Economic growth is determined by two influences. One is a linear effect where increased capital investment produces short-term economic growth without associated structural change in industry or technological advancement. The other is an accelerator effect where technical innovation and a quickening pace of industrial reconstruction coupled with economic reform at the organizational level, generate long-term growth. In economics, the former moves the position of the production curve horizontally while the latter changes the slope of the curve.

The rapid economic growth of China after reform and opening-up was based on massive growth in the Total Productivity Factor (TPF). According to the National Bureau of Statistics data, between 1978 and 1995 capital investment contributed 55 percent to economic growth and TPF some 29 percent. (This figure of 29 percent corresponds well with that of other academics but is lower than the 40 percent attributed by the World Bank.) However before this period, TPF was actually in negative territory.

Future growth resulting from labor input seems unlikely to exceed 1 percent in the near future. Considering China?s already high saving ratio of 40 percent and domestic investment rate, no one can expect much in the way of further growth resulting from capital investment. Therefore, the key to China?s future economic growth is to be found in TPF performance.

A favorable TPF is the result of sound policy and good government. Well-refined systems are necessary for the accumulation of natural, material and human resources. Effective systems should be capable of compensating for the cost effects of China?s WTO entry. Action is required in three areas if we are to further improve our level of economic growth and ensure the underlying lasting quality of that growth.

First and most importantly, comes the need to further develop the necessary policies and administration. An economic environment founded on sound policy and effective administrative management promotes economic growth whereas its absence retards growth. In addition to the role of government, other components of society have a role to play. These include enterprises, communities, citizens and even international organizations. The government should further strengthen its relationship with society. It can bring a new level of cooperation into its relationship with enterprises and citizens to take the place of traditional relationships based on control. This will help to optimize public expenditure and will be in the best interests of the people.

Second, promote good government through systems reform. Eliminate corruption. Open up markets to competition and so introduce competitive mechanisms. Move away from monopoly and do away with monopoly rent.

Third, make our reform more transparent and bring more information into the public domain. Evolve our government from the opaque to the visible, better known for its responsibility and public accountability.

The turning point for China?s economic growth lies in high efficiency, justice, full employment and sustainability.

(The author Hu Angang is director of the Center for China Studies under the Chinese Academy of Sciences and Tsinghua University.)

(china.org.cn, translated by Li Liangdu, August 1, 2002)