Abstract
With rapid industrial upgrading along the global value chain of manufactured goods, China has transformed, within one generation, from an impoverished agrarian society to a middle-income nation as well as the largest manufacturing powerhouse in the world. This article identifies the pattern of China?s industrial upgrading and compares it with those of other successfully industrialized economies and the failed ones. We find that (i) China (since 1978) followed essentially the same path of industrial upgrading as that of Japan and the ?Asian Tigers.? These economies succeeded in catching up with the developed western world by going through three developmental stages sequentially; namely, a proto-industrialization in the rural areas, a first industrial revolution featuring mass production of labor-intensive light consumer goods, and then a second industrial revolution featuring mass production of the means of mass production (i.e., capital-intensive heavy industrial good s such as steel, machine tools, electronics, automobiles, communication and transport infrastructures). (ii) In contrast, economies stuck in the low-income trap or middle-income trap did not follow the above sequential stages of industrialization. For example, many Eastern European and Latin American countries after WWII jumped to the stage of heavy industrialization without fully developing their labor-intensive light industries, and thus stagnated in the middle-income trap. Also, there is a clear lack of proto-industrialization in the rural areas for many African economies that have remained in the low-income trap. We believe that laissez-faire and ?free market? alone is unable to trigger industrial upgrading. Instead, correct government-led bottom-up industrial policies are the key to escaping the low- and middle-income traps.
Highlights
In less than 40 years, China has transformed from an impoverished agricultural country to the world’s largest manufacturing powerhouse
Our empirical evidence seems to defy the new institutional theories proposed by North (1991) [32] and Acemoglu et al (2001)[1] about the mechanisms of economic development, and it supports instead the New Structural Economic Theory proposed by Justin Lin (2011, 2013)[25,26] and the New Stage Theory proposed by Yi Wen (2016) [43]
Lin and Wen’s theories view political institutions as largely endogenous to economic development and are not the prerequisites to development. They instead argue that the key to development is not just market but, more importantly, correct industrial policies pushed by capable governments
Summary
In less than 40 years, China has transformed from an impoverished agricultural country (with income per capita less than $250 in the 1970s) to the world’s largest manufacturing powerhouse (with income per capita around $8000 in 2016). Countries in Africa, Latin America and Eastern Europe are far more democratized, marketized, privatized, liberalized and deregulated than China, yet unable to grow like China, still troubled by sluggish growth and caught by low- or middle-income traps after so many years subscribing to the Washington Consensus. This contrast, by no means implies that market forces are not important or critical for China’s achievement (since China was caught in a poverty trap before its market-oriented reform in 1978), but it implies that market forces alone are far from sufficient, albeit necessary.
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