Economic Development of China: History and Causes

Introduction

In the aftermath of World War II and the Chinese Civil War, China in the 1950s was predominantly rural, characterized by feudal systems of land ownership, widespread poverty, and low levels of industrialization. However, by 2020, China had transformed from a largely agrarian economy into a global manufacturing giant. Its Gross Domestic Product (GDP) surged from $89 billion in 1960 to $14.34 trillion by 2019, lifting more than 800 million people out of poverty. In 2014, the International Monetary Fund (IMF) announced that China had overtaken the United States as the world’s largest economy by purchasing power parity (PPP).

By 2020, China was home to the largest number of “unicorns” — private companies valued at over $1 billion. Between 1979, when economic reforms began, and 2017, China’s real GDP grew at an average annual rate of nearly 10%, marking the fastest sustained economic expansion in history according to the World Bank. China’s rise from an impoverished, war-torn nation in the 1950s to the world’s second-largest economy by the 21st century, even surpassing the United States in PPP terms, is a remarkable achievement.

China’s rise was not solely economic. Its growing global influence reshaped geopolitics. The Belt and Road Initiative (BRI), launched in 2013, aimed to create a vast infrastructure and trade network connecting Asia, Europe, and Africa, further cementing China’s role as a global leader. Meanwhile, China became more assertive in international organizations such as the United Nations (UN) and the World Trade Organization (WTO), reflecting its newfound global standing.

What Were the Reasons for This Remarkable Achievement?

Although there is a difference of opinion regarding the factors behind the remarkable Chinese growth, the consensus is on the following seven ones

A. March of History

Describing China’s economic progress over the last 75 years as a “miracle” is misleading because it overlooks the historical context of China’s past dominance in the global economy. Before the “Century of Humiliation” inflicted by Western colonial powers, both China and India accounted for nearly half of the world’s GDP, indicating that they were major economic players long before their exploitation by the West. The economic decline of both nations was not a failure of their societies but rather the result of foreign exploitation and internal instability brought on by colonialism. China’s resurgence, therefore, was not miraculous, but rather a long-overdue recovery, fuelled by the right political leadership, structural reforms, and favourable global conditions.

China’s rapid rise can be seen as the result of seizing an opportunity. Following economic reforms initiated under Deng Xiaoping in the late 20th century, China embraced globalization and industrialization, positioning itself as the “world’s factory.” As John Snow predicted in the 1940s, China was indeed a “sleeping giant,” and its rise was inevitable given its historical importance and vast resources. The so-called miracle is better understood as China’s return to its historical position,

B. Mao Zedong’s Role: Laying the Foundations

It is simplistic to credit all of China’s transformation solely to Deng Xiaoping and his policies of openness. Mao Zedong, China’s founding leader, played a crucial role in laying the foundational pillars. While many of Mao’s economic policies, such as the Great Leap Forward (1958–1962) and the Cultural Revolution (1966–1976), led to significant setbacks, his tenure also brought about major achievements in areas like:

1. Ending Feudalism: Mao’s land reforms dismantled the feudal system, which had kept the rural population impoverished and unproductive. Collectivization, though controversial, redistributed land and disrupted traditional power structures.
2. Human Development: Mao’s focus on education, healthcare, and social welfare led to higher literacy rates and improved public health, fostering a sense of national unity essential for the future.
3. Women’s Empowerment: Mao’s vision also allowed women to join the workforce and granted them legal equality, a significant social shift that would contribute to China’s long-term productivity.

Though these initiatives were overshadowed by Mao’s political excesses, they laid the groundwork for China’s subsequent success under Deng Xiaoping.

C. Deng Xiaoping’s Reforms: Opening Up

Building on these foundations, China was primed for transformation under the leadership of Deng Xiaoping, who took power in 1978. Deng famously declared, “To get rich is glorious,” marking a pragmatic shift away from strict Maoist policies towards economic liberalization. His approach, encapsulated in the phrase “crossing the river by feeling the stones,” emphasized gradual reforms that adapted to China’s unique challenges.

1. Liberalization and Deregulation: Deng initiated the Gaige Kaifang (reform and opening up), which introduced market mechanisms within a socialist framework. This hybrid model, described as “socialism with Chinese characteristics,” allowed China to enter global markets while retaining state control over key sectors.
2. Decentralization and Special Economic Zones (SEZs): Deng decentralized economic control, particularly through the establishment of SEZs, which attracted foreign investment by offering tax incentives, cheap labour, and a relaxed regulatory environment. Coastal cities like Shenzhen became global manufacturing hubs.
3. Productivity Growth: Deng’s reforms also resulted in large-scale privatization, particularly in agriculture and manufacturing. The increased efficiency from reallocating resources in formerly state-controlled sectors, such as trade, agriculture, and services, was a critical driver of China’s rapid productivity gains.

Deng’s incremental approach allowed China to avoid the economic shocks experienced by other countries, such as the Soviet Union, which underwent rapid liberalization.

D. Chinese Communist Party’s Role: Steering and Stability

China’s rapid economic rise is inseparable from the strategic leadership provided by the Chinese Communist Party (CCP). Both Mao Zedong and Deng Xiaoping were instrumental in establishing a centralized political system that allowed the CCP to shape and control the country’s economic policies and development strategies in three ways

1. Stability, Continuity and Consistency: The CCP played a critical role as the pillar of stability for China’s economic, political, and social systems. By maintaining strict control over both the political system and economic planning, the party was able to mitigate the risks of social unrest and maintain a cohesive national strategy. Its centralized authority ensured the implementation of long-term plans without the disruptions caused by political instability. Unlike many developing countries, where political transitions often result in stalled economic reforms, China’s single-party system offered continuity and consistency.
2. Leadership Funnel: The CCP’s focus on meritocracy, where leaders are selected based on their competence and vision, enabled the party to build an experienced and capable political leadership funnel. This system of meritocratic governance ensured that individuals occupying senior positions were not only competent but also committed to the long-term national goals, helping to steer the country toward sustained growth.
3. Hybrid Governance: The CCP embraced a hybrid model of governance — combining state-directed economic planning with capitalist market mechanisms — which allowed China to integrate into the global economy without losing its political autonomy. This balance between state control and economic liberalization fostered the rapid industrialization and export-led growth that transformed China into the world’s second-largest economy. The CCP’s tight control over social engineering — such as policies on urbanization, labour migration, and education — ensured that social development aligned with economic growth, avoiding the pitfalls of unchecked inequality and unrest that have plagued other developing countries.

The CCP’s ability to adapt its strategies while retaining centralized control has been key to sustaining China’s growth over the past several decades.

E. Foreign Direct Investment’s Role: Capital, Technology, Management

Foreign investment played a pivotal role in China’s development. By the early 1980s, China opened its doors to multinational corporations, providing tax breaks and access to inexpensive labour in exchange for capital and technology. By 2020, over $2.1 trillion in foreign direct investment had flowed into China, accelerating industrialization and funding infrastructure development in three major ways

1. Capital Injection: In the late 20th century, as China opened up to the global economy under Deng Xiaoping’s reforms, FDI became a vital source of funding for expanding production capacity. The influx of foreign capital allowed China to finance major projects in manufacturing, real estate, and technology sectors, fuelling its transformation into a global production hub. FDI not only provided the necessary financial resources but also helped create millions of jobs, boosting household incomes and increasing consumer spending, which further drove economic expansion.
2. Technology Transfer: Beyond capital, FDI brought advanced technology to China, significantly contributing to its industrial modernization. Multinational corporations introduced cutting-edge machinery, equipment, and production processes, enabling Chinese companies to enhance productivity and improve product quality. This technology transfer was critical for China to move up the value chain, from producing low-cost goods to more sophisticated, high-tech products. Over time, Chinese companies began to absorb and innovate upon the technology brought in by foreign firms, further boosting their competitiveness in international markets.
3. Managerial Expertise: Another key contribution of FDI to China’s growth was the introduction of modern management techniques. Foreign firms brought with them expertise in areas such as corporate governance, supply chain management, marketing strategies, and human resource development. When combined with China’s strong work ethic, the culture of innovation, and the enabling environment provided by the government’s policies, these factors created the perfect conditions for rapid economic expansion.

Thus, FDI by fuelling capital injection, technology transfer, and managerial expertise, contributed to industrial modernization and economic growth through foreign technology and management practices.

F. Xi Jinping’s Role: Prosperity, Equity, and Global Outreach

After Mao and Deng, it will be XI who will be remembered as the most important leader in Chinese history for the following three crucial contributions he made to China

1. Equitable Distribution: President Xi Jinping has played a transformative role in ensuring the equitable development of China’s regions that were left behind during the country’s initial economic rise between the 1970s and 1990s. Xi’s leadership emphasized reducing this regional disparity through targeted investment in infrastructure, industrial development, and regional connectivity. His policies encouraged the relocation of industries from wealthy eastern regions to inland provinces. This approach aimed to balance growth across the country, ensuring that economic progress reached all corners of China. Another major contribution under Xi Jinping’s leadership has been his unwavering focus on poverty alleviation. In 2020, Xi declared that China had successfully eradicated extreme poverty, an achievement that few countries have managed to accomplish in such a short span of time. The government invested heavily in rural development programs, building infrastructure, improving access to education and healthcare, and providing financial assistance to the poorest households.
2. Technological Transformation: While Deng Xiaoping’s reforms in the late 20th century attracted foreign direct investment and established China as a manufacturing hub, it was Xi’s vision that propelled the country into cutting-edge technological innovation. in fields like artificial intelligence, telecommunications, space exploration, and nuclear energy. His “Made in China 2025” initiative focuses on boosting domestic high-tech industries such as robotics, artificial intelligence, telecommunications, space exploration, nuclear energy, biotechnology etc is reducing reliance on foreign technology. This technological leap has positioned China as a formidable competitor on the global stage, driving innovation in nearly every critical sector of the modern world.
3. Global Outreach: On the global stage, Xi Jinping has significantly expanded China’s outreach through four ambitious projects: the Belt and Road Initiative (BRI), the Global Development Initiative (GDI), the Global Security Initiative (GSI), and the Global Civilization Initiative (GCI). These initiatives aim to reshape the international order by promoting infrastructure development, security cooperation, sustainable development, and cultural exchange under China’s leadership. Collectively, these projects represent China’s assertive push to position itself at the centre of global governance and development, amplifying its influence in shaping the future world order.

Thus by focusing on equitable distribution and poverty alleviation, technological transformation, and global outreach, Xi made China a global power

G. Confucian Philosophy’s Role

Confucian philosophy is an often overlooked factor in China’s growth, Confucian philosophy has played a crucial role in shaping China’s economic progress in three distinct ways

1. Obedience Culture: One key aspect is the culture of obedience and respect for authority, deeply ingrained in Confucian teachings. This cultural norm has allowed the Chinese Communist Party (CCP) to govern the country for over 75 years with minimal resistance. The emphasis on hierarchy and respect for leadership has provided political stability, which, in turn, has ensured continuity in long-term economic planning. This stability has been vital in enabling consistent policy implementation, allowing China to pursue ambitious developmental goals without significant internal disruptions.
2. Work Ethics: Another significant contribution of Confucian philosophy is its promotion of a strong work ethic. Confucianism regards hard work as a virtuous act, almost akin to a form of worship, where personal and societal progress is achieved through diligence. This cultural attitude has provided China with a highly motivated workforce willing to contribute to the nation’s economic development. As China transitioned into an industrial and manufacturing powerhouse, the Confucian work ethic became a critical driver of productivity, helping the country maintain its rapid economic growth and competitive edge in global markets.
3. Saving Habits: Confucian teachings on frugality and self-discipline have contributed to China’s remarkably high savings rate, one of the highest in the world. The philosophy encourages individuals to save for the future and prioritize long-term security over immediate consumption. This collective habit of saving has not only bolstered China’s financial system by providing capital for investment but has also allowed the country to self-finance many of its large infrastructure and development projects. The high savings rate has been instrumental in fueling China’s sustained economic expansion, making it less reliant on foreign capital and more resilient to global financial shocks.

The CCP incorporated these Confucian values into its governance model, reinforcing social stability. This social contract, where the population accepted political restrictions in exchange for economic prosperity, was key to maintaining a stable environment conducive to rapid growth.

Conclusion

China’s transformation from a poor, isolated nation in the 1950s to a global economic powerhouse is a testament to its unique development model. By blending socialism with market mechanisms, attracting foreign investment, and maintaining political stability under the CCP, China defied conventional economic wisdom and lifted hundreds of millions out of poverty. Its rise has not only reshaped the global economy but also challenged Western narratives about governance and development.

While China faces significant challenges, including environmental degradation, income inequality, and political repression, its achievements over the past seven decades are extraordinary. As China continues to assert its influence, the world will watch how it navigates its future challenges and opportunities in shaping the 21st century.