The economic reforms started in 1978 have transformed one of the poorest countries into a middle-income country. Per capita GDP in China has increased from 381 Chinese yuan (the primary unit in renminbi) in 1978 to 38 852 yuan or US$6256 in 2012. Total GDP in China has increased from 364.5 billion Chinese yuan in 1978 to 51 932.2 billion yuan or US$8.363 trillion in 2012 (National Bureau of Statistics of China, 2012 Yearbook; 2013). China has surpassed Japan and become the second largest economy in the world, just behind the US, which had a GDP of US$15 trillion in 2011 (World Bank, 2013).This chapter analyses the role of fiscal policies in Chinaís rapid economic growth in the last few decades. There is a large amount of literature on Chinaís economic growth in the past few decades. Lin (1997) found that education was crucial for economic development, and provinces with higher average years of schooling in the initial year had higher growth rates of real per capita GDP in subsequent years. Lin (1999; 2000a) examined the effect of exports on economic growth based on the data of 30 Chinese provinces from 1978 to 1995 and the time-series data for the whole country from 1952 to 1997, and found that the growth rate of exports and the growth rate of per capita output were positively related. Rodrik (2010) argued that China should continuously promote modern tradeables and subsidize tradeables directly, rather than subsidize them indirectly through the exchange rate.
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