Chapter 5 evaluates the role of education in China’s rapid growth. In 1980, China was one of the poorest countries in the world, but the average years of schooling of its adult population was already near that of a middle-income country. This relatively high educational level was an advantage for China’s economic development. However, this advantage all but disappeared by 2005. China’s greatest advantage turns out to be in the quality rather than quantity of education. According to the cognitive skills index produced by Eric Hanushek and his coauthors, who use it as a measure of a country’s educational quality, China ranks the best among all developing nations. This factor alone may explain a very significant 4 percentage point difference in GDP per capita growth between China and developing countries such as Peru and South Africa. It is shown that China’s advantage in the quality of schooling is not due to more investment in education by the government. Instead, it is the traditional Confucian culture that has made people in China and other East Asian economies influenced by the culture value of education more than people in most other developing countries.

Economists and political scientists tend to explain China’s rapid rise from the institutional perspective. There are two contrasting schools of thought: the free market school and the active government school. Both schools acknowledge that market reform has been a key factor in China’s rapid economic growth, but the active government school also attributes it to China’s strong government and its active economic intervention. These two contrasting institutional views are evaluated in Chapter 3. The short conclusion is that neither view can properly explain the Chinese growth puzzle. The free market view cannot because China’s market is not much freer than that of most developing countries. The active government view cannot either because China is not particularly well ranked in terms of government effectiveness. There are many other institutionalists who hold more fine-grained views than the above two schools. Some of these views are also evaluated in the chapter, which concludes that institutional and policy factors may be important contributors to China’s economic growth, but they are not the differentiating factors that have made China grow faster than all other countries.

Chapter 7 further elaborates and defends the idea that it is Confucian culture’s emphasis on hard work, savings, and education that has enabled China (and other East Asian economies influenced by Confucian culture) to rapidly accumulate both physical and human capital and to absorb existing Western technologies and develop indigenous innovation capacity better than other developing countries, leading to its rapid economic rise. It addresses some of the common objections to the cultural theory as well as some misunderstandings of the theory. This chapter also shows that there has been a cultural awakening in economics in the past two decades and that an increasing number of leading economists have explored both theoretically and empirically the role of culture in economic growth and development. The last section of the chapter considers the role of some other Confucian values such as benevolence and trustworthiness in helping to promote economic growth in a society with a weak rule of law.

There are tendencies either to exaggerate China’s innovative capacity and its threat to Western technological supremacy, or to dismiss it and attribute its technological progress to imitation, or worse, to the theft of foreign technologies. Chapter 6 addresses the role of technological progress and innovation in China’s rapid rise and evaluates its changing ability to innovate by using common indicators like the number of patent applications or grants, the number of scientific publications, and the amount of R&D expenditure. On a per capita basis, the gap between China’s level of innovation and that of the most developed countries such as the United States is still large. However, for a country that is still some distance from the technological frontier, the key question is not how big its innovation gap is, but whether the gap is narrowing and whether it is narrowing quickly enough. By this criterion, China has been by far the best performer among all developing countries. As technological innovation requires both physical and human capital input, the Confucian culture of thrift and education may have been the differentiating factor behind China’s rapid progress in science and technology.

Chapter 2 evaluates three popular explanations of China’s rapid economic rise over the past forty years, including its low income base and cheap labor, demographic dividend, and export promotion. It is shown first that low income or cheap labor alone does not make a country grow faster. In fact, most developing countries do not catch up quickly with developed countries. The chapter then evaluates how much the demographic dividend may have contributed to China’s extraordinary growth. It is shown that the direct demographic dividend resulting mechanically from faster growth of labor than general population accounted for only half a percentage point of China’s GDP per capita growth, and it was not much different from that of many other developing countries. But China enjoyed a higher indirect demographic dividend in the form of higher savings and more education due to a lowering dependency ratio, and it may explain up to 2 percentage points of China’s growth. As for export promotion, the chapter demonstrates that China’s export share in GDP is actually lower than that of most countries, and its rapid export growth is not the cause but the result of its fast economic growth.

Chapter 4 starts by distinguishing between long-term growth and short-term fluctuation. The former is determined by the supply-side factors of investment, education and technological progress, whereas the latter is affected by demand-side factors of consumption, investment and exports. Investment creates both short-term demand and long-term supply. China has enjoyed the highest investment rate in the world in the past few decades, made possible by its extraordinarily high savings rate. After evaluating several popular explanations for China’s high savings rate, the chapter argues for a cultural explanation. Although a high rate of savings and investment is one of China’s distinct advantages over all other developing countries, the popular press often describes China’s growth as seriously imbalanced, relying too much on investment and exports and too little on consumption. Chapter 4 shows why this popular view is misplaced. Much of the misunderstanding is caused by the failure to distinguish between long-term and short-term growth and the resulting failure to understand that economic development as long-term growth cannot be driven by consumption.

After 2012, the Chinese economy entered a phase of declining growth. The GDP growth rate of 6.1 percent in 2019 just before the COVID-19 pandemic was the lowest in nearly thirty years. What caused the slowdown? Is the country falling into the so-called middle-income trap? These questions are addressed in Chapter 8. The chapter first shows why the “middle income trap” does not really exist and that before reaching high-income status, a country’s growth rate is unrelated to its income level. It then shows that China’s slowdown was mainly caused by a precipitous decline in investment growth. This decline was initially caused by the sweeping anti-corruption and anti-pollution campaign during 2013–2015. It was worsened by the misguided contractionary macroeconomic policies in 2016 and 2017 due to a mistaken belief by policymakers and economic commentators that China had invested too much and the corporate sector had piled up too much debt. In other words, China’s downturn before COVID-19 was not inevitable, and its economy could have grown faster.

Will China catch up to America, and if so, when? Will the superpower conflict with the United States derail or at least significantly slow down China’s rise in a post–COVID-19 world? What does China’s further rise mean for the rest of the world? These are the questions addressed in the final chapter. It first assesses China’s potential growth rate over the next thirty years under the assumption that geopolitical challenges will not have a significant effect on China’s long-term growth trend. The chapter then discusses the impact of the COVID-19 pandemic and geopolitics on China’s growth prospects. The chapter projects that China’s economy will most likely surpass that of the United States by 2030 and possibly double that of the United States in 2050. It is argued that geopolitics will not have significant impact on China’s economic prospects, and that China’s rise can benefit the rest of the world particularly through its increasing contribution to global technological progress. Because China’s rise appears irreversible, the chapter concludes that we are entering a truly multipolar world, and peaceful coexistence is no longer an option but a necessity.

The introduction first provides the general background and motivation for the book. Catching up to America was an explicit development goal for China set by Mao Zedong in the 1950s. But Mao’s approach to economic development ended in disaster. Since 1978 when Deng Xiaoping launched economic reform, China has experienced arguably the most rapid economic rise in world history. The introduction then raises the main questions to be addressed in the book. What has led to China’s rapid economic rise? When may China overtake the United States to become the largest economy? Is there a China model of development that can be emulated by other developing countries? Why is China’s economy slowing down? Will deteriorating US–China relations slow it down even further? The introduction then points out that the real puzzle with Chinese growth is not why China has grown faster than all developed countries, but why it has grown so much faster than other low- and middle-income developing countries. Next, it lays out the content and structure of the book chapter by chapter. Lastly, it describes the global comparative perspective the book has adopted in its analysis of China’s economic rise.