Managing the Middle-Income Transition
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Managing the Middle-Income Transition

Challenges Facing the People’s Republic of China

Edited by Juhzon Zhuang, Paul Vandenberg and Yiping Huang

The growth model of the People’s Republic of China has been based on high investments, exports, low-cost advantage, and government interventions. This model has successfully transformed the country from a low-income to an upper middle-income economy. However, the model has generated contradictions that could undermine future growth. Making the transition to high income requires greater reliance on efficiency and productivity improvement, innovation, and market competition. This book examines the challenges faced by the People’s Republic of China in sustaining robust growth, and policy options for making a successful transition to a high-income economy to avoid getting caught in the middle-income trap.
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Chapter 5: The role of government in economic growth

Yang Yao


The government has played an important role in the economic growth of the People’s Republic of China (PRC) in the past 60 years. Like other East Asian countries in their early stage of development, the government of the PRC has used various policy tools to regulate and direct the economy toward specific goals. Indeed, it has been much more directly engaged in economic activities than its East Asian counterparts. The PRC’s better performance in the global financial crisis that erupted in 2008 has again put the role of government in the spotlight. Both positive and negative views exist. Proponents of strong and interventionist government say this is more effective than laissez-faire government in fighting recessions. On the other hand, opponents view interventionist government akin to a nineteenth century mercantilist state that promotes growth at the expense of other countries. A common denominator in the PRC’s experiences shared by other successful economies in East Asia is ‘disinterested government’—that is, government that takes an unbiased position in conflicts between individual social and political groups. It is a weaker concept than the autonomous or the developmental state, but supersedes other success factors revealed in East Asia. The PRC’s strong growth performance is also attributed to the incentives offered to government officials who align their personal interests with larger societal interests. These are institutionalized or semi-institutionalized by a pragmatic philosophy toward institutions and regional decentralization.

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