Working Paper

The Visible Hand: The Role of Government in China’s Long-Awaited Industrial Revolution

Abstract: China is undergoing its long-awaited industrial revolution. There is no shortage of commentary and opinion on this dramatic period, but few have attempted to provide a coherent, in-depth, political economic framework that explains the fundamental mechanisms behind China?s rapid industrialization. This article reviews the New Stage Theory of economic development put forth by Wen (2016a). It illuminates the critical sequence of developmental stages since the reforms enacted by Deng Xiaoping in 1978: namely, small-scale commercialized agricultural production, proto-industrialization in the countryside, a formal industrial revolution based on mass production of labor-intensive light consumer goods, a sustainable ?industrial trinity? boom in energy/motive power/infrastructure, and a second industrial revolution involving the mass production of heavy industrial goods. This developmental sequence follows essentially the same pattern as Great Britain?s Industrial Revolution, despite sharp differences in political and institutional conditions. One of the key conclusions exemplified by China?s economic rise is that the extent of industrialization is limited by the extent of the market. One of the key strategies behind the creation and nurturing of a continually growing market in China is based on this premise: The free market is a public good that is very costly for nations to create and support. Market creation requires a powerful ?mercantilist? state and the correct sequence of developmental stages; China has been successfully accomplishing its industrialization through these stages, backed by measured, targeted reforms and direct participation from its central and local governments.

Keywords: China; Income Traps; Institutions; Industrial Revolution; Economic Development; Industrial Policies; Washington Consensus; Shock Therapy; New Stage Theory;

https://doi.org/10.20955/wp.2016.016

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2016-08-01

Number: 2016-16

Pages: 39 pages