The Making of an Economic Superpower―Unlocking China’s Secret of Rapid Industrialization

Abstract

The rise of China is no doubt one of the most important events in world economic history since the Industrial Revolution. Mainstream economics, especially the institutional theory of economic development based on a dichotomy of extractive vs. inclusive political institutions, is highly inadequate in explaining China's rise. This article argues that only a radical reinterpretation of the history of the Industrial Revolution and the rise of the West (as incorrectly portrayed by the institutional theory) can fully explain China's growth miracle and why the determined rise of China is unstoppable despite its current "backward" financial system and political institutions. Conversely, China's spectacular and rapid transformation from an impoverished agrarian society to a formidable industrial superpower sheds considerable light on the fundamental shortcomings of the institutional theory as well as mainstream "blackboard" economic models, and provides more-accurate reevaluations of historical episodes such as Africa's enduring poverty trap despite radical political and economic reforms, Latin America's lost decades and frequent debt crises, 19th century Europe's great escape from the Malthusian trap, and the Industrial Revolution itself.

Forecasting China's Economic Growth and Inflation

“…China's economy, as well as its monetary policy, has reached a stage that is mature enough for rigorous empirical macroeconomic analysis comparable to the international standards (Wen, 2016). In more ambitious projects for future research, for example, Markov-switching models taking into account of regime changes and stochastic volatility and mixed-frequency models incorporating weekly or daily financial variables would be useful tools to address many practical and policy-related issues.…”

Escaping the Middle-income Trap —A Cross-Country Analysis on the Patterns of Industrial Upgrading

“…Complementing to Lin's view, Wen (2016) [43] argues that targeting industries with comparative advantages is not enough. The state also needs to help create markets for firms according to comparative advantages.…”

“…The fundamental reason is that the market is itself a public good, which individuals have few incentives and resources to create. Wen (2016) [43] points out that the "free market" has 3 pillars: political stability, social trust, and infrastructure, all of which determine the shape and extent of the market but are extremely costly to provide. Thus the market, especially unified mass market, can only be created by a strong mercantilist state.…”

“…Such a state is willing to promote manufacturing through trade and is capable of market creation. According to Wen (2016) [43], this is the secret recipe of the British Industrial Revolution and the rise of Europe since the Great Voyage. China's rapid industrialization since 1978 can thus be attributed precisely to its rediscovery of this secret recipe.…”

“…More specifically, Wen (2016) [43] provides a conceptual framework, called the New Stage Theory (NST) of economic development (or the Embryonic Development Theory), to illuminate the correct sequence to introduce market forces by the state, which he calls "the central historical developmental logic" shared by both the Industrial Revolution and China's miraculous growth. The NST characterizes economic development as a process of sequential market creation and structural transformation, from an agrarian market structure to a proto-industrial market structure, then to a light-industrial market structure and subsequently to a heavy-industrial market structure, and finally, to a service-oriented welfare-state market structure.…”