12,000 startups are being created everyday in China.
Fifty years ago, you might have heard some parents in the U.S. try to reprimand their children by saying: “eat your food, there’s starving children in China.”
But that was a long time ago. Like the asteroid that wiped out the dinosaurs millions of years ago, China’s economic growth is changing the world.
An undeveloped country, suffering from famine, became an economic superpower that took over the world’s production in less than fifty years.
China keeps growing faster than any other big country ever has.
What mysteries lie behind its success?
Three crucial factors have attributed to China’s economic miracle: a gigantic population, production efficiency and intensity and capital, in other words, its total factor productivity (TFP).
Let’s dig in and examine how these three factors have taken China’s GDP to unprecedented heights.
A country’s GDP per capita is that country’s GDP divided by its population. It’s an indicator for economic performance relative to size. Since China’s economic reforms in 1978, its annual GDP per capita growth rate has been steady at around 9%. That’s a remarkable performance, given that the World Banks already deems a 2% GDP per capita growth rate to be excellent.
In the graph above, you can see how physical capital stock accounted for over half of China’s growth rate between 2000 and 2012. China’s TFP contributed to one third of its growth, while China’s labor force was vital during the earlier period.
The mix of these three factors are what drives China’s amazing growth.
Industrialization meets one billion workers
China’s massive population proved to be a gift from the gods.
Before China’s infamous One-Child Policy in 1979, China had an incredibly high birth rate. This eventually led to China’s working age population (15-64 years old) reaching one billion by 2014. This seemingly infinite labor force was a perfect match for industrialization.
For the first stage of any pre-industrial economy, you need to focus on agriculture. This is low-skilled labor but very intensive. China properly followed the Asian Capital Development model by moving on to manufacturing. It requires more skill, but is still incredibly labor intensive. China’s massive workforce moved from the fields to the factories.
Lately, China’s been stepping in its Northeast Asian rivals’ shoes - Japan and South Korea. They started transitioning into the technology and services sector.
Fortunately for China, its workers’ skills, also referred to as human capital, have evolved at the same pace as its development phases. For an economy to grow, you need a big enough workforce with the necessary skills.
Human capital investment skyrockets in China
In the early 1990s demand for skilled employees skyrocketed as foreign investments increased. The graph below shows the rise in Chinese college admissions, particularly in urban areas.