People’s Republic of China: Economic Performance and Prospects

The economic reforms of the People’s Republic of China (PRC) have led to a switch from negative to large positive total factor productivity growth when Chinese GDP is recalculated using market rather than state-set prices. The reforms have also led to a substantial but less than complete correction of distortions in the structure of GDP, particularly the overemphasis on the producers goods industry during the pre-reform years. The reform process itself proceeded along a dual track of developing new systems without first reforming old systems. Political resistance to reform made this approach necessary, but it also had a number of adverse effects. Markets performed well in some sectors such as agriculture and small-scale industry, but poorly in such key sectors as finance. The partial nature of reforms thus led to an economy subject to strong cyclical savings. Reform in the earlier years was accompanied by declining inequality in the rural areas, but this decline soon reversed itself, and inequality began rising markedly in the rural areas. Because urban inequality rose from the beginning of the reform, overall inequality has risen substantially, although the number of absolute poor has fallen steadily. Regional and rural-urban inequality have resulted in large migration within the PRC, posing a broadbased challenge to government reformers.