By Wu Jinglian

Research Report No 195, 2006

I. Three Modes of Growth

China's economic growth since the founding of the People's Republic has been following the pattern of the initial economic growth of the early industrialized countries.

According to the analysis of modern economics, the contemporary economic development in the Western countries has roughly gone through three periods. The first period ran from the first Industrial Revolution in the late 18th century to the early stage of growth that began from the second Industrial Revolution in the late 19th century. During this period, the economic growth in the Western countries was mainly driven by investment. The theoretical summary of this mode of economic growth was the famous Harrod-Domar model. The second period was generally called the period of modern economic growth, which lasted from the late 19th century to the information age in the mid-20th century. The economic growth during this period was driven by technological advance and efficiency improvement. Its theoretical summary was the neoclassical Solow growth model. Beginning from the 1950s, the developed countries entered a period of economic growth characterized by knowledge economy and informatization in the post-industrial age. During this period, the development economics formed new theories of economic growth and established the endogenous economic growth model.

The initial mode of growth in the early industrialized countries produced a series of negative economic and social consequences, such as the worsening living conditions of the working class and the serious pollutions, which were called the evils of the so-called "Manchester Capitalism". Karl Marx made a thorough analysis of these evils. He noted that as the investment-driven economic growth constantly raised the ratio of capital to labor and the ratio of invariable capital to variable capital, namely the organic composition of capital, the ratio of variable capital (capital used for wage payment) to the total capital would become increasingly lower. This would lead to two regular phenomena. One phenomenon was what Marx called the law of a declining average rate of profit. The decline of the average rate of profit could cause the intensification of competition and the formation of monopoly. Another phenomenon was named by Marx the law of a constant growth of the relatively surplus population (namely the unemployed population). In other words, the income of the workers or the proportion of their consumption funds in the national income would become increasingly smaller, which in turn caused the increase in the unemployed population and the poverty of the proletariat. In the first volume of his work Capital published in 1876, Marx pointed out that the death knell for capitalism would ring soon. His conclusion was precisely based on the above analysis.

Marx's analysis of the mode of economic growth in the early years of capitalism is unassailable even from the contemporary perspective. But unfortunately, while the early industrialized countries had all turned to the modern mode of efficiency-driven growth in the late 19th century, the socialist countries led by the Soviet Union almost all adopted the early mode of growth of the Western countries. This was because the Soviet Union established a line of industrialization in the 1920s characterized by a conscious introduction of the early capitalism mode of growth, namely the "line of socialist industrialization giving priority to the development of heavy industry". This "line of socialist industrialization" put forward by Joseph Stalin was not inferred from any theoretical mode of growth. Instead, it was out of practical need, the need that the Soviet Union surrounded by capitalism must build up its defense strength as fast as possible. It was only because the Soviet leadership headed by Stalin wanted to increase the legitimacy of their line and suppress the inner-party opponents in the party's struggles that they cited the expositions on the early growth of capitalism made by Vladimir Lenin in his work On the So-Called Market Question published in 1893. Lenin said in that article that growth was fastest in the means of production sector producing means of production, fast in the means of production sector producing consumer goods, and the lowest in the sector producing consumer goods. They used this statement on historical facts to prove that the mandatory state investment made to ensure the priority growth of the heavy industry was a conscious application of the "basic principles of Marx's theory of reproduction".

Stalin's "line of socialist industrialization" was confirmed by the Soviet Communist Party as the only correct line in the country's "campaign against right opportunism" in the mid-1920s. Later, Feldman，an economistof the Soviet Planning Commission, was authorized to build a theoretical model for the investment-driven high economic growth. This model, known as the Feldman model, became the theoretical foundation for theformulation of five-year plans. The socialist countries founded later, including China, all adopted this line. Although China deeply felt the disastrous consequences resulting from this mode of growth as from the late 1950s and took some measures in the course of reform and opening up to alleviate and eliminate its consequences, a change in the mode of growth has never become a reality due to the lack of fundamental theoretical and policy solutions. This explains why the 11thFive-Year Plan still has to reemphasize the necessity and urgency of striving for a change in the mode of economic growth.

II. Export-Oriented Policy Cannot Indefinitely Support Growth

In the course of industrialization, some countries and regions in East Asia somewhat adopted the approach featuring investment-driven growth. That approach had been adopted by the early industrialized countries in the course of their initial economic growth. But for a considerable time, these countries and regions did not feelthe bottleneck constraint of end consumption noted by Marx. On the contrary, they maintained robust growth for more than one to two decades. This was, to a great extent, because many countries and regions in East Asia adopted an export-oriented policy and replaced the shrinking domestic demand with the export demand so as to ease the sluggish domestic demand arising from the mode of investment-driven growth. For this reason, the export-oriented policy featuring the appropriate government protection of national enterprises and the devaluation of national currencies was often regarded as one of the important magic weapons for creating the "East Asian miracle" in the 1970s-1980s. After the reform and opening up and especially after its foreign exchange reform in 1994, China also successfully used this approach to seek a vigorous export growth and to support a sustained rapid economic growth with the robust export demand.

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