China’s dual-track progressive reform model is of world significance.

　　Since the reform and opening up, China is the only country in the world that has not experienced financial and economic crisis.

　　If we want to find a word to describe China’s economic achievements in the 40 years of reform and opening up, the most appropriate word is "miracle".

　　At the beginning of the reform and opening up in 1978, China was one of the poorest countries in the world. According to the statistics of the World Bank, China’s per capita GDP in 1978 was only $156. It is generally believed that sub-Saharan African countries are the poorest regions in the world, but in 1978, the per capita GDP of sub-Saharan African countries was $490. Like other poor countries in the world, at that time, 81% of the population in China lived in rural areas, and 84% of the population lived below the international poverty line of $1.25 per day.

　　At that time, China was also a very introverted economy, with exports accounting for only 4.1% of GDP and imports accounting for only 5.6%, which added up to only 9.7%. Moreover, more than 75% of the exported products are agricultural products or agricultural processed products.

　　On such a weak basis, from 1978 to 2017, China’s economy has achieved an average annual growth rate of 9.5% for 39 consecutive years. In the history of human economy, no other country or region has seen such a high-speed growth for such a long time, and the average annual growth rate of China’s foreign trade has reached 14.5%. In the history of human economy, no other country can change from a closed economy to an open economy so quickly.

　　At this growth rate, China’s economic scale surpassed that of Japan in 2009, becoming the second largest economy in the world. In 2010, China’s export volume surpassed that of Germany, becoming the largest exporter in the world, and more than 97% of its export products were manufactured products, so China was called "the factory of the world".

　　The country that was once called the "world factory" was Britain after the Industrial Revolution. By the end of the 19th century and the first half of the 20th century, the "world factory" became the United States. After World War II, it became Germany, Japan and now China.

　　In 2013, the total trade volume of China surpassed that of the United States and became the largest trading country in the world. In 2014, in terms of purchasing power parity, China’s economy surpassed the United States and became the largest economy in the world. Last year, China’s per capita GDP reached US$ 8,640, making it an upper-middle income country.

　　In this process, more than 700 million people were lifted out of poverty according to the international poverty line, which contributed more than 70% to the world’s poverty reduction in the past 40 years. During this period, although China’s theory of economic collapse broke out one after another, China is the only country in the world that has not experienced financial and economic crisis since the reform and opening up.

　　Why can China achieve such achievements in reform and opening up?

　　To answer this question, we must first understand what is the essence of economic growth. On the surface, it is the continuous improvement of per capita income and the continuous enrichment of materials. However, the prerequisite for the improvement of per capita income is the continuous improvement of labor productivity. There are two main ways to improve labor productivity:

　　One way is to carry out technological innovation in existing industries, so that workers can produce more and more good products; The other way is industrial upgrading, which allocates resources from industrial sectors with low added value to industrial sectors with high added value. For developed and developing countries, these two methods are the same.

　　Developing countries have the possibility to achieve technological progress and industrial upgrading through introduction, digestion, absorption and re-innovation, which is called latecomer advantage. Taking advantage of this advantage, developing countries can achieve technological progress and industrial upgrading at lower cost and less risk, and achieve faster economic growth than developed countries.

　　This is because the technology and industry of developed countries are at the forefront of the world, and only by inventing new technologies and industries can technological progress and industrial upgrading be realized. For developing countries, as long as the technology used in the next production activity is better than that in this period, it is technological progress; As long as the added value of new industries entered in the next period is higher than that in the current period, it is industrial upgrading.

　　Because there is a gap between the advanced level of technology and the level of industrial added value, developing countries can introduce, digest, absorb and re-innovate mature technologies from developed countries, and realize industrial upgrading by entering industries with higher added value than the existing level and mature in developed countries.

　　Of course, it is only a theoretical possibility to take advantage of the advantage of latecomers, and not all developing countries can take advantage of the advantage of latecomers to achieve rapid development.

　　After the Second World War, 13 economies took advantage of their latecomers to achieve an average annual economic growth of 7% or more, which lasted for 25 years or more, greatly shortening the gap with developed countries. After the reform and opening up, China is the most eye-catching among the 13 economies, and it is also the fastest to catch up.

　　Therefore, I believe that the main reason why China’s economy can achieve rapid growth after the reform and opening up is that China has made full use of the advantages of latecomers. Why didn’t China take advantage of the advantages of latecomers before the reform and opening up? The most important thing is that the way of thinking determines the way out.

　　Why did China’s transformation succeed, while other countries failed in the same period?

　　If we think that the market-oriented reform is the main reason for the economic disparity in China around 1978, why are most socialist countries in transition in the 1980s and 1990s, and many developing countries with other social natures are also undergoing the transition from planned economy or government-led economy to market economy, which is similar to China? They are in constant crisis, and the gap with developed countries is getting bigger and bigger, while we are developing steadily and rapidly?

　　In the 1980s and 1990s, these socialist countries and other developing countries of social nature began to transform. At that time, it was believed that the poor economic benefits of these countries before the transformation were due to too much government intervention in the market and the failure to establish a modern market economic system as perfect as that of developed countries.

　　At that time, the mainstream view of international academic circles believed that "shock therapy" must be implemented to realize economic transformation. According to the Washington Consensus, all government intervention should be abolished and privatization, marketization and liberalization should be promoted.

　　Although the goal is good, this transformation idea ignores that the government intervention in the original system is to protect and subsidize heavy industries that do not have comparative advantages. If the protection subsidy is abolished, the result will inevitably be the bankruptcy of enterprises that lack viability, resulting in a large number of unemployment and a huge impact on social and political stability in the short term.

　　Moreover, many industries in heavy industry are related to national defense and security. Even if they are privatized, the state cannot give up and must continue to give protection subsidies, while private entrepreneurs are more enthusiastic about asking the government to provide protection subsidies than state-owned enterprises. Rent-seeking and corruption are serious, but the efficiency is even lower.

　　Why can China’s economy maintain stability and develop rapidly? We are pursuing the "old ways for the old and new ways for the new", and we will continue to give necessary protection subsidies to industries that are capital-intensive, large-scale and related to employment and national security during the transition period to maintain economic stability; For industries that were restrained in the past and were labor-intensive and in line with China’s comparative advantages, we should liberalize access, actively attract investment, and set up industrial parks and processing export zones in a pragmatic way to turn them into competitive advantages.

　　With the rapid development of new industries that meet the comparative advantage, capital accumulates rapidly, and the comparative advantage changes. The industries that violated the comparative advantage have become China’s comparative advantage. Enterprises have become self-reliant from lack of viability, and protection subsidies have changed from "giving charcoal in the snow" to "icing on the cake". They can and should be abolished, so as to eradicate the problems of corruption breeding and widening income gap caused by market distortion and improper intervention in the process of gradual dual-track reform, and make China complete.

　　In the 1980s and 1990s, the mainstream western economic theory thought that the gradual dual-track system adopted by China was the worst way of transformation, and advocated eliminating government intervention at one time. The practice of China’s reform and opening up has proved that the pragmatic gradual dual-track system is an important reason for China to maintain economic stability and rapid development.

　　What is the significance of summing up China’s 40-year experience of reform and opening up to modern economics?

　　After World War II, many developing countries got rid of colonial and semi-colonial status and devoted themselves to the industrialization and modernization of their own countries, but few successful economies. Since World War II, among nearly 200 developing economies, only two economies have moved from low income to high income, one is Taiwan Province, China, and the other is South Korea. In 2025, Chinese mainland is likely to become the third economy from low income to high income after World War II.

　　By comparing a few successful and most unsuccessful economies after World War II, I found that so far no developing economy has succeeded in formulating policies according to mainstream western theories, and the common feature of a few successful economies is that their policies were wrong from the mainstream theory at that time when they were implemented.

　　For example, in the 1950s and 1960s, all developing countries were pursuing national modernization and industrialization. At that time, the mainstream theory was structuralism. It was believed that developing countries should implement the import substitution strategy, allocate resources under the leadership of the government, and develop modern capital-intensive industries. The economies that implemented this strategy failed.

　　A few successful East Asian economies, however, started from the traditional labor-intensive small-scale industries and pursued the export-oriented rather than import-substitution strategy. At that time, this development mode was considered wrong.

　　In the 1980s and 1990s, all socialist and non-socialist countries turned to market economy from government-led development mode. At that time, the mainstream theory was neo-liberalism, which advocated "Washington Consensus" and "shock therapy" to eliminate all kinds of government intervention distortions at one time in order to establish a perfect market economy system. Countries that have transformed in this way have suffered from economic collapse, stagnation and constant crises, while a few economies, such as China, Viet Nam and Cambodia, have achieved rapid development, but they have adopted a dual-track and gradual reform model. Why is this so?

　　Because the mainstream theory comes from the summary of the experience of developed countries and takes the conditions of developed countries as the premise of the theory, because the conditions of developing countries and developed countries are different, copying the mainstream theory from developed countries will inevitably encounter problems.

　　From the perspective of economics, the theories we are adopting now are based on what developed countries have, such as structuralism, or what developed countries have done well, so that developing countries can copy them, such as neoliberalism.

　　The market economy in developed countries is indeed relatively perfect. Because the governments of developing countries have a lot of intervention in the market, they advocate that developing countries adopt the institutional arrangements of developed countries. In fact, this theory ignores an important point, that is, it does not see the differences between the conditions of developing countries and developed countries.

　　This is one of the reasons why I began to advocate the new jiegou after I came back from the World Bank in 2012. It is very different from the mainstream economics in the past, and it is the experience summed up in China’s own success or failure, as well as in developing countries and economies after World War II.

　　Such a theory comes from developing countries and consciously takes the conditions of developing countries as the starting point, which can better explain why China is successful, what are its shortcomings and how to develop in the future. At the same time, this theory also has important reference value for other developing countries.

　　I believe that as long as we continue to deepen along the road of reform and opening up, China will become the largest economy in the 21st century, and the economic phenomenon that happened in China will be the most important world economic phenomenon. The economic center of the world has always been the innovation center of economic theory, and most famous economists come from this. Therefore, when China becomes the world economic center in the 21st century, most of the world famous economists will come from China. As a developing country and a country in transition, China has similar conditions with other developing countries and countries in transition, and our theory will help other developing countries realize industrialization and modernization more than that from developed countries.

　　Author: Professor Lin Yifu of Peking University