Economic growth and development

China’s economic development has been miraculous, with an average annual GDP growth rate of 9.9 percent and trade growth rate of 16.3 percent, since the transition from a planned economy to a market economy in 1979. This chapter attempts to provide answers to five related questions: why was it possible for China to achieve such extraordinary growth performance during its transition? Why was China unable to attain similar success before its transition started? Why did most other transition economies, both socialist and nonsocialist, fail to achieve a similar performance? What costs does China pay for its extraordinary success? Can China maintain dynamic growth in the coming decades? The chapter argues that China’s extraordinary development performance in the transition was a result of developing its economy according to its comparative advantages which allowed China to tap into the “latecomer advantage.” The poor performance before the transition was due to China’s attempt to develop comparative advantage-defying capital-intensive heavy industries while China was a capital-scarce agrarian economy. Other transition economies failed to achieve a similar performance because they adopted a shock therapy causing the collapse of their economies; whereas China adopted a gradual dual-track approach, which achieves stability and dynamic growth simultaneously. The costs of this transition approach are widening income disparities and other social economic issues – China, however, has the potential to maintain dynamic growth in the coming decades if the remaining distortions as a legacy of dual-track transition are eliminated.