Is the Chinese Economy a Miracle or a Bubble?

An indispensable reference to the development of the Chinese economy—past, present, and future.

—DALE W. JORGENSON, Samuel W. Morris University Professor, Harvard University

Since China undertook economic reform and opened its economy to the world in the late 1970s, its economy has been growing at an average annual rate of over 9 percent for more than four decades. No other economy in recorded history has grown at such a high rate and for such a long period as China has done. The questions that naturally arise are: Was the Chinese economy a miracle? Or was it a mere bubble? Will the Chinese economy begin to stagnate like the Japanese economy did in the 1990s, and perhaps decline? Will it be able to escape the “middle-income trap”? If it is not a miracle, can the Chinese development experience be replicated elsewhere?

This book provides a comprehensive and detailed discussion of the remarkable growth of the Chinese economy over the past decades, by scrutinising the sources of economic growth, and evaluating

the strategies adopted by the Chinese government to promote the transition from a centrally-planned economy to a market-based economy by means of the “dual-track” approach. It is argued that, while the Chinese economy is unique and exceptional in many ways, its development experience can be explained and attributed.

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A comprehensive and detailed discussion of the remarkable growth of the Chinese economy at nearly double-digit rates in the four decades since the reforms of Deng Xiaoping in 1978. This volume will be an indispensable reference to the development of the Chinese economy—past, present, and future.

—Dale W. Jorgenson

Samuel W. Morris University Professor, Harvard University

Lawrence Lau’s discussion and economic reasoning with regard to the economic development of China dispels the view that the Chinese economic development since the opening up in the late 1970s was bubble. I found his reasoning fascinating and his arguments that other countries can replicate the Chinese experience to facilitate their own development sound and well-reasoned. This book will be read and discussed by scholars and practitioners interested in a better understanding of the road to economic development.

—Myron Scholes

Nobel Laureate in Economic Sciences (1997)

Professor Emeritus, Stanford University

The essays in this book present a rich and informed analysis of China’s long-run economic development. They provide a unique insight into the Chinese economy at a crucial point in the country’s development. The essays have deep analytical weight, reflecting Lawrence Lau’s outstanding contribution to economic thought and policy formation in China.

—Peter Nolan

Founding Director, Centre of Development Studies, University of Cambridge

This is a great and well-researched book. As a distinguished scholar and renowned adviser to Chinese economic policymakers, Professor Lawrence Lau utilizes extensive data and economic models to evaluate the various sources of growth since China’s 1978 reforms from an innovative perspective. The book juxtaposes China’s experience with other East Asian economies, offering unique and deep insights into its distinctive development path. It’s essential reading for politicians, scholars, business leaders, investors, students, and anyone interested in understanding China better.

—Junsen Zhang

Dean and Distinguished University Professor, School of Economics, Zhejiang University

Fellow of the Econometric Society

Lawrence J. Lau received his B.S. degree (with Great Distinction) in Physics from Stanford University in 1964 and his M.A. and Ph.D. degrees in Economics from the University of California at Berkeley in 1966 and 1969 respectively. He joined the faculty of the Department of Economics at Stanford University in 1966, becoming Professor of Economics in 1976 and the first Kwoh-Ting Li Professor in Economic Development at Stanford University in 1992. From 1992 to 1996, he served as a Co-Director of the Asia-Pacific Research Center at

Stanford University, and from 1997 to 1999, as the Director of the Stanford Institute for Economic Policy Research. He became Kwoh-Ting Li Professor in Economic Development, Emeritus, upon his retirement from Stanford in 2006. From 2004 to 2010, Professor Lau served as Vice-Chancellor (President) of The Chinese University of Hong Kong. Since 2007, Professor Lau has been serving as Ralph and Claire Landau Professor of Economics at The Chinese University of Hong Kong. From September 2010 to September 2014, he served as Chairman of CIC International (Hong Kong) Co., Limited. He has authored numerous publications, including The China-U.S. Trade War and Future Economic Relations (2018).

Foreword by Dale W. Jorgenson / ix

Preface / xi

Acknowledgments / xvii

Introduction / 1

Section I: Economic Growth: China and East Asia

Commentary / 18

1. The Sources of Economic Growth of the East Asian Newly Industrialised Countries / 27

2. The Sources of Asian Pacific Economic Growth / 65

3. How Much Slack Was There in the Chinese Economy Prior to Its Economic Reform of 1978? / 73

4. The Sources of Chinese Economic Growth since 1978 / 111

5. What Makes China Grow? / 135

6. The Great Transformation—East / 189

Section II: The Strategies of Economic Development: China and East Asia

Commentary / 216

7. The Role of Government in Economic Development: Some Observations from the Experience of China, Hong Kong, and Taiwan / 223

8. The Sky Isn’t Falling—The East Asian Currency Crisis (1997) / 263

9. Gain without Pain: Why Economic Reform in China Worked / 275

10. The Macroeconomy and Reform of the Banking Sector in China / 299

11. Reform without Losers: An Interpretation of China’s Dual-Track Approach to Transition / 329

12. The Chinese Economy: Myths and Realities / 355

Section III: The Chinese Economy in the New Era

Commentary / 386

13. The Sky Is Not Falling!—The China-U.S. Trade War (2018) / 389

14. Chinese Economy in the New Era / 425

15. Public Goods Provision and Chinese Economic Development / 449

16. The Prospects for the Chinese Economy in 2023 and Beyond / 483

Conclusion / 493