Chinese Economy

----A Book Worth of Reading

Chinese economy has experienced remarkable development sine late 1970s and there is no evidence that such momentum will cease in the foreseeable future. Drawing much attention from economists, Chinese economy is now the focus of world economy.

This book, Chinese Economy, written by two Chinese economists----Pro.Lin Yifu and Pro. Cai Fang, is dedicated to introducing Chinese economy. For those who are not familiar with Chinese economy, what’s most fascinating is its unprecedented rate of increase in GDP. However, economic development, including the change in economic structure and the increase in income per capita and so on, is far more than a higher GDP. For those interested in Chinese economy, a lot of questions may arise in their mind. What was Chinese economy like before it took off? What adjustments have been made to push Chinese economy to develop in the right direction and at such a high speed? Before Chinese Economy was published, no literature was devoted to discussing Chinese economy that specifically and systematically. Now, those eager to work out the mystery of Chinese economy can turn to this book as an introduction.

As a Chinese economics student, it is my responsibility to get a thorough understanding of Chinese economy and this book is the very one to help me. Although the two authors do not intend to go further on specific topics in this book, it can help us understand Chinese economy as a whole. Anyway, demonstrating specific Chinese economic problems is beyond the scope of this book as an introductory one. Mainly speaking, there are three features of this book.

First, although written by professional economists, it is easy to comprehend. The authors have made great efforts to use as few professional expressions as possible, so readers with limited economic background can go through this book with out much difficulty. However, basic economic knowledge and concepts are necessary, such as Gini Coefficient which denotes income distribution inefficiency. Each chapter begins with theories that are easy to grasp and is followed by straightforward data and diagrams. Without complicated and bizarre models, aspects of Chinese economy are illustrated in plain language. Although it is introductory, it can never be said to be superficial. Actually, it is full of data and facts that can help us get to know Chinese economy in the shortest time.

Second, all arguments in this book are based on the analysis of traditional economic system of China. In order to explain why the performance of Chinese economy is changing so fast, it is necessary to know what traditional economic system was----the Chinese economic system before late 1978.Aactually, all adjustments made and policies implemented by Chinese government after 1978 were aimed at solving the problem of inefficiency under the traditional economic system. Traditional economic system was composed of three parts, as generalized by the authors. First, prices were distorted. China devoted most of its resources to developing heavy industry before late 1970s. When PRC was founded, Chinese economy was undeveloped and capital was scarce, so cost of capital was high and price of capital should have been very high. However, in order to develop heavy industry, Chinese government at that time lowered price of capital artificially. Correspondently, prices of foreign exchange, raw materials, labor and necessities were lowered to decrease the cost of formation of capital in heavy industry. Second, resources were allocated by highly concentrated regulation, but not the market (invisible hand). Low prices of factors and products induced shortage. To ensure that resources flew to heavy industry, a regulated resources allocation system but not market system was needed. Thirdly, microeconomic units (individuals) were lack of incentive. In order to develop heavy industry, surplus in the production process did not belong to microeconomic units, but to the state and consequently to heavy industry. This leaded to serious lack of incentive and efficiency.

The third feature is that the writers highly emphasize the role of comparative advantage theory. When PRC was founded, capital was scarce while labor was abundant. According to comparative advantage theory, agriculture and light industry that calls for much labor but less capital should be developed advantageously. However, Chinese government at that time directed most resources to heavy industry (for the sake of nation security or so) which required much capital. In a long time after PRC was founded, Chinese products had no comparative advantage over products from other countries. In a word, failure to take advantage of cheap labor but falsely emphasized heavy industry is the source of the low level development before 1978.

This book is divided in to 11 chapters, each chapter dealing with one aspect of Chinese economy. The first chapter talks about geological condition, natural resources and the population. The second chapter deals with labor resource and market. The third market is about financial system and financial market. The fourth chapter is mainly about economic development. Not only increase in total production, but also change in economic structure was covered. The fifth and sixth chapters deal with agriculture and industry respectively. The seventh chapter is about the establishment of social security system, which has much to do with the reformation of state owned firms and the interest of Chinese people. The eighth chapter concerns about sustainable development and the ninth talks about the relationship between Chinese economy and the world economy. The tenth chapter discusses government’s role in economic development while chapter eleven concludes the whole book. As mentioned above, each chapter is based on but not limited to economic theory. A good many of facts and data are supplied to help us grasp Chinese economy quantitatively. Also, most of the analysis follows the pattern discussed above----talk about the traditional economic system first and then shows us what has been done to infrastructure it.

There is both history and prediction in the book. Almost every event in the reformation of Chinese economy is mentioned. What’s more, the book builds a framework that can help us understand Chinese economy as a whole but not superficially. It is beneficial to those who are interested in Chinese economy. As to students learning economics, it is informative enough to intrigues our interest in studying Chinese economy. To further study Chinese economy, further reading is inevitable. However, Chinese economy as an introduction is indeed worth of reading.