Chapter 12: Reaping China’s reform dividends
But this complement may be much inferior to what, with other laws and institutions, the nature of its soil, climate, and situation might admit of. (Adam Smith) Before China completes the full transition to a market economy, its economic system still faces numerous institutional barriers constraining the labor supply, investment efficiency, and the improvement of TFP. Eliminating these barriers through economic reform can, therefore, immediately increase the potential growth rate and reap reform dividends. Lessons drawn from countries long stuck at the middle-income stage suggest that many middle-income countries cannot escape economic stagnation, because they fail to remove institutional obstacles hindering economic growth. For China, the only way to avoid the middle-income trap is to advance reform and establish a market economic system. The prevailing belief is that, in order to implement the proposed reforms, China must somehow sacrifice speedy growth—that is, any reform must be of an anti-growth type. Even a serious study conducted by the International Monetary Fund (2014) suggests that reform will fuel long-term growth, but that there must initially be a short-term trade-off between reform and growth. Those views, however, are misleading for two reasons. First of all, a growth speed stimulated by policy instruments at the expense of the sustainability and healthiness of the economy is not only worthless, but harmful.
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