Institutional Foundations of China’s Structural Problems

Rapid economic growth in the past thirty years has transformed China into the second-largest economy in the world. This achievement is spectacular from the perspective of post-war history. The influence of China’s thirty-year economic growth and its contribution to long-term global economic growth, owing to China’s huge population, seem comparable with that of the USA in the late 19th century. However, this comparison could be misleading without considering the fact that at this time the USA had better institutions than most other countries and was a leading country during the second industrial revolution. Thus, not only did the USA surpass Great Britain to become the largest economy in the world, but it also became the richest in terms of per capita GDP. In comparison, the current GDP per capita of China only accounts for one-eleventh (by the market exchange rate) or one-sixth (by purchasing power) of the USA, ranking it 94th in the world after Thailand (IMF 2011). As China is a relatively poor country that has just entered the low- to medium-income category, with severe institutional problems and overall relatively backward technologies compared with advanced countries, the questions of how far China can reach and whether its growth is sustainable are most challenging to address.