity from solar photovoltaics had quickly dropped from 4 to 0.5 RMB per kilowatt-hour in 2017, which was nearly the same as the cost of electricity from coal. Internal

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combustion engine (ICE)-based automobiles that were driven by fossil fuels has also kept improving their energy efficiency. In the 1980s, an ICE automobile cost 15 L of petroleum every one hundred kilometers, which is now about 8 L. In contrast, pureelectric cars do not need any petroleum, and if electricity from solar photovoltaics is used, they have zero emission. In fact, the reform and opening-up did not just help China reduce immense energy consumption and emission, but contributed greatly to the sustainable development of the world.36 China’s huge production capacity in solar photovoltaic equipment helped developed countries in Europe and North America increase their scale of solar electricity generation. In fact, China’s low-cost products sold so well that those countries resorted to antidumping and countervailing duty investigations from time to time.

6 Innovative Institutions: From Interest-Oriented Administrative Directions to Laws and Regulations Fully Integrated in Society China’s ideal ecological civilization, from the perspective of use and protection of natural resources, comes from the oriental classic philosophy of “Tianren Heyi” (integration of nature and humanity) and the ecological agricultural practice over several thousand years that respected and adapted to nature. From the perspective of environmental pollution control, the efforts towards ecological civilization are associated with several major international environmental and economic events. The first was in 1972 when the reform and opening-up had not been initiated. In 1972, China attended the UN Conference on the Human Environment in Stockholm, and environmental protection was started to be institutionalized in China. The second was the UN Conference on Environment and Development in Rio de Janeiro in 1992, after which China started the agenda of sustainable development. The third was China’s entry in the WTO in 2001, after which the international trade rules and markets pushed China to set forth more stringent regulations involving environment and ecology. The fourth started with the UN Conference on Sustainable Development in Rio in 2012, through the 2030 Agenda for Sustainable Development passed in 2015 and the international negotiations among the parties of the UN Framework Convention on Climate Change in the “post-Kyoto times”, i.e., after 2012, in response to climate change, which resulted in the Paris Climate Agreement in 2015. During the course, China successfully transitioned from a follower, then a participant and contributor, finally to a leader in the global environmental governance.37 The institutionalization

36 Pan,

Jiahua, The Economics of Climate Change, China Social Sciences Press, 2018.

37 Pan, Jiahua, “Negative Blow and Positive Effect: An Analysis on the Effect of the Announcement

by US President Trump to Withdraw from ‘Paris Agreement’”, Bulletin of Chinese Academy of Sciences, 2017, vol. 9.

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of China’s ecological civilization also started with learning from others in the beginning of the reform and opening-up and then transitioned to taking the initiative to practice and innovating to take the lead. Before 1991, China focused on institutionalizing pollution control and ecological protection. The institutions, made after the 1972 UN Stockholm conference, were not landed until the beginning phase of the reform and opening-up. In terms of the law-making, the Constitution was amended in March, 1972 to include regulations on environmental protection in Article 3, Section 11, and environmental protection was written in the fundamental law of the country, Constitution, for the first time. The Standing Committee of the National People’s Congress subsequently started to make a law for environmental protection, and the Law of Environmental Protection (Temporary) was passed in principle in September, 1979, and the guiding principle (overall planning, reasonable structuring, comprehensive employment, turn harm into benefit, rely on the people, joint work of all, protect the environment, benefit the people) that had far-reaching effect and the accountability-based governance policy—whoever pollutes cleans it up—were determined. In fact, pollution control and ecological protection are closely associated with each other. When it opened up itself, China kept an open mind to join a series of international conventions on natural protection, including the International Whaling Commission (1980), Convention on International Trade in Endangered Species of Wild Fauna and Flora (1980) and Convention Concerning Protection of World Cultural and Natural Heritages (1986), and some involving pollution control such as the International Convention on Civil Liability for Oil Pollution Damage (1980) and Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matter (1985). The concepts and institutions of environmental protection and ecological restoration introduced via Opening-up directly led to the making of laws to protect the environment and ecology in China, with government agencies established for promotion of ecological civilization, such as the Law on Protection of the Marine Environment (1982), Law on Prevention of Water Pollution (1984) and Law on Prevention of Air Pollution (1987), and based on these laws, the Law of Environmental Protection was officially promulgated in 1989. In addition, multiple specialized laws related to use and protection of natural resources were promulgated from 1984 to 1989, including the Forest Law, Grassland Law, Fishing Law, Land Law, Water Law and Law of Protection of Wild Animals. The governance system of environment management was also standardized by drawing on other countries’ experiences in coordinated development and pollution prevention. On the second national environmental conference, environmental protection was made a basic state policy of China, and three policy lines, “prevention as the basis, integration of prevention and management, comprehensive management” “whoever pollutes cleans it up” and “intensifying environmental management”, were established. Based on the actual demand in China’s environmental management, a requirement was made to the governments at all levels to set up an environmentalprotection agency in the Decision by the State Council on Environmental Protection, and the National Bureau of Environmental Protection was formed in 1988. By then, China had a preliminary system of environmental protection. In 1981, China set forth

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the institution of growing trees to make forest, and the percentage of forest cover in China grew from 12.98% in 1984 to 13.4% in 1990. In the period from the Rio Janeiro conference in 1992–2001 when China joined the WTO upon completing the negotiations to join the WTO, China established institutions for sustainable development. On the Rio Janeiro conference in 1992, environment was superimposed with development, which was a major adjustment to the single theme of environmental protection in 1972. The theme of the 1992 conference was sustainable development, which was in perfect agreement with China’s demand and the environmental pressure. Until it joined the WTO in 2001,38 China was oriented with sustainability in development when institutionalizing environmental and ecological protection. Development was the top priority, and among the three pillars of sustainable development, environmental ecology must coordinate with social development and economic growth and was under influence of the policies of sustainability, market economy and rule of law in national governance. Therefore, this period of 1992–2001 saw transitioning of China in sustainable development and market economy. When making laws, regulations and institutions, China mainly followed international experiences and introduced technologies from other countries, which were then implemented domestically. China was part of the negotiations of major global conventions such as the UN Framework Convention on Climate Change and Convention on Biological Diversity, which were signed and approved after they were passed on the 1992 Rio Janeiro Conference. Afterwards, China made action plans under the guidance of these conventions and included them in the planning for national economic and social development with goals defined, which were then implemented. These action plans include the Environment Action Plan of China (1991–2000) that was made in the early 1990s, Agenda 21 in China, the Ninth FiveYear Plan for National Economic and Social Development and Outline of Prospective Goals for 2010 that was passed in the mid-1990s, and the Decision Regarding Several Issues of Environmental Protection and Outline of National Ecological and Environmental Protection that were issued by the State Council in 1996 and 2000, respectively. These action plans specified the strategy of sustainable development for modernization of China and defined phased goals of environmental protection. The institutionalization of ecological environment became more complete and operational by the making of the Law on Protection of Marin Environment, the promulgation of Regulations on Protection of Wild Animals and Regulations on Nature Reserves, the amendment of the Law of Mineral Resources, Law of Land Management, Law on Prevention of Environmental Protection by Solid Waste and Law on Prevention of Noise Pollution, and the promulgation of Temporary Regulations on Prevention of Water Pollution in the Haihe River Area that was made specifically for the heavily polluted river area. In 1997, the Criminal Law was amended, and environment-related crimes were included in the amendment, setting the legal basis for regulation of environmental crimes. 38 In 1986, China applied for re-entry in the General Agreement on Tariffs and Trade (GATT). In 1995, the WTO accepted China as an observatory member. On December 11, 2001, China officially joined the WTO and became the 143rd member.

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From 2002 after China joined the WTO to 2012, China focused on making social institutions that were friendly to resource conservation and the environment partly due to the requirement of the international market. After China joined the WTO in 2001, international investment helped China improve its environmental protection, while at the same time, Chinese products had to meet environment-related international standards to be competitive on the international market, which de facto forced China to make more institutions towards an environment- and resource-friendly society, to consolidate and develop institutions and mechanisms for international trade and globalization of environmental protection, and to meet the requirement of the outlook on scientific development.39 On December 23, 2001, China amended 21 articles of the environmental regulation while keeping those related to trade and abolishing those not suitable to accommodate to the rules of the WTO and to do China’s duty. In 2004, the State Council issued the Implementation Outline of Administration Fully by Law, which required the environmental agencies at all levels across the country to clean up administration according to the environment administrative licensing and cancel or adjust the rules that were not in agreement with the WTO rules. In the 2000s, the Outlook on Scientific Development was proposed on the Third Plenary Session of the 16th CCCPC, i.e., “always put people first and put in place a concept of all-round, coordinated and sustainable development to promote the allround development of the economy, society and people”. In 2005, the Fifth Plenary Session of the 16th CCCPC further proposed to build a resource-conservative and environment-friendly society (“the dual-type society”). In 2007, ecological civilization was written into the report of the 17th National Congress of the Party, and scientific development, ecological civilization, resource conservation and environment friendliness became important criteria to assess whether the socioeconomic development was scientific and whether the development was harmonious in China.40 In 2005, the General Office of the State Council issued the Notification on the Environment Protecting Action Dedicated to the Discipline of Enterprises with Illegal Disposal of Waste to Ensure People’s Health. In 2001, the Comprehensive Working Plan of Energy Conservation and Emission Reduction of the 12th FYP and National Planning of the 12th FYP Regarding Environmental Protection were issued, which had specific requirements for the tasks and goals of environmental protection in the 12th FYP. By the end of 2011, China had made 11 laws focused on prevention of environmental pollution, 13 laws on the management and reasonable use of natural resources, 12 laws on protection of natural ecology, prevention of ecological damage and prevention of natural disasters, more than 30 laws closely associated with the law of environmental resources, more than 60 administrative regulations on environmental protection, more than 2000 charters and regional regulations on

39 Li, Lin, “Major Experiences of China’s Law-Making over the 30 Years of Reform and Openingup”, Study Times, August 11, 2008. 40 Instructor Study Office of the CCP Committee of Beijing, “Highlighted Reflection of the Outlook of the World and Instrumentalism that Guide Development”, People’s Daily, June 20, 2007.

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environmental protection, more than 10 military regulations and charters on environmental protection and more than 1100 standards of environmental protection (Cai, Shouqiu, 2012). Guided by the advanced concepts such as the outlook on scientific development and ecological civilization, China paved the way for the development of recycling economy. In 2005, the State Council issued the Decision on Landing the Outlook on Scientific Development and Intensifying Environmental Protection, which amended the previous statement, “coordinating environmental protection with socioeconomic development”, to “coordinating socioeconomic development with environmental protection”, marking the transition from coordinated development to prioritizing environmental protection. After 2012, ecological civilization was institutionalized. Beginning in 2010, ecological civilization became an issue that affected the overall integrity, strategic planning and fundamental completeness of the sustainable development of the Chinese economy and society, the welfare of the people and the future of the Chinese nation. The 18th National Congress of the CPC in 2012 laid out the comprehensive “five-in-one” structure of ecological civilization, and ecological civilization was written into the Party’s Charter. Also on the Congress, characteristic systems, institutions and mechanisms were made in light of the actual situations in China such as the accountability system that were held equal in both the Party and administration for environmental protection, the supervision of the central government on environmental protection and test based on the goal of ecological civilization, which solved the previous challenge of difficulty in practicing by the laws, strict enforcement of laws and holding those accountable in violation of laws. In 2013, the Third Plenary Session of the 18th CCCPC proposed to establish a complete network of institutions for ecological civilization to promote the system reform regarding the ecological civilization. In 2014, the Fourth Plenary Session of the 18th CCCPC decided on the requirement to “protect the ecological environment with a strict legal system, speed up in establishing a legal framework of ecological civilization to effectively discipline development and promote green, recycling and low-carbon development, intensify the legal liabilities of producers for environmental protection and increase the cost of breaking the law in large scales; establish a comprehensive law of the property right of natural resources, improve the laws and regulations in protecting and developing the territorial land and space, make and improve laws and regulations on ecological compensation, pollution prevention of soil, water and air and protection of marine ecology, and promote ecological civilization.” The requirement was essentially the top-down design for integrating the Party regulations and State laws and for reform to facilitate the modernization of national governance system and capability. Targeting the pollution of air, water and soil, the General Office of State Council distributed the Action Plan of Prevention of Air Pollution, Action Plan of Prevention of Water Pollution and Action Plan of Prevention of Soil Pollution in 2013, 2015 and 2016, respectively, which specified division of work, schedule and goals for pollution prevention of air, water and soil that were quality-oriented. In 2016, the Outline of the 13th FYP stated to “escalate the efforts to protect the environment and to improve the efficiency of resource use centered on improving the quality of the environment and focused on resolving major problems concerning the ecological environment”. In

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the Planning of Ecological Environment Protection for the 13th FYP that was subsequently released, it was reinforced to “implement the strictest institution of environmental protection centered on the environment quality”. Targeting the regional development of ecological civilization, evaluation system of green development and the environmental-protection responsibilities of the major leaders at each level of the Party and government, the CCCPC and State Council jointly distributed a series of standardization files such as the Evaluation and Testing Method Against the Goal of Ecological Civilization and Temporary Regulations on Natural Resource Auditing of Officials and Cadres When Leaving Their Posts to standardize the responsibilities of all Party and government leaders based on dual-responsibility of one position and equal responsibility to the Party and government. The 19th National Congress of the Party in 2017 made new reform and development plans for ecological civilization based on the new situations, judgement and tasks, and amended the Party Charter to make strict laws for ecological civilization. In March, 2018, ecological civilization was written into the Constitution. As part of the institutional reform of the central government, Ministry of Ecological Environment was established to unify the authority of monitoring the environmental quality and law enforcement that had previously scattered in multiple government agencies, and Ministry of Natural Resources was established to unify the ownership and management authority that had been divided among multiple government departments. As a result, the previously challenging conflicts of divided duties and responsibilities with the natural laws of ecological environment were eliminated, and mountains, waters, forests, farmlands, lakes and grasslands are now managed systematically and in coordination to promote the improvement in the environment quality.

7 Civilization Transition: From Zero-Sum Game of Damages and Conquer to Building a Community with a Shared Future for Mankind In the 40 years of reform and opening-up, China felt the internal pressure and enjoyed the intrinsic tradition for ecological development and environmental protection, as well as external push and pull. In the global tide of green development, ecological civilization is not just an instrument to improve and reform the industrial civilization. It is the inevitable trend and destination of the development of the humanity. While pollution control, resource conservation and ecological protection were the external result of China’s efforts after the reform and opening-up that could be measured in terms of development mode and system operation, the internal engine was the concept of green development that is supported and improved by the efforts towards

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the ecological civilization. China’s ecological wisdom and paradigm of green development are the source of power of a beautiful China, as well as the contribution and leadership for the world’s transition in development.41 The historic, transitional and overall change in the relationship between people and nature goes from damaging and conquering nature to harmoniously living together. People rely on nature for survival. However, at some point, we conquered the natural forces. Then, the natural forces retaliated at us. For example, the Saihan Dam located at the northern Sai plateau retreated into a highland barren hill due to inappropriate use, where “birds had no tree to perch on and sands hid the sky and sun”. Today, the Saihan Dam had copious water grasses, thick forests and a green land stretching for thousands of kilometers. In developed countries, there was a “silent spring” due to disruption of nature, and during China’s industrialization and urbanization, there used to be scenes of “no birds over a thousand mountains”. In contrast, in the new era, we are no longer the enemy of nature. Birds have flown back and Boyang Lake and Dianchi Lake have become paradises of migrating birds. Boas have even set foot in university campuses. The Sanjiangyuan tri-water source on the Qing-Zang Plateau, tigers and leopards of the northeast in the deep forests of the northern Changbaishan Mountains, China’s national treasure, the giant panda, in the Qinling Mountains are all enlisted as national parks and protected from the red lines of ecological protection. Peace, harmony and beauty have been restored to nature. The Yellow River, running through thousands of years in China’s history, brought down sands and muds and changed its course unpredictably. Now, the malicious dragon is bound and the Yellow River is clear: the annual amount of sand transport has reduced abruptly from the historical record of 1.6 billion tons to less than 300 million tons now. The Yellow River is safe now. Pollution was a temporary pain during development. When haze covered a city, people’s health was of concern. When polluting water ran uncontrolled, the ecology was damaged. When toxins appeared in soil, the entire society was endangered by the safety risks of food. The Ten Air Regulations, Ten Water Regulations and Ten Soil Regulations declared war on pollution, and the goal was to blue the sky, clear the water and clean the land. In just a few years, significant effects were shown in the Yangtze and Zhujiang River Deltas, and the concentration of fine particles in air in Beijing, Tianjian and Hebei met the pre-set goal. In 2017, the average PM2.5 concentration in Beijing was 58 µg/m3 , which was 32 µg/m3 lower than the value in 2013, 90 µg/m3 , meeting the goal set in the national Ten Air Regulations of approximately 60 µg/m3 . Now the several thousand-year-old mountain top covered in snow can be seen out of one’s window, and the south mountain is in sight when one looks up. The air is much fresher than before. The residential drinking water sources in all cities at the prefecture- and higher levels meet the standard for more than 90% of the days annually, and the marine area where water meets the quality standard of type 1 ocean water accounts for 95% of the marine area managed by China in spring and summer. 41 Pan, Jiahua, “Green Development Has Changed China (People’s Observation)”, People’s Daily, July 29, 2018, page 8.

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The extensive, consumption-based mode of development is now part of history in China. The energy consumption and emission of carbon dioxide per unit of GDP both met the pre-set goals ahead of time, and the proportion of coal and charcoal of the primary energy has maintained a decrease by one percentage point per year for the recent decade, and it is now as low as 60%. The proportion of clean energy exceeds 20%, and the coal consumption of unit thermal power is the best among the world. An ecological economy was made to speed up the transition of the economic society to become green: industries were aligned with ecology and ecology was industrialized. To achieve green and beauty in the natural ecology, improve the quality of environment and conserve resources in production, a green reform must be brought up for the system of social development. When entering the characteristic socialist era, China had already formed the spatial pattern, industrial structure, production mode and life style of resource conservation and environment protection, thus through ecological remodeling of traditional industries and development of ecological-protection industries, China’s socioeconomic development system has become green. In terms of the spatial pattern, there is no longer the landscape of “sparks in every village and smoke coming out of every household”, and industrial development based on “fast flowing water and depleting rivers for fishing” has been fundamentally changed. In areas with shortage of water resources, the highly water-consuming industries and plantations were terminated. Terrace farming was stopped and the land on slopes was returned to forests, rivers, lakes and wetlands were repaired, and nature reserves were set up from zero ground and distributed across the country densely. There are now a total of 2750 nature reserves of various types and levels in China, among which those on land cover approximately 14.88% of the land area of China. Industry is the foundation of development, and it is also the source of pollution. Therefore, a spatial design was adopted that industry was based on industrial parks so that the resources could be centralized for use and pollution managed in individual parks. In terms of the industrial structure, manufacturing has shown a decreasing proportion of the national economy, while the proportion of the tertiary sector exceeded 50% for the first time in 2015. The intra-industrial structure has also been optimized continuously. New industries such as high-tech, high-end manufacturing, e-commerce and internet finance have all kept improving the conservation of resources and friendliness to the environment. In 2017, China made a total of 690 thousand new-energy automobiles, an increase by 51.2% compared to the preceding year; 130 thousand industrial robots (or robot sets), an increase by 81.0%; and 2.9 million non-military drones, an increase by 67.0%. In fact, the changes to some industries or products are even revolutionary. For example, while some countries have released schedules for prohibition of petroleum-fueled automobiles, China is still working on the schedule, but the production of pure electric automobiles in China is way ahead of the rest of the world. In June, 2018, the State Council released a three-year action plan of blue-sky defense, which proposed to sell approximately two million new-energy automobiles in 2020 and to replace all public-transport automobiles with new-energy ones in all municipalities, provincial capitals and planned cities in key areas by the end of 2020.

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In terms of the production mode, China has successfully transitioned from the linear mode where raw materials were processed into products and waste to the recycling mode where raw materials are processed into products and raw materials. The slags that used to pile up into hills now have economic value and can be used as “urban slag hills” have become the source of industrial substances. A simple and appropriate life style with low carbon emission is now favored, and they have replaced the previous extravagant and high energy-consumption way of life. In fact, low-carbon travels, green communities and ecological cities have become the basic tune and the taste of social development. The structural supply-side reform and the revolution of energy production and consumption have fundamentally changed China in terms of the systems of national economy and social development. Xi Jinping’s concept of ecological civilization is the guiding philosophy for China’s green development and the basis of the green ideal. It has a complete system and rich connotation, and it’s deep while easy to understand, thereby quite useful as guidance in practice. That humans and nature live in harmony is the classic oriental philosophy based on nature, as well as a basic principle of the Marxian relationship between humanity and nature. It is the new addition to the modernization theory, as well as the pre-condition and result of green and beauty. The scientific judgement that lucid waters and lush mountains are invaluable assets is the idea of natural value for green development. Lucid waters and lush mountains are assets and serve as source and basis of development. Gold and silver mountains can be used for lucid waters and lush mountains, but they are not omnipotent, and lucid waters and lush mountains are preferred over gold and silver. A good ecology is the most basic welfare that covers the most majority of people. Fresh air, clean water and safe food are the root of life and foundation of welfare. The theory of life with a common destiny including mountains, waters, forests, farmlands, lakes and grasslands reveals the connection among all ecological factors and system integrity. Green does not stand alone and systematic control is needed. Environment is part of the productive force, and improving the environment develops the productive forces. This theory of nature as part of the productive forces breaks the frame of the Western economics oriented with labor and capital, while science explains the productive core of nature. The red environmental lines are rigid. Dinosaurs will never come back, and human demand and development must submit to the rigidity of the environment. Nature repair and ecology are the priority, and respecting nature is the condition for adapting to and protecting it. Facing increasingly aggravate risks in the global ecological security, all must cooperate to achieve win-win situations and build the humanity with a shared destiny. Green development requires a faster pace in establishing the network of ecological civilization from an objective perspective, which includes the ecological culture system aligned with ecological values and concepts, ecological economy system mainly composed of ecology-oriented industries and industrialized ecology, goal and responsibility system centered on the quality of ecology and environment, institutional system of ecological civilization ensured by the governance system and modernized governance, and ecological security system focused on the positivelyrecycling ecological system and effective prevention and control of environmental

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risks. Apparently, the network of ecological civilization is based on the principle and concept of ecological civilization. The values and concepts of the ecological culture system include not only the principle of harmony between humans and nature in the philosophical perspective, but also the theory of nature value that “lucid waters and lush mountains are invaluable assets” and the concept of ecology assets. No matter whether industries are aligned with ecology or ecology is industrialized, the basic principle and requirement of the nature value, people’s welfare and the humanity with a common destiny must be taken into consideration. Testing of the quality of ecological environment is aimed to ensure that the assets of ecology are not devalued, people’s welfare is maintained, and the ecological system is balanced and stable. The institutional system of ecological civilization solidifies the ecological culture system and ensures the ecological economy and goal-testing systems. The system of ecological security prevents the risks of the economy system and ensures it to operate well. The network of green development must be constructed following the basic principles of ecological civilization while the cultural, economic, testing, institutional and security factors must be taken into account. China’s ecological wisdom has painted a great blueprint for a beautiful China, and it also provides an approach to the environmental protection and sustainable development for the world. The concept of ecological civilization has changed China, and it is continuing to do so while leading the world in the green transition. However, the ecological environment quality is not yet stable although it has been improved continuously with a visible trend of steady improvement, as noted by President Xi Jinping, at the National Ecological Environment Protection Conference. He also stated that efforts should be made to build a human community with a shared future as part of the responsibilities of China in the international community. With the environmental problems of China solved, a regional issue of global ecological security is solved, and it also provides a solution to the global sustainable development that has been tested in practice. In the report of the 19th National Congress of the CPC, “a beautiful China” was part of the goal for modernization, and it represented a great blueprint for the green future. Practicing the concept of green development is essentially to realize the green future. By 2020, the war against pollution needs triumph so that the ecological civilization will be at a level in agreement with the goal of common prosperity, pressing problems of the environment will be solved, important ecological systems protected and repaired, use of resources more efficient, and the quality of the ecological environment will overall be improved. Under this condition, the ecological environment will be fundamentally of high quality in 2035 and the goal of a beautiful China will be realized. By the mid-twenty-first century, the material, political, cultural, social and ecological civilizations will all be escalated, the entire society will be green in terms of development mode and life style, humans and nature will live in harmony, the state governance system and capacity in ecological environment will be fully modernized, and China will be beautiful. The Chinese pattern of sustainable development, which was formed under the concept of green development and keeps improving, has made China more and more beautiful while at the same time, making an example for and leading the world in the

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transition to sustainability and pushing the humanity to unite with a shared future. The “green” concept in developed countries is based on a zero-sum game theory: they require all developing countries to stop industrialization to reach the “zero growth” as defined by the Club of Rome to protect the global environment; given the lower cost in pollution management in developing countries, they take their developing neighbors to be dumping grooves and hope to dump all toxic and harmful solid wastes in developing countries to keep themselves green; and they keep the core technologies to get high profits while transferring the production facilities to developing countries that produce disastrous emissions, leading the developing countries to become “pollution bays”. This realization of green by means of sacrificing the green of others is obviously against the concept of green development and is, therefore, not sustainable. China’s concept of green development values peace, development, collaboration and win-win, believes in the humanity with a shared future and aims to build a world with sustained peace, general safety and common prosperity that is open, tolerant, clean and beautiful to protect the earth, home to the mankind. China has led international collaborations in response to climate change and become an important participant, contributor and leader of the global ecological civilization, which is manifested in the following aspects. First, China has contributed philosophical thoughts. That humans and nature live in harmony is the oriental classic wisdom, which has been modified and improved through the values and beliefs of the Western industrial civilization, and will push the sustainable development of the world. In 2015, the Agenda 2030 for sustainable development was passed on the UN Summit, in which the harmony between humanity and nature appears multiple times. In fact, the ideas of people-orientation, environment, prosperity, harmony and win-win reflect a rich picture of ecological civilization. Second, China has acted. China’s green development isn’t just words. Neither is it something China imposes on others while it won’t do it itself. It is what China has done with deep and clear marks and has shown great efforts and solid progresses. The 2020 goals set forth in the 2009 global conference in Copenhagen on climate change were already realized in China ahead of time, and in terms of the contribution by country as set forth in the Paris Agreement, China has made its part with unexpectedly good performance. China will eliminate poverty in 2020, which is ten years earlier than the UN’s goal of the 2030 sustainable development. As a developing country, China is leading the world in the installed capacities of water, wind and photovoltaic power and the electricity generated with zero carbon emission; the Chinese market of solar water-heaters is the largest in the world; and the area of planted forests and the additional carbon sinks of the forest reserve both top the world. Third, China is willing to collaborate to reach win-wins. In both international governance and green investment, China is open and believes in harmony and tolerance, and works toward the global transition to green development. The development concept of ecological civilization does not seek world supremacy or just self-interest. China’s approach to green development serves the humanity with a shared future, and is making a new pattern of globally green development.

Human Resources: From Demographic to Talent Dividend Wenshu Gao

In the 40 years of reform and opening-up, the Chinese economy expanded by 33.52 times, with an annual economic growth averaged at 9.5%.1 During these years, the number and percentage of the working-age population in China both remained high, and the dependency ratio was relatively low. This special demographic structure laid a solid foundation for the high-speed growth of China’s economy. In a society where the working-age population makes up a large proportion, the society sees a highly productive people and a high rate of savings, both of which benefit the economic growth. Therefore, a high percentage of working population boosts the economic growth to step up an additional level over the normal growth rate, showing a positive effect on the economic growth by the high percentage of the working-age population, which is called the “demographic dividend”. Studies have shown that the demographic dividend contributed approximately a quarter to the economic growth in China.2 After 2010, China’s demographic structure went through profound changes. The working-age population gradually decreased and the dependency ratio increased, showing a diminishing “demographic dividend”. In this background, the source that had previously supported the economic growth, i.e., the efficiency of resource reallocation due to growing labor, capital formation and migration of laborers, was also weakened. China’s economy was faced with a transition from the conventional growth mode mostly driven by factor input to a new mode. Under the new mode, the economy must rely on the effect of the factor of human capital, i.e., replacing the number of laborers by the quality, and be powered by innovation and technological advance 1 National Bureau of Statistics, People’s Republic of China, China Statistical Abstract 2018, China Statistics Press, 2018, p. 10. 2 Cai, Fang & Wang, Dewen, “Demographic Transition: Implications for Growth”, Ross Garnaut and Ligang Song (eds.), The China Boom and Discontents, Asia Pacific Press, The Australian National University.

W. Gao (B) School of Economics, Chinese Academy of Social Sciences, Beijing, China © China Social Sciences Press 2021 F. Cai (ed.), The Chinese Approach, https://doi.org/10.1007/978-981-16-1899-4_10

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based on the accumulation of human capital. The future of China’s economy relies on talented people and calls for significant increases in the contribution by talents. In other words, sustained development of the Chinese economy must be supported by accumulation of the human capital and development and use of the talent dividend.

1 Demographic Transition and China’s Economic Growth 1.1 China’s Demographic Transition Since the reform and opening-up, China’s population has been growing. The total population in China was 963 million in 1978, and it grew to 1.390 billion in 2017, representing an average annual growth rate of 0.9%. Accordingly, the working population grew from 402 million in 1978 to 776 million in 2017, showing an average annual growth rate of 1.7%.3 The adequate supply of human resources created favorable conditions for the Chinese economy to grow in high speeds. China’s population growth showed a clear trend of decreases in the late 1980s. The natural growth rate of the population reached the peak in 1987 (16.6‰), and it decreased to 10‰ 10 years later (1997) and even below 5‰ in 2009 (4.87‰), after which time the rate fluctuated around 5‰ and reached 5.32‰ in 2017. The decline in the natural population growth rate was mainly attributable to the declines in the birth rate or fertility rate. The birth rate went through steady decreases from 20‰ in the early 1980s to less than 12‰ now, while the death rate remained essentially flat at approximately 6.5‰, only reaching 7.11‰ in 2017 due to population aging in recent years that led to a slightly higher death rate. The reproduction type of China’s population has transitioned from “high births, low deaths and high growth” to “low births, low deaths and low growth” (Fig. 1). Population aging is the most prominent feature of the demographic transition in China. In the early 1980s, only about 5% of the Chinese people were 65 years old or older, and China had a relatively young population. After 2000, the demographic structure in China underwent profound changes, with the population rapidly aging. According to the United Nations (UN), China officially became an aging society in 2000, i.e., the proportion of those aged at 65 or older out of the Chinese population reached 7%. In 2017, there were 158 million people aged 65 or more in China, accounting for 11.4% of the Chinese population,4 showing a higher degree of population aging. With the aging population came profound changes in the dependency ratio. Dependency ratio is the ratio of the number of people of non-working ages to that of those of working ages. It describes the number of the elderly and children each laborer 3 National

Bureau of Statistics, People’s Republic of China, China Statistical Abstract 2018, China Statistics Press, 2018, p. 8. 4 National Bureau of Statistics, People’s Republic of China, China Statistical Abstract 2018, China Statistics Press, 2018, p. 18.

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Fig. 1 Changes in the birth rate, death rate and natural growth rate of China’s population (1978– 2017). Source National Bureau of Statistics, People’s Republic of China, China Statistical Abstract 2018, China Statistics Press, 2018, p. 10

supports and can be divided into the old- and young-age dependency ratios. A low dependency ratio translates into abundant resources of labor and a small burden on the society, which is beneficial to the economic growth in some sense. China’s dependency ratio had a sustained decline during the period between the initiation of the reform and opening-up and 2010, during which it decreased steadily from 62% in the early 1980s to 34.2% in 2010. This means that in the early 1980s, three laborers supported 2 dependents on average and in 2010, three laborers supported only one dependent. The decrease in the dependency ratio in China can be attributed to the decrease in the young-age dependency ratio. The young-age dependency ratio decreased from 55% in the early 1980s to 22% in 2010, while the old-age dependency ratio kept increasing, from 8% in the 1980s to 12% in 2020. In particular, 2010 is the turning point of China’s dependency ratio when it reached the nadir of 34.2%. After 2010, China’s dependency ratio started to increase, which reached 39.2% in 2010, marking that China’s demographic structure had taken a key transition (Fig. 2).

1.2 The Demographic Transition and Economic Growth For a long time, studies on the relationship of population and economic growth have focused on the changes in the total population or the growth rate of the population while the impact of the demographic-structure changes has been largely overlooked. In recent years, changes in the demographic structure and the instrumental demographic dividend started to emerge as an important field of demography and economics. Before the demographic dividend, people talked about the demographic

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Fig. 2 Changes in the dependency ratios in China (1978–2017). Source National Bureau of Statistics, People’s Republic of China, China Statistical Abstract 2018, China Statistics Press, 2018, p. 18

transition in the academics and among the public, which describes the three phases of the age structure of a population based on the temporal sequence of the decreases in the death and birth rates and how fast the decreases are, that with a high youngage dependency ratio, that with a high proportion of the working-age population and that with a high old-age dependency ratio. As people understood more of the demographic transition, it was found that a period with a high proportion of the working-age population would see an increased supply of labor, a low dependency ratio and a productive population, all of which are beneficial to the economic development. The additional propeller of economic development due to the demographic transition is called the demographic dividend. Researchers began to notice the demographic dividend when they studied the economic miracles in East Asia. Andrew Mason used the term, demographic bonus, to describe the increase in the per capita output brought by the rapidly growing population of the working ages when he studied the economic miracles in East Asian regions of Japan, South Korea, Taiwan of China, and Thailand.5 Bloom and Williamson proposed the theory of demographic gift in their empirical study on the data of 78 East Asian and non-East Asian countries and regions,6 which was further elaborated on by Bloom, Canning and Sevilla.7 Mason and Lee later developed the theory of demographic dividend proposed by Bloom and others, and further classified 5 Mason, Andrew, “Population and the Asian Economic Miracle”, Asia-Pacific Population & Policy,

East-West Center, Honolulu, Hawaii, 1997. David & Williamson, Jeffrey, “Demographic Transitions and Economic Miracles in Emerging Asia”, The World Bank Economic Review, vol. 12, no. 3, 1998, pp. 419–455. 7 Bloom, David, Canning, David & Sevilla, Jaypee, “The Demographic Dividend: A New Perspective on the Economic Consequences of Population Change”, Princeton: RAND, 2003. 6 Bloom,

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the demographic dividend as the first and second demographic dividends based on the composition effect and behavioral effect of the demographic dividend on economic growth.8 Two basic factors are needed for demographic dividend: one, a relatively big number and high proportion of the working-age population, and two, a relatively small dependent burden. When those of the working ages make up a large proportion of a population, the population becomes quite productive, the society sees a high rate of savings, both of which facilitate the economic growth, and the economy gets an additional boost on top of the normal growth rate due to this high-proportional productive population. This positive effect on the economic growth of the population with a high proportion of those of the working ages is called demographic dividend. Several East Asian countries and regions including Japan, South Korea and Taiwan of China all went through periods of demographic dividend when their economies were speeding up. In fact, the demographic dividend accounts for about one third of the economic miracle in East Asia. In general, people aged 14 years old or younger have no working capacity and need rich investment in health and education by those of the working ages. People aged 15– 64 comprise the working-age population, and they provide labor resources to the labor market, participate in economic activities and create wealth, and produce the wealth for their own consumption as well as for the consumption of the young- and old-age populations through “intra-family transfer” and “social transfer” of payments. The elderly aged 65 or higher have lost working capacity and need care and support physically and mentally by the working-age population. Therefore, those of the working ages are in the dominant position in a population, and their proportion of the population directly decides the development of the entire national economy. Meanwhile, the old- and young-age populations consume wealth with different consumption capacities, though, and are the dependents in the society except that the latter is a potential productive population while the former, simply consuming. Therefore, differences and changes in the age structure of a population are closely associated with the economic growth, and the age structure of the population in a country or region certainly impacts its economic growth. Among all age structures, the adulttype structure with “small ends and a middle bulk” is considered to have a window for demographic dividend and may facilitate economic growth.9 When a population starts to transition, the death rate, particularly the young-age death rate, starts to shoot down before any visible decrease in the birth rate until it stabilizes at a low level, leading to inconsistent growth rates of the population and laborers within a certain period of time. The high birth rate and low death rate in the beginning phase of the demographic transition lead to a quick increase in the young-age proportion of the total population, and the economic society starts to be in demographic debt. Subsequently, the birth rate starts to decline, with which the 8 Mason,

Andrew & Lee, Ronald, “Reform and Support Systems for the Elderly in Developing Countries: Capturing the Second Demographic Dividend”, Genus, 2006, 57 (2), pp. 11–35. 9 Bloom, David, Canning, David & Sevilla, Jaypee, “The Demographic Dividend: A New Perspective on the Economic Consequences of Population Change”, Princeton: RAND, 2003.

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young-age population makes up a decreasing proportion of the total population, while the young-age population that previously constituted the demographic debt grows into the working-age population, and during this period, the growth rate of laborers is higher than that of the total population, resulting in an adult-type population structure. In this period, the young-age dependency ratio plummets down in a large scale while the working-age proportion of the population rockets up in a large scale, providing an abundant supply of labor to the economic growth and, in particular, the expansion of modern sectors. This is the effect of labor supply that drives the economic growth. Meanwhile, this productive demographic structure also boosts high the economic output, lowers consumption needs, and increases the savings rate, showing a savings effect and capital-deepening effect to drive the economic growth, which, together with the effect of capital transfer that leads to the accumulation of human capital, provide an important driving force for economic growth.

1.3 The Contribution of the Demographic Dividend to China’s Economic Growth China’s birth rate started to decline in the 1970s with the implementation of the family-planning policy as well as the contribution of socioeconomic factors. After the 1980s, the reform and Opening-up boosted the development of the society and economy while the family-planning policy was implemented strictly in urban and rural areas, which further decreased the birth rate, leading the natural growth rate of the population to decline correspondingly. Wang and Mason argued that the rapid decline in the birth rate in the 1970s in China brought potential demographic dividend, and by analyzing growth factors, they dissected the contribution of the demographic dividend to the economic growth. They concluded that the first demographic dividend contributed 8.3% to the per capita growth of the Chinese economy from 1960 to 2000 and over 15% from 1982 to 2000, but that China’s economic growth would decrease in an annual rate of 0.45% from 2014 to 2050 as the first demographic dividend diminished little by little.10 Cai Fang and Wang Dewen studied the panel data by province of 1982–2000 in China and found that for each unit decrease in the total dependent burden, the economic growth sped up by 0.115 percentage points while the decrease in the total dependent burden contributed about 5% to the savings rate and a quarter to the Chinese economic growth.11 Studies have shown that the contribution of the demographic dividend, resulting from the summation of the contributions to the economic growth made by the 10 Wang, F. & Mason, A., “Demographic Dividend and Prospects for Economic Development in China”, UN Expert Group Meeting on Social and Economic Implications of Changing Population Age Structure, Population Division, Mexico, Aug. 31–Sep. 2, 2005. 11 Cai, Fang & Wang, Dewen, “Demographic Transition: Implications for Growth”, The China Boom and Discontents, Ross Garnaut & Ligang Song (eds), Asia-Pacific Press, The Australian National University.

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Table 1 Contribution of demographic dividend to China’s economic growth Period 1978–2010

Factor concentration to economic growth Demographic dividend (%) (%) K

h

L

A

h+L

D

h+L+D

1978–2010

49.10

6.56

12.00

32.33

18.57

5.33

23.90

1978–1980

40.42

10.02

22.14

27.42

32.16

11.85

44.01

1981–1990

40.54

6.27

22.53

30.66

28.80

9.42

38.22

1991–2000

46.57

8.04

6.56

38.83

14.60

2.14

16.73

2001–2010

62.79

4.34

3.89

28.98

8.23

2.49

10.71

Note K, capital stock; h, average human capital level; L, labor; A, technological advance and institutional dividend; D, dependency ratio; h + L, demographic dividend due to increased number and improved quality of laborers; and h + L + D, overall demographic dividend Source Lu, Yang & Cai, Fang, “Demographic Dividend over 40 Years of Reform and Opening-up in China: Contribution, Trend in Changes and Policy Suggestions”, report by the Institution of Population and Labor Economics, Chinese Academy of Social Sciences, July, 2018

increased size and improved quality of the population and the decreased dependency ratio, was between 1/5 and 1/4 from 1978 to 2010 (Table 1). However, there are clear differences in the contribution of the demographic dividend in different stages: In the beginning of the reform and opening-up (1978–1990), the demographic dividend contributed about 40% to the economic growth, which is higher than the contribution made by the existing capital and technological advance; from 1991 to 2000, the contribution of the demographic dividend reached 15%, but it was exceeded by the contribution of the existing capital and technological advance; and from 2001 to 2010, the contribution of the demographic dividend further decreased to 10% and that of the capital further increased, but the contribution of technological advance also declined. Overall, the demographic dividend showed a declining contribution to the economic growth. The nature of demographic dividend is that an abundant supply of labor prevents the diminishing returns on capital, which maintains high-speed economic growth that relies on the input of capital and labor. Based on the observation on the population dependency ratio and capital accumulation level combined, the maximal demographic dividend was reached before the dependency ratio touched the nadir in 2010, after which the dividend quickly disappeared. As the contribution to economic growth by the demographic dividend became increasingly negligible, the growth of the Chinese economy could no longer be supported by increased employment, or improved ratio of capital to labor, but it became growingly dependent on the increases in the contribution by the total factor productive (TFP). In addition, a gradually aging population may still have demographic advantages with the right institutions, i.e., the second demographic dividend. A longer and healthy life expectancy may become a new source for demographic dividend, and the key to developing this dividend is to continue to expand education opportunities, especially the general and vocational education at the high school stage, as well as to strengthen training on employees,

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while the retirement age is extended when the timing is right, so that adequate supply of labor is ensured.12

2 How China Obtained its Demographic Dividend Changes in the age structure of a population only provide potential opportunities for economic growth, and a beneficial age structure does not translate into demographic dividend on its own. Whether or not demographic dividend can be obtained depends on whether there are matching policies and institutions, degree of market freedom and human capital in a country or region. For example, from 1965 to 1990, many South American countries went through demographic transitions similar to that in East Asia, but they did not see any similar economic miracle. High inflation, political instability, antagonism between labor and capital and trade policies oriented with imports all cost these countries the opportunity to seize the demographic dividend.13 In contrast, East Asian countries and regions made full use of the demographic dividend to accelerate their economic growth because they adopted appropriate economic policies and invested heavily in education, thereby creating a large number of jobs and taking the opportunity brought by the demographic dividend to their own benefits.14 In the case of China, the realization of demographic dividend after the reform and opening-up was closely associated with the reform on labor migration, optimization of input in education and improved institutions of the labor market.

2.1 Reform on the Policy of Labor Migration Before the reform and opening-up, China implemented a strict command economic system, and labor flow, especially the flow from rural to urban areas was under tight control for a long time, leading to a large number of laborers locked in rural areas and agricultural production. After the reform and opening-up, China implemented the family contract responsibility system in all rural areas, which promoted the agricultural productivity and further revealed the problem of surplus rural labor. With the progress of the urban economic reform in China, the non-State economy in cities and towns became active, the employment policy loosened up, and a significant demand for rural labor emerged. In this background, China gradually loosened the control 12 Cai, Fang, “How Long Will China’s Demographic Dividend Last”, Economic Perspectives, 2011,

vol. 6. 13 Canning, David, “The Impact of Aging on Asian Development”, Seminar on Aging Asia, A New

Challenge for the Region, Kyoto, Japan, May 7, 2007. 14 Mason, Andrew & Lee, Ronald, “Reform and Support Systems for the Elderly in Developing Countries: Capturing the Second Demographic Dividend”, Genus, vol. 57, no. 2, 2006, pp. 11–35.

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over the flow of rural labor to urban areas little by little. Consequently, in the late 1980s, rural-to-urban labor flow already became a routine in the economic activities in China. The policy framework of labor flow has undergone five stages of controlling flow, allowing flow, controlling blind flow, standardizing flow and fair flow.15 In the period of 1979–1983, labor flow was controlled with measures including strengthened management of household registration and food, tight control of hiring rural laborers and settling the surplus rural laborers on site. In the period of 1984–1988, labor flow was allowed, and peasants were permitted to raise money and prepare food on their own to work or start business in cities and towns. In the period of 1989–1991, blind flow was brought under control with measures such as strict control of excessively rapid growth of “transfer of agricultural to non-agricultural status”, issuance of temporary work permit, employment registration, and attention was paid to clearing the unplanned employees from rural areas. In the period of 1992–2000, labor flow was standardized by implementing an employment system of cross-regional migration of rural laborers that was centered on the management of employment certification and card. After 2000, measures were taken to facilitate a fair flow by clearing out and abolishing discriminative rules and unreasonable limitations for peasant workers and making sure that peasant workers were no longer owed wages. These changes show that China has made material progress in the reform on the divide-systems of rural and urban areas to promote the unification of the rural and urban labor markets, and the flow of rural laborers is now in a whole new development stage. Number-wise, the size of the urban and rural labor flow in China has overall shown an increasingly expanding trend. Although different studies have concluded with different scales of the migration of rural laborers due to different statistics, all of them have shown a huge number of city-bound migrants from rural areas. Overall, only a few million people moved to other places to work in both urban and rural areas in the early 1980s, but in the 1990s, the number reached tens of millions, and after 2000, the size of rural-urban migration of laborers expanded rapidly and exceeded 100 million in a short period of time. By 2017, as many as 171 million peasant workers had gone to cities and towns to work, and accordingly, the urban peasant workers made up a higher proportion of urban jobs, from approximately 20% in the end of the 1980s to approximately 40% in the 2000s (Fig. 3a, b). The large-scale migration of rural labor to urban areas significantly promoted the economic growth in China. The free labor flow and migration essentially represent the efficient allocation of labor resources in the society by the labor market. Through the rural-to-urban flow of labor, a large number of workers went from the rural setting with low productivity to cities and towns with high productivity, thereby greatly facilitating the economic growth of China. As estimated by the World Bank, the labor transfer between sectors could explain 16% of the growth of China’s gross

15 Bai, Nansheng, Song, Hongyuan, et al., Going Home or Going to Cities: A Study on the Back-flow of China’s Rural Laborers Working Away from Home, China Financial and Economic Publishing House, 2002.

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Fig. 3 a Number of urban peasant workers. b Proportion of urban jobs taken by peasant workers. Source Calculations were based on the data from Report on Observation Survey of Peasant Workers and China Statistical Yearbooks by the National Bureau of Statistics

domestic product (GDP).16 In addition, a study by Cai Fang and Wang Dewen showed that the labor transfer from the agricultural to industrial and service sectors from 1982 to 1997 in China contributed 20.23% to the economic growth.17

2.2 Optimization of Input in Education to Meet the Demand of Labor Market The most important way to accumulate human capital is school education and vocational training. China promulgated the Law of Compulsory Education in 1986, which was modified in 2006, and compulsory education rapidly covered the whole country. In 2017, the net school enrollment rate of school-age children in China reached 99.9%, and 98.8% of the students finishing primary school continued to enroll in middle school. Meanwhile, China invested hugely in higher education. In 1999, the enrollment of higher-education institutions started to be expanded, which not only allowed more high-school graduates to be admitted in colleges, but promoted a higher enrollment rate in senior middle schools as well. In 2017, 94.9% of the junior middle-school graduates continued to study in senior middle schools, and the gross enrollment rate of higher-education institutions reached 45.7%.18 The development of education, without question, made major contributions to the human capital accumulation during the high-speed growth of China’s economy. According to studies, 16 World

Bank, World Development Indicators 2005, China Finance and Economic Publishing House, 2005. 17 Cai, Fang & Wang, Dewen, “Sustainability and Labor Contribution of China’s Economic Growth”, Economic Research Journal, 1999, vol. 10. 18 National Bureau of Statistics, People’s Republic of China, China Statistical Abstract 2018, China Statistics Press, 2018, p. 180.

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the average education level of all employees in China increased annually with fluctuations from 2001 to 2014. Specifically, the average years of education completed was 8.2 years in 2010, and 9.9 years in 2014.19 In summary, the overall level of the human capital of China’s laborers has been growing rapidly, and the continuous improvement in the quality of laborers has ensured the rapid growth of China’s economy. Meanwhile, the vocational education and training have also been developed in great leaps in China. From 1978 to 2017, the number of the middle-level vocational schools increased from 2760 to 10,707, and the enrollment, from 447 thousand to 5.787 million.20 In terms of skill training, in order to promote the vocational training of rural laborers, six ministries and committees including the Ministries of Agriculture and Labor and Social Security issued Training Plan for National Peasant Workers, 2003–2010 in September, 2003. In April, 2004, the “Sunshine Project for Transfer and Training of Rural Laborers”, jointly organized by these six ministries and committees, was officially launched, and by 2010, 35 million rural laborers had been transferred and trained. Meanwhile, ministries such as the Ministries of Labor and Social Security and Education also provided vocational training opportunities for peasant workers who had left the agricultural sector, and more than 10 million peasant workers in cities and towns benefited from these opportunities. In fact, the development of vocational education and training has made significant contributions to improving the quality of human capital among Chinese laborers, especially the young laborers.

2.3 Continuous Optimization of the Institutions of Labor Market First, recruitment and employment became fairer and fairer. In the late 1990s, some big- and middle-sized cities set up barriers for or prohibit peasants to work in some vocations and jobs in order to protect the jobs of the residents in the cities. These barriers and prohibition impaired the working right of the peasant workers who had come to these cities to work and showed clear discrimination against them. In this background, the central government started to adjust labor policies for increased protection of the equal right of peasant workers on the job market. In March, 2001, the National People’s Congress (NPC) underscored the statement to break the divided rural and urban systems, remove the unreasonable barriers in front of rural laborers coming into cities and towns to work and guide the surplus rural laborers to flow between urban and rural areas in an orderly way in the Outline of the Tenth Five Year 19 Gao,

Wenshu & Xie, Qianyun, “A Study on the Demand for Human Capital of China’s Structural Upgrade of Industries”, Journal of Central China Normal University (Humanities and Social Sciences), 2017, vol. 2. 20 National Bureau of Statistics, People’s Republic of China, China Statistical Abstract 2018, China Statistics Press, 2018, p. 176.

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Plan of the National Economic and Social Development of the People’s Republic of China. In 2003, the Notification of the General Office of the State Council Regarding Proper Management of and Services for Peasant Workers Coming into Cities and Towns to Work, which required to abolish all the registration procedures designed for peasant workers and emphasized that peasant workers and urban residents should be treated equally. In 2004, the Opinion of the Central Committee and the State Council Regarding Several Policies of Promoting Peasants to Increase Incomes (central file no. 1, 2004) was issued, which requested to further clean up and abolish the discriminative and unreasonable fees charged of urban peasant workers, simplify the procedures for peasants to get cross-regional and urban jobs and prevent manipulation of administrative rules to charge fees on urban peasant workers and their employers. This file completed the reform framework for peasant workers to be treated equally and for peasants coming to cities and towns to integrate into urban life. In the same year, the Notification of the General Office of the State Council Regarding Further Improving the Work Environment for Peasants in Cities and Towns was issued and requested regional governments of all levels, especially the governments of cities and towns, to understand the importance and assume the responsibility of improving the work environment for peasants coming to cities and towns to work. The policies in this period reflected how much weight the central government gave to improving the working environment for urban peasant workers, marking a new phase of policy adjustment regarding rural emigrant workers in China.21 On March 27, 2006, the State Council issued the Several Opinions on Resolving Peasant-Worker Issues and it was stressed to eradicate discrimination in hiring against peasant workers and to promote equal opportunities. This was the first policy file that comprehensively and systematically addressed issues concerning peasant workers, and it included policies measures in many aspects essential to peasant workers such as wages, employment, skill training, labor protection, social security, public management and services, reform of the household registration system and rights and benefits of land contracting. In 2007, the Law of Employment Facilitation, Law of Labor Contracts and Law of Adjudication of Labor Disputes were promulgated, practically forming a legal framework for abolishing discrimination against peasant workers in hiring and promoting equal opportunities. Second, huge progress was made to the social security institutions. To push forward the reform on the social security system, China released the Decision on Establishing a Unified Old-Age Insurance Institution for Enterprise Employees, Decision on Establishing a Basic Medical Insurance Institution for Urban Workers and Regulations of Unemployment Insurance in 1997, 1998 and 1999, respectively, in which the participants, premium rates and benefits were clearly specified for the old-age, medical and unemployment insurance. These regulations did not have the same coverage of social security, but they all explicitly stated that anyone with a labor

21 Wang,

Zhulin, A Study on the Transformation of Peasant Workers into Urban Residents During Urbanization, doctorate thesis, Northwest A&F University, 2008.

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relationship with a relevant hiring unit would be eligible to participate in social insurance and enjoy corresponding benefits. However, these regulations did not define the “employees”, and many hiring units failed to include peasant workers into any social insurance plan as they did not acknowledge peasant workers to be their employees. In light of this, the Regulations of Employment Injury Insurance issued in 2004 clearly defined the term “employees”: “Employees referred to herein include any laborer who forms a labor relationship with a hiring unit (including a de facto labor relationship) with any hiring form and for any labor term.” By then, among all laws and regulations involving social insurance for peasant workers, only the Regulations of Employment Injury Insurance had included peasant workers in “employees” while all others had not specified whether the peasants who had come to cities and towns to work should be included in any social insurance plan. In February, 2009, the Ministry of Human Resources and Social Security publicized the Method for Peasant Workers to Join the Basic Old-Age Insurance to the society, which stipulated that all peasant workers working in cities and towns with a labor relationship with a hiring unit should be included in the basic old-age insurance, providing unambiguous rules for urban peasant workers to enjoy equal rights in social old-age insurance with other urban residents. In order to promote the reasonable allocation and orderly flow of human resources and to ensure unobstructed transfer and continuation of the old-age insurance plans for insurance participants moving to other provinces and working in cities and towns, the State Council decided to implement the Temporary Method to Transfer and Continue the Basic Old-Age Insurance Plans for Urban Enterprise Employees on January 1, 2010. This method included the following major contents: All those participating in the basic old-age insurance for urban enterprise employees, including peasant workers, may transfer their insurance plans when moving to other provinces to work; when transferring the balance of one’s personal account of the insurance, part of the balance in the account contributed by the employer may be transferred as well; and for all participants in the insurance, including peasant workers who are to be treated equally, the numbers of years they have contributed to their insurance accounts in all regions should be combined and the balance of their personal accounts should be accrued.

3 The Disappearance of China’s Demographic Dividend After the reform and opening-up, the demographic dividend was an important force to propel China’s high-speed economic growth and it contributed about a quarter to the growth. However, China’s demographic dividend is diminishing as its demographic landscape has undergone fundamental changes since the total number and proportion of the working-age population in China showed sustained decreases, the population aged rapidly and the dependency ratio increased.

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It’s been projected that China’s total population will keep growing for seven to eight years, reaching approximately 1.412 billion in 2020 and the peak of approximately 1.422 billion around 2026, after which it will decline continuously, getting below 1.4 billion in 2037 and landing around 13.13 billion in 2050.22 The total number and proportion of the working-age population in China will decline persistently. The number of the working-age population, or those aged 15– 59 years, will be approximately 912 million in 2020, and lower than 900, 800, 700 and 660 million in 2023, 2036, 2048 and 2050, respectively. Proportion-wise, it will be approximately 64.57% in 2020 and below 60%, 55% and 50.24% in 2028, 2043 and 2050, respectively, of the total population. If the ages of 15–64 are taken as the working ages, the total population of this age interval will be approximately 985 million in 2020 and lower than 900, 800 and 778 million in 2037, 2048 and 2050, respectively, while their proportions of the total population will be approximately 69.75% in 2020 and below 65%, 60% and 59.22% in 2035, 2048 and 2050, respectively (Fig. 4a, b). The number and proportion of China’s old-age population will both keep growing. The population aged 60 or higher will reach approximately 256 million in 2020, accounting for about 18.16% of the total population. This old-age population will exceed 300, 400 and 492 million in 2025, 2033 and 2050, respectively, while their proportions will exceed 20%, 30% and 37.50% in 2023, 2036 and 2050, respectively. The even older-age population, those aged 65 or higher, will reach 183 million in 2020, accounting for about 12.98% of the total population. This older-age population will exceed 200, 300 and 375 million in 2023, 2034 and 2050, respectively, while their proportions will exceed 20% in 2033 and reach about 28.52% in 2050 (Fig. 5a, b).

4 Accumulation and Release of Talent Dividend Now that the demographic dividend is diminishing, China is challenged with how to replace the number of laborers with quality. In this phase, it is imminent to have significantly improved contributions of talents to the economic growth. The 22 Institution and Population and labor Economics, Chinese Academy of Social Sciences, “A Study on Changes in the Working-age Population and Economic Development”, research report, November, 2016. The projection was for the period of 2010–2050, and made with the PADIS-INT population projection software developed by the Center of Population and Development Research in China. The projection was based on the data of the 2010 census and included the changes in the parameters such as the total population, births, mortalities and urbanization; fertility level included the impact of the policy allowing all to have two children, and the total fertility rates were projected to be 1.65, 1.8, 1.8, 1.8 and 1.65 for the years from 2016 to 2020, respectively, which would fall back to 1.55 in 2021 and stay at the level afterwards; the population life expectancy was projected to grow in a non-linear fashion, reaching 78.77 years for males and 83.67 years for females in 2050; the life table of the UN’s Far-Eastern model was adopted as the mortality pattern; and the urban-rural population migration was projected to be 10 million people annually before 2020 with a reduction of two million every 10 years afterwards.

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Fig. 4 a Projections of the working-age population in China. b Projections of the proportions of working-age population in China. Source Institution and Population and labor Economics, Chinese Academy of Social Sciences, “A Study on Changes in the Working-age Population and Economic Development”, Research Report, November, 2016

Fig. 5 a Projections of the old-age population in China. b Projections of the proportions of old-age population in China. Source Institution and Population and labor Economics, Chinese Academy of Social Sciences, “A Study on Changes in the working-age Population and Economic Development”, Research Report, November, 2016

future of China’s economic development depends on talents, and with accumulated and released “talent dividend” will come technological advance and improved productivity. Analogous to the “demographic dividend”, the term “talent dividend” was coined to describe a high proportion of the laborers with good education or training, i.e., talents, of the total population, which provides an additional propeller

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of economic development. Talent dividend replies on a large number of knowledgeable or skillful laborers with specialties who are overall competent, especially those with higher education, who will bring considerable economic benefits. In 2010, China conducted its first survey on talent resources with all parameters included, and the statistical results showed that China had a total talent resource of 120 million people and they together contributed 26.6% to the economic growth,23 demonstrating the critical impact of the talent dividend on the economic development in China. President Xi Jinping stressed, “Development is the first priority, talents make up the primary resource, and innovation is the top driving force” when attending the deliberation session of the Guangdong delegates of the NPC on March 7, 2018. He also stated that getting strong relies on innovation and innovation relies on talents. Talents that are trained domestically and overseas should both be respected and entrusted with good responsibilities so that they may achieve their own life goals while dedicating themselves to their motherland. Talent dividend does not emerge on its own. It must be obtained through abundant material input and long-term education and training. China should introduce as many talented people from overseas as possible while investing more in the education of its own by improving the evaluation means of domestic talents so that talented people educated and trained within China will emerge constantly.

4.1 Improving the Human Capital in All Aspects Human capital is an important source of the increases in the TFP. The accumulation of human capital in China is faced with several prominent problems such as weakened incentives of education, unbalanced distribution of education resources and inadequate higher-education opportunities, which cry for additional input in the public education, optimization of the input structure of education, further widening the coverage of higher education, and constant promotion of vocational education and employee training so that sustained economic growth may be based on a solid foundation of human capital. First, additional input in public education is needed. Adequate input in public education is an important condition for China to cross the middle-income trap. Japan and South Korea both invested more than 4%, even over 5% in some years, of their respective GDP in public education when they were crossing the middle-income trap. Studies have shown that among all types of education, vocational education and training have the lowest social benefits, followed by general education and basic education, and pre-school education gives the highest benefits. It is therefore suggested that pre-school is included in the compulsory education. In fact, pre-school education is of vital importance for the physical and mental health, good habits and intellectual development of young children. In recent years, pre-school education 23 Organization Department of the Central Committee of the Communist Party of China, Statistical

Report on China’s Talent Resources, 2010, China Statistics Press, 2012, p. 1.

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made some progress in China, but its coverage is still low compared to some countries. In most developed countries, pre-school isn’t part of compulsory education, but their pre-school systems generally have abundant funds and charge relatively low fees, while low-income families have access to several forms of discounts in schooling fees, which guarantees that all who want their children to have pre-school education may do so. In fact, it has been a general practice in most countries to invest in and strengthen pre-school education. In China, it is necessary to include pre-school in the compulsory education system so that all children may receive standardized and high-quality pre-school education. Meanwhile, It is also suggested to include the senior middle school in the compulsory system. In 2000, China realized the goal of full coverage of the nine-year compulsory education, but senior middle school has not been included in the system yet. Senior middle school is an important educational phase as it bridges the junior middle school and higher education and is directly related to the education level and quality of a country. For China, increased input in the education of senior middle school to achieve full coverage is also something that cannot be avoided. Second, wider coverage of higher education is also needed. Experiences of South Korea and Japan have shown that the generalization and wide coverage of higher education provides a strong pillar to support the progress from the middle- to highincome phase of a country. In 2016, only 18.1% of all the laborers with a job had received college education or higher.24 From the perspective of the demand of the long-term development of China’s economic society, further widening the coverage of higher education is inevitable. In developed countries, it generally took 25–30 years from generalized higher education to obtaining a wide coverage. In recent years, the gross enrollment of higher-education institutions in China showed a slowing growth rate, albeit growing. To narrow the gap with developed countries in education, the development of higher education shall only speed up and never slow down. Finally, vocational education and training must continue to be developed. China needs a large team of experienced technicians with good skills, and that requires the middle- and higher-level vocational education. China should rely on the guidance of the labor market to develop vocational education. Usually vocational education has high personal returns, thus families and enterprises should be motivated while the government should not input as much as that in general senior middle-school education. Vocational education should, without question, be developed with big efforts, but it must be noted that it cannot replace college education. Higher education has an indispensable role in the making of an innovation-oriented country, and vocational education should not be placed in opposition to higher education. Given the current situation in China, employee training has a weak connection with the labor market, and this should be noted with care in the current training system. The experiences in Japan and South Korea when they were crossing the middle-income trap should be learned in that employee training should be led by enterprises while schools and

24 Department of Population and Employment, National Bureau of Statistics, China Labor Statistical

Yearbook 2017, China Statistics Press, 2018, p. 59.

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enterprises should be facilitated to cooperate. After all, enterprises are sensitive to the demand on the labor market and the training they provide is more directional.

4.2 Optimizing the Allocation of Talent Resources The market should be allowed to play a decisive role in the allocation of talent resources. The relationship of the government with the market should be properly handled to greatly reduce the direct allocation of talent resources by the government and to push for maximal benefits and optimal efficiency of the allocation of talent resources based on the market rules, prices and competition. Institutional barriers should be removed by all means to promote the fair flow and hiring of talents. The reform on the household registration system should be continued to facilitate the cross-regional flow of talents and to eradicate unfairness of employment due to household registration or regional differences. The institutions and regulations that have held the talent flow and allocation, such as profile management and assessment for titles, should be reformed. The reform on the household registration system should be sped up to simplify the procedure for talent resources to obtain urban household registration. The conditions of obtaining urban household registration should be further loosened so that the laborers with a lawful and stable job and residential place may be officially turned into urban residents as soon as possible. A study based on the two nationally representative surveys of migrant population observation, made by the National Bureau of Statistics and the Commission of Health and Family Planning, respectively, has shown that among the national migrant population with the rural type of household registration, the proportion of those with a college degree has reached 10% while a total of 2.8 million people are “migrant college graduates with the rural type of household registration”,25 and the number is still growing rapidly. In fact, college graduates with the rural type of household registration have become an important composition of peasant workers. Therefore, if all restrictions are removed for the college students holding the rural type of household registration to obtain the urban type and all of them, currently numbered at 2.8 million, can obtain the household registration in a city or town through appropriate policy reform and incentives, the national urbanization rate will be increased by two percentage points and reach approximately 43.5%, and the goal of reaching 45% urbanization in 2020 will be fulfilled without a problem. This requires us to open up our minds and let go the outdated stereotype that peasant workers have little skills and are poorly educated and to come up with original ideas in the reform on the household registration system to facilitate rural college graduates to obtain urban registration as soon as possible.

25 Institution of Population and labor Economics, Chinese Academy of Social Sciences, “A Study on the Obtainment of Urban Household Registration of College Graduates”, Research Report, March, 2018.

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Therefore, the policy of how to obtain the urban type of household registration should remove all barriers for college students in cities other than very few unique large cities such as Beijing and Shanghai so that everyone with a three-year college education or higher may apply directly for the household registration in the city. In the few unique large cities, the policy regarding household registration should also be reformed to increase the weight on education level to encourage high-quality talents to land a stable job and obtain the household registration without many difficulties. In addition, no differentiation should be made between fresh graduates and those who have graduated for years and all college graduates should be treated equally. Furthermore, for the immigrant human resources who cannot obtain the urban household registration for a while, efforts should be made to equalize public services to all. Dependent on the local socioeconomic development, efforts should be invested to gradually allow equal access to public services such as employment, social security, child education, housing, family planning, medical insurance and cultural activities for immigrant population and registered urban residents to help the immigrant population to integrate in the urban life. In particular, the education system should be improved to help the children of immigrant workers to enroll in schools, and the guiding principle, i.e., management by the destination government and establishing public full-time school, will be landed.

4.3 Facilitating Talents to Start up Their Own Business Start-up business has developed rapidly in China, and a diversified structure is emerging with fresh college graduates and those who have returned after study overseas starting up human capital-rich business and former urban employees and peasant workers who have returned rural homes starting up general service business. From 2008 to 2016, the employment pattern of fresh college graduates underwent a transition and the proportion of those starting up their own business increased annually, from less than 1% to about 4%.26 Meanwhile, a growing number of students who studied overseas have come back, reaching nearly 200 thousand in 2011 and as many as 432.5 thousand in 2016, constantly setting new records. Among the returners, about 15% have started up their own business.27 College graduates and returners from overseas together make up the backbone of knowledge-rich star-ups, pushing China’s innovation to keep moving forward. However, there are still some prominent problems with China’s start-ups, which mainly include the following. There is less than common awareness of start-ups in the entire society and those who try to start up their own business make up only a small 26 Mycos

Institution, Employment Report of College Graduates in China, 2017, Social Sciences Academic Press, 2017; Mycos Institution, Employment Report of Senior-Level Vocational School Graduates in China, 2017, Social Sciences Academic Press, 2017. 27 Center for China and Globalization, Report of Study Overseas of Chinese Students, 2016, Social Sciences Academic Press, 2016.

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proportion while they are generally faced with difficulties in financing. The government administration is not efficient enough and the policy incentives for start-ups have been implemented with less than satisfactory effects. In fact, the administrative procedures related to start-ups have been significantly simplified in the background of the “double starting-up” policy, but the procedure of registration, review and approval is still quite complicated and the standard is too high to register a new company, which have held the development of innovation and new enterprises. Some government agencies and local governments occasionally show negligence of and absence from administrative responsibilities, leading the relevant policy incentives to fail to provide due help to makers in some cases. Given the current development of China’s labor market, starting up new business is complex and subject to a variety of factors. Therefore, systematic measures should be taken to establish a network to support all those who want to start up their own business, promoting a society-wide awareness that start-ups are encouraged.

4.3.1

Establishing and Improving Policy Framework to Create a Favorable Environment for Makers

Since the State Council printed the Opinion on the Several Policies and Measures Regarding the Great Efforts to Promote All to Start up and Innovate in 2015, relevant government agencies have kept landing the policies to reform and improve the policy framework to produce widely beneficial policies in support of makers. However, the major institutional barriers that are currently holding independent makers, as described below, still need to be further reformed in depth to create an institutional environment that is more favorable to start-ups. In terms of innovation protection, there is still a high cost of information access and protect one’s own rights despite considerable improvements in the institutions regarding patent protection, and intense efforts should be made to set up a one-stop service for rapid patent review, determination of proper rights and protection of the rights, thereby removing all concerns for innovations to be transferred into productive forces. In terms of talent introduction, increased incentives should be added to the policies aimed to attract those willing and capable of starting up innovation business. Measures should be taken to encourage and guide outstanding fresh graduates to start up their own business in their hometown and explore all possibilities to fully remove the restrictions for graduates of higher-education institutions to obtain urban household registration, thus creating an environment more favorable for college graduates to start up new business.

4.3.2

Optimizing Financial Services to Lower the Cost of Starting up New Business

Middle- and small-sized enterprises are the majority of start-ups and provide a lot of jobs, but they are faced with a big barrier in financing, which has long held their

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development. Therefore, a one-stop service of investment and financing should be provided to middle- and small-sized enterprises to ensure that they have adequate access to financial information including equity financing, debt financing and relevant services. Given the financing difficulties of these enterprises due to limited scales of capital and capacity of mortgage repayment, their advantages as knowledge-rich enterprises should be fully employed to replace financing cost with human capital, leading to the “double dividend” of innovation and research and development.

4.3.3

Building a Base Platform to Provide Increased Security for Start-ups

The information platforms for start-ups should be improved and regional information platforms should be integrated based on higher-education institutions and highereducation clusters. As a result, services of administration, training, technical support and exchange of supply and demand information may be provided to college graduates who start up new business, while services such as promotional information, communication with external audiences, management of start-up teams and statistics and analysis of start-ups may be provided to science and technology parks and higher-education institution management. Greater efforts should be made to improve the platforms of start-up practices to facilitate in-depth collaboration between schools and enterprises and integration of production, study and research with applied science and engineering and technological projects as the foundation and through full use of the composite platform resources including incubators, maker communities and crowd-making spaces, thereby facilitating the transfer of the innovative scientific and technological results. The platforms of human resources for start-ups should also be strengthened. The advantage of mobile internet and social media may be taken for rapid and wide communication to strengthen identity-based social connection and joint social activities online and offline, create personalized social platforms customized for each industry or region, and lower the cost to match makers in startups.

4.4 Increasing Efforts to Introduce Talents from Overseas High-level talents overseas have always constituted an important resource of China’s talent resources and play a vital role in the development of China’s society and economy. With the reform and opening-up continuously deepened, China, little by little, has become the “hotspot” for high-level talents overseas to play their advantages and create their own enterprises. According to relevant data, foreign experts were introduced for a total of 2.315 million times during the 12th Five-Year Plan (FYP), 40% higher than that of the 11th FYP, 1.653 million. These high-level talents overseas have made important contributions to China’s socioeconomic development. However, more efforts are needed to bring more talents. For example, in the research institutions in China, researchers with a foreign nationality still make up only a small

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percentage. Even in the Chinese Academy of Science, which represents the highest level of scientific research in China, only 1.6% of the stuff are foreigners, far lower than internationally renowned research institutions in other countries. For example, the Max Planck Institute for the Advancement of Science (MPIAS) in Germany has official research staff that consist of 41% foreigners, and the percentage exceeds 10% for the Institute of Physical and Chemical Research (RIKEN) in Japan, French National Centre for Scientific Research (CNRS) and U.S. National Institute of Health. The world is now seeing an increasing flow of talents and an intensified war for talents. Therefore, how to better the policy to attract high-level talents from overseas with innovative measures shall be the priority when introducing high-level talents into China from overseas in order to facilitate all those talents in support of China’s development and national reinvigoration to become part of China’s development cause.

4.4.1

High-Level Innovation-Oriented Talents Overseas as the Priority

Although high-level talents overseas should be attracted by all means, it should be differentiated between the types that are needed and those that are not. Overall, China is in extreme shortage of people good at innovation at a high level, especially first-class scientists and scientific leaders. After all, there are not many first-class scientists and scientific leaders and only a handful of strategic scientists at the international forefront in China. As high-level innovation-oriented talents are the key to the promotion of socioeconomic development and technological advance, as well as the key to improving China’s independent innovation and core competitiveness, we must always aim at high-level talents and select those who can help the development of China.

4.4.2

Intensified Efforts to Attract Those Studying Overseas to Come back

For a long time, the high-level talents introduced into China from overseas have primarily been made up of those who went abroad to study. Shortly after the People’s Republic of China was founded, the Central Committee of the Party made a series of guiding principles and policies, which attracted many people who had gone abroad to study to come back to work, helping China out of the extreme lack of talents. In recent years, with the rapid development of the economy and the swiftly strengthened power of the country, more and more people who had gone abroad for study decided to come back and start up new business and careers. In 2000, only 9000 people came back to China after studying abroad, and the number went up to 135 thousand in 2010 and 430 thousand in 2016. According to statistics, 72% of the academic leaders in China’s key disciplines are “returners”, as are 81% of the members of the Chinese Academy of Science and 54% of the members of the Chinese Academy of Engineering. These talented “returners” have made significant contributions to the

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development of China’s education, science and technology, economy and national defense.

4.4.3

Big Attraction and Proper Use of Foreign Students in China

We must have a vision for the future and invest more efforts to attract and train people to come to China for study. Since the reform and opening-up, more and more people have come to China for study, reaching a cumulative 2.95 million enrollments. At the end of 2013, there were a total of 175 thousand people studying in highereducation institutions in China. The large number of people who studied in China have become friendly envoys to China, playing a key role in deepening the friendly relationship of China with other countries. As China grows into an increasingly strong power economically and politically, it is imminent for China to take attracting foreign students as a strategic measure for better national soft power and international competitiveness. Efforts should be intensified to attract foreign students, with more policy incentives and better services and security for them, so that more and more foreign students will come to China for study and for cultural exchange while they will also become an important force to strengthen the friendliness between China and their own countries. In addition, the possibility should be explored for foreign students to find jobs in China after they graduate so that outstanding foreign students will be kept in China to further expand the talent team.

4.4.4

Better Plans to Actively Introduce High-Level Talents from Overseas

The project of major talents is an important grip for the Chinese government to land the strategy of the talent plan and national invigoration through talents. To implement the talent project is important to develop talent advantages, and to implement the strategy of introducing high-level talents overseas, key disciplines should be identified and intense efforts should be made to attract higher-level talents and foreign experts. The issues previously reflected by overseas talents, such as inconvenience in exiting and entering China, difficulty of registering household for children and inability to link to the social insurance plans from other countries, must be addressed as soon as possible. A wider channel for talents to flow in should also be made by improving the regulations involving border exit and entrance. Based on the policy and planning of national development driven by innovation and centered on the State key projects in science and technology and the major scientific and technological projects and engineering projects that reflect the State strategies, the current structure of the talent-introduction projects should be modified and optimized.

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4.5 Exploring the Potential of the Old-Age Talent Resource The elderly who are willing to work should be encouraged to go back on the job market. For the elderly who are at a good level of human capital, are competitive on the job market and wish to continue to work for a better life, a favorable employment environment should be created for them and institutional barriers that prevent them from getting official full-time jobs should be removed by making better policies regarding labor contracts, social insurance and income taxes. The old-age human resources should be properly developed, jobs appropriate for the elderly should be created and institutionalization of a flexible retirement-age should be explored. At present, people aged 24–64 in China have a 10.2% decrease, on average, in the years of completed education with the increase of every one year in age, and the trend becomes more obvious with age in that for those aged 44–64, the decrease is 16.1% with the increase in every year of age. Therefore, the condition has not matured for a generalized increase in the retirement age, and education and training opportunities are urgently needed to get more old-age people to work, alleviating the problem of a lack of resources of care for the retired and extending the demographic dividend. Meanwhile, the old-age population should be studied for new consumption demand and transfer it into a force to drive the economic development. The elderly constitute a special group of consumers, and they have spiritual and cultural demands for exercising and leisure, as well as material demands in residential lives and social old-age care. The government should provide support and encouragement by means of treasury, taxation, finance and business management so that the demands that keep growing with the aging population will turn into new-type services and a new driving force of economic growth.

Social Security: Establishment and Equalized Provision of Basic Public Services Yanzhong Wang

China achieved world-renowned high-speed economic growth during the 40 years of reform and opening-up. Meanwhile, it should not be ignored that the Chinese government also did what they could in each development stage to push forward the progress towards an equalized coverage of basic public services by building a network of basic public services and social security systems that would be balanced among regions and cover both urban and rural areas. In 2017, President Xi Jinping, when reporting to the 19th National Congress of the Communist Party of China (CPC), gave full affirmation on the achievements in improving people’s lives and constructing the social security network, but he also reminded that future efforts to “improve the public service system” and “speed up the equalized provision of basic public services” would be needed to satisfy people’s growing desire for a better life and to meet the increasing demand for public services. Equalization of basic public services refers to the public goods and basic services provided by the government or public institutions that fit with the development level of the economic society and embody the principle of equality and justice and to which all people have generally equal access. The concept involves a wide range of connotation and denotation and lacks a clear definition. In the general sense, basic public services usually include public institutional services such as public education, health and cultural services, basic services of public interest such as public facilities, ecological management and environmental protection, public security services such as personal safety, production safety and food safety, and social security services such as employment services, social relief and old-age security. In the narrow sense, basic public services are often subject to change based on the needs of relevant working departments or research purposes. However, in both the broad and narrow senses, there has been a consensus that social security, education, public health should be included as the basic public services that all should have equal access to. In this chapter, these three types of public services will be the focus when the progress, Y. Wang (B) Institute of Ethnology and Anthropology, Chinese Academy of Social Sciences, Beijing, China © China Social Sciences Press 2021 F. Cai (ed.), The Chinese Approach, https://doi.org/10.1007/978-981-16-1899-4_11

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Table 1 Increases in the Chinese economy and government public expenditure after the reform and opening-up (unit: 100 million RMB) Year

1978

1980

1990

2000

2010

2015

2017

GDP

3678.7

4587.6

18,872.9

100,280.1

413,030.3

689,052.1

827,121.7

General public 1132.3 budget revenue

1159.9

2937.1

13,395.2

83,101.5

152,269.2

172,566.6

General public budget expenditure

1122.1

1228.8

3083.6

15,886.5

89,874.2

175,877.8

203,330.0

Government expenditure on social security and employment

18.9

20.3

55.0

1517.6

9130.6

19,018.7

24,812.4

Government expenditure on education

75.1

114.2

462.5

2562.6

12,550.0

26,271.9

30,259.5

Fiscal expenditure on public health

35.4

51.9

187.3

709.5

4804.2

11,953.2

14,599.7

Source National Bureau of Statistics, China Statistical Yearbook 2017 and China Statistical Abstract 2018

achievements and practice features of the equalization of public services during the 40 years of reform and opening-up are described.

1 High-Speed Economic Growth Promoted Basic Public Services to Develop Rapidly As the Chinese economy grew in high speeds after the reform and opening-up, the government revenue kept increasing, and the expenditure on the basic public services and other public input also kept growing. The year-round budget for general public affairs in China was 112.21 billion RMB in 1978, and it grew to 20.33300 trillion RMB at the end of 2017, with an annual increase by 14.3% (Table 1).1 The constantly increasing and adequate expenditure of public budget provided the material foundation and financial guarantee for the rapid development of basic public services. Meanwhile, the demand for basic public services also kept growing, which provided the internal force to drive the government to add to the expenditure on social security, employment, education, public health, medical insurance and basic healthcare. For the large population in China, there was a severe lack of public 1 National

Bureau of Statistics, China Statistical Abstract 2018, China Statistics Press, 2018, p. 10.

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services during the time of the command economy. But it was also a time of limited fiscal capacity, and the government could only use the limited amount of money to ensure the basic welfare of the employees of publicly-owned economic units in cities and towns while the large number of urban and rural residents and non-institution employed workers were only provided the minimal level of public services. With economic growth and increasing government revenue, the government started to expand the coverage of basic public services to all workers and urban and rural residents. In this background, the social security systems kept increasing their coverage, and the services of compulsory education, public health and basic healthcare all achieved full coverage in the society. Meanwhile, China successfully progressed to a mid-high income country from a low-income one, which further improved the quality of basic public services and optimized the structure of education, public health and social security systems. According to statistics, in 1978, 196.39 million people were enrolled in junior middle schools and primary schools, 15.53 million enrolled in senior middle schools and only 850 thousand enrolled in colleges or above, as compared to 145.358 million, 23.745 million and 30.175 million, respectively, at the end of 2017, with 8.215 million and 26.686 million more people having received education of senior middle school and college or above, respectively.2 In the beginning phase of the reform and opening-up, efforts to widen the coverage of the nine-year compulsory education constituted a major part of the equalization of education services. After 2000, the number of people who completed senior high-school and higher education grew in large scales, and China stepped into a new phase with constantly improving middle-level education and popularization of higher education. Similar trends are observed in the healthcare and social security systems. According to statistics, only 61.66 million people participated in the basic old-age insurance in 1990, while 915.48 million, 1.17681 billion, 187.84 million, 227.24 million and 193.00 million people were covered by the basic old-age insurance, basic medical insurance, unemployment insurance, work injury insurance and maternity insurance, respectively, in 2017.3 Apparently, the coverage of social insurance plans had significant increases, which reached 65.8% for the basic old-age insurance and 84.7% for the basic medical insurance in 2017. However, the constant improvements in the basic public services did not automatically result from the economic development, but were obtained because the Communist Party of China (CPC) never forgot to better people’s lives and never stopped to take responsibilities. Improving people’s lives is the essential requirement of the foundation of the CPC, which is to seek public interest, and the nature of the CPC government, which is for the people, and it is also the ultimate goal of the socialist development of China, just as in the remarks of President Xi Jinping at the press conference of the Standing Committee of the Political Bureau of the 18th Central 2 Statistical

Communiqué of National Economic and Social Development of the People’s Republic of China, 2017, webpage of the National Bureau of Statistics, http://ww.stats.gov.cn/tjsj/zxfb/201 802/t20180228_1585631.html. 3 Statistical Communiqué of Human Resources and Social Security Development, 2017, Webpage of the Ministry of Human Resources and Social Security, http://www.mohrss.gov.cn/ghcws/BHC SWgongzuodongtai/201805/t20180521_294290.html.

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Committee of the CPC (CCCPC), “The desire of people for a happy life is our goal.” Since the Party’s 18th National Congress, the socialist development with Chinese characteristics has entered a new era, the principal contradiction facing the Chinese society has turned into one between unbalanced and inadequate development and the people’s ever-growing needs for a better life, and a stronger desire and growing demand for equal access to basic public services have been observed. “People look forward to better education, more stable jobs, more satisfactory incomes, more reliable social insurance, a higher level of healthcare services, more comfortable living conditions and a more beautiful environment.” To satisfy these demands, improving basic public services is the major tool. In fact, the government has kept adding to the input in these areas, with increased proportions of expenditure, and there have shown large-scale improvements in the public services and coverage of social security. Longitudinal analysis of the general public budget expenditure of the government from 1978 to 2017 has revealed that from 1978 to 1996, the general budget expenditure of the government had an acute decrease in its proportion of the GDP, from 30.5% all the way down to 11.1%, while after 1997, this percentage kept growing (except for some fluctuations in a few years). Specifically, the general budget expenditure accounted for 15.8% of the GDP in 2000, 21.8% in 2010, 24.6% in 2017, which is close to a quarter. Meanwhile, the expenditure on social security, education and public health also accounted for a growing proportion of the general public budget expenditure, from 11.53% in 1978 to 34.27% in 2017 (Table 2). It’s fair to say that the amount and increase scale of the expenditure on basic public services in China both increased significantly after the reform and opening-up, especially after 2000. In addition, since the late 1990s, China has given high priority to social security and education as shown by large-scale increases in the investment in them. In a short period of 20 years, the coverage and benefits of China’s social security system improved significantly while the higher education reached massification based on the full coverage of the nine-year compulsory education. Then in 2009, a new round of reform on the medical and public health systems was initiated, which elevated the government’s investment to another level and significantly facilitated the rapid development of the public health and basic medical insurance services. Table 2 Increases in the proportions of expenditure on social security, education and healthcare out of the public expenditure of the government after the reform and opening-up Year

1978

1980

1990

2000

2010

2015

2017

General public budget expenditure, % GDP

30.50

26.80

16.34

15.84

21.80

25.50

24.58

Expenditure on social security, education and healthcare, % general public budget expenditure

11.53

15.17

22.86

30.15

29.47

32.55

34.27

Source National Bureau of Statistics, China Statistical Yearbook 2017 and China Statistical Abstract 2018

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2 Reform of the Social Security Institutions and Improvement in Social Protection After the People’s Republic of China (PRC) was founded, several social security institutions were established, including the survival guarantee to qualified peasants (food, clothing, medical care, housing and burial expenses or education for orphans), primary healthcare for urban and rural residents and employment safety for employees of State-owned enterprises (SOEs). After 1978, the social security institutions began to be developed based on the reform achievements. In the early 1980s when the reform and opening-up were being initiated, the effect of the conventional security systems was weakened and no new-type social security system was established, making the period a transitional phase in terms of the social security development. The decade from the end of the 1980s to the Asian financial crisis in 1997 represented the reform exploration phase of establishing new-type social security systems while China clearly identified the goal of the Reform to be a socialist market economy. In this phase, China explored social-security provisions in a variety of forms, contents and innovative institutions in trial sites and accumulated a lot of practical experiences for establishing the social insurance mode based on social pooling benefits and individual accounts and the subsistence allowance system for the low-income population. From August, 1997, when the State Council officiated the unified old-age insurance system for enterprise employees, to November, 2012, when the Party’s 18th National Congress was held, the modern social security institutions developed quickly in China, and three major social security systems were established, i.e., the social insurance system for urban employees as the torso, social relief such as the subsistence allowance system as the base, and basic public services such as education and healthcare aimed at provision of equal access and social welfare services, which basically reached full coverage in the society. After the Party’s 18th National Congress, China’s social security systems and public services were consolidated. The social insurance institutions were coordinated between urban and rural areas, institutional integration was accelerated, and the institutional framework and benefits became fairer. While targeted poverty alleviation was being pushed forward to help people in poverty out of it, the social relief services centered on the subsistence allowance system were also strengthened to provide bottom security. All these laid a solid foundation for realizing of goal of reaching common prosperity in 2020. In summary, further equalization of education services, deepening the reform of medical and public health systems and promoting the socialization of old-age care made the world’s largest social security network in China, and the Chinese model of social security characterized with rich practice has been formed.

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2.1 Finding the Objective and Position of the Modern Social Security Systems The working focus in the initial phase of the reform and opening up was economic development set by the CPC. It was aimed to address the issues of egalitarianism and lack of motivation in work that became severe during the command-economy times. At the time, there was a lack of recognition of the role and effect of a social security network.4 As the reform progressed continuously, China’s perception of the objective and function of social security changed accordingly, and establishing a social security network became increasingly important during the reform. In the mid-1980s, China was mainly after the economic system reform, and the reform on the social security institutions was positioned as a supporting tool to the economic system reform. In order to facilitate the reform of urban SOEs, the government promoted the reform on the conventional employment security institutions, as well as implemented the reform of labor contracting. While the hiring procedures were being reformed in the hiring units, the employment security institutions and the security institutions in enterprises and public institutions that had previously been coupled with the hiring units were found to be unsuitable for the economic system reform. Therefore, in 1991, the State Council issued the Decision on the Reform of the Basic Old-Age Insurance System for Enterprise Employees, in which it was stated to take steps to establish a system with basic old-age insurance supplemented by the enterprise contribution to the insurance and personal savings accounts of employees so that old-age care would be shared by the government, enterprises and individuals with the cost handled by social pooling. Thus the reform was initiated on the basic old-age insurance system for urban enterprise employees. In 1993, the Decision by the CCCPC on Several Issues Regarding the Establishment of a Socialist Market Economy remarked, “A multi-level social security network is of vital importance to deepening the reform of enterprises and public institutions, stabilization of the society and unobstructed progress in making the socialist market economy”. Now social security became an important pillar to support the framework of the socialist market economy in China. The multi-level social security network included social insurance, social relief, social welfare, special assistance to entitled groups and social collaborative help and account safety of individual savings, and it also revealed the goal and direction of the reform of the social security system. In the 1990s, China released a series of regulations and policy files such as the Regulations of Unemployment Insurance of State-Owned Enterprise Employees (1993), Notification Regarding Deepening the Reform of the Old-Age Insurance for Enterprise Employees (1995), and Temporary Methods of Work Injury Insurance for Enterprise Employees (1996) and proactively pushed forward the social security reform trials, resulting in a variety of reform modes. As the socialist economic system took deeper root, a unified labor market became critical for the reform and opening-up, for which it was imminent to integrate the 4 “Decision

on the Economic System Reform by the CCCPC”, Selected Important Files Since the 12th National Congress (vol. 2 of 3), compiled by the Central Archives, People’s Publishing House, 1986.

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various reform models of social security institutions in the trial sites. Therefore, after 1997, the State Council strengthened supervision to coordinate the explorations of social security reforms in all trial sites towards a unified basic institution. As a result, the Decision on Establishing a Unified Old-Age Insurance System for Enterprise Employees (1997), Decision on Establishing the Basic Medical Insurance System for Urban Employees (1998), Regulations of Unemployment Insurance (1999) and Regulations of Subsistence Allowance System for Urban Residents (1999) were issued by the State Council, leading to the establishment of a modern social security network including the basic old-age insurance and medical insurance for urban employees and unemployment insurance and subsistence allowance for urban residents. After 2000, under the guidance of the Scientific Outlook on Development, the social security network evolved into an independent social sector although it continued to play a supporting role in the socialist economic system. The Party’s 16th National Congress vowed to improve the social security systems as an important task and goal for reaching common prosperity by stating to “establish and improve a social security system consistent with the economic development level, which is important to guarantee the social stability and national prosperity and security”. In the first half of 2003, the epidemic of the severe acute respiratory syndrome (SARS) broke out, alerting the Chinese government that not only was social security for employees important, but a social security network fully covering the entire nation, especially rural residents, was also vital. To reach this goal, the foremost was to establish a medical insurance system for peasants. In 2003, the State Council issued the Opinion on Establishing the New Rural Cooperative Medical Care System, and trials were started for the new rural cooperative medical care system (new rural med co-op). By 2007, the new rural med co-op had covered more than 90% of rural residents, marking the return of a basic healthcare system to rural areas after the primary healthcare system had been lost for more than 20 years. In 2007, China also started to set up a subsistence allowance system in rural areas and explore the possibilities for a basic medical insurance system for both urban and rural residents. The resulting insurance system widened its coverage rapidly. In 2009 and 2011, the government announced to establish a new rural social old-age insurance and urban social old-age insurance, respectively. By the time the 18th National Congress of the Party was about to be held, the four basic security systems covering both urban and rural residents, i.e., the new rural med co-op, basic medical insurance for urban residents, basic old-age insurance for rural residents and basic old-age insurance for urban residents, had been established. Meanwhile, China continued to deepen the reform on the basic old-age insurance system for urban employees and established a medical relief system for both urban and rural residents, while keeping improving the Regulations of Work Injury Insurance. The framework of social security for all employees and urban and rural residents was now complete, and the series of reform measures laid the foundation in institutions for realizing the goal that all enjoy basic security in life. At the 18th National Congress of the Party, the goal of “common prosperity” was announced, marking a new phase of comprehensive development of common prosperity and comprehensive deepening of the reform for China. The reform and

318

Y. Wang

development of the social security network were also given a new position, mission and task, i.e., “accelerating the improvement in the system of basic public services, pushing the socialist society to be more harmonious, safeguarding the fundamental interest of the greatest majority of people” and making constant progress in achieving “education for all, compensation for the working, medical care for the sick, care for the elderly and housing for all”. In fact, the 18th National Congress showed great depth in the perception of the role of a social security network. The report of the Congress specified, “Social security is a basic institution to provide protection for people’s lives and regulate income distribution”,5 which gave the social security institutions independent status. While implementing the strategy of targeted poverty alleviation centered on the goal of reaching common prosperity, China made constant efforts to improve the re-distribution of incomes through taxation, social security and transfer payments, with the greatest weight on the role of taxation, for a fairer and more sustainable system of social security. In 2014, the State Council issued the Temporary Method of Social Relief to set up a comprehensive relief system that included subsistence allowance, support of those in extreme difficulties, rescue of people hit by disasters, medical relief, education relief, housing relief, employment relief and temporary relief. In this period, important measures were taken in the reform of the old-age insurance mechanism in government and public institutions, and it was integrated with the system of old-age insurance for urban employees. In 2015, the State Council issued the Decision on the Reform of the Old-Age Insurance System in Government and Public Institutions and the Method of Vocational Pension in Government and Public Institutions, which made the old-age insurance mechanism for people working in government and public institutions fairer. In addition, to promote the coordinated development of urban and rural areas and integration of the urban and rural social security systems, China established the basic old-age and medical insurance systems for both urban and rural residents. In 2017, the 19th National Congress of the Party reported that China had entered a new era of socialism with Chinese characteristics and released and established the guiding principle of the Xi Jinping socialism with Chinese characteristics in the new era, which specified “people orientation” and “leading people to create a better life” as the working goal of the Party, further underscored the importance of social security as the core of people’s lives in that “efforts should be made to allow the achievements of the Reform and Opening-up to benefit all the people in a fairer way and to reach common prosperity”, emphasized the efforts to “work to the benefit of the people and resolution of their concerns, address the problems in people’s lives and facilitate social fairness and justice” and to make constant progress in achieving “education for all, compensation for the working, medical care for the sick, care for the elderly and housing for all”, and announced to “have a complete multi-layered social security system with full coverage, urban and rural coordination, clear accountability 5 Hu, Jintao, “Advance Along the Path of Socialism with Chinese Characteristics with Determination,

Striving for Common Prosperity” (November 8, 2012), from Selected Important Files Since the 18th National Congress of CPC (vol. 1), edited by the Central Archives, Central Archive Press, 2014, p. 28.

Social Security: Establishment and Equalized Provision …

319

and rights, appropriate support and sustainability”.6 In this phase, China invested unprecedented efforts and resources in improving people’s lives and social security, especially the targeted poverty alleviation efforts. After the reform and openingup, especially in the 20 years after 2000, China accomplished glorious effects in building a modern social security network, protected the basic rights and lives of all people, and won world-wide acclaim. On November 17, 2016, the International Social Security Association (ISSA) award for “Outstanding Achievements in Social Security” was presented to the government of the People’s Republic of China for “its unprecedented extension of pension, insurance and other forms of social protection”.

2.2 Constantly Adding to the Input for a Wide Coverage of Social Security Systems With the progress and development of the social security reform, input in providing social security kept growing, and the channels of revenue and expenditure, as well as the structure, underwent significant changes. In the 1980s, the State-provided social security was mainly made up of the protection provided by SOEs and government and public institutions to their employees, and the national treasury only provided survival support to the group in extreme poverty that was strictly defined and limited social welfare to the qualified groups, also strictly defined, such as military personnel. In the last few years of the 1990s, the social insurance institutions were established for employees, and a responsibility-sharing mechanism that combined individual accounts with multi-source contributions was introduced, which led the social insurance fund to gradually become the main source of social security. In 2002, the total revenue of the national fund of social insurance was 404.87 billion RMB and the total expense was 347.15 billion RMB. However, due to the constantly increasing coverage and protection level, especial the expenses resulting from some special policies, the public treasury started to spend more and more on provision of social protection. In 2002, the government treasury spent 37.297 billion RMB on social support of qualified groups, welfare and relief, and together with the expense on retirement fees for employees in administrative institutions and various social protection, the national expenditure on social security totaled 263.622 billion USD. In addition, the social security system started to widen the coverage from employees to all the people after 2000. The cost of the nine-year compulsory education in rural areas was completely covered by the government, while poverty relief, reform on the medical care, medicine and public health systems and housing security were all developed continuously to further expand the expense on livelihood protection and

6 Xi,

Jinping, Decisive Victory in Building a Moderately Prosperous Society in All Respects and Strive for the Great Success of Socialism with Chinese Characteristics for a New Era: Report on the 19th National Congress of the Communist Party of China, People’s Publishing House, 2017, pp. 44–50.

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social security, and the input in the social security network made by the government and social insurance fund also kept growing. The expense on social security thus became the fastest-growing, large-scale section of the public expenditure of the Chinese government. Here we define the government expenditure on social welfare, relief and subsidies for social insurance as the social security expense in the narrow sense (statistic 1) and that on social insurance as the expense in the broad sense (statistic 2, excluding the subsidies for social insurance). Both statistics of social security expense had sustained increases. The expense in the narrow sense grew from 1.891 billion in 1978 to 2.159145 trillion RMB in 2016 (statistic 1), while the expense of the social insurance fund also grew quickly (statistic 2), from 221.098 billion in 1998 to 5.756291 trillion RMB in 2016. In addition, the equalization of access to public services was an important part to the harmonious socialist society, and the government expense on public services such as education and public health should also be included in statistics, while in contrast, provision of livelihood protection such as cultural and housing protection includes a large variety of types. Therefore, for convenience of calculation, we only combined the government expenses on education and public health with the two statistics above to obtain the expense on equalization of public services (statistic 3). Combination of the expenses on social security in the narrow sense and on social insurance with the government expenditure on education and public health resulted in considerable totals, which was 452.734 billion in 1998 and 9.879446 trillion RMB in 2016 (Table 3). Further addition of the expense on housing protection (statistic 4) led the total expenditure on the national social security and basic public services to be 10.557067 trillion RMB, accounting for 56.23% and 14.19% of the total government expenditure and GDP, respectively (Table 4). The rapid growth in the various expenses of social security drove high their proportions of the government expenditure and GDP while narrowing the gap in social protection from other countries. In fact, compared to countries of similar development levels, China is now spending satisfactory amount of money on social security and basic public services. It is noteworthy that the government treasury has made increasing subsidies to the social insurance fund year by year, reaching 763.354 billion RMB in 2016 (Table 5) in order to repay the historical debts in social security provision and to reach a balance in revenue and expense. The government’s attention and sustained increases in the input in public services laid the solid foundation for the establishment and development of the social security network in China, especially the various forms of social insurance. Over the 40 years of reform and opening-up, China successfully transitioned its social security schemes from the conventional hiring unit-based provision of employment protection for employees in the command economy to a modern social security network in the socialist market economy, which was based on three institutional frameworks of modern social relief, social insurance and basic public services. Enrollment of the social security plans kept growing, and in particular, the social insurance system widened its coverage all the time. Now the social security network has a full coverage in institutions and is quickly developing towards a full coverage of people and “full insurance enrollment of people”. In 1978, only the 150 million urban employees

9130.62

12,585.5

14,490.54

15,968.85

19,018.69

21,591.45

2012

2013

2014

2015

2016

6804.29

2008

11,109.40

4361.78

2006

2011

3116.08

2004

2010

2636.22

128.03

1996

2002

95.14

1994

595.63

66.45

1992

1517.57

35.58

1986

2000

18.91

1978

1998

Statistic 1

Year

57,562.91

51,540.50

44,607.02

38,831.40

30,939.20

26,834.81

21,639.32

15,098.51

9,950.23

7,223.71

5,590.43

3,604.52

2,210.98

–

–

–

–

–

Statistic 2

98,794.46

89,765.56

77,825.54

69,113.06

59,426.40

49,761.15

38,273.52

26,865.76

16,898.14

12,368.39

9604.93

6493.56

4527.34

2005.35

1456.20

916.77

432.53

129.40

Statistic 3

11.50

10.81

10.52

10.33

9.99

10.17

10.16

10.87

10.79

10.94

11.95

9.55

5.52

1.61

1.64

1.78

1.61

24.88

23.97

24.05

22.98

20.89

21.47

24.08

21.30

21.63

22.16

22.36

20.05

17.81

–

–

–

–

–

42.70

41.75

41.96

40.91

40.12

39.82

37.38

37.90

36.73

37.95

38.41

36.13

36.47

25.26

25.14

24.50

19.62

11.53

2.90

2.81

2.51

2.46

2.36

2.35

2.26

2.26

2.06

1.95

2.19

1.53

0.71

0.18

0.20

0.25

0.35

0.52

Statistic 1

1.65

% GDP Statistic 3

Statistic 1

Statistic 2

% Fiscal expenditure

Table 3 Government expenditure on social security provision in China (100 million RMB and %)

7.74

7.62

7.01

6.60

5.79

5.67

5.37

5.02

5.18

4.52

4.65

3.63

2.62

–

–

–

–

–

Statistic 2

(continued)

13.28

13.27

12.23

11.75

11.13

10.52

9.49

8.94

7.97

7.74

7.98

6.54

5.36

2.82

3.02

3.41

4.21

3.55

Statistic 3

Social Security: Establishment and Equalized Provision … 321

24,812.40

2017

75,746.40

Statistic 2

124,605.60

Statistic 3 Statistic 1

11.71

% GDP Statistic 3

Statistic 1

Statistic 2

% Fiscal expenditure Statistic 2

Statistic 3

Note Statistic 1 includes expenses on support to qualified groups, social welfare and relief, retirement fees of administrative public institutions and subsidies to social insurance; statistic 2 adds the expense of the social insurance fund excluding the subsidies to the fund on top of statistic 1, and the percentage calculations for statistic 2 included the social insurance expense excluding the subsidies in the denominator. Statistic 3 includes the expenses on education and public health on top of statistic 2. Note that the percentage of fiscal expenditure in 2002 is relatively big, which is associated with the large-scale increase in the subsidy to the social insurance fund by the government treasury in that year Source Based on the annual Finance Yearbooks of China, China Statistics Yearbooks and China Public Health Statistical Yearbooks. The data of the expense on social insurance from 1998 to 2008 were from the Finance Yearbook of China, 2008 and the 2010–2016 data were from the government report on the national fiscal expenditure. There may be some inconsistencies with data of some years. In the China Statistical Yearbook 2015, the GDP data of 2013 and before were amended based on the third economic census. The GDP data of 2015 were from the 2015 communiqué of national economic and social development, the 2016 GDP data were from China Statistical Yearbook 2017, and the 2017 data were from the China Statistical Abstract 2018 and Statistical Communiqué of Human Resources and Social Security Development 2017, which showed that the total expense of the social insurance fund in 2017 was 5.7145 trillion RMB, among which 621.1 billion was the government subsidy to the old-age insurance.

Statistic 1

Year

Table 3 (continued)

322 Y. Wang

Social Security: Establishment and Equalized Provision …

323

Table 4 Government expenditure on social security in China (100 million RMB & %) Year

Housing protection

2010

2376.88

Statistic 4 40,650.40

% Fiscal expenditure 45.23

% GDP 9.94

2011

3820.69

52,759.34

48.29

10.90

2012

4479.62

63,906.02

50.74

11.96

2013

4480.55

73,593.61

52.49

12.52

2014

5043.72

82,869.26

54.60

13.03

2015

5797.02

95,562.58

54.33

14.12

2016

6776.21

105,570.67

56.23

14.19

Note Statistic 4 includes the expense on housing protection on top of statistic 3, which is equal to the expense on social security in the narrow sense plus the expenses on education, medical care and public health and housing. The expense on housing protection was calculated as part of the expense on social security and employment before 2010, and that is why the table starts from 2010 Table 5 Fiscal subsidy to social insurance fund and its proportion of fiscal expenditure (100 million RMB and %) Year

Fiscal subsidy to social insurance fund (A)

Total fiscal expenditure (B)

A/B

1998

21.55

10,798.18

0.20

1999

169.66

13,187.67

1.29

2000

298.65

15,886.50

1.88

2001

342.97

18,902.58

1.81

2002

517.29

22,053.15

2.35

2003

493.90

24,649.95

2.00

2004

519.77

28,486.89

1.82

2005

577.23

33,930.28

1.70

2006

888.95

40,422.73

2.20

2007

1275.00

49,781.35

2.56

2008

1630.88

62,592.66

2.61

2009

1776.73

76,299.93

2.33

2010

2309.80

89,874.16

2.57

2011

3152.19

109,247.80

2.89

2012

3828.30

125,953.00

3.04

2013

4403.14

140,212.10

3.14

2014

5042.83

151,785.56

3.32

2015

6596.19

175,877.77

3.75

2016

7633.54

187,755.21

4.07

Source Annual Finance Yearbooks of China and Government Reports of Fiscal Balance

324

Y. Wang

had basic protection when the total urban population accounted for less than 18% of the national population and less than one million rural people were qualified for life support, leaving the majority of urban and rural residents, especially the latter, little opportunity to get any social protection. With the establishment and improvement of all the social security institutions, the number of people covered and, in particular, the number of people enrolled in social insurance kept growing (Table 6). After the 18th National Congress of the Party, the increases became even more significant (Fig. 1).

3 Protecting the Right to Education Promoted Equalization of Public Education Services 3.1 Pushing for Equalization of Basic Public Education Services In 1949, 80% of the Chinese population was illiterate, and the enrollment rates of primary and junior middle schools were only 20% and 6%, respectively, with a mere 117 thousand people studying in higher-education institutions. To help the severely under-educated population as soon as possible, the CPC and government gave a high priority to education and treated it as the top task in the education sector to remodel the old education system and build a new one in order to higher the education level of the entire population. However, as China was a developing country with a large population, little foundation and highly unbalanced economic development at the time, it was profoundly arduous to develop the education cause to create a public education system covering all the people. Nevertheless, China, after the establishment of the PRC, started to develop its education system on zero ground. This was an important, yet arduous task, and there were extremely limited resources; therefore, it remained a difficult choice for quite some time whether to invest in high-quality elite education or general mass education. Analysis now shows that overall progress was made in both the quantity and quality of the overall education during that period, but the development of education actually walked along a long, winding path to explore and apprehend the nature, resource input and methods of education. In the command-economy era, all economic and service resources were under the control of the State or collectives, basic education was provided more as a form of welfare. In cities and towns, education and vocational training for employees were provided by the State and hiring units as public welfare, while the rural education system was the collective welfare provided by village collectives under the support of the State. Although there was limited provision of welfare and the education quality was not very high, the massification of schools significantly increased the enrollment and literacy rates among the vast majority of school-age children and achieved considerable effects in educating the illiterate

Social Security: Establishment and Equalized Provision …

325

Table 6 Social insurance enrollments in China 1995–2017 (unit: 10,000 people) Year

Basic employee old-age insurance

Basic urban medical insurance

Unemployment Work Maternity New rural Urban insurance injury insurance cooperative and rural insurance medical old-age care insurance

1995 10,979.0

745.9

8238.0

2614.8

1500.2

1998 11,203.1

1878.7

7927.9

3781.3

2776.7

2000 13,617.4

3786.9 10,326.3

4350.3

3001.6

2001 14,182.5

7285.9 10,354.6

4345.3

3455.1

2002 14,736.6

9401.2 10,181.6

4405.6

3488.2

2003 15,506.7

10,901.7 10,372.4

4574.8

3655.4

2004 16,352.9

12,403.6 10,583.9

6845.2

4383.8

8000

2005 17,487.9

13,782.9 10,647.7

8477.8

5408.5

17,900

2006 18,766.3

15,731.8 11,186.6

10,268.5

6458.9

41,000

2007 20,136.9

18,020.3 11,644.6

12,173.4

7775.3

72,600

2008 20,136.9

19,995.6 12,399.8

13,787.2

9254.1

81,500

5595

2009 23,550.0

21,937.0 12,715.0

14,896.0

10,876.0

83,300

8691

2010 25,707.3

43,262.9 13,375.6

16,160.7

12,335.9

83,600

10,276.8

2011 28,391.3

47,343.2 14,317.1

17,695.9

13,892.0

83,200

33,182.0

2012 30,426.8

53,641.3 15,224.7

19,010.1

15,428.7

80,500

48,369.5

2013 32,218.4

57,072.6 16,416.8

19,917.2

16,392.0

80,200

49,750.1

2014 34,124.4

59,746.9 17,042.6

20,639.2

17,038.7

73,600

50,107.5

2015 35,361.2

66,581.6 17,326.0

21,432.5

17,771.0

67,000

50,472.2

5171

2016 37,929.7

74,391.6 18,088.8

21,889.3

18,451.0

–

50,847.0

2017 40,293.0

117,681.0 18,784.0

22,724.0

19,300.0

_

51,255.0

Source The 1989–2008 data were from the China Labor Statistical Yearbook 2009. The 2010–2016 date were from the China Statistical Yearbook 2017. The data of the new rural cooperative medical care (new rural co-op) were from the China Public Health Statistical Yearbook 2009. The data on urban and rural old-age insurance before 2010 only include the rural old-age insurance and the data of new rural co-op were from the annual statistical communiqués of labor protection. The 2010–2015 data of new rural co-op were from the annual statistical communiqués. After 2010, the enrollment in the new rural co-op decreased because some provinces and cities included both rural and urban residents in the urban and rural medical insurance schemes. The 2016 enrollment in the basic urban medical insurance included 448.6 million urban residents and 295.316 million urban employees. Due to the integration of the urban and rural medical insurance, the new rural co-op saw a decreased enrollment and no data were released after 2016. However, those who are not included in the statistics are usually covered by the new rural co-op (medical insurance for residents). The 2017 data were from the Statistical Communiqué of Human Resources and Social Security Development 2017, by the Ministry of Human Resources and Social Security of the People’s Republic of China at http://www.mohrss.gov.cn/ghcws/BHCSWgongzuodongtai/201805/t20180521_294290.html

326

Y. Wang

Fig. 1 Changes in the enrollment in social insurance plans 2013–2017

young and middle-age adults. Unfortunately, however, the 10-year period of 1966– 1976 interfered with and damaged further development, leading to chaos in the education system for a time, almost complete discontinuation of higher education and severe downgrading of the overall education quality. In 1977, the national college entrance examination was restored, a signal that China was about to restore the right and correct the wrong in education and also drawing the curtain for the reform and opening-up. With the progress in the reform and opening-up and constant increases in the government input in education, China saw soaring leaps in the development of education. In the early 1980s, education fund was diversified by changing the previous mode with the government as the only investor to a mechanism with the government, society and families sharing the cost of education together. The education funds were now raised through multiple channels, proving new resources for various forms of social and higher education. In the mid-1980s, higher-education schools started to implement an institution that allowed enrollment of public-funded, self-funded and hiring unit-funded students, allowing the schools to charge a fee to students not covered by plans. Meanwhile, the government encouraged various schooling forms funded by social sectors, breaking the mono-type education system with only public schools. In the mid-1990s, the noncompulsory education phases were no longer free, and higher-education institutions implemented a unified mechanism to charge school and housing fees based on a specified proportion of their costs, while the public schools charged a small amount of miscellaneous fees to students in the compulsory education years. Starting from the implementation of these mechanisms, educational funds began to be raised through a variety of channels including the government expenditure on education, money from social groups, personal education funds of citizens, social donations and financing, school and miscellaneous fees and other sources. After the Asian financial crisis in 1997, large-scale expansion of enrollment in higher-education institutions became an important strategic measure and policy objective to expand the domestic demand. At

Social Security: Establishment and Equalized Provision …

327

the time, the government did not have a strong treasury, and the market mechanism that had shown successes in the economic development was transplanted directly in education and healthcare. While provision of basic education was continued to be consolidated, “industrialization of education” was pushed forward both as an idea and practice. Due to the significant expansion in the enrollment of highereducation institutions, there showed a rapid increase in the education input both by the society and families. Introduction of the mechanism to share the cost of education and the increased revenue in non-government education channels also lent a strong financial support to the rapid development of education. Consequently, China saw two in-advance developments in the generalization of compulsory education and massification of higher education at the turn of the twenty-first century, which helped improve the efficiency of education services to a degree. However, excessively growing education fees were beyond the capability of many urban and rural residents, and became a heavy load to the society. Although some policies were made to help students in poverty to complete schools at the time, there lacked for a long time a unified support system for students in poverty, leading a large number of school-age children and adolescents to drop out of school due to poverty for a certain period of time.7 Meanwhile, the reform on the treasury and taxation systems that was carried out during the same period resulted in a high unbalance of education input between urban and rural and different areas, and together with an excessively low input and management level of basic education and long-term lack of responsibilities and input in rural education by the government, the “people’s education by the people” was de facto the “rural education by peasants”. Due to historical, natural and economic conditions, and particularly under the guidance of the policies of “development with focuses” and “gradient development”, an institution was formed for the distribution of education resources favoring key schools in that key primary, middle and highereducation schools had the priority to receive government funds for education while those non-key schools were faced with a lack of support for a long time. In this period, education services were increasingly less fair and more unevenly beneficial, which was in a strong contrast to the rapid development of education, further leading to issues such as difficulty in choosing schools, school overload for primary- and middle-school students and unmanaged charges in the name of education. Discontent grew in the entire society. After 2000, China paid more attention to making sure that education was fair and balanced. The efforts to promote education in this period were characterized with promotion of equalization of education services, and the implementation of a series of special policy incentives and the measure of transfer payments facilitated education in rural central and western areas as well as regions with under-developed education. In 2003, the Central Committee held a “National Work Meeting on Rural Education” and required to place the work related to rural education in top priority as important as a strategic position. Subsequently, students receiving the compulsory education in 7A

large-scale survey on compulsory education conducted by the National Center for Education Development Research in 1994–1995 showed that the top reason for children to drop out of school in impoverished areas was family poverty.

328

Y. Wang

rural schools were exempted from school fees and miscellaneous fees nationwide, and the cost of compulsory education was fully included in the budget of the governments at all levels, leading to the truly and completely free nine-year compulsory education. In fact, the implementation of the nine-year compulsory education strategy is one of the greatest achievements in education in China. After the mechanism was established to cover the cost of compulsory education by the government, China became further aware of and resolute about promoting fair education as a basic State policy. Relevant institutions and mechanisms were formed in steps, and the specific designs for the basic public education services were included in the 12th and 13th Five-Year Plans (FYPs), the basic State system of public services, which covered eight dimensions of free compulsory education, nutritional supplement for rural students receiving compulsory education, living subsidy for boarding students, subsidy for pre-school education for all, State grants for middle-level vocational education, exemption from school and miscellaneous fees for middle-level vocational education, State grants for standard senior high schools, and exemption from school and miscellaneous fees for senior high-school students with documented family poverty. In 2017, the report at the Party’s 19th National Congress further specified the strategic goal of promoting education as a priority, with the goal to “push for the integration of urban and rural compulsory education and wide coverage of standard senior middle school education and strive to allow every child to enjoy fair and quality education”, while it was required to better and “improve the student-support mechanisms to allow the majority of newly grown laborers in both urban and rural areas to receive senior middle school education and more to receive higher education”.8 Under the condition that the government paid much attention to and added to the input in education, China’s education had rapid development after the reform and opening-up through sustained reform. The numbers of schools, teachers and students kept growing, the education structure was constantly optimized, and China fulfilled its goal of reaching full coverage of compulsory education ahead of time with big leaps in the development of senior middle school education, massification of higher education and sustained improvement in the quality of teaching and research in the background of a large population and vast number of laborers. After 1978, the enrollment in the primary school was never below 95%, the enrollment in the junior middle school was nearly 80% in 1995 and increased to over 90% after 2002, and the enrollment in senior middle schools was 33.6% in 1995 and was improved to over 70% after 2008. The most significant change was observed in higher education, where the national enrollment in three- or more-year colleges was 856 thousand in 1978 and increased to 27.536 million in 2017, while the enrollment rate was improved from 3.4% in 1990 all the way up to 10.5% in 1999 and 40% in 2015 (Table 7), demonstrating big leaps and a galloping progress. China has become a truly big power in education and is now actively progressing towards a strong one. 8 Xi,

Jinping, Decisive Victory in Building a Moderately Prosperous Society in All Respects and Strive for the Great Success of Socialism with Chinese Characteristics for a New Era: Report on the 19th National Congress of the Communist Party of China, People’s Publishing House, 2017, pp. 45–46.

14,627

13,370

12,241

13,195

13,013

10,864

9941

9692

10,094

1985

1990

1995

2000

2005

2010

2015

2017

4442

4312

5279

6215

6256

4727

3917

4010

4552

4995

3952

4031

4665

4009

2486

1943

1481

1217

1556

1766

2,754

2,625

2,232

1,562

556

291

206

170

114

86

7300

7086

7448

8358

10,355

11,010

10,707

–

–

–

3213

3152

3955

4781

4969

3945

3426

–

–

–

Junior Middle

2861

2965

3504

3070

2000

1610

1337

–

–

–

Senior Middle

2576

2524

2189

1613

723

457

326

–

–

–

Higher Education

98.8

98.2

98.7

98.4

94.9

90.8

74.6

68.4

75.9

87.7

Primary

94.9

94.1

87.5

69.7

51.2

48.3

40.6

41.7

45.9

40.9

Junior Middle

–

92.5

83.3

76.3

73.2

49.9

27.3

–

–

–

Senior Middle

% Students continuing school

45.7

40.0

26.5

21.0

12.5

7.2

3.4

–

–

–

Higher Education

Note The percentage of those who continued to higher education was the “gross” enrollment rate of higher-education institutions, i.e., the ratio of the number of students schooled to the number of population of this age interval specified by the government (18–22 years of age) Source National Bureau of Statistics, China Statistical Abstract 2018, China Statistics Press 2018, pp. 177–181

14,624

1980

Higher Education

Primary

Senior Middle

Primary

Junior Middle

Students schooled/10,000 people

Students schooled (10,000)

1978

Year

Table 7 China’s development in education, 1978–2017

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3.2 Characteristics and Achievements of the Equalization of Basic Education Services First, the idea of “education as the first priority” has taken root in people’s mind step by step. Input in education is an important measurement of whether education is treated as a priority in a country or region. In 1993, the Outline of Education Reform and Development in China made it clear to “take steps to increase the proportion of the government expenditure on education out of the gross domestic product to reach four percent by the end of the this century”. The goal, unfortunately, was not fulfilled due to various reasons. In 2010, the Education Planning Outline reinstated the goal and specified to “increase the proportion of the government expenditure on education out of the gross domestic product to 4% in 2012”. This time, with sustained efforts, the national treasury granted 2.1994 trillion RMB for education funds in 2012, accounting for a percentage of the GDP over 4% for the first time. The proportion has stayed above 4% since then. At the Third Plenary Session of the Party’s 18th CCCPC, the principle was established to “disconnect the key expenditure with fiscal balance increases or GDP” while the government expenditure on education was still specified to remain at or above 4% of the GDP, demonstrating the strong resolution of the CCCPC to develop education as a priority. Second, the compulsory education was made fully and completely free. China always treated expansion of education coverage as the most important when making strategic key points for the development of education. From 2005 to 2006, a new mechanism was established where the central and regional governments shared the cost of rural compulsory education based on projects and a certain ratio to ensure the adequacy of rural education funds. With the new mechanism, all fees, schooling and miscellaneous, were no long charged of students in the compulsory education stage in all rural areas, while the government subsidized the schools for general cost, school maintenance and renovation, free provision of textbooks and the living expenses for boarding students. Statistics show that nearly 200 thousand students who had dropped out of school due to poverty went back to school in the year when the policy was implemented.9 In 2008, the schooling and miscellaneous fees were stopped in urban areas, and compulsory education was then fully covered by the government treasury, realizing a free compulsory education in the very basic sense. With sustained efforts, by the end of 2011, compulsory education had achieved full coverage in all 31 provinces (autonomous regions and municipalities) and the Xinjiang production and development military group in the country, and the illiterate rate among young and middle-age adults had dropped to 1.08%. This was an important milestone in the history of education development in China, marking the delivery of the promise China made to the international community and fulfillment of the goal in advance proposed in the “Dakar Agenda for Action” by the UN’s Education, Science and Culture Organization (UNESCO) in 2015 to provide free, quality primary education 9 Yuan, Guiren, ed., “Education Is the Root of Centennial Development: A Review on the Education

Reform and Development Since the Party’s 16th National Congress”, People’s Publishing House, 2012, p. 112.

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to all children, while providing China’s wisdom in education massification to other countries. Meanwhile, in order to check the urban–rural, regional and inter-school gaps that tended to widen, especially to address the issue of primary- and middleschool selection that became increasingly intricate, the Party and government started to push for balanced development as an important part of supporting the compulsory education, and required that public schools in the compulsory education stage enroll students in the vicinity without any tests while pushing for normalization of compulsory education schools and institutionalization of teacher exchanges. The data from the 24 big cities that were under intensive surveillance showed that students in the compulsory education stage all enrolled in schools in the vicinity without a test, and that the enrollment was based on district, normalized and supervised properly, among which, 99% of the kindergarten students enrolled in primary schools nearby in the 19 hot-spot cities and 97% of the primary-school graduates enrolled in a junior middle school nearby. Third, preschool, vocational and higher education was intensified step by step. People had long complained about the difficulties and high cost to enroll in preschools, and in response to the complaint, the State Council publicized three Three-Year Action Plans for Preschool Education in three years in a row from 2011, to increase the preschool education resources in various forms, train the teaching staff for preschools in various ways and to add to the input in the preschool education through multiple channels. The central treasury set up a special fund of more than 100 billion RMB to support the remodeling of old preschools and establishment of private preschools in the rural areas in central and western China. In 2016, the gross enrollment rate of the three-year preschools reached 77.4%, and the proportion of the students newly enrolled in primary schools who had received preschool education reached 98.4%. The rapidly growing coverage of preschool education provided a solid ground for an equal start in the society. In terms of vocational education, China has paid intense attention to it since 2002 and reiterated to treat vocational education as an important base for socioeconomic development and a strategic foothold for education. China has established the world’s largest system of vocational education that faces the society and the market, and the principle of vocational education is to provide services, it is aligned with employment, and it is closely associated with employment promotion and poverty elimination. There are now 12.3 thousand vocational schools nationwide, which provide about 100 thousand specialties, enroll 9.3 million people, have 268.2 million students in school and finish more than 100 million trainings every year. In areas such as the modern manufacturing, emerging strategic industries and modern services, more than 70% of the newly employed personnel working at the frontline are graduates from vocational schools. The rapidly developing vocational education has not only provided human resources to the economic development, but widened the channels for people to move up the social ladder as well. Higher education has also widened its coverage quickly while it is constantly made equally accessible to all. In 2008, the “Cooperative Plan to Support the Enrollment of General Higher-Education Institutions in Central and Western Areas” was initiated, and the difference in the enrollment rate between the central/western province with the lowest rate and the national average

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has since been reduced to within 5 percentage points. In 2012, national key highereducation institutions started to enroll students from rural and impoverished regions within the national, local and institutional special programs, and a cumulative 274 thousand students have since been enrolled from rural and impoverished areas under these programs. Fourth, education was significantly improved in rural, remote, border and impoverished areas as well as areas populated by ethnic minority groups. China has made sustained efforts to increase the education resources in these areas. One such effort was increased protection of right to education in the under-developed areas by special education programs, urban–rural compulsory education, sharing the funds to subsidize students and increased transfer payments from the central to local governments in special education expenditure. A second effort was to improve the overall competence and salaries of rural teachers by adopting the policy of free education for students in normal schools, national training programs for primary and middle school teachers and building temporary lodges for teachers in rural schools in remote and impoverished areas. In particular, the policy to provide living subsidies for rural teachers was implemented in September 2013, which now covers 708 clustered areas and counties in extreme poverty and benefits more than 1.3 million people, with the highest subsidy reaching 2000 RMB per person per month. In fact, in areas where the subsidy is high, there even emerged a “reverse flow” of teachers from urban to rural areas. A third effort was to push for balanced distribution of education resources through full reform, exchange and rotations of school principals and teachers, programs to support rural teachers, education by private groups, recruitment of teachers by schools while management by counties and informatization of education. A fourth effort was to increase the regional education cooperation among the eastern, central and western regions, programs of one-to-one support to the higher education in western areas, facilitating education in the Xinjiang Uygur Autonomous Region, the Tibet Autonomous Region and the Zang area in Sichuan province. As a result, the major education measurements in the west and areas of ethnic minority groups are closing their gaps with the national averages. Fifth, the right to education was well protected for special groups. After the new mechanism of raising the compulsory education fund was established, the State did not waste any time to turn to subsidization of the non-compulsory education. After years of efforts, a national system of policy support completely covering all stages from preschool to post-graduate education was set up, fulfilling the stately promise that “not a single student shall drop out of school due to family economic difficulties”. In particular, the nutrition improvement program implemented in 2011 has subsidized more than 36 million rural students in the compulsory education years for nutritional and dietary improvement in the 699 State-level clustered areas in extreme poverty, for which the central treasury managed for a total of 159.1 billion RMB to be allocated. Since 2003, following the policy of “management mainly by the government of the immigration region and establishment of mainly public full-day primary and middle schools”, all regions have made active efforts to arrange for children of urban immigrant workers to receive compulsory education, and the proportion of these children studying in public schools have remained above 80%. In 2017, about

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140 million urban immigrant workers saw their co-immigrant children having “two exemptions and one subsidy” and the base amount of the public education fund per student was allowed to transfer with the children as they moved to cities and towns with their parents. Meanwhile, more efforts were made to build boarding schools to meet the demand of the students who had not moved to cities and towns with their parents, as well as an education, management and service network involving the government, community, school and family. The “Education Regulation for the Disabled” was also amended to improve the mechanisms to provide protection for special education. At present, more than half of the disabled students are studying in regular schools, and an education system for the disabled is being formed that integrates school, family and social education. In the Chinese culture, education is highly valued. Through sustained efforts since the reform and opening-up, China’s education cause has undergone fundamental changes. A modern national education network including preschool, primary, middle and higher education is in place and is relatively good in China, giving China the world’s largest education system, with particularly important achievements in the coverage, depth and contents of the basic public education services in that the effort to push for equal access to the services has achieved significant effects. First, the overall opportunity for citizens to receive education has significantly increased. When the PRC was just founded, 80% of the population was illiterate. In this background, China kept enlarging the education coverage to provide growing protection for the citizens to be educated. By the end of 2016, China had owned the world’s largest education system, with 512 thousand schools and 265 million in-school students; the gross enrollment rate was 77.4% for preschools, the net enrollment rate was 99.9% for primary schools, and the gross enrollment rate was 104% for junior middle schools with the consolidation rate of the nine-year compulsory education being 93.4%, 87.5% for senior middle schools, showing that senior middle-school education had practically reached full coverage, and 42.7% for higher-education institutions, showing a near-massification level of higher education. Overall, the education programs at all levels and of all types in China are above the average level of mid-high income countries and the overall education level of China is above the average among the world.10 Second, people have felt a significantly stronger sense of gain. Equalization of access to the basic public education services must directly address the complaints of people in order to target specific issues. With the basic public education services becoming more and more equalized, education has integrated into people’s lives, which is manifested directly as the real demand, expectation and feelings of education by people. The National Institution of Education Sciences conducted the second satisfaction survey on basic education from September to October, 2017, and the

10 “The Education Choice of the Times in China: A Review on the Achievements in Education Reform and Development since the Party’s 18th National Congress (Quality Improvement)”, China Education Daily, October 17, 2017.

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results showed that the overall satisfaction index of the national education development was 76.09, and that of local basic education development was 72.82, showing wide-spread satisfaction among people. Third, education has played a growing role in promoting social fairness. Education services have become more and more accessible to the entire population, playing a positive role in adjusting social wealth distribution and promoting people to move up the social ladder in that many social members have changed their whole lives through education. The education system has kept enlarging, producing new laborers that have received senior middle-school education or higher while vocational education provides nearly 10 million technical or skilled talents for all industries and positions every year, among whom most grew up in mid- and low-income families. Not only has the current demand for laborers been satisfied, but people growing up in midand low-income families may also obtain more satisfactory incomes by participating in the labor market effectively. According to the longitudinal study on the nutrition improvement programs for rural students in the compulsory education years by the Center for Disease Control and Prevention (CDC) in China, in the regions where the nutrition improvement programs were trialed, the average height of all age groups was 1.4 cm higher for girls and 1.6 cm higher for boys in 2016 than in 2012, and the average weight, 0.9 kg and 1.0 kg more, respectively, which both exceeded the average increases of national rural students. Meanwhile, the anemia rate dropped from 17.0% in 2012 to 7.6% in 2016.11 Fourth, education has offered more choices that are growing by the day. Equalized basic public education services are by no means simply averaging the services for all, but should be based on protection of equal opportunities and provide a good variety of services to people. Now China has a complete education system. Longitudinally, preschool, primary, middle-level, higher-level, pre-vocational and post-vocational education programs line up seamlessly, and at the cross section, general, vocational and continued education are connected with each other. Privately-owned education programs have grown constantly. In 2016, private schools accounted for 33.4% of all the schools in China and the number of students studying in private schools accounted for 18.2% of all in-school students nationally. Meanwhile, the reform on the examination and enrollment mechanisms was constantly pushed forward, which has led schools to come up with innovational methods to train talents and to provide diversified choices for students to learn. It should also be noted that more and more families, with growing incomes, chose to fund their children to study abroad for more quality education. In 2014, a total of 459.8 thousand people went abroad for study. China is now amid the largest tide of studying abroad in history and has become the largest country to export students in the world.12 11 “Nutrition Improvement Programs Shape the Future of Our Nation”, website of the Ministry of Education, http://www.moe.gov.cn/jyb_xwfh/xw_fbh/moe_2069/xwfbh_2018n/xwfb_20180627/ sfcl/201806/t20180627_341250.html. 12 “Steady Increases in the Number of People Studying Abroad and China Has Met the Largest Tide of Study Abroad”, the website of the Department of Education, Yueyang City, http://www.yueyang. gov.cn/jytyj/22483/22495/content_52139.html.

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Fifth, education has shown a significantly stronger support to the socioeconomic development. Equalization of access to the basic public education services cannot exceed the development stage or the reality of the socioeconomic development. Instead, it must play its due role in supporting the socioeconomic development to be truly viable. With education reaching full coverage, the newly grown laborers in China has now completed an average of more than 13.3 years of education, which corresponds to the first year of college. Meanwhile, the backbone of China’s new laborers are made up of people with higher and middle-level vocational education, providing a solid talent pillar to the economic development. Higher education has also played an active role in scientific innovation and services. Higher-education institutions have won more than 60% of the three great national awards in science and technology and secured more than one fifth of the patents granted nationwide, while the various science and technology parks based on the support of higher-education institutions have become the main aggregation places to start up innovation business and for maker spaces.13

4 Establishing a Medical Security System to Promote Sustained Development of Basic Public Health Services The reform and development of China’s basic public health system have achieved significant effects since the reform and opening-up. The major efforts involved include provision of widely accessible medical services to the people by developing the public health system, improving the production capacity and business activity of medical and pharmaceutical enterprises by constantly deepening the reform, driving the medical services to be fairer by developing and improving the medical security mechanisms for employees and residents, and pushing for sustained improvement in people’s health status by developing public health services and promoting healthy life styles. Both in the command-economy era and after the reform and opening-up, China had an average life expectancy that was well above those of the countries with similar development levels, and its overall performance in public health services was well recognized among the international community. Of course, China promoted different reforms on the medical and pharmaceutical systems in different periods of time and kept exploring the optimal policies for public health and means and ways to develop public health services to adapt to the evolving economic system and national governance structure.

13 “Introduction by the Ministry of Education on the Education Reform and Development in Our Country since the Party’s 18th National Congress According to Data”, website of the Ministry of Education, http://www.gov.cn/xinwen/2017-10/10/content_5230685.htm.

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4.1 Establishing a Medical Security Institution with Wide Coverage in Steps An institution to provide security in medical care is an important part to the social protection system in the modern society, and it also guarantees fairness in healthcare. In the command-economy era when the economic development was at an extremely low level, China established the labor insurance medical care system for urban enterprise employees, the cooperative medical care system for peasants, and the publiclyfunded medical care system paid by the government for public service employees. These three medical care systems provided some basic protection for urban laborers, peasants and public service employees. The economy was in difficulty at the time, and the government could only afford an overall low level of investment in public health, but the basic public health system and the three-layer healthcare service system together played a significant role in providing healthcare to the urban employees and residents and, in particular, rural residents. After the reform and opening-up, the micro-economic mechanisms previously under the command system were gradually marketized. The rural collective economy was weakened, and the reform on SOEs was brought to deeper levels, leading the pre-existing labor medical care system and the cooperative medical care system to fail to function. In the 1980s, the government started to implement policies to allow pharmaceutical products to be overpriced by a certain percentage to support medical care by the pharmaceutical profits, and decided to take mainly marketoriented measures to raise funds for medical institutions to develop and to promote the public health services. In the 1990s, especially in the mid-1990s, the cost of medical services post-marketization soared high rapidly and more and more people found it difficult to obtain medical services despite the sustained increases in incomes, which were well left behind by the increases in the medical cost. In addition, a large number of patients lost protection of medical care and had to pay out of their pockets for medical services, highlighting the problems of difficulty in seeking medical services, high medical cost, and dropping or returning to poverty due to diseases. How to provide basic healthcare security to employees and residents as medical services kept improving in capacity then became an important social and even political issue. In the mid- to late 1980s, China started a sustained and arduous exploratory reform centered on this issue, i.e., reforming the three institutions of medical security, medical and public health services and production and distribution of pharmaceutical products. Among the three institutions, the medical security institution was the core and central piece of the system reform of China’s medical and healthcare systems. Four major fields were involved in the reform, i.e., public health security, basic medical insurance for employees, basic medical security for residents, and medical relief for the impoverished. The first field of reform was the public health system for prevention of infectious diseases, for which the government should be fully responsible. The Chinese government gave high priority to this field and took careful steps to establish and improve the security system of financial input, risk management mechanism and a

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series of laws and institutions. In the command-economy era, China made significant achievements in and learned abundant experiences from the prevention and control of large-scale epidemics, infectious diseases and regionally epidemic diseases. After the reform and opening-up, particularly after being tested by the SARS and avian influenza, the Chinese government added to the financial investment and built a professional institution of public health with the CDC playing a central role. China also invested considerable efforts in controlling emerging infectious diseases such as the AIDS by constantly escalating the efforts to combat “pornography, gambling and illegal drug use”, controlling the transmission of infectious diseases by blood and drug use, and investing more in the development of AIDS drugs. Drawing on the historical lessons and following through the guiding principle of prevention as priority, China continued to promote campaigns of national health, smoking control and health education to ensure the overall health of the people. The second field of reform was the establishment of the basic medical insurance system for employees. This reform was in the same pace with the reform of the social security institutions, and the trials were started in the late 1980s, and in 1998, the State Council issued the Decision to Establish a Basic Medical Insurance System for Urban Employees, which required to set up a basic medical insurance system with a social pool and individual accounts that would cover all people working in enterprises in cities and towns. Despite many controversies and even problems, the basic medical insurance system for urban employees that combined social pooling and individual accounts was born from explorations during the reform, which, together with the basic old-age insurance system for urban employees, became one distinctive feature of China’s medical and social security network. Following the institutions of the system, a growing number of urban employees, including the retired, joined in, leading the coverage of the insurance to keep widening and the basic insurance level to constantly increase. In 1998, 18.776 million people were covered by the insurance, and the number grew to 199.95 million in 2008, 295.31 million in 2016 and 303.23 million in 2017. The combined revenue and expense of the basic urban medical insurance fund also grew continuously, from 38.33 billion and 24.41 billion RMB in 2000 to 430.89 billion and 353.81 billion RMB in 2010, respectively. In 2017, the total revenue and expenditure of the basic medical insurance fund were 1.7932 trillion and 1.4422 trillion RMB, respectively, with a cumulative balance of 1.3234 trillion RMB (including the cumulative balance of 353.5 billion RMB of the basic medical insurance funds for urban and rural residents as well as the balance of individual accounts of 615.2 billion RMB) according to the Ministry of Human Resources and Social Security.14 The fund of the basic medical insurance for urban employees is the major part of the national medical insurance fund, and it covers about only a quarter of the national population. Thus it overall has a high rate of policy-backed reimbursement and medical insurance benefits.

14 “Statistical Communiqué of the Development of Human Resources and Social Security, 2017”, website of the Ministry of Human Resources and Social Security, http://www.mohrss.gov.cn/ghcws/ BHCSWgongzuodongtai/201805/t20180521_294290.html.

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The third field of reform was basic medical insurance for residents. In October, 2002, China clearly stated to actively guide peasants to establish a new-type cooperative medical care system based on pooling funds for severe diseases. This system emphasized the role of the government in raising and managing funds. After trial and error in restoring the cooperative medical system for years, China eventually identified the insuring body to provide protection for peasants after the conventional rural collective economy was completely disrupted, hence the name, new-type rural cooperative medical care system. In 2007, the new-type rural cooperative medical care system was expanded to cover 86% of the national counties and a total of 730 million peasants were covered, leading to a participation rate of over 70%. In 2008, the new-type rural cooperative medical care system covered 814 million peasants, with a participation rate of 91.5%. Afterwards, the rate remained above 95%. China also made faster steps to set up the basic medical insurance system for urban residents following the requirement of “fully pushing for the establishment of the basic medical insurance for urban employees, basic medical insurance for urban residents and new-type rural cooperative medical care system”. This medical insurance system for urban residents was started to be trialed in 2007 and was practically in place in 2011. By the end of 2011, nearly 1.3 billion people had been covered nationwide, accounting for more than 95% of the population. A nationally covering medical insurance system was now in place. By 2017, China’s basic medical insurance schemes had covered 1.35 billion people, and the scheme for urban residents and that for rural residents were basically unified. The major method to raise funds was “government subsidy combined with individual contribution” for both the new-type rural cooperative medical care system and the basic medical insurance for urban and rural residents. The part raised by the government grew most rapidly, accounting for more than two thirds of the medical insurance funds and thus making the government take the major role in fund raising. After the Party’s 18th National Congress, faster steps were taken to integrate the new-type rural cooperative medical care system and the basic medical insurance for urban and rural residents following the principle of “coordinating the urban and rural pools” to result in one “basic medical insurance system for residents” with further increased government subsidies. In 2017, the government subsidy for the basic medical insurance system for urban and rural residents was increased to 450 RMB per person from 240 RMB in 2012, and 50% and 70% of the outpatient visits and inpatient care, respectively, within the policy-allowed services were eligible for reimbursement.15 Based on the 20-year exploration before the reform and opening-up, China established a basic medical insurance system covering the largest population in the world in a short period of 20 years from 1998 to 2017 (Table 8). The basic medical insurance for residents covering both urban and rural areas is the most prominent achievement of China’s effort to equalize the access to the basic healthcare services in terms of the establishing speed, number of people covered and scale of increases in the government expenditure. 15 Research Office of the State Council, ed., A Companion to the “Government Work Report” at the First Plenary Session of the 13th National People’s Congress (2018), People’s Publishing House, 2018, p. 106.

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Table 8 Coverage of China’s basic medical insurance schemes Year

Basic employee medical insurance

Basic resident medical insurance New-type rural cooperative

For urban and rural residents

# Covered (10,000)

# Covered (10,000)

# Covered (10,000)

% Covered

% Covered

% Covered

1995

745.9

3.84

1998

1877.6

8.69

2000

3786.9

16.36

2003

10,901.7

37.39

–

2005

13,872.9

41.55

1.79

76.7

2007

18,020.0

50.68

7.30

96.0

4291.1

10.07

2010

23,734.7

58.42

8.36

96.0

19,528.3

45.16

2013

27,443.0

60.74

8.02

98.7

29,629.0

64.88

2015

28,893.1

60.23

6.70

98.8

37,688.5

78.15

2016

29,531.5

59.97

–

–

44,860.0

90.14

2017

30,323.0

60.05

87,359

Source Compiled based on China Statistical Yearbook 2017. The coverage rate of urban employees is the ratio of the number of people covered to the sum of urban employees and number of the retired covered in the basic medical insurance; the coverage rate of the new-type rural cooperative is the ratio of the number of people covered to the number of people with rural household registration, and the relevant data in the table were from the annual statistical communiqués of the Ministry of Public Health. The urban resident coverage rate is the ratio of the number of people covered to the number of urban residents (those with urban household registration—urban employees covered in the employ scheme). Due to variable statistics and coverage overlaps, the coverage rates here are not accurate, but they serve as a reference for understanding the development progress of China’s medical insurance system. In 2017, the urban and rural basic insurance systems for residents were unified, and only the data from the communiqué of the Ministry of Human Resources and Social Security with no differentiation between urban and rural data or calculated coverage rate

The fourth field of reform was medical relief and medical insurance for severe diseases. There is always limitless space for further improvement in medical care and health promotion, and how to raise funds for medical services is also a major challenge for all countries alike around the world. China had to promote economic development while raising funds as much as possible for medical insurance and protection when the overall income was still low. Therefore, the medical insurance schemes had to be anchored as basic, and high-level medical benefits were not available for laborers and residents. At the time, personal funds still accounted for a considerable proportion of the expenditure on medical services. The resident medical insurance fund reimbursed only 50% of outpatient and 70% of inpatient fees, and individuals or families had to pay for more than 50% of the entire cost of medical services. Meanwhile, the lower the income of a family, the heavier the burden it had when facing severe diseases, and such families might even lack the capacity to join any basic medical insurance plan. The issue of a “drop or return to poverty” remained soring, which posed a challenge to the goal of the Chinese government to eliminate absolute

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poverty and to reach common prosperity in 2020. To meet the challenge of providing basic medical insurance for low-income groups, China chose to subsidize those with subsistence allowances so that as many people as possible would be covered by the new-type rural cooperative medical system or the basic medical insurance for urban residents, while exploring mechanisms to set up severe disease insurance to help alleviate the burden of overwhelming costs on the families facing diseases. In 2012, six ministries and committees including the National Committee of Development and Reform jointly issued the Guidance on Establishing Severe Disease Insurance for Urban and Rural Residents, which specified to set up an insurance mechanism for severe diseases to alleviate the burden of affected residents in urban and rural areas and that the reimbursement of the insurance should not be lower than 50%. In 2013, trials were initiated in some provinces and cities for severe disease insurance and emergency relief. In 2014, the severe disease insurance trial was expanded to all provinces and the medical relief institution was in place. In 2015, a medical relief institution for major and extremely severe diseases was established on the basis of the severe disease insurance. From 2013 to 2017, the severe disease insurance system reimbursed 12 additional percentage points of the insurance-compliant medical costs on top of the reimbursement by the basic medical insurance schemes, and more than 17 million people benefited from it.16 This reform enriched the medical insurance schemes in China, while at the same time, it addressed the issue that the low-income group might “drop or return to poverty” to a degree through institutional help. The medical institutions in the above four fields provide basic protection for people’s healthcare, and they bear two common features. One, they make up a medical security network with a comprehensive structure, vast number of people and wide coverage, ranking the first in scale among all medical security systems around the world. Two, the government played a significantly dominate role in establishing the four institutions when it continuously explored the institutions, mechanisms and formats adaptive to China’s conditions and kept adding to the investment in resources and finance (Fig. 1). China spent a total amount of 11.021 billion RMB on healthcare in 1978, and the amount grew to 4.634488 trillion RMB in 2016, among which the government expenditure on healthcare grew from 3.544 billion in 1978 to 1.391031 trillion RMB in 2016, while the proportion of the total expenditure on healthcare grew from 3.0% in 1978 to 6.23% in 2016 of the GDP (Fig. 2).17

16 Research Office of the State Council, ed., A Companion to the “Government Work Report” at the

First Plenary Session of the 13th National People’s Congress (2018), People’s Publishing House, 2018, p. 106. 17 National Bureau of Statistics, China Statistical Yearbook 2017, China Statistics Press, 2018, p. 722.

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Fig. 2 China’s total expense on healthcare and government expenditure on healthcare, 1980–2016

4.2 Developing the Medical and Public Health Services with Great Efforts Access to medical services of urban and rural residents depends on the consuming ability of the service consumer, which includes the funds and resources owned by the consumer and his/her family, as well as the funds and resources the government and society make available to the medical service system, especially the constantly growing medical insurance fund. Meanwhile, the access also depends on the supply ability of the providers of medical services, which includes the number and quality of medical institutions and personnel, as well as the facilities available, such as medications, consumables, equipment and services required by or involved in the medical service a consumer is seeking. The supply ability involves both quantity and quality, and both are affected by the medical fund available. The medical insurance and relief network helps reduce the medical expenses of patients and provides affordable and relatively fair economic support for participants to obtain medical services, and the medical service system meets the basic medical demand of patients in technical aspects to ensure that both urban and rural residents receive treatment if sick. The medical service system does not rely on the government for direct financial support, but seeks funds from public medical institutions as well as private hospitals and socially-supported hospitals, and some medical services that do not involve in-patient care may be provided directly by healthcare practitioners. The supply and demand sides of medical services together shape the medical market of a country or region, and aside from the government that takes direct responsibility of supervising the market, the department of medical security and management also takes a role in price and quality management as a third-part paying system. Before the reform and opening-up, the Chinese government invested great efforts in healthcare to address the severe lack of doctors, medications, and supply of medical services, and motivated cities to give support to villages, built healthcare agencies

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Table 9 Status of China’s Healthcare Services, 1978–2017 (units: each, 10,000 beds, 10,000 people) Year

Total healthcare institutions

Hospitals

# Beds in healthcare institutions

# Healthcare staff

# Technical staff among healthcare staff

1978

169,732

9293

204.2

788.3

246.4

1980

180,553

9902

218.4

735.5

279.8

1985

978,540

11,955

248.7

560.6

341.1

1990

1,012,690

14,377

292.5

613.8

389.8

1995

994,409

15,663

314.1

670.4

425.7

2000

1,034,229

16,318

317.7

691.0

449.1

2005

882,206

18,703

336.8

644.7

456.4

2010

936,927

20,918

478.7

820.8

587.6

2015

983,528

27,587

701.5

1069.4

800.8

2017

986,649

31,056

794.0

1173.9

897.8

Source National Bureau of Statistics, China Statistical Abstract 2018, China Statistics Press, 2018, pp. 182–183

in all villages, trained healthcare professionals and “rural barefoot doctors”, studied the traditional Chinese medicine and traditional medical resources, and established a three-layer rural care and prevention network of healthcare services in “counties, countries and villages”, playing a positive role in maintaining people’s, especially peasants’, health. After the reform and opening-up, the Chinese government started to take advantage of the market mechanism and social resources to further develop healthcare on top of the conventional mode of government-supported medical institutions. Despite some controversies over certain policies in this period and some problems in certain aspects, the healthcare system and medical service capacity were overall improved rapidly. From 1978 to 2017, the numbers of medical institutions, beds, and technical healthcare staff showed increases by three to four times (Table 9). At the end of 2017, there were a total of 986,649 healthcare institutions nationwide, among which, there were 31,056 hospitals, 933,024 community-level healthcare institutions and 19,896 professional public health institutions. There were a total of 7.94 million beds, with 5.72 beds per thousand people in healthcare institutions. There were a total of 11.739 million healthcare staff, with 2.44 registered (assistant) doctors and 2.74 registered nursing practitioners per thousand people and 1.82 primary doctors and 6.28 public health professionals per ten thousand people.18 The medical and public health service network made up of hospitals, community-level healthcare institutions and professional public health institutions covering all urban and rural areas, which keeps developing and expanding, has rooted out the “lack of doctors and medications” and 18 “Statistical Communiqué of Healthcare in China, 2017”, website of the National Health and Family Planning Committee, http://www.nhfpc.gov.cn/guihuaxxs/s10743/201806/44e3cdfe1 1fa4c7f928c879d435b6a18.shtml.

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laid a solid foundation in material and technology for the provision of basic medical and health services to urban and rural residents. After decades of development, China’s healthcare service system formed its own unique features from practice and accumulated some experiences of promoting development through reform in different economic systems. First, the healthcare services in rural areas were given high priority with sustained efforts to build the three-layer rural healthcare service network. China, as a developing country, had a population mostly made up of rural residents for a long time. Without healthy peasants, China could never see a healthy population. From the establishment of the PRC, through the beginning of the reform and opening-up, to the new round of medical reform initiated in 2009, the Chinese government always paid close attention to the rural system of healthcare services. A typical example is the establishment of the three-layer rural healthcare network to keep adding to the medical resources at the grass roots. The three-layer rural healthcare network is headed by the county-level medical and public health institutions, with the village and township healthcare institutions as the torso of the network and village healthcare clinics as the base. The three-layer rural healthcare network takes on a variety of responsibilities such as prevention, healthcare, basic medical care, public health supervision, health education and technology support for family planning, and provides basic security for peasants to obtain healthcare. The rural healthcare network has been developed into a three-layer network at the county, country and village levels for medical care, disease prevention and healthcare, and is named as one of the three secret weapons of rural healthcare with the other two being rural doctors and the new-type rural cooperative medical care system. In 2004, the State proposed to make solid efforts to focus the medical and healthcare work on rural areas to improve the basic facilities and staff competence for the rural healthcare system to eliminate the lack of doctors and medications in steps. Second, disease prevention was given high priority and the public health system and community-level services were constantly strengthened. The county-level medical and public health institutions were designed to be made up of two systems, medical services and public health services. The SARS epidemic in 2003 made the Chinese government pay more attention to the community-level competence and the public health system, and the three-layer rural healthcare network and the urban and community healthcare services were given more financial support. In 2005, the central government arranged for three billion RMB government bonds to be invested in support of village and township healthcare institutions in central and western areas to improve the healthcare services there. In 2006, the government initiated the program to construct the rural healthcare system and the central treasury arranged for 2.7 billion RMB government bonds to be used in the construction of medical and public health infrastructure and community-level medical service system. In 2009, the central government vowed to make every administrative village have its own healthcare clinic within three years and allocated special funds for the remodeling and building of 23 thousand village and township healthcare institutions, 2,400 community healthcare centers, 1500 county-level hospitals, 500 county-level Chinese medicine hospitals and 1000 county-level maternity and infant care centers.

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In 2012, the Opinion on the Reform and Management of Village Healthcare Institutions was issued, which required that village healthcare clinics provide services for disease prevention, maternity and infant care, health education and rehabilitation for the disabled, as well as general medical care and referral services for common and high-frequency diseases and conditions while the village and township healthcare institutions serve as a bridge for lower and upper layers and provide general medical services and public health management. For the prevention and control of infectious diseases, a nationwide CDC system was established for strengthened public health services. Third, the medical reform was given high priority with sustained efforts to push for the reform and improvement in the mechanisms and institutions of medical care, medication and public health. After 1978, reform became another name of the times. Over the 40 years of reform and opening-up, China went through three stages in medical reform, i.e., establishing a market-oriented medical service system, establishing and improving medical insurance systems in steps, and comprehensively deepening the reform on the systems of medical, pharmaceutical and public health services. In each stage, the reform had its focuses, but all involved the three areas of medical care, medical insurance and medication. Link of the three medi-areas was a prominent characteristic of China’s reform on the medical and public health systems that was constantly brought deeper. The reform was overall effective, but it often led to new problems. When the problems built up to a point that demanded new reform measures, a new round of reform began. This is actually a routine of the international practice in the reform of medical and public health systems. Many countries make some adjustments and reform on their healthcare system every three to five or five to seven years, which also shows how complex the healthcare system is. China’s reform on the medical and public health system was overall proactive and had clear target in the beginning, with significant phased effects. The reform on the management system and mechanism expanded the supply of medical and public health resources, improved the accessibility and fairness of medical services, and promoted the performance of healthcare. In 2016, China initiated a full-scale trial of building multi-format medical care complexes to intensify the community medical services to provide convenient access to medical care for people. By the end of 2017, a total of 34,652 community healthcare centers (stations) had been in place nationwide, equipped with 437 thousand medical staff at the centers and 117 thousand at the stations. A total of 632 thousand village healthcare clinics were set up in the 554 thousand administrative villages nationwide, and the number of beds and the number of medical staff in village and township healthcare institutions per thousand rural population reached 1.35 and 1.42, respectively.19 Reform and development have complemented each other, and reform, in addition to increased input of healthcare resources, has become a major engine to drive the development of China’s healthcare services. 19 “Statistical Communiqué of the National Economic and Social Development of the People’s Republic of China, 2017”, National Bureau of Statistics, http://222.stats.gov.cn/tjsj/zxfb/201802/ t20180228_1585631.html.

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5 The Characteristics in Practice and the Chinese Model of Social Security and Public Services The 40 years of reform and opening-up were just a moment of history, but the years represent an important historical period in the modernization of China and the progress of the great reinvigoration of the Chinese nation, as well as a critical period when China went from “standing up” to “getting strong”. The reform and development of the social security and public service systems played an important role in the period as an integral part of the development of socialism with Chinese characteristics, and made significant contributions to the Chinese path, practice and model. A review on the development progress of China’s social security network and public services has produced rich practical experiences worth summarizing and analyzing. A few key points are described below. First, the social security network was always positioned to serve the basic demands, and it was coordinated with efforts to promote economic growth. China’s social security institutions started to be reformed and developed when the economy was underdeveloped, the economic growth was at a high speed, and the economic system and socioeconomic structure underwent rapid reformations. The social security network was initially positioned as something to support the economic development and match the SOE reform and the socialist market economy. This was the logic start of the reform and development of China’s social security institutions. In this period, China was concerned that a rapidly growing expenditure on social security would become a huge burden to drag down the economic growth, and determined that the institutions would only serve “basic needs”. Therefore, all institutional designs, such as the individual accounts, the deductible and the maximum reimbursement rate of medical bills, the housing provident fund and the national social security fund, were all based on individual savings in order to provide security for two generations. After 20 years of hard work, the Chinese people overall lived a prosperous life at the end of the twentieth century, but the emerging problems of widening gap of incomes, insufficient market consumption and lack of public services including education, public health and old-age care became more poignant. Therefore, the social security network and public services had a new goal to promote social justice, social harmony and economic growth. From 1998 to 2018, China input rapidly increasing resources in social security and public services, which gained significant development, and in just 20 years, a social security network and public services were in place in the developing country with the largest population and had the widest coverage in the world. The social security network and public services did not just play their due roles. They also facilitated the economic system reform, and made considerable contributions to the sustained healthy development of the national economy. The economic system reform provided a powerful engine for the reform of social security institutions, and economic development laid a solid foundation for the development of these institutions. Meanwhile, the social security institutions also promoted economic development directly and indirectly from multiple aspects. The reform of the social security

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institutions created a favorable social background for the reform of the economic system, pushed forward the reform of SOEs, and had provided basic protection of the lives of the over 30 million employees who lost their work posts in the SOE reform. The improvement in the social security institutions promoted the upgrade of human capital and economic efficiency, the increased benefits provided by the social security institutions boosted residents’ consumption, and the social security institutions played an important role as a “vibration absorber” and a “regulator” in the times of economic crises. In addition, the investment gains of the social security fund, construction of basic-need houses, medical service system and the old-age insurance system all promoted economic growth directly. The positive interaction between the economic development and social security improvement that was established during the reform and opening-up did not come easily, and how China achieved the interaction provides valuable experiences for other developing countries. Second, China always sought more development by reforming and established a modern social security network that accommodated to the socialist market economy. Reform was the main theme determined at the Third Plenary Session of the 11th CCCPC, as well as the underlying force to drive the development of social security institutions. For 40 years, the reform of social security institutions has strongly promoted the improvement and sustainable development of the institutions, and the design of the reform covered all aspects, among which the three major tasks, society-based management to replace hiring unit-based management, centralized management to replace fragmented management by multiple organs and pooled management with coordination to replace regional and urban–rural fragmentation, were completed, marking the transition of the social security institutions from the conventional command economy to the socialist market economy. In the commandeconomy era, management was based on each employer unit and social security was provided in the “State-unit” mode in that the life, death, sickness and old-age care of employees were all taken care of by the units while the units were responsible for all sorts of social security issues, including raising funds for social security, paying salaries, and management of relevant social security profiles. During the reform of the economic system, China proactively pushed forward the SOE reform to lessen their burdens and improve their viability, efficiency and competitiveness. In the design of matching measures to the SOE reform, China changed the social security mode and abolished the “State-unit” mode and adopted the social pooling management to realize society-based security institutions. The various types of social security affairs that had previously been handled by hiring units were transferred to society-based management in steps so that enterprises were freed from meticulous social security affair handling and it was put in the hand of professional social security department and management service agencies, all of which pushed forward the reform of SOEs effectively. Switching from unit- to society-based management was the first step of the reform of the social security institutions and it laid the foundation for the subsequent reform measures. In terms of administration, the previous fragmented management by multiple departments was centralized. In the beginning of the social security reform, the management was handled in a way of “multiple dragons managing one river” in that multiple departments and industries managed the social security

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issues for different populations or different issues of social security. For example, the Ministry of Labor was responsible for the social security management of urban employees, the Ministry of Human Resources was responsible for the social security affairs of government institution staff, the Organization Department of CCCPC was responsible for managing the social security issues for leaders, the Ministry of Civil Affairs was responsible for the social security in rural areas, the Ministry of Health was responsible for the management of the rural cooperative medical care, China Disabled Persons’ Federation was responsible for the well-being of the disabled, the Department of Logistic Support of the Central Military Commission was responsible for the social security affairs of the military personnel, and the Ministry of Finance, Ministry of Education, National Development and Reform Committee and Ministry of Housing and Urban Development all shared some responsibilities in the social security management. In addition, the People’s Insurance Company of China (PICC) managed the old-age insurance of all collectively-owned enterprises, and eleven industries, i.e., rail, post and telecommunication, irrigation and water management, electricity, China State Construction, coal and charcoal, petroleum, transport, nonferrous metallurgy, airlines and finance, all managed the old-age insurance affairs within their own industries. Such a layout of “multiple dragons managing one river” easily led to chaos in management and difficulty in accountability, which impaired the decision-making and implementation of the social security reform, integration of social resources, the fairness and efficiency of the social security institutions and the sustainable development of social security. In 1998, the Ministry of Labor and Social Security was established during the structural reform of the State Council, which integrated the functions of the previous relevant ministries such as the Ministry of Labor and Ministry of Human Resources, and five departments were set up in the Ministry to handle social security-related affairs, i.e., Department of Old-Age Insurance, Department of Unemployment Insurance, Department of Medical Insurance, Department of Rural Social Insurance and Department of Social Insurance Fund Supervision. “Social Security” became part of a ministerial title for the first time, showing the importance of the reform of social security institutions. In addition, the State Council issued the Notification on the Issues Related to the Provincial and Industrial Pooling of the Basic Old-Age Insurance for Enterprise Employees to Be Handed over to Local Departments for Management (Guofa [1998] No. 28), and the Ministry of Labor and Social Security (MLSS) and Ministry of Finance jointly issued the Notification on the Relevant Issues Regarding Industrial Pooling of the Basic Old-Age Insurance for Enterprise Employees to Be Handed over to Local Departments for Management (MLSS Document [1998] No. 80), which changed the fragmented management of social security affairs among industries and all relevant issues were handed over to the proper local departments for management. Then the social security management was no long fragmented among departments or industries, and became centralized, marking a critical step in the reform and development of the social security network in China. In terms of the macroscopic management, the fragmentation between regions and between urban and rural areas was also brought under reform to eventually form a system that was coordinated nationally between urban and rural areas and between different regions for nationally balanced and concerted development. Based

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on the Ministry of Labor and Social Security, China made another step to reform the management mechanisms of social security institutions to further straighten out the management and relevant connections of the institutions. In light of the management issues found in the reform and development practice of social security, China set up the Ministry of Human Resources and Social Security in 2008 to further integrate the social security responsibilities of relevant departments, including the integration of the rural social insurance function previously managed by the Ministry of Civil Affairs. This reform helped with the coordinated development of urban and rural social security coverage, promoted the social security network to be fairer, and laid an important foundation for building a fair, sharing social security network covering all urban and rural residents. In 2016, the urban and rural basic old-age insurance schemes were unified, and the basic medical insurance schemes for urban and rural residents were also integrated. Furthermore, the pooling and coordination were gradually elevated to higher levels for a fairer system of social security. For example, the basic old-age insurance scheme was first comprehensively managed at the prefecture level, which was later elevated to the city level, and finally to the provincial level, and the institution of setting up a central government regulating fund has been actively explored in practice in order to realize nationally-coordinated management of the basic old-age insurance scheme. Management of social security affairs at higher administrative levels helped change the regional and institutional fragmentation and further improved the fairness and efficiency of the social security institutions. Third, the government was always in a dominating position and the principle of joint development and sharing was always closely followed while the market and social forces were allowed to play their roles actively. Government dominance is the basic feature of a modern social security system as it is the fundamental guarantee that the system has a wide coverage and is fair. However, government alone without motivating social forces or playing the role of market mechanisms usually leads to a growing financial burden and stiff institution. In the case of China, the overtly stiff employment protection institution managed by hiring units started to be reformed with the reform of the economic system in the mid-1980s. In order to promote the SOE reform and achieve a viable hiring mechanism, China initiated the reform of labor contracting, cut the surplus laborers and improved efficiency while taking steps to reform the old-age institution for urban enterprise employees to introduce social pooling mechanisms on old-age funds and to explore the reform of a basic old-age insurance scheme for urban enterprise employees, resulting in a series of policy files in the 1990s. In 1991, the State Council required in the Decision on Reforming the Basic Old-Age Insurance Institution for Enterprise Employees to take steps to establish an old-age insurance institution that would combine the basic old-age insurance with enterprise complementary contribution and individual contributions of employees. The goal was to “change the mechanism that old-age insurance was entirely the responsibility of the State and enterprises and to adopt a mechanism with shared responsibility among the State, enterprises and employees where employees would need to pay certain fees”. The social insurance system thus became the backbone of the social security mechanisms in China, where the principle was to match right with duty, and enterprises, hiring units, and participating

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employees and families were all bound by relatively clear mechanisms of incentives and restrictions, laying the institutional foundation for the sustained development of the social insurance system. Similarly, active efforts were made to motivate social forces to develop social welfare, relief and service systems to build a multi-pillar and multi-layered social security and public service network. This was always an important principle in China’s development of social security institutions, and it played a positive role in several fields. Fourth, protection of survival and protection of development were always combined with efforts to alleviate poverty and policies to help increasing employment. In fact, the biggest challenge was always poverty, regardless of pursuing economic development or social security. China has always made active efforts to combat poverty, including the long-term poverty alleviation policies and the targeted poverty alleviation policies, in order to provide government guidance and social support for the impoverished to have improved capacity for self-development and to get out of poverty on their own hard work. Of course, for the impoverished who have lost labor capacity, the social relief system based on the provision of subsistence allowance plays a role of “bottom” protection. Similarly for employment, China has invested great resources in the unemployment insurance institution while actively making policies to help the unemployed to find jobs. During the period of SOE reform, the “two guarantees” played a positive role in protecting the right to survival of the laborers during the economic system reform. The social insurance institution was designed to protect the basic lives of laborers in special situations such as getting old, sick, disabled and unemployed and giving birth. The social welfare institution was designed to facilitate urban and rural residents to obtain a decent life and to improve their life quality. In addition, while improving the basic protection, China has also given more and more attention to the protection of development such as education, healthcare and employment to improve the competence of laborers and to promote the upgrade of human capital, thereby boosting the development ability and competitiveness of laborers. Fifth, laws were constantly improved, use of international experiences and new technologies was valued and the positive role of social security was played actively. China paid a lot of attention to law improvement during the reform and development of the social security institutions, and laws were made to define the responsibilities, rights and duties of relevant legal subjects, promote the optimization of management and operation mechanisms and shape and facilitate the sustainable development of the social security institutions. In the 1990s, the State Council issued a series of policies, laws and regulations such as the Unemployment Insurance Regulations, Regulations on Work Injury Insurance and Temporary Methods of Social Relief . In 2010, the National People’s Congress (NPC) promulgated the Social Security Law of the People’s Republic of China, and it took effect in 2011. In 2012, the Military Insurance Law of the People’s Republic of China was promulgated and took effect. To protect the welfare of the elderly, the disabled, women and children, the NPC

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promulgated the Law of the People’s Republic of China on the Protection of Disabled Persons, Law of the People’s Republic of China on the Protection of Minors, Law of the People’s Republic of China on the Protection of Women, Law of the People’s Republic of China on the Protection of the Rights and Interests of the Elderly and Charity Law of the People’s Republic of China, which were also amended as needed. The legal framework is a strong push to the social security network to develop rapidly and healthfully. Over the 40 years, China developed its social security institutions rapidly and the progress could not have been possible without learning and drawing on international experiences. China actually conducted abundant investigations and reviews on the different social security modes around the world, and took full consideration of the suggestions by international institutions, specialists and scholars, especially the comments and suggestions by the World Bank and International Labor and International Social Security Association. The multi-layer social security network, the combination of social pooling and individual accounts and the operational mechanisms of the social security network all had the input of other countries’ social security experiences. The design and implementation of the social insurance system also considered the relevant international technical experiences when, for example, the basic medication catalogue covered in the medical insurance and the catalogue of care services were being made, when the payment method of medical insurance was being reformed and when the decision was being made on how to invest the social security fund. In addition, the efficiency of the social security network was highly valued and modern technologies were applied constantly to keep informatizing the services for more accurate and efficient services of social security. After the 40 years of reform and opening-up, China’s persistent efforts to expand and optimize the social security institutions showed comprehensive effects, which are manifested as follows. First, the social security network helps combat poverty. The social relief system is very clear in terms of who may benefit from it, i.e., those in poverty, and it provides various comprehensive support to them as the “bottom” protection. Meanwhile, the social insurance system helps combat poverty on an even higher level by preventing it. Second, the social security network promotes re-distribution of incomes. Due to increased input in and improved benefits of social security, the social security network is now playing an active role in the re-distribution of incomes. In particular, the relief and welfare institutions directly adjust the distribution of incomes via the provision of welfare and availability to the public, while the social insurance system also plays an active role to a degree in re-distribution of incomes. Third, social security promotes social stability. This is actually an important demonstration of the roles of social security in the governance of the society. That is, social security plays an important role as a “vibration absorber” in the prevention and resolution of national crisis of survival and risk of poverty, as it did during the times

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of SOE reform and financial crises, demonstrating an active role in promoting social stability and harmony. Fourth, social security facilitates the realization of common prosperity. The social security systems and public services have overall boosted high the incomes and life quality for urban and rural residents and made significant contributions to targeted poverty alleviation, the triumph over poverty and common prosperity.

Income Distribution: Towards Integration of Equality and Efficiency Zhong Wei

The two most well-known theories involving income distribution are the one on the relationship between equality and efficiency and the one of an inverted U-shaped curve. Arthur Okun, when describing the relationship between equality and efficiency in his book, Equality and Efficiency: The Big Tradeoff , argued that one must trade equality with efficiency, and subsequent researchers followed his argument and treated equality and efficiency as a tradeoff. However, the tradeoff was questioned in some recent studies. The inverted U curve was developed by Kuznets when he studied the development courses of many countries around the world, and it describes that the income gap widens as an economy begins to develop and narrows as the economy keeps developing and reaches a certain level. These two theoretical hypotheses are still influential in the Chinese academics. However, the experiences of some East Asian economies showed that economic development did not invariably lead to a widening gap of incomes, which brought some to question the inverted U curve, while the tradeoff between equality and efficiency has not been validated in theory. The development course in China over the past nearly 40 years showed some characteristics of the inverted U curve, but they were different in one way or another from the curves of other countries. The evolution of income distribution in China did go through phases where efficiency was favored over equality, but with the stable governance party and governing ideals, China always took it serious to distribute the cake fairly while making all efforts to make the cake bigger, thereby giving the evolution a feature of integrated equality and efficiency.

Z. Wei (B) Institute of Economics, Chinese Academy of Social Sciences, Beijing, China © China Social Sciences Press 2021 F. Cai (ed.), The Chinese Approach, https://doi.org/10.1007/978-981-16-1899-4_12

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1 Strategy and Incentives to Vary Incomes: 1977–1987 1.1 Distribution to Each According to His Contribution Is a Socialist Principle When the reform was first started, there was just a small difference of incomes within both the urban and rural areas. According to the World Bank, both the urban and rural Gini coefficients of residents’ incomes were around 0.2. However, the difference between urban and rural areas was significant. Therefore, the income distribution in the beginning of the reform was characterized by the coexistence of small income differences within and a large difference between the urban and rural areas. Discussions about the idea of distribution to each according to his contribution already started in the 1950s when the free-supply system was abolished, and heated debates were focused on bourgeois rights, the principle of material interests and work compensation according to the amount of work. During the period of 1966–1976, some arguments by the “Gang of Four” further pushed the principle of distribution “to each according to his contribution” to the practice of egalitarianism. The separation of labor compensation from the contribution delivered a heavy blow to people’s motivation in production. To motivate laborers at the microscopic level to generate the macroscopic growth of the economy, adjustments regarding income distribution must be made to people’s minds and institutions. If “Practice Is the Only Standard to Test Truth” marked that China was to restore the right and correct the wrong in general immediately after the reform and opening-up was initiated, the big discussion on “distribution to each according to his contribution” should be deemed as the start of restoring the right and correcting the wrong in economics at the time. In the beginning of the reform and opening-up, there were particularly active discussions about the concept of distribution “to each according to his contribution” among people in the thinking and theoretical fields. Many important economists were involved, and four symposium meetings were held on the concept in a short period between the spring of 1977 and the winter of 1978,1 which constituted an important part of the movement to liberate people’s minds. On the second meeting, Su Shaozhi and Feng Lanrui submitted “A Rebuttal on the Erroneous Argument by Yao Wenyuan that ‘To Each According to His Contribution, Leads to a Capitalist Class”, in which they provided authentic interpretation on the concept with a large section devoted to criticizing the extreme “leftist” egalitarianism. Based on this paper, Deng Xiaoping instructed the Political Research Office of the State Council to draft a theoretical paper on the concept of “to each according to his contribution”. While the draft was being prepared, Deng Xiaoping met with the drafting members several times and gave important instructions. For example, on March 28, 1978, when talking to the lead of the Political Research Office of the 1A

Compilation of Minutes of the Four Meetings of the Symposium on the Concept of To Each According to His Contribution, China Financial & Economic Publishing House, 1979.

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State Council, Deng Xiaoping remarked, “‘To each according to his contribution’ means to distribute income based on the quantity and quality of labor. Following this principle, the labor quality and technological quality and contribution should be the basis for the decision of a worker’s salary level. Of course, the worker’s political attitude should also be considered, but one thing must be made clear that a good political attitude refers to good performance in the socialist labor and a big contribution. If the distribution is not primarily based on contribution, but on politics, it is not distribution to one’s contribution, but to one’s political attitude. In summary, distribution must be based on contribution, not on political considerations or years of service.”2 These remarks clearly defined the concept of distribution “to each according to this contribution”, and income distribution was restored to the base of contribution. The results of the symposium meetings combined with the thoughts of the decision makers at the Central Committee of the Communist Party of China (CCCPC) resulted in “Following the Socialist Principle of ‘To Each According to His Contribution’”. In this paper, some major consensuses on the meetings were summarized, e.g., distribution according to contribution will not lead to bourgeois rights, a capitalist class or bipolar distribution, the name was cleared for the quantity-based compensation mechanism and prizes, and the principle of material interests was emphasized with attention given to the relationship between the State, collective and individuals. This paper thus provided a solid theoretical foundation for the reform on the income distribution institution. To motivate the several hundred million peasants to participate in the socialist production and to restore agricultural production to realize agricultural modernization in steps, the Third Plenary Session of the 11th Central Committee of the Communist Party of China (CCCPC) specified, “All economic organizations at all levels of the People’s Communes must strictly follow the socialist principle of distribution ‘to each according to his contribution’ and calculate work compensations based on the quantity and quality. Egalitarianism must be abandoned.” Immediately afterwards, the 1982 Central File No. 1 announced to implement the contract responsibility system while the land was still owned publicly, and it greatly motived peasants to participate in production. The contract responsibility system increased agricultural surplus and promoted the transfer of agricultural labor to non-agricultural sectors and urban areas. From the perspective of income distribution, the reform on the rural economic system led household characteristics to become the basic reason underlying the income differences between rural residents. The contract responsibility system in rural areas also provided experiences to the reform in urban areas. At the Third Plenary Session of the 12th CCCPC, it was proposed to establish a variety of economic responsibility systems with the contract system as the major form, link the compensations of workers to their labor results, and further implement the principle of distribution by contribution after profits were replaced by taxes and the variety of economic responsibility systems

2 Selected

Works of Deng Xiaoping, vol. 2, People’s Publishing House, 1994, p. 101.

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were established, while enterprises were required to energize their own distribution mechanisms to reach a diversity of distribution patterns of salaries.

1.2 Let Some People Get Rich First In December, 1978, Deng Xiaoping delivered one of his famous talks, “Liberate Our Minds, Seek Truth from Facts, and Look Forward with All of Us United Together”, in which he explicitly stated to implement the principle of socialist material interests. He said, “Avoiding the idea of more gains from more work and ignoring the material interests may work to a few advanced people, but won’t work to the majority of people. It may work for a short period of time, but not for a long time. The spirit of revolution is priceless, as there will be no actions of revolution without it. However, revolutions arise from the base of material interests. If we only talk about sacrifices and never talk about material interests, it is idealism.”3 Deng Xiaoping also made the assertion of “getting rich first” and explained the internal connection of “getting rich first” and “getting rich together”. He said, “We should allow some regions, enterprises and workers and peasants to obtain more incomes and live a better life than others because they have worked more diligently and effectively. The better life of these people will set an influential example to their neighbors, and other regions and people from other enterprises will learn from them. In this way, the entire national economy will move forward in waves and all people of all ethnic groups will get rich relatively quickly.”4 For quite a long time afterwards, “to let some people to get rich first” became the orientation of the basic policies regarding income distribution reform, and it also decided the guiding principle of reforming the residents’ income distribution system. The series of reform measures in the urban and rural areas actually realized the goal of “letting some people get rich first”. In addition, the regionally unbalanced development strategy to adapt to the Opening-up was also an important way to “let some people get rich first”, which also resulted in a widening gap of incomes between different regions. In summary, the income distribution reform in this period was aimed to overcome egalitarianism, motive laborers to participate in production and implement a distribution mechanism according to contribution. The rural contract responsibility system and the urban economic responsibility system were both preconditioned by the public-ownership of the productive means, which was why the distribution mechanism based on contribution could be implemented. Although it was announced to persist with and develop a diversity of economic forms including the collective and individual economies at the Third Plenary Session of the 12th CCCPC and foreign capital were constantly introduced with foreign enterprises established all the time when special economic zones were founded and coastal cities opened up during the progress of the opening-up, the various non-publicly-owned economic forms 3 Selected 4 Selected

Works of Deng Xiaoping, vol. 2, People’s Publishing House, 1994, p. 146. Works of Deng Xiaoping, vol. 2, People’s Publishing House, 1994, p. 152.

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were only deemed as a beneficial supplement to the socialist economy when the publicly-owned sector was in solid domination. About the income gaps due to the contribution-based distribution mechanism, those in favor of the idea of “letting some people get rich first” argued that the gaps of incomes and development in the initial phase were inevitable on the path to common prosperity, and that completely even and synchronized progress for all to get rich would only lead to common poverty. This was actually a deep reflection on egalitarianism and to clear the name for the concept of distribution “to each according to his contribution”.

1.3 Efficiency as Priority with Equality also Considered Based on the changes in the guiding principle described above, it came as no surprise that progress was first made in the studies on the relationship between equality and efficiency. Zhou Weimin and Lu Zhongyuan were the first to propose the principle that efficiency should be the priority with equality also considered.5 Meanwhile, more researchers favored the distribution principle of efficiency first with equality also considered.6 This principle was later included in a Party document and became the guiding principle for income distribution in the 1990s. In October, 1987, the report at the Party’s 13th National Congress stated for the first time the distribution institution primarily based on distribution according to contribution with other mechanisms as supplementary forms, while it also stated that “all non-labor incomes should be allowed as long as they are lawful”, that the socialist distribution policy should “benefit the enterprises good at business operation and individuals working honestly hard to get rich first, resulting in reasonable income differences, as well as prevent a bipolar distribution of wealth by persistently seeking common prosperity to realize equality with efficiency improved first”. This statement acknowledged that alternative forms of distribution were lawful, and the guiding principle of distribution was also described preliminarily that favored efficiency with equality also valued. In October, 1992, it was announced at the Party’s 14th National Congress to establish the socialist market system as the goal, with adjustments made to the guiding principle of income distribution to match the socialist market economy. In November, 1993, the framework of income distribution in the socialist market economy was announced in the Decision of the CCCPC on Several Issues Regarding the Socialist Market Economy that was released at the Third Plenary Session of the 14th CCCPC. The Decision included the following aspects. In terms of individual income distribution, “to each according to his contribution” must be the major form of distribution while multiple other forms could be present as well; the compensation for the work 5 Zhou, Weimin & Lu, Zhongyuan, “Efficiency First and Equality also Considered: The Tradeoff to

Prosperity”, Economic Research Journal, 1986, vol. 2. Bei, “Promoting Efficiency with Equality and Realizing Equality with Efficiency”, Economic Research Journal, 1986, vol. 7.

6 Jin,

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of individuals should be based on mechanisms with competition introduced, with egalitarianism eliminated, so that those who made bigger contributions would get more compensations and reasonable differences would result between individual incomes; those rich first should be encouraged to bring and help others to get rich as well to reach common prosperity; and a multi-layered social security network should be established with focuses on the institutions of enterprise-based old-age care and unemployment insurance. Here, the principle of income distribution showed the most prominent alteration compared to the previous one in terms of the relationship between efficiency and equality, i.e., it was explicitly stated that “efficiency should be the priority and equality should also be considered”. The principle of efficiency first with equality considered clarified the importance of efficiency relative to equality. Efficiency as the priority was a continuation of the basic idea since the reform and opening-up that valued motivating laborers to improve productive efficiency, while the simultaneous consideration of equality reflected the consistent pursuit of equality by the Party and people as well as the policies in response to the issues in income distribution in the beginning phase of the reform and opening-up. Early in the reform and opening-up when the production responsibility system was implemented, the amount of profits that enterprises could keep continued to grow, and most of the profits were transformed to be salaries, prizes and benefits for employees due to a lack of incentives for enterprises to expand production in the command economy at the time. In other words, salaries consumed profits, which was manifested on the macroscopic level to be a larger scale of increases in the total employee salaries than in the national incomes and a larger scale of increases in the average employee salary than in the productivity improvement.7 In response to this, the Third Plenary Session of the 14th CCCPC stated to “make the Stateowned enterprises have a slower growth of the total employee salaries than that of the enterprise economic benefits and the mean employee salary increase by a smaller scale than that of the enterprise productivity”. To narrow the income gap, the Third Plenary Session of the 14th CCCPC also announced to “establish a multi-layered social security network”, “take steps to establish the tax-filing institution of individual taxable incomes with intensified enforcement of taxation on individual incomes by the law while inheritance and endowment taxes should be introduced at appropriate times, and avoid bipolar distribution of incomes due to excessively high incomes of a few through distribution policies and regulation by taxation.” It was also announced at the Party’s 15th National Congress report to “regulate excessively high incomes, improve the mechanism of individual income taxes with new tax types such as inheritance tax introduced, and standardize income distribution to rationalize the income gap and prevent bipolar distribution”. At this point, taxation and social security mechanisms started to be used as redistribution instruments to regulate the income gap. In addition, it was also stated to “land the national poverty alleviation programs and policy measures” “to add to the efforts of reducing poverty” at the Fifth Plenary Session of the 14th CCCPC and the 7 Dai,

Yuanchen & Li, Hanming, “Consumption of Profits by Salaries: A Potential Risk in the Reform of the Economic System in China”, Economic Research Journal, 1988, vol. 6.

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Party’s 15th National Congress. Redistribution instruments such as taxation, transfer payments and social security measures as well as poverty alleviation efforts were all important means to narrow the income gap and realize equality in income distribution, and they all subsequently became part of the routine mechanism to regulate the income gap. However, these guiding principles were not fully landed and the corresponding taxation and social relief mechanisms did not show significant effects due to limited coverage and efforts. The principle of “efficiency first with equality also covered” was essentially prioritization of efficiency over equality with the latter serving the former. This guiding principle facilitated the rapid growth of the Chinese economy to a large degree, but it also lent a hand in constantly widening the gap of incomes in the 1990s.

1.4 Reform Dividend and Growing Incomes In the beginning phase of the reform and opening-up, China already saw a widening trend of the income gap. However, the widening gap actually played a significant role in motivating laborers and promoting economic growth at the time since the gap that began to widen was originally negligible with pandemic egalitarianism, while at the same time, the reform was focused in rural areas at the time, which gave rural residents more income increases than urban residents, and the gap between urban and rural incomes was actually narrowed. When the income distribution data are broken down into intra- and inter-group analysis of urban and rural areas, the results show that the intra-group (within cities and towns and within villages) income gap was widening and the inter-group (between urban and rural areas) gap was narrowing, which combined to result in an overall slightly widened income gap. It deserves some attention that the smallest gap between the urban and rural areas after the Reform and Opening-up was in 1985, and the record still holds today (Fig. 3). The inter-regional income gap is another common measure for inter-group differences. As shown in Fig. 4, the income gap between regions in China went from narrowing, through widening to narrowing again. From the beginning of the reform and opening-up until the end of the 1980s, the inter-provincial income differences quickly reduced with the progress of the Reform, especially the rapid progress in the rural reform, and some previously under-developed provinces even showed faster GDP growth than others (Fig. 4). In this period, the inter-industrial income gap had not emerged and remained a small fissure (Fig. 5). The reform was focused in rural areas in the beginning, leading to a rapid increase in the incomes of rural residents and achieving, to a degree, the Pareto improvementtype welfare increases and stable differences in the national incomes. As estimated by the World Bank, the Gini coefficient in China was 0.29 in 1981, and decreased by a small scale to 0.2769 in 1984. Meanwhile, as economic growth was in absolute priority early in the reform, income gap was not a prominent problem. In terms of the poverty alleviation outcome, the income increases showed a much bigger effect than any effects of distribution means. In this period, the rural poverty incidence was

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still high, but it had been reduced by a large scale compared to the beginning phase of the reform and opening-up. Therefore, the strategy to realize economic growth and improve economic benefits by introducing differential incomes should be given credit.

2 To Each According to His Contribution Versus to His Contribution of Productive Factors: 1988–2001 2.1 To Each to His Contribution of Productive Factors As the economic system reform went into greater depth, multiple forms of ownership emerged, with the public ownership in domination. Meanwhile, people’s incomes began to have various sources. On the one hand, the non-state-owned economy made up a growing proportion of the national economy, and the owners of non-state-owned enterprises had the right to profits of their own enterprises, while on the other hand, residents’ incomes began to show surpluses after personal consumption, which potentially led them to invest the extra money, and the gains of the investment could not be classified as the compensation for labor by definition. Meanwhile, as China became more and more opened to the outside, some foreign investment enterprises would also demand returns on investment, and the return obtained was also challenging to the conventional principle of distribution by contribution. In addition, some with special talents had the option to obtain incomes by buying stock shares with their technologies and some in management, by making use of their administrative talents through contract responsibility system or an annual-salary mechanism. The diversity of ownership forms and the varying income sources questioned the appropriateness of the principle of distribution “to each according to his contribution”. In fact, emerging things in the reform such as the above could have been explained by extending the principle of distribution “to each according to his contribution”. For example, acknowledgement of technology would make knowledge as a form of labor to be entitled to distribution, and classification of the profits of individual business into labor income would make this form of economy to comply with the principle of distribution by contribution. However, enterprises of three types of ownership and the private economy, as well as the socialist market economy, challenged the principle of distribution to each according to his contribution since it was extremely difficult and theoretically challenging to match the profits gained by hiring labor with the principle. As challenging as these new things to the conventional socialist principle of distribution “to each according to his contribution”, they actually created an opportunity for China to localize this principle. Exploration of the distribution theory also followed the theme of how to persist with and develop the principle of distribution by contribution under the condition of the socialist market economy. With China’s economic reform continuously going into deeper levels and the rapid growth of the economy, people’s incomes showed

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increasingly varying sources. How to interpret these incomes with the principle of distribution by contribution thus became the new situation and challenge facing us. Therefore, in the mid- to late 1980s when various types of ownership emerged, it began to become a hot spot in the theoretical field to follow through with the implementation and interpretation of the principle of distribution “to each according to his contribution”.8 Early during the discussion on this topic, people were obviously defensive as they were severely limited by stereotypes. The mainstream viewpoint at the time held that the factor gains, which should be classified as incomes from capital, technology and management, should be interpreted as incomes from labor. For example, discussion on living labor and materialized labor led to new definition of labor income, which in turn resulted in the viewpoint that both living labor and materialized labor create value. In contrast, others classified all the factor incomes that were not from labor into the category of “distribution according to capital”, blurring the lines between technology, management and capital. Looking back now, we have realized that both the viewpoints are biased and have ignored the roles of non-labor factors such as technology and management. From 1992 to 1997, how to persist with and develop the principle of distribution “to each according to his contribution” became a theoretical hot spot for its significant importance in the reality that the socialist market economy was being established. Scholars made theoretical explorations into the multiple forms of ownership with the public ownership in dominance and the relationship between ownership and distribution principles. The center of arguments was how to properly handle the distribution of productive factors. Some valuable discussions in these theoretical explorations and arguments were accepted and assimilated by the mainstream ideology, contributing to the distribution principle of distribution to each according to his productive factors, which later became an important complement to the distribution principles in the socialist market economy that was based on distribution according to contribution with multiple other forms. That is also to say, distribution was to each according to his contribution with the socialist public ownership while with other non-public ownership forms, distribution was based on productive factors. In 1997, the 15th National Congress of the CCCPC was held, and in the Congress report it was state, “integrating the distribution principles based on contribution and on productive factors and prioritizing efficiency with equality taken into consideration are beneficial to the optimization of resource allocation, economic development and social stability.” This was the first time that the two principles of distribution according to contribution and distribution according to productive factors were proposed to be integrated.

8 Jin,

Xizai & Liu, Chunlin, “About the Discussions on Distribution According to Capital”, Economic Research Journal, 1987, vol. 8; Liu, Jielong, “Exploration of Distribution Means in the Socialist Market Economy”, Jianghai Academic Journal, 1993, vol. 3; Yu, Taosheng, “The Threein-One Equation and Distribution According to Productive Factors”, Journal of Wuhan University (Philosophy and Social Science Edition), 1994, vol. 5.

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2.2 Institutional Factors Affecting the Changes in Income Distribution 2.2.1

Development of the Non-state Economy and Income Distribution

In the 1990s, the non-State economy began to gain leaps in development and there emerged income differences between those working within the government institutions and those who did not. In this period, people did not have much different incomes if they worked in government institutions, but if they didn’t, there could be a significant difference in terms of incomes, and the income difference was also great between people working within government institutions and those who did not. Compared to the current income difference between government- and non-government jobs, things felt quite different in the 1990s because the difference was huge back then, and that is why many quit their jobs from government and public institutions to “get down to the sea” to find other jobs in the early 1990s. This new situation pushed the nonpublicly-owned economy to develop while at the same time, widening the income gap between government and non-government jobs. Such changes involving government and public institutions had additional impact on income distribution, reflecting a major institutional factor underlying the growing difference in people’s incomes in this period.

2.2.2

Worsened Conditions of Rural Trade

The urban–rural income gap is an important factor of income distribution. As the economic system reform moved its focus from rural to urban areas, the urban population began to see income growth at a speed much faster than that for the rural population. After all, rural residents had limited lands for cultivation and not much capital, and had to bear a slowly growing income. In the beginning of the reform, the prices of agricultural products rose quickly, but the growth in prices soon slowed down to a very low rate, which was significantly slower than the increases in the prices of industrial products. This is also to say, the conditions of rural trade began to worsen. The difficulty in obtaining sufficiently growing gains from land drove peasants to move to non-agricultural industries. The first wave of peasant worker migration from rural to urban areas emerged in the early 1990s, which resulted from the combined effect of the pull by the rapid development of urban industries and the push by the slow growth in agricultural profits.

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2.3 Re-examining Distribution According to Contribution of Productive Factors It was a theoretical innovation to distribute according to the contribution of productive factors under the condition when the conventional principle of distribution according to one’s contribution could not meet the development demands in the primary stage of socialism. The former was an important supplement to the latter, and it also represented how Marxian political economics was localized in China in an important way. Therefore, it was of unquestionable significance in practice and theory. However, it was challenging to coordinate between the distribution principle by the contribution of productive factors and that by one’s contribution, and in particular, how to set the appropriate price of each productive factor. The latter was in fact one of the reasons why the income gap kept widening in the subsequent years. However, before we talk about how this distribution principle contributed to the widening gap in incomes, we must first recognize and admit that it played a positive role in promoting economic prosperity and rapid growth. After all, distribution according to the contribution of productive factors, once implemented, marked that it was legitimate to obtain gains from investment for all with assets, which motivated people with assets to invest, and an active investment environment in turn promoted the economy to grow rapidly. This is a clear logic line, and we must acknowledge and accept it. However, the challenge with the distribution principle according to the contribution of productive factors always remained, i.e., how to tell the contribution of each productive factor and how to proportion the factor contributions. It was actually possible to answer the questions in theory, but extremely difficult to act in practice. In Western countries, the power of labor unions made it possible for laborers to negotiate with capitalists, while the relative balance between the two sides protected the interests of laborers to a degree and the contribution of labor was thus determined. At the same time, developed countries mostly passed the stage of labor surplus and were generally in shortage of labor. As a result, the price signals on the labor market were clear and it was highly likely for laborers to obtain reasonable return through labor flow. In China, in contrast, governments at all levels were under the long-term impact of the strategy to prioritize economic growth, and with the purpose of promoting local economies, they usually provided various tax benefits to investors in their efforts to introduce business and capital, which protected the interests of the investors to the maximum. This strategy was successful in some aspects, among which the most prominent effect was to have overall expanded the scale of China’s economic growth, ensured the rapid growth of China’s economy and provided many more jobs. However, the deficits were also obvious, i.e., overprotection of investors by all-level governments, with some governments even working with the investors to level down the salaries of the employed (especially the average laborers in sufficient supply), leading the employed to be put in a relatively vulnerable position in the labor-capital relationship,

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which together led the distribution by the contribution of productive factors to favor the monopolies in an industry and investors. Therefore, distribution according to the contribution of productive factors now manifested as protection of investment, and, on the macroscopic level, as a reduction in the proportion of labor returns out of the national economic total. The distribution principle based on the contribution of productive factors, the idea to “let some people get rich first”, and the principle of “efficiency first with equality considered” altogether generated both positive and negative effects. On the positive side, investment was encouraged and the economy grew rapidly, while on the negative side, the income gap widened. It must be noted here that the general public in China showed more or less understanding to the differences in returns between labor and capital investment, but deep resentment to the gap due to illegal and abnormal incomes. In this period, illegal and abnormal incomes emerged and impacted negatively the order of income distribution. However, the underlying reason was the invention in income distribution by unchecked power instead of the principle to distribute according to the contribution of productive factors.

2.4 The Widening Trend in the Income Gap As explained in the last section, with the socialist economic system being established, the principle of “efficiency first with equality considered” and distribution according to the contribution of productive factors, as well as many other economic system reforms altogether played a critical role in stabilizing the rapid growth of the Chinese economy, and the economy grew at a much faster rate than that in the beginning phase of the reform. In other words, China did a great job in making the cake bigger. However, in terms of how to distribute the cake properly, the long persistence with the two principles, while bringing rapid economic growth, had some negative effects in income distribution. The macroscopic outlook of distribution and the income differences among residents both had problems. In terms of the macroscopic outlook of distribution, the proportion of labor gains of GDP showed rapid decreases under the impact of the two “below” principles, and the previous concern of “erosion of profits by salaries” in the early 1990s was quickly replaced by the slower growth of labor gains and residents’ incomes that that of GDP, leading to quick decreases in their proportions of GDP (Fig. 1). Meanwhile, with the implementation of the gradient opening-up strategy in the coastal area, the income gap between coastal and inland areas began to widen, as did those between industries, between urban and rural areas and within urban and rural areas. All these combined were manifested as a quickly widening income gap among residents across the country (Figs. 2, 3, 4 and 5). Fortunately, however, the economy maintained strong growth, resulting in a larger effect of growth than that of distribution despite the worsening distribution situation. Together with the strong mobilization capacity of the government and sufficient

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Fig. 1 Labor returns and capital returns as proportions of GDP (excluding the net production taxes) Source Zhang et al. (2015)

Fig. 2 The Gini coefficient of nationwide resident income Source The data before 2003 were from the WDI by the World Bank, 2016, and the data of 2003 and later were from China’s National Bureau of Statistics

attention to the impoverished population, the poverty incidence among rural residents in China further declined (Fig. 6).

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Fig. 3 Per capita income ratio of urban to rural residents Source The data before 2013 used the per capita disposable income of urban residents and the per capita net income of rural residents, and the data of 2013 and later were per capita disposable income for both urban and rural residents. The data were from the National Bureau of Statistics

Fig. 4 The coefficient of variation of provincial GDP values Source Calculated based on the data from the yearly China Statistical Yearbook

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Fig. 5 The coefficient of variation of the mean employee salaries across industries Source The data before 1992 were from the 1993 China Statistical Yearbook, and the 2003 China Statistical Yearbook for the data of 1993–2002, and the data of 2003 and later used the mean industrial salaries of the employees in urban hiring units, which were obtained from the 2016 China Statistical Yearbook

Fig. 6 The impoverished population sizes and poverty incidences in rural areas Source The China Yearbook of Household Survey, 2017

3 Growth and Equality Both Valued: 2002–2011 3.1 From Efficiency First to Equal Weight Given to Growth and Equality Policies regarding income distribution in the early phase of the reform, be it overcoming egalitarianism with contribution-based distribution restored or efficiency first with equality considered and a diversity of distribution means combining contribution- and productive factor-based distribution, were all aimed to promote

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steady and rapid economic growth by providing reasonable incentives, and thus all sought economic growth before social fairness and efficiency before equality. However, under the guidance of these policies that put economic growth before social equality, changes emerged in the income distribution that were unfavorable to income equality. In the background of rapid economic growth, a widening gap in incomes was observed both between and within the urban and rural areas. Aside from this microscopic level, on the macroscopic level, a decrease trend was observed in both the proportion of labor gains of the primary distribution and the proportion of resident incomes out of GDP. That is also to say, the cake was made bigger and bigger, but the part distributed to residents and laborers became relatively small in proportion, while it was not equally distributed among residents. The rapidly widening gap of income severely challenged the values of equality and justice, and the reform on income distribution started to favor social equality, resulting in the guiding principle of equal weight given to equality and economic growth in income distribution. This principle was maintained to a degree at the Party’s 16th National Congress held in the early 2000s: “Let go all labor, knowledge, technology, management and capital and allow them to thrive and all sources of wealth to flow fully freely. Establish the principle to include productive factors such as labor, capital, technology and management in the distribution according to the contribution and improve the distribution system with contribution as the major basis and multiple other forms coexisting. Egalitarianism should be avoided while excessively uneven incomes should also be prevented.” However, change was observed. For example, the following was added, “Give more weight to efficiency in the primary distribution and make use of the market role to encourage some to get rich first through honest labor and legal business while paying attention to equality in the secondary distribution by strengthening the regulatory role of the government in the income distribution to offset any excessive difference of incomes. The goal is common prosperity, and the proportion of those with middle-level incomes shall be increased and efforts shall be made to help those with low incomes to earn more.” This was a necessary amendment to the principle of efficiency first and equality covered. In fact, efficiency favored in the primary distribution with equality favored in the secondary was, to a degree, re-definition of the margins of equality and efficiency as the primary and secondary distributions were given respective roles, suggesting that equality and efficiency were give equal weight. This change at the Party’s 16th National Congress, together with the idea of “a harmonious society”, changed the principle of “efficiency first with equality covered” to a degree. From 2002 to 2005, some theoretical papers started to touch on the social equality and justice, as well as equal weight on efficiency and equality.9 Of course, contrasting arguments were also made as some theoretical researchers insisted that “efficiency first with equality considered” was the principle of the socialist market 9 Liu,

Guoguang, “Transitioning to the Distribution Principle of “Efficiency and Equality Equally Valued”, Studies on Socialism with Chinese Characteristics, 2003, vol. 5; Fan, Hengshan, “Policy Orientation of the Social Security Reform in the Current Phase”, Chinese Cadres Tribune, 2004, vol. 7; Study Group of the Chinese Academy of Social Sciences, “Making All Efforts Towards a Harmonious Socialist Society”, Social Sciences in China, 2005, vol. 3.

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economy and it should not be changed.10 Eventually, the emergence of a demand for adjustment to the guiding principle of income distribution led to acceptance of the idea of equal value of efficiency and equality by the CPC. In the “CCCPC’s Suggestion on Making the 11th Five-Year Plan”, the overall structure of the income distribution reform was laid out, i.e., improving the distribution institutions with contribution as the basis and multiple other forms and insisting on the participation of all productive factors in the distribution according to contribution. Provided economic growth, it was particularly emphasized to “pay more attention to social equality to allow everyone to share the achievements of the reform and development”. The attention to social equality was later escalated in the Party’s 17th National Congress report, and further amendment was made to the guiding principle of income distribution. In the report of the Party’s 17th National Congress, it was specified to “properly handle the relationship between efficiency and equality in both the primary and secondary distributions with more attention given to equality in the secondary distribution”, marking a complete alteration of the previous principle of “efficiency first with equality considered” and setting new margins for the development of income distribution. To narrow the income gap, China announced to “increase the proportion of those with middle incomes and the incomes of those with low incomes with common prosperity as the goal” at the 16th National Congress of the CPC, in addition to the routine efforts to alleviate poverty and re-distribution policies involving taxation and social security. At the Fifth Plenary Session of the 16th CCCPC, it was announced to “make special efforts to increase the incomes of those with low incomes, increase the proportion of those with middle-level incomes in steps, effectively regulate excessively high incomes, standardize the distribution order of individual incomes, and check the widening trend in the inter-regional and inter-department income gaps by all means”. At the 17th National Congress of the Party, it was stated to “protect lawful incomes, regulate excessively high incomes, and abolish illegal incomes while taking steps to close the widening income gaps by expanding transfer payment, intensifying the role of taxation in regulation, breaking monopolies, creating equal opportunities and restoring the distribution order”. These were in fact the policies by the CCCPC in response to the unreasonable distribution structure due to excessively wide income gaps. These policies, i.e., increasing the incomes of those with low incomes, increasing the proportions of those with middle incomes and regulating the excessively high incomes to form a reasonable income distribution pattern, subsequently constituted the direct goal of the efforts to narrow income gaps.

10 Yang, Yaozhong, “The sine quo none for Income Distribution from Transition and Development:

Efficiency First with Equality Considered—Also a Discussion on Fan Hengshan’s ‘Efficiency and Equality Equally Valued’”, Journal of Yangtze University (Social Sciences Edition), 2005, vol. 1.

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3.2 Policy Adjustment to Narrow the Income Gap Since the Party’s 16th National Congress, the Party and government had paid great attention to distribution-related issues, and released the “five-fold coordination” guiding principle to develop a harmonious society, with a series of policies and measures formulated to protect the underprivileged and to narrow income gaps based on the idea of providing equal access to public services. As these measures and policies were all oriented with development balance and people’s lives, many were related to income distribution, while all of them eventually influenced income distribution.

3.2.1

Regional Development Balance and the Strategy to Develop the West

In this period, the first strategy released to promote regional balance of development was the strategy of large-scale development of the west, which showed significant effect on narrowing regional gaps of incomes. In January, 2000, the State Council set up the western-area development leadership group to investigate the basic routes and strategic tasks of accelerating the development in the western area and to plan for the key work of the strategy. In October, 2000, the strategy of the large-scale development of the west was officially released in the “Suggestion by the CCCPC Regarding the Formulation of the Tenth Five-Year Plan of the National Economic and Social Development”, which was passed at the Fifth Plenary Session of the 15th CCCPC.

3.2.2

1.

2.

Livelihood-Oriented Strategy Adjustment: Social Insurance, Subsistence Allowance and Poverty Alleviation

The Institution and Development Strategy Aimed to Increase the Incomes of Those with Low Incomes. The relevant institutions, policies and measures include the subsistence allowance system covering both urban and rural areas, unemployment insurance, minimum wage standards, temporary relief, relief and support for people in extreme difficulties, medical relief for major and severe diseases, living stipends for the disabled in difficulties, care subsidies for the highly disabled and the strategy of targeted poverty alleviation. In addition, the standards of these institutions, policies and measures were also improved constantly, significantly leveling up the bottom. Although they did not show much effect in narrowing income gaps, these institutions and policies play a vital role in stabilizing the society and preventing social turmoil. Various Policies Benefiting Peasants. For example, agricultural taxes were reduced or cancelled, agricultural specialty taxes were abolished for all but tobacco, crop-growing peasants were given direct subsidies, and subsidies were given to peasants in some areas for good seeds and purchase of agriculture

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4.

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equipment. In addition, total exemption from school and miscellaneous fees for all rural students in the compulsory education stage of primary and middle schools also provided certain protection for income increases of peasants to some degree. These policies played an important role in narrowing the gap and promoting development coordination between urban and rural areas. Equalization of Public Services. Relevant institutions and policies include the social medical relief institution coving both urban and rural areas, basic medical insurance institution that integrated the institutions for urban and rural residents, old-age insurance for urban and rural residents, transfer payment of the treasury, and regional development strategies facing the central and western areas such as the large-scale development of the west. Regulating the Incomes of Those with High Incomes. Relevant measures were mostly released in recent years and were further refined and pushed for complete implementation. The major policy files involved in the regulation of high incomes include the “Guidance Suggestion Regarding Further Standardizing the Compensation Management of Those in Charge in Centrally-Owned Enterprises” that was released in 2009. Such policies and measures have played or are playing their roles in narrowing income gaps.

3.3 Trend in the Income Distribution Changes When Equality and Efficiency Were Equally Valued Guided by the principle of equally valuing equality and efficiency, the rapidly widening gap of incomes was checked to a degree. In terms of the income differences among residents across China, the Gini coefficients of national residents’ incomes for the past consecutive years (Fig. 2), as released by the National Bureau of Statistics, showed a rapid, upward trend in the income differences among all residents in China from 1980 to 2009, but in 2010, the Gini coefficient began to decline in small, but steady scales. There are still controversies among researchers about whether the income differences were reduced after 2009. Even among the scholars who accept the estimates of the Gini coefficient by the National Bureau of Statistics, there are different opinions about whether the reduction in the coefficient was temporary or represented a trend. However, overall, there has been no previously seen rapid widening of income gaps among residents across the country in recent years, and that is factual. We know that most of the Gini coefficient of the residents’ incomes in China is attributable to the urban–rural gap due to the significant urban–rural dual structure. In fact, the income differences between the urban and rural areas once accounted for approximately 60% of the entire gap. After 2002, the income difference between urban and rural residents increased, followed by decreases. This difference reached the peak in 2009, which corresponded to the peak of the Gini coefficient in 2009. As the urban–rural differences accounted for a considerable proportion, and they showed significant decreases in recent years, the income gap between urban and

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rural residents at the end of 2014 was only slightly higher than the maximum value of 1994, leading to the steady, even declining trend in the income differences in the entire country (Fig. 3). The inter-regional income gap is another common measure for inter-group differences. As shown in Fig. 4, the income gap between regions in China maintained a decreasing trend in the recent decade, which is different from the course of decreases followed by increases in the preceding years. The strategy of large-scale development of the west, initiated in 2002, was an amendment and complement to the strategy of coastal development in the 1990s, and the economy in the western area has since been boosted gradually, leading to reductions in the inter-regional income gap that has lasted until now since 2004. The decreasing trend in the income differences was closely associated with the regional development strategies in this period. Apart from the large-scale development of the west, China also implemented strategic plans such as revitalization of the old industrial bases in the northeast and promotion of the rise of the central area, as well as policies and measures such as improving the proportion of regional transfer payments. These strategic plans, policies and measures played a significant role in narrowing the inter-regional income gap. The inter-industrial income gap is still a prominent income-distribution issue. In the period of the command economy, even in the 1980s when the reform was just started, the income differences between industries were quite small. However, since the 1990s, the salaries of different industries have become more and more disparate, which was significantly associated with the excessively growing salaries in industrial monopolies. The ratio of per capita income of industrial monopolies to competitive industries was within 1.1:1 in the early 1990s. It gradually increased to 1.1–1.3:1 in the mid- to late 1990s, and exceeded 1.3:1 after 2000. A variety of lines of evidence have shown that the industrial incomes in China showed a trend favourable to industrial monopolies after the 1990s, which led to a constantly widening industrial income gap. Studies on the salary disparity between industrial monopolies and competitive industries showed that salaries in the form were higher than the latter, and the differences kept growing. In addition, the higher salaries in industrial monopolies were often accompanied by better welfare, and the latter had a larger impact than the former on the overall income differences, which further widened the income gap between industrial monopolies and competitive industries.

4 The New Era and Sharing in Development: Since 2012 With the economy growing rapidly, the increasing relative inequality of incomes may be accompanied by absolute increases in incomes, and such increasing income inequality is more or less acceptable as it may represent Pareto improvement. However, with the economic growth slowing down and as people start to feel the income differences more strongly, the society may become less tolerant of the income

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inequality, resulting in a demand for better social equality. In China, the GDP growth rate reduced to below 8% after 2012 while the income inequality had not been reduced with a significant scale since reaching the peak of 0.491 in 2008. Meanwhile, the presence of a large scale of impoverished population in rural areas also challenged the goal of common prosperity. All these factors made it more imminent to resolve the issues of distribution inequality and realization of common prosperity. That we are approaching the time point when common prosperity is aimed to be realized has also driven the transition of distribution principles to shared development and common prosperity. Common prosperity is the essential nature and ultimate goal of socialism, as well as the embodiment of the advantages of socialism. To realize it, Deng Xiaoping came up with the revolutionary idea of allowing some to get rich first to drive the others for eventual common prosperity, which means that it was inevitable for China to go through a phase of widening income gaps. Deng Xiaoping actually had a schedule for resolving the issue of income gaps and bipolar income distribution, i.e., he said, “We can imagine that we will reach a level of prosperity at the end of this century and that is the time for us to invest intense efforts to resolve this issue.”11 That is also to say that a prosperous society was deemed a time point for resolution of income gaps and to reach common prosperity. A study argued that there was a transition in the development idea of going from “rich first” to “common prosperity” when the Party’s 16th National Congress stated to “pool all forces to build a society with a higher-level prosperity benefiting all the more than one billion people in the first two decades of this century”, and one of the core connotations of common prosperity was for all to share the development of the country.12 In fact, to share the achievements of development with all people and to reach common prosperity have become an integral part to the people-oriented Scientific Outlook on Development since the 16th National Congress. Therefore, the guiding principles for making distribution policies have been to resolve distribution inequality, share development and reach common prosperity under the conditions of large income inequality and the establishment of the “grand goal of common prosperity to be realized in 2020” in the Party’s 18th National Congress. Since the Party’s 18th National Congress, the CCCPC has given more weight on the equality of distribution ideas and reiterated that the CPC has always pursued social equality. The relationship between efficiency and equality was further clarified at the 18th National Congress based on what was explained at the 17th, and the relationship is that “both primary and secondary distributions should pay attention to both efficiency and equality while the secondary distribution should pay more attention to equality.” This highlights the importance of equality in income distribution. At the Third Plenary Session of the 18th CCCPC, realizing social equality and justice was also positioned as a key factor of the reform, while Xi Jinping also remarked in “Making Solid Efforts to Unify People’s Thoughts to the Principle of

11 Selected

Works of Deng Xiaoping, vol. 3, People’s Publishing House, 1993, p. 379.

12 Hu, Angang, How to Realize Common Prosperity for Each Region, Central Party Literature Press,

2002.

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the Party’s 3rd Plenary Session of the 18th CCCPC”13 to “not only make the ‘cake’ bigger and bigger, but also distribute the ‘cake’ well” in order to promote social equality and justice. Meanwhile, Xi Jinping also escalated shared development to the level of a national development concept and explained that “shared development pays attention to the resolution of social equality and justice”.14 In addition, the guiding importance of common prosperity in income distribution was made clear at the Party’s 18th National Congress: “Common prosperity is the fundamental principle of socialism with Chinese characteristics. We must persist with the basic socialist economic system and distribution system, adjust the distribution pattern of national incomes, strengthen the adjustment to the distribution, and make efforts to resolve the issue of a large income gap so that development achievements shall cover all people more frequently and more equally for us to march towards common prosperity in steady steps.” At the Party’s 19th National Congress, the major contradiction in the new era of China was proposed, and that is the contradiction between unbalanced and inadequate development and the people’s ever-growing needs for a better life, which highlights the importance of shared development in socioeconomic development in the new times. In terms of specific policies, poverty-alleviation campaign was launched, which associated elimination of impoverished population with the goal of common prosperity, and that is the focus of the reform on income distribution in this period.

4.1 The People-Oriented Guiding Principle of Income Distribution in the New Era To be oriented with people is the main theme of the reform and development in the new era, as well as the main theme of the progression of distribution theory and practice. In 2015, the development idea of “being oriented with people” was first stated clearly at the Fifth Plenary Session of the 18th CCCPC, and “sharing” was included as one of the five development ideas. On November 23, 2015, Xi Jinping remarked at the group study of the Political Bureau of the 18th CCCPC, “We must always orient development with people. Development is for the people, and that is the fundamental stand of the Marxian political economics.”15 At the Party’s 19th National Congress, the idea of centering on people was further consolidated. At the press conference after the First Plenary Session of the 19th CCCPC, Xi Jinping took special care to mention that people’s aspiration for a better life should always be the focus of the CPC’s efforts. 13 Xi,

Jinping, “Making Solid Efforts to Unify People’s Thoughts to the Principle of the Party’s 3rd Plenary Session of the 18th CCCPC”, Qiushi, 2014, vol. 1. 14 Xi, Jinping, “Speech at the Second Full-Member Meeting at the Fifth Plenary Session of the 18th CCCPC (excerpt)”, Qiushi, 2016, vol. 1. 15 Excerpts of Xi Jinping’s Discussion on Socialist Economic Development, Central Party Literature Press, 2017, p. 30.

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With the idea of people-oriented development integrated in the distribution theory in the new era, there are two features of the theory development. One, it puts more weight on social equality and justice in that it reiterates that the “cake” should be distributed well while being made bigger and bigger. Two, the theory highlights common prosperity. Through a series of policies and measures to adjust the distribution pattern and by means of the re-distribution regulatory mechanisms such as improved taxation system, social security and transfer payments to address the issue of income gaps, more of the development achievements have benefited all people in a fairer fashion.

4.2 Shared Development is the Essential Requirement of Socialism Since the 18th National Congress of the CPC, the nationwide income differences have been reduced to a degree, but the issue of development inequality has not been resolved. The major contradiction, as stated at the Party’s 19th National Congress, is the contradiction between people’s aspiration for a better life and unbalanced and inadequate development, highlighting the significance of shared development in the socioeconomic development in the new era. While shared development and common prosperity are being realized, it must be reiterated that economic development must be the base and the middle-income population be nurtured and expanded in order to form an olive-shaped distribution pattern. The middle-income population has obvious economic characteristics. They are usually well-paid, and free to spend their incomes on durable consumables, quality education and medical services, housing, vacations and other leisure activities. China is now a member of the upper-middle income countries, and the growth of the middleincome population is of significance to the sustainable and healthy development of China’s economy and society. International experiences have shown that “a prosperous middle class is a must for promoting consumption needs, sustaining economic growth and getting out of the middle-income trap”.16 A probable reason why some middle-income countries have tried for a long time but still are trapped in middle incomes is lack of a middle-income population. After all, “without such a population, it is difficult to create the immense consumption market required to support growth, investment in education and institutionalized savings and social motivation”.17 South Korea as compared to Brazil makes a good example. The former strode over the middle-income trap while the latter failed partly because the former grew a large

16 Lin,

Chonggeng & Spencer, Michael, Medium and Long Term Development and Transformation of the Chinese Economy: An International Perspective, Citic Press, 2011, p. 40. 17 Lin, Chonggeng & Spencer, Michael, Medium and Long Term Development and Transformation of the Chinese Economy: An International Perspective, Citic Press, 2011, p. 42.

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middle class, which accounted for 55% of the total population at the time and was twice as much as that of the latter. In October, 2010, the “Suggestion by CCCPC Regarding Making the 12th FiveYear Plan for the National Economic and Social Development” first described the concept of “the middle-income population”. In the Decision of the Third Plenary Session of the 18th National Congress, it was specified to increase the incomes of the low-income population, expand the proportion of those with middle incomes and strive to narrow the distribution gaps between urban and rural areas, different regions and industries to approach an olive-shaped income structure. In the Fifth Plenary Session of the 18th National Congress, “expanding the middle-income population” was included as an integral part to the goal of common prosperity and “expanding the proportion of those with middle incomes” was included in the planning outline of the 13th FYP. In the report of the 19th National Congress of the CPC, a more long-reaching goal was proposed for the expansion of the middle-income population: from 2020 to 2035, bring a significant increase in the proportion of those with middle incomes based on common prosperity that has already been reached to realize socialist modernization. Since the Party’s 18th National Congress, the size of the middle-income population has been growing rapidly in China. As remarked by President Xi Jinping at the banquet with Chinese and American entrepreneurs in Seattle in 2015, the middle-income population in China was nearly 300 million and it would double in the next ten years. Scholar estimate has also shown a similar trend in that the middle-income population accounted for 38.1% of the total population in China in 2012, which increased to 47.6% in 2014. However, this size is still small compared to high-income countries. For example, in the U.S., the middle class claims 230 million people, accounting for three quarters of the national population. And the percentage exceeds 90% for South Korea, Japan and European Union countries. Therefore, there is still large room for China’s middle-income population to grow. In fact, the new era calls for the growth of the middle-income population so that an olive-shaped distribution pattern will be in place sooner than later. Meanwhile, we must note that shared development is a gradual progress. The issues such as a large income gap and unreasonable distribution structure may be due to economic development and can only be solved by development, but they may also involve unreasonable laws, institutions and policies and therefore can only be solved by means of institutional reform.

4.3 Specific Measures to Realize Shared Development 4.3.1

Targeted Poverty Alleviation to Help Reach Common Prosperity

The period of the 13th FYP is the decisive time for reaching common prosperity, for which shared development is a must. This means that prominent problems that have blocked shared development are becoming more imminent to be solved as we

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approach the time limit to reach common prosperity. Among the problems, those involving income distribution and the poverty issue are the essential barriers to common prosperity, and must be solved during the 13th FYP. Since the reform and opening-up, tens of millions of people have got out of poverty due to the high-speed economic growth in China. According to the 2016 Report on Poverty Reduction and Development in China jointly released by the Chinese Academy of Social Sciences and State Council, the impoverished population decreased by 790 million from 1981 to 2012 in China, accounting for 71.82% of the world-wide poverty reduction scale. In the report at the Party’s 18th National Congress, a goal was further set to reach common prosperity in a comprehensive perspective by the end of 2020. All-round common prosperity relies on poverty extermination as soon as possible. In fact, President Xi Jinping has always paid special attention to poverty reduction. On November 3, 2013, he stated the idea of “targeted poverty alleviation” for the first time when investigating development-based poverty reducing efforts in Shibadong Village of the Tujia and Miao Autonomous Prefecture, Xiangxi, Hunan Province. In November, 2015, the central meeting on poverty reduction and development was held in Beijing and President Xi Jinping remarked, “By 2020, we shall realize ‘freedom from two worries and protection from three issues’… Meanwhile, the disposable income per capita of the peasants in impoverished areas shall grow in a larger scale than the national average and the major measures in basic public services in these areas shall be close to the national averages.”18 At this point, China’s efforts to reduce poverty through development entered the final battle. In 2012, 98.99 million people were in poverty in China, and the number was reduced to 70.17 million in 2014. By 2020, it shall be ensured that all those in poverty in rural areas under the current standards of poverty shall be lifted out of it, all counties categorized as in poverty shall be removed from the category and regional holistic poverty shall be solved. Since the 18th National Congress of the CPC, the poverty reducing efforts in China have shown significant effects. From 2012 to 2017, a total of 68.53 million people were lifted out of poverty, averaging to an annual reduction of 13,706 million, and the poverty incidence dropped from 10.2% to 3.1%. In 2017, 28 counties in poverty such as Jinggangshan and Lankao counties were removed from the category of impoverished counties, the first time in history that the number of impoverished counties was reduced.

4.3.2

Taking a Material Step by Setting a Cap

Most of the previous distribution policies aimed to raise the bottom level of incomes. However, the quickly widening gap of incomes in the recent years in China was mostly due to the excessively rocketing incomes of the high-income population. Therefore, policies aimed to regulate the incomes of the rich were released one by one. After the 18th National Congress of the CPC, the “Plan to Reform the 18 Excerpts of Xi Jinping’s Discussion on Socialist Economic Development, Central Party Literature Press, 2017, p. 30.

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Salary Institutions of Centrally-Managed Enterprise Leaders” was publicized and a self-reporting filing system was set up for the high-income population to file their income taxes in 2014. Both are specific policy measures to address the regulation of the incomes of the rich. The salary-capping measures for the large-scale State-owned monopoly enterprises is expected to have considerable effect on narrowing the interindustrial income difference, while the individual income tax filing system may be influential to check the personal income differences and to increase tax revenue from individual income taxes. However, these measures are expected to only show effects after some time. In addition, the “Belt and Road” Initiative deserves close observation from the perspective of balancing regional development. The initiative will have some effect to drive the economic development in the central and western areas, thereby helping narrow the regional development gaps and playing a positive role in promoting shared development.

5 Summary of the Experiences and Lessons in Income Distribution Since Reform and Opening-Up Now 40 years from the initiation of the reform and opening-up, the major contradiction in the Chinese society has transformed into the contradiction between people’s aspiration for a better life and the unbalanced and insufficient development, the economy has grown from a high-speed to high-quality development, and China is now after the development of higher quality, better efficiency, more equality and sustainability. According to the strategic planning at the Party’s 19th National Congress, common prosperity will be reached in a comprehensive perspective in 2020, and on this basis, socialist modernization will be practically realized in 2035. By that time, people will live a much wealthier life, the proportion of the middle-income population much higher, the differences between urban and rural areas, between regions and between residents significantly reduced, basic public services practically equalized to all, and all the people will take a solid step towards common prosperity. By 2050, China will be a modernized socialist strong country that is strong, democratic, civilized, harmonious and beautiful, all people will reach common prosperity and people will enjoy a happier, safer and healthier life. The practice over the 40 years of Reform and Opening-up, the basic distribution institution that is based on contribution with multiple distribution forms has proved successful, and it has promoted the rapid growth of residents’ incomes and the fast accumulation of the social wealth. However, equality has always remained part of the essential ideals of the governing party, and it is characterized by different features in different historical periods, which combine into a holistic strategy to explore the integration of efficiency and equality in a dynamic development. A summary of income distribution is provided below from the perspective of the relationship between equality and efficiency by historical stage.

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5.1 The Beginning Phase of the Reform Was Underpinned by Income Differentiation with the Idea of Efficiency as a Must While Social Equality Was also Considered When the reform and opening-up was just started, efficiency was gradually established as the top priority with wide acceptance among the society in efforts to overcome egalitarianism and motivate people to participate in labor, which needed efficiency to be underscored in practice and in theory. At the time when China’s economic system was started to be reformed, not only did people have low incomes in general with a high poverty incidence, but China as an economy had very low gross domestic product as well. During this period, excessive attention to equalization with ignorance of efficiency would send China back to the old path of the command economy, which would in turn make it difficult to maintain equalization due to deficient efficiency. Furthermore, equalization does not necessarily equal equality. In the command-economy era, employees had little differences in wages, which did not bring equality. On the contrary, the egalitarianism gave people similar rewards regardless of the amount of labor, and laborers had no motivation. As a result, the incomes were equalized, but it was not fair. In contrast, differential incomes led to restoration of the distribution mechanism according to labor contribution, which also embodied the principle of equality. In summary, the beginning phase of the reform and opening-up may seem to represent a period when income inequality began, but it was in fact a fairer situation. Under the guidance of the distribution principle by contribution, the efficiency was improved significantly in this period, and the economy grew at a much higher rate.

5.2 Establishing and Improving the Socialist Market Economy Gave More Weight on Efficiency and the Underprivileged Were Cared for to Protect the Bottom of the Society At the Third Plenary Session of the 14th CCCPC in 1993, the goal of the economic system reform in China was set as the socialist market economy, while the principle of “efficiency first with equality considered” was proposed for the first time. This principle was reiterated at the 15th National Congress. In 1997 when the 15th National Congress was held, it was stated to “combine distribution by contribution with that by productive factor” for the first time, marking the distribution principle now with two distribution mechanisms, by contribution and by productive factor, combined. Both mechanisms of income distribution represented important progress in the localization of the Marxian political economics in China, and they also accommodated to the development context in China at the time. As a result, the economy grew at even

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higher rates. However, it should also be noted that the income differences were increased in all aspects in this period due to the underscoring of efficiency. In the meantime, the most basic equality and protection of the bottom of the society were also part of the ideas to regulate incomes. Bottom protection was manifested as the close attention to the population in poverty. After the rapid poverty reduction due to economic growth was attenuated, the central government officially placed the poverty reduction work in rural areas on the agenda and established poverty reduction offices and followed through with development-based poverty alleviation projects. In 1993, the “Seven-Year Program to Help 80 Million People out of Poverty” was released, and the poverty incidence in rural areas was decreased in large scales. In addition, when SOEs were transforming towards modern enterprises, a new-type social security system was launched for urban employees, which helped lessen the tension due to unemployment to a degree.

5.3 Equal Attention to Growth and Equality Was Re-integration of Equality and Efficiency After the Party’s 16th National Congress, as the income differences became increasingly large, concepts to pay attention to equality and to promote common prosperity showed up more and more in the decisions and policy documents of the Party and government. The principle of “efficiency first with equality considered” was no longer mentioned at the Fourth Plenary Session of the 16th CCCPC in 2004. Instead, the idea of “paying attention to efficiency at the primary distribution and to equality at the secondary” was changed to “properly handling the relationship between efficiency and equality at both primary and secondary distributions with more attention to equality at the secondary” at the 17th National Congress of the CPC, thus the relationship between equality and efficiency was considered as part of the whole of production and distribution. Combined with the guiding principles such as the “harmonious society” theory and the “five-fold coordination”, the equal attention to growth and equality in this period re-balanced the relationship between equality and efficiency. In this period, the Party and government took appropriate measures to help those with low incomes, such as the series of agricultural policies and measures, the subsistence allowance system covering both urban and rural areas, the resident old-age insurance and medical relief institutions for both urban and rural areas, and the constant improvement in the minimum wage. These institutional measures and policies played a positive role to alleviate the discontent among the society. As a result, although the income differences were still growing in the first few years after 2000 while people were not happy with it and it was also a hot spot of social attention, no large-scale social disturbances took place. In this perspective, equal attention to growth and distribution was a timely and effective turn in the guiding principle.

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5.4 Shared Development Is the Only Way to Integration of Equality and Efficiency Since the Party’s 18th National Congress, the relationship between equality and efficiency was given new insights, and the development concept with “people as the center” was widely accepted, leading to more attention to equality in theory and in practice. The basic principles were set to be “equal right, equal opportunity and equal rules”, with “equal start, equal progress and equal result” as the focus of work, and equality was thus integrated in the socialist market economic system, laying a solid foundation for a happy life for people. To realize the goal of reaching common prosperity in all aspects, the current focus is on targeted poverty alleviation. This unprecedented measure is of vital significance to poverty reduction. In addition, to narrow the income gap, the central government took measures to tackle the high-income end by strengthening supervision on the individual income taxes and setting a cap for high-level management of SOEs. These measures all reflect a higher weight put on social equality as a policy option to deal with the relationship between efficiency and equality. A longitudinal review of the evolution of the guiding principles and policies and measures regarding income distribution in China over the past 40 years reveals that the income distribution has actually undergone a dynamic process. The dynamics are reflected as a choice between efficiency and equality in different periods with different tasks. Although the income differences were enlarged for quite some time, the significant improvement in efficiency and the rapid economic growth led to large increases in incomes, even for the low-income population, while the income differences grew bigger mainly because the high-income population had larger-scale increases. Therefore, no social unrest resulted due to the wide-spread discontent over the widening income gap by the middle- and low-income groups as, despite their discontent, the vast majority of them benefited a lot from the economic growth. In the meantime, the stable, long-term governance of the CPC paid equal attention to both short- and long-term development, and at times when the cake could not be distributed most satisfactorily, the most vulnerable and underprivileged were protected for the basic rights, and at times when populism was wide spread, the CPC could start from the reality to ensure economic growth as much as possible, thereby making the right choice between equality and efficiency and maintaining the relative balance of efficiency and equality in the long run.

Epilogue

The year 2018 marks the 40-year anniversary of China’s Reform and Opening-up. The course these 40 years, together with the wonders created and achievements made during this period, has expanded the road for developing countries to stride to modernization, provided new options for the countries and nations around the world that hope for accelerated development with independence not compromised in any way, and contributed China’s wisdom and approaches to the solution to many issues of the humanity. For theoretical scholars, this is a good time point to review and summarize the experiences of the Reform and Opening-up to extract the China wisdom from the Chinese stories. In the past few years, I was working towards this end in the framework of the project, “Theories and Experiences of China’s Long-Term Economic Development”, with scholarly papers and monographs published from time to time. My colleagues, Du Yang, Wang Meiyan, Lu Yang and Jia Peng in the Institution of Population and Labor Economy, Chinese Academy of Social Sciences, were all involved in the studies of this project. To go deeper in a wider range and to realize the initial goal of this project, I invited my colleagues from relevant institutions in the Chinese Academy of Social Sciences to contribute chapters to this book, in the hope of making theoretical contributions to extracting experiences, improving theories and providing solutions. This book is structured and authored as follows: Prologue

Cai Fang

Chapter 1

The Path of Reform: Grassroots Explorations and the Top-down Design

Zhang Xiaojing

Chapter 2

Opening up: From Participant to Leader

Zhang Yuyan & Feng Weijiang

Chapter 3

The Macroscopic Economy: Insistence on the Overall Principle of Advancing in Stability

Yao Zhongzhi

Chapter 4

Regional Development: From Gradient Advance to Coordinated Development

Wei Houkai (continued)

© China Social Sciences Press 2021 F. Cai (ed.), The Chinese Approach, https://doi.org/10.1007/978-981-16-1899-4

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Epilogue

(continued) Prologue

Cai Fang

Chapter 5

The “Sannong” Policy: Starting with Integrating Urban and Rural Development

Zhang Xiaoshan

Chapter 6

From Large-Scale Poverty Reduction to Targeted Poverty Alleviation

Wu Guobao

Chapter 7

Industrial Development: From Big to Strong Huang Qunhui

Chapter 8

Leadership of Science and Technology: Beyond the Traditional Late-Mover Advantage

Li Ping

Chapter 9

Ecological Civilization: From Instrumentalism to Teleology

Pan Jiahua

Chapter 10

Human Resources: From Demographic to Talent Dividend

Gao Wenshu

Chapter 11

Social Security: Establishment and Wang Yanzhong Equalized Provision of Basic Public Services

Chapter 12

Income Distribution: Towards Integration of Wei Zhong Equality and Efficiency

Zhao Jianying, the Director of China Social Sciences Press and the Assistant Editor-in-chief Wang Yin invited me to organize the writing of this book. There are still limitations of this book that need further investigation from us, and I, as chief editor of this book, shall be fully responsible for all potential inappropriate and erroneous parts. I look forward to all comments from readers. Cai Fang November 24, 2018

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