Forty years since Deng

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Editor's note: Keyu Jin is a professor of economics at the London School of Economics. The article reflects the author's opinions, and not necessarily the views of CGTN.

This year marks the 40th anniversary of China's economic reform and opening-up program. China has transformed itself from a once economic backwater to a manufacturing powerhouse, on its way to becoming the world's largest and most connected component.

If every era is marked by a series of common themes, the current one in which we are living is undoubtedly one about China's emergence, and its quest to achieve its destiny on its own terms.

Before looking forward, one can now look back for new insights, with the aid of more evidence and perspective. Perhaps, one of the most misunderstood aspects of China's rise was the drivers of its rapid growth in the first three decades.

The common perception is that China grew based on capital accumulation, and investment, the bridges that led to nowhere, and the empty buildings that gave rise to "ghost cities." Well, the data and evidence reject this view decidedly.

The slogan of reform and opening-up written near the entrance of a construction site, 1996. /VCG Photo

First, a few pieces of evidence would already point out the fallacies of this theory. Why would the annual rate of return to capital remain so high for so long? According to a variety of academic studies, it was about 25 percent over the period of 1978-2007.

This is much higher than the average rate of return for many countries, and the surprising element of this is that it lasted for so long.

If any economy's growth impetus was reaching levels of satiation because of over-investment, then, the returns to capital should precipitously decline to a low level. But clearly, this did not happen. Even in the recent decade, during which the economy has started to slow down, the rate of return has been above 10 percent.

Another piece of evidence that doesn't jibe with the "over-investment" conjecture is that the capital to output ratio has been relatively constant over this period, rather than rapidly rising. This means that capital did not lead, but grew at the same pace, with the output.

So, what explains China's growth? An under-appreciated, but instrumental, factor is the reduction in the distortions embedded in the economy. During the first 30 years of reforms, distortions were mitigated, so that resources could be better allocated across sectors and firms.

Indeed, resources moved from low-productivity to high-productivity areas – in particular, from agriculture to manufacturing, and from state-owned firms to private firms. This process significantly raised an economy's efficiency.

The Reform and Opening-up exhibition opened at the National Museum of China, Beijing, November 14, 2018. /VCG Photo‍

The private (non-state) sector grew from a negligible share of output in 1980 to more than 80 percent of output in 2007. Four hundred million people moved from agriculture to industry in the period between 1978 and the 1990s. These two large structural transformations underpinned China's growth in these two decades.

Total factor productivity growth achieved a stellar 3.61 percent average annual growth rate (1978-2007), which is higher than what most other countries had experienced, and certainly higher than the 0.5 percent growth coming out of advanced economies in the same timeframe.

The bottom line is that it is not always about accumulating more resources (labor or capital) that propels growth. By simply using existing resources more efficiently, a country's productivity level can dramatically improve.

Looking forward, the next 40 years will be another important stage for the Chinese economy. China has certainly "emerged," but is far from becoming a rich country. Whether it will escape the "middle-income trap," and whether it will continue to raise the living standards of all its citizens remains an open question.

To continue growing, China's needs to rely on productivity growth, and on innovation, which is the only sustainable factor for long-term growth.

Recent trade tensions seem to push China towards more self-sufficiency – whether it is to rely less on external economies and more on indigenous technologies or to strengthen IP protection, which is inherently good. A new phase of growth potential has begun.

We shall look back in 40 years, hopefully with the same sense of accomplishment and pride as we have today.

(If you want to contribute and have specific expertise, please contact us at opinions@cgtn.com.)