Beginning in the late 1970s, China’s economy produced the largest growth spurt in recorded history. This striking departure from the economic experience of the previous 200 years encourages onlookers to view recent economic success as a “miracle” that requires neither economic nor historical explanation. Such thinking ignores common elements that have shaped China’s long-term economic trajectory: forces propelling spurts of innovation and growth, restrictions that often impede these dynamic forces, and enduring features of China’s polity that generate tensions between centralized authoritarian power and economic growth. Neglect of these historical legacies invites misconceptions about the current boom’s origin and the economy’s likely future path. History and economics figure prominently in our analysis of both.

China represents a new chapter in ongoing controversy over the use of state intervention to promote innovation and upgrading. This book analyzes the nature and outcome of recent Chinese efforts to accelerate progress toward global technology frontiers in electricity, telecommunications and semiconductors.

Our contributors document impressive absorption and upgrading of a wide array of technologies as well as individual instances of path-breaking innovation. Notable advances include achievement and even extension of global technical standards in particular segments of electricity transmission and thermal power generation along with rising competitive strength in global markets for conventional and nuclear electricity, telecom equipment and software.

We also observe instances – notably semiconductors and wind turbine equipment - in which government efforts to promote innovation have encountered difficulty in penetrating overseas (wind equipment) and even domestic (semiconductors) markets. In addition, we observe consistently high levels of excess capacity and operational inefficiency – for example, the average cost of generating and delivering each unit of electricity is at least 30 percent higher in China than in the United States

Recent initiatives center on the Made in China 2025 plan to develop an extensive array of advanced manufacturing industries. Current strategy emphasizes instruments – self-reliance, channeling resources toward state enterprises, top-down selection of strategic products and technologies and Party control – that have retarded productivity growth in the past, while moving away from openness, competition, private-sector expansion and other measures strongly associated with past increases in productivity.

Telecommunication equipment, a sector that has thrived in an environment of openness and competition, offers a strong contrast to the recent decline in productivity outcomes visible at the industry-wide level and in several electricity-related product categories. Current policies reinforce distorted incentives that can only expand the massive costs associated with excess investment, misallocation and corruption. These costs will act as a powerful counterweight to the extraordinary human, financial and policy resources that China’s leaders are now directing toward innovation and upgrading across a broad spectrum of industries.

From modest beginnings, China’s renewable energy sector is today the world’s largest. We contrast the evolution of China’s solar and wind sectors, with an eye to the effect of differences in technology, government policies, and markets. In solar, relatively modest barriers to entry and returning Chinese with industry experience, combined with rapid growth in overseas demand and high quality standards to propel the sector forward. Localization of the supply chain lowered costs and conferred important advantages on the largely private sector, much as it had done in other successful export sectors in the electronic industry. In sharp contrast, the growth of China’s wind turbine sector has been tied to a “government-made” domestic market and highly protectionist measures favoring local firms. Although there are signs of upgrading, the sector remains SOE-dominated throughout the value chain, and uncompetitive internationally. Moving forward fortunes of solar and wind turbine manufacturers will be tied to an increasingly crowded domestic electricity market in which excess capacity, lackluster demand growth and regulatory issues are the new normal. In this setting, political connections rather than firm capability will determine winners and losers. The experience of the renewable sector reveals both the strengths and weaknesses of China’s industrial policy.

INTRODUCTION

The primary motivation for China's economic reforms was to increase economic growth and raise living standards after nearly twenty years of stagnation. Given the move to more market-based income determination, the reforms had the potential to conflict with inherited egalitarian-motivated socialist institutions and rhetoric. To what extent have the reforms led to widening inequality? Who have been the winners and losers? Have the reductions in poverty that accompanied growth been sufficient to alleviate concerns over inequality? Do increases in inequality threaten the long-run sustainability of the reforms? Are there identifiable patterns in the evolution of the income distribution that suggest potential policy responses?

The objective of this chapter is to document the evolution of inequality, and the income distribution more generally, during the reform period and where possible to draw conclusions concerning the role that transition has played in increasing inequality. The centerpiece of our chapter is the assembly of three cross-section data sets that allow a relatively consistent calculation of inequality from the mid-1980s onward. It turns out that establishing “first-order” facts about Chinese inequality is quite difficult and that conclusions hinge on mundane (but important) issues of measurement and data quality. In this regard, it is unfortunate that much of the household-level survey data collected annually by China's National Bureau of Statistics (NBS) remains outside the public domain.