New book offers unconventional answers to China's economic rise

China's rapid economic rise poses many stark questions. For one, what is behind the country’s eye-catching resurgence and what does it mean for the rest of the world? CEIBS Professor of Economics Zhu Tian’s new book, Catching Up to America, comes up with some unconventional answers.

The book debunks several popular explanations of China’s rapid rise – explanations ranging from an abundance of cheap labour, export orientation, and demographic dividend to strong government, mercantilist policies and theft of Western intellectual property. Based on global comparative analyses, the book argues that the main differentiating factor in economic performance between China and most other developing countries has been its Confucian culture of savings and education (not demographics or unique institutions and policies). Prof. Zhu also shows that many of the misconceptions about China’s economy have arisen from a failure to adopt a truly global comparative perspective and a failure to distinguish between long-term growth and short-term fluctuations.

Prof. Zhu centres his argument on a concept he calls the “China growth puzzle” – pointing out that the main issue is not why China has grown faster than high-income developed countries, but why it has grown so much faster than other low- and middle-income developing countries.

The opening chapter looks at China’s fastest growing 30-year period of 1982-2012, during which its per capita GDP grew by 9.12% per year. China grew not only faster than the US (1.92%) and the high-income OECD countries (averaging 1.86%), but also much faster than low- and middle-income countries such as Sub-Saharan African countries (averaging 0.45%) and Latin American and the Caribbean countries (averaging 1.21%). The chapter then evaluates the extent to which China’s growth rate may have been overstated, but concludes that China’s growth was still the fastest even allowing for inaccurate data. Prof. Zhu also shows that China’s rapid growth is similar to that achieved by Japan and the four Asian Tiger economies a few decades earlier, and contrasts this with the fact that no other developing countries have achieved the same success as these East Asian economies.

The book then moves on to evaluate popular explanations of China’s rapid economic rise over the past 40 years. Prof. Zhu argues low income or cheap labour alone does not make a country grow faster, and points to statistics showing most developing countries do not automatically catch up quickly with developed countries. The chapter then evaluates how much the demographic dividend may have contributed to China’s extraordinary growth, and finds any advantage resulting from faster growth of labour than general population accounted for only half a percentage point of China’s GDP per capita growth – not much different from that of many other developing countries.

Many economists and political scientists explain China’s rapid rise from an institutional perspective. There are two key schools of thought – the free market school and the active government school. Both acknowledge market reform has been a key factor in China’s rapid economic growth, but the active government school also attributes this to China’s strong government and its active economic intervention. Prof. Zhu argues neither view properly explains the China growth puzzle, because the country's market is not much freer than that of most developing countries, and China is not particularly well ranked in terms of government effectiveness.

Prof. Zhu distinguishes between long-term growth and short-term fluctuation, and notes the former is determined by the supply-side factors of investment, education and technological progress, whereas the latter is affected by demand-side factors of consumption, investment and exports. Investment creates both short-term demand and long-term supply. Prof. Zhu argues that China has enjoyed the highest investment rate in the world in the past few decades thanks to its extraordinarily high savings rate, which he ascribes to its Confucian culture. Although a high rate of savings and investment is one of China’s distinct advantages over all other developing countries, the popular press often describes China’s growth as seriously imbalanced, relying too much on investment and exports and too little on consumption. Prof Zhu goes on to explain why this popular view is misplaced.

The role of education in China’s rapid growth is also examined in the book. The country’s long-standing and relatively high educational level is a significant advantage for China’s economic development, but the differentiating factor is the quality rather than quantity of education, according to research. Prof. Zhu argues it is the traditional Confucian culture that has made people in China and other East Asian economies value education more than people in most other developing countries, thus giving China and similar economies an edge in economic development.

Technological progress and innovation is important in economic growth in general, but IP theft is often cited as a reason for the speed of China’s rise. Prof. Zhu evaluates China’s changing ability to innovate by using common indicators like the number of patent applications or grants, the number of scientific publications, and the amount of R&D expenditure. He finds that on a per capita basis, the gap between China’s level of innovation and that of the most developed countries like the US is still large. However, for a country that is still some distance from the technological frontier, the key question is not how big its innovation gap is, but whether the gap is narrowing and whether it is narrowing quickly enough. By this criterion, China has been by far the best performer amongst all developing countries. As technological innovation requires both physical and human capital input, the Confucian culture of thrift and education may have been the differentiating factor behind China’s rapid progress in science and technology, Prof. Zhu argues.

To what extent has Confucian culture, with its emphasis on hard work, savings, and education, enabled China and other countries in the Sinosphere to rapidly accumulate both physical and human capital, absorb existing Western technologies, and develop indigenous innovation capacity better than other developing countries? Prof. Zhu addresses some of the common objections to the cultural theory as well as some misunderstandings of it. He also notes that there has been a cultural awakening in economics in the past two decades and that an increasing number of leading economists have explored both theoretically and empirically the role of culture in economic growth and development. The last section of the chapter considers the role of some other Confucian values such as benevolence and trustworthiness in helping to promote economic growth in a society with a weak rule of law.

China’s slowdown is also addressed. After 2012, the Chinese economy entered a phase of declining growth. The GDP growth rate of 6.1% in 2019 just before the COVID-19 pandemic was the lowest in nearly 30 years. What caused the slowdown? Is the country falling into the so-called “middle-income trap”? Prof. Zhu argues this phenomenon does not really exist and that before reaching a high-income status, a country’s growth rate is unrelated to its income level. He then shows that China’s slowdown was mainly caused by the precipitous decline in investment growth, due to sweeping anti-corruption and anti-pollution campaigns during 2013-2015. The book also says this was exacerbated by the misguided contractionary macroeconomic policies in 2016 and 2017 due to a mistaken belief by policymakers and economic commentators that China had invested too much and the corporate sector had piled up too much debt. In other words, China’s downturn before COVID-19 was not inevitable, and its economy could have grown faster.

Finally, Prof. Zhu addresses the central matter of his book – will China catch up to America, and if so, when? Will the superpower rivalry slow China’s rise in a Post-COVID-19 world? Prof. Zhu assesses China’s potential growth rate over the next 30 years under the assumption that geopolitical challenges will not have a significant effect on China’s long-term growth trend. He then discusses the impact of the COVID-19 pandemic and geopolitics on China’s growth prospects. He predicts China’s aggregate economy will most likely surpass that of the US by 2030 and possibly double it by 2050. He argues geopolitics will not have significant impact on China’s economic prospects, and that the country’s rise can benefit the rest of the world, particularly through contributing to global technological progress.

Prof. Zhu concludes that because China’s rise appears irreversible, we are entering a truly multipolar world, and peaceful coexistence is no longer an option, but a necessity.

Writer | Cameron Wilson

Editor | Michael Thede 

Zhu Tian

Professor of Economics, CEIBS

Zhu Tian is a Professor of Economics and the Director of the EMBA Programme at CEIBS. His teaching and research interests focus on the Chinese economy and culture and economic development. He is also the author of Catching Up to America: Culture, Institutions, and the Rise of China.

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