What has created China's economic miracle?

By Boss Gu, rewritten in English by Mr. Y

Over the past 40 years, China has grown rapidly from one of the poorest countries to the 2nd largest economy (and probably the largest consumer market in reality) in the world.

From 1980 to 2020, the proportion of Chinese people living in extreme poverty has dropped from more than 90% to nearly zero (see the diagram below, source: https://en.wikipedia.org/wiki/Poverty_in_China).

Figure 1. Changes in the proportion of people living in extreme poverty in China

 Today, China is the world's largest exporter

(https://en.wikipedia.org/wiki/List_of_countries_by_exports) and the largest trading nation (https://ustr.gov/countries-regions) at the same time.

Such economic growth in a country with a population of over 1.4 billion deserves to be called a miracle! A question that arises is, why has China's economy developed so rapidly, or what has created China's economic miracle?

Many people attributed it to China's socialist system, because China is one of the few socialist countries in the world; others say it is China's traditional Confucian culture.

For those Chinese who have been deeply involved in this economic transformation, the answer is obvious: because of "Reform and Opening up". The so-called "Reform and Opening up" means, in plain words, market-oriented reform and opening to trade and personnel exchanges with foreign countries.

Most foreigners may not know about “Reform and Opening up”, but many probably have heard that China is a socialist country. So, let's start with socialism today.

Five "socialist" countries

There is always a saying that only China, Vietnam, North Korea, Cuba, and Laos are now practicing socialism in the world. Therefore, people always think that except for these five countries, the rest are capitalist countries, or free market countries.

However, people who say so neither know the world nor these five "socialist" countries.

If you have a little international knowledge, you will agree that, the social status quo of China, Vietnam is already a world apart from Cuba, North Korea, although they are all "recognized" socialist countries.

Since the 1980s, Deng Xiaoping, China's supreme leader during that period, proposed that socialism can also practice market economy, which separated the socialism ideology from its economic system. Since then, China's economic system became completely different from that of North Korea and Cuba.

North Korea and Cuba still have socialism or planned economy to this day, while China has almost eliminated the planned economy except in a few areas.

What is a planned economy at all? Simply put, rather than based on market demand, planned economy organizes production by following government orders.

Some people think that state-owned enterprises are the planned economy. China does have many state-owned enterprises, but this doesn’t mean China has correspondingly quantity of planned economies.

Nowadays in China, even state-owned enterprises organize production according to market prices and make profit and loss calculations. However, in the planned economy, enterprises, like the government, did not need to and did not make profit and loss calculations.

State-owned enterprises surely have many problems, such as privileged position, barriers to competition, and the absence of owners, but not the planned production.

State-owned enterprises do not meet the criteria of the free market. But one fact that may shock foreigners is that even in some areas where state-owned enterprises dominate, the degree of Chinese marketization in these areas is still world leading.

For example, the public medical care, in the past thirty years the Chinese medical system has been much freer and more market-oriented than most so-called capitalism countries in the world; take the British medical system as an example, doctors are civil servants and hospitals are government agencies. While the UK is considered a model of capitalism and free markets, there is not much of a free market in UK healthcare.

I have witnessed first-hand a phenomenon that is unique to Chinese immigrants to the UK. Once they suffer from a disease that requires surgical treatment, they usually choose to fly to China and pay for treatment there instead of staying in the UK to wait for the free public treatment, because if they wait too long, a minor illness may turn into a terminal disease.

Therefore, it is completely ignorant to equate the economic systems of China and North Korea. China's development is indeed the success of the free market(or Reform and opening). Although this level of marketization is still far from the ideal state, it is not low in the world. This is also the fundamental reason for China’s economic booming in the past four decades. 

Once you have lived in China for a certain period especially during 2010s, you can clearly see and feel China's marketization.

Private enterprises have a large degree of freedom in operation, products from all over the world can be seen everywhere, and labor transactions are freer than in Europe and the US.

For a long time, small and medium-sized enterprises have been in a low-tax state, labor can migrate freely, and there are not many occupational regulations vs. you need a license to be a barber in the US.

Similarly, we can list the drawbacks of China's market compared to the developed countries, such as, state-owned enterprises have monopolized more fields, the UK rarely has any approval system. In addition, the regulation (or confinement) in certain areas of the Chinese market has increased in recent years, which we believe is not a good thing.

China's marketization level is not comparable to that of "socialist" countries such as Cuba and North Korea. In addition to Vietnam's rapid marketization in recent years, Laos has also done some marketization, while Cuba and North Korea are still planned economic systems.

Therefore, Cuba and North Korea have become the poorest places in the world.

The main or probably the only reason for China's economic take-off in the past 40 years is the free market, or what China is used to calling it "market economy." That is, the market coordinates production activities.

The Irrefutable Evidence

On the other hand, China's economic boom over the past 40 years can be the strongest proof of the free market.

Compared with the period before 1980, China's ruling party (or basic political structure) has not changed, China's ethnic composition has not changed, China's territory has not changed, and China's religion and traditional culture have remained basically unchanged. The only significant change is the introduction of the market economy and its replacement of the planned economy. In the period before 1980, China was almost the poorest country in the world, and even suffered from famine.

Those who were adults before “Reform and Opening up” are now over 60 years old. Almost everyone recalls that their biggest wish at that time was to eat a piece of meat throughout the year.

After the implementation of Reform and Opening up, China's GDP increased by over 100 times! (check the diagram below, source: https://tradingeconomics.com/china/gdp).

Figure 2. The average income of urban residents increased from less than 50 CNY per month to more than 10,000 CNY ! (https://tradingeconomics.com/china/wages)

Today, tens of millions of Chinese people have lived the affluent life in the West that they once dreamed of, and those who traveling abroad are regarded as “mobile wallets” in many countries.

And this profound and rapid transformation is enough to show how the free market plays an indispensable role in human's prosperity.

Of course, two other big changes were also taking place in China at the same time.

Firstly, during the year 1956-1973, China had teachers, scientists, civil servants, farmers and other people working in all walks of life, but ZERO entrepreneurs or capitalists. Almost all urban residents worked for the government or state-owned units, and the rest were farmers working for the commune.

Today, the total population of private entrepreneurs and self-employed individuals in China has exceeded 180 million!

(http://english.scio.gov.cn/pressroom/2024-06/14/content_117253322.htm)

By the end of 2023, the private economy section in China has contributed more than 50% of China's tax revenue, more than 60% of GDP, more than 70% of technological innovation results, more than 80% of urban employment, and more than 90% of the number of enterprises.

The second major change was that China trade sanctions were reduced to zero.

Ever since the establishment of diplomatic relations between China and the US in 1973, the US has gradually relaxed its trade sanctions on China.

The above two changes further demonstrate the fundamental role of the free market in economic development.

The first change is easy to understand. The free market is the soil for entrepreneurs to survive. The efforts and wisdom of entrepreneurs have further promoted the rapid development of China's economy.

The second change reflects the important role of the free market environment outside China.

Since the establishment of diplomatic relations between China and the US in 1973, the US has gradually relaxed its trade sanctions on China. Until 2001, the US removed all its trade sanction bar on China, when President Bush signed an order formally announcing that China would be granted permanent normal trade relations status.

From the impoverished 1978 to 2000, China's GDP increased 5 times. Since 2001, China joined the World Trade Organization (WTO); China's economy experienced explosive growth, with GDP increasing 14 times in 20 years.

As a showcase city of China's Reform and Opening up, Shenzhen has developed from a 1970’s small fishing village to a world-renowned technology, finance and manufacturing center today.

Figure 3. Photo of Shenzhen city from the 1990s. The photo shows a street scene in Shenzhen with a poster of “Reform and Opening up”. At that time, most of the Chinese people still used bicycles as their private means of transportation. The streets are very lively, busy but also orderly.

The person in the above poster is DENG Xiaoping, who is known as the Chief architect of China's Reform and Opening up. The lower half of the poster features Shenzhen’s landmark buildings at the time, representing Shenzhen’s modernization and economic achievements.

Shenzhen was a microcosm of China's development in the past four decades. Today, the skyscrapers buildings in the poster are common in every medium-sized city in China.

Over the past four decades, China has escaped widespread poverty and embarked on the road to prosperity because of the market economy. And China's past path has undoubtedly shown that the free market is the only way for a country to become rich and strong.

Looking at the world today, whoever firmly embraces the free market will prosper.

Free Argentina

In 2024, South American country Argentina ushered in the first Austrian-school leader in human history - President Milei Havier.

Austrian School of Economics are the staunchest defenders of the free market.

Milei is now carrying out a series of brave market-oriented reform in Argentina. If Argentina can continue to implement bold market-oriented reforms like today for 20 years, it will surely become a rich country again in 20 years, "a place flowing with milk and honey".

Let's see. Come on, Milei! Long live freedom, damn it!

Figure 4. Argentina new present of Austrian-School, Milei

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