Economic Lessons Learned from China’’s Forty Years of Reform and Opening-Up

This book first shows that the past 40 years of China’s economic reform and opening up represents the greatest magnitude of economic growth in history. Based on field trips, extensive and intensive interviews and literature surveys, this book argues that there are five general lessons for a rapid growing economy from China’s economic reform and opening up, all in the area of the relationship between the government and the economy. First, the local governments need to be incentivized to help rapid entry and development of enterprises. Second, local governments need to be incentivized to help rapid land conversion from agricultural to non-agricultural. Third, financial deepening is vital; that is, inducing households to hold more and more financial assets in local currency. Financial deepening is essential to convert savings into investments. This requires financial stability, which is crucial. Fourth, the learning through opening up is the key to endogenous economic growth. The fundamental benefit of opening up is learning rather than enjoying comparative advantage. The fifth and final lesson from China is that the central government must proactively manage the macroeconomy. The rationale is that enterprises compete with each other in games of industrial organization. In order to resolve this problem, proactive measures including market-oriented means, administrative orders and reform measures should be implemented. Overall, the main lesson from China’s past 40 years of reform and opening up is that proper incentives and behavior of the government, local and central, are important for economic growth. China has been conducting reforms in this regard and as a result, the government more or less has been playing the role of a ＂helping hand＂ regarding economic growth, although China’s economic system is far from perfect and many reforms are still needed.

David Daokui Li is the Mansfield Freeman Chair Professor of Economics at Tsinghua University, the Dean of Academic Center for Chinese Economic Practice and Thinking (ACCEPT), the Director of Center for China in the World Economy (CCWE), the founding Dean of the Schwarzman Scholars at Tsinghua University and the Director General and Chief Economist at New Development Bank (NDB). Professor Li holds a Ph.D. in economics from Harvard University and a B.E. from the School of Economics and Management, Tsinghua University.

As a member of the Monetary Policy Committee of the People’s Bank of China from 2010 to 2012, David D. Li holds many insightful opinions on Chinese economic practice and frequently provides consultation on economic policy making of the Chinese government. As the Co-president of the Society for the Analysis of Government and Economics (SAGE) and the founding Dean of ACCEPT, David D. Li is the main advocate of the theory of government and economics.