 Without understanding the institution left over from the Cultural Revolution, people would not understand China's economic reform, because the whole thing started from the inherited institutions from the Cultural Revolution. So here the key is really a regionally decentralized totalitarian system, in the sense that all the local governments, all the different levels of local governments have the resources and control what they are going to do. My name is Chenggang Xu. I'm a professor of economics at CKGSB, which is a private business school in China. When people claim that the rise of China is the biggest event in the recent economic history in the world, the qualification is the following. If we look at the issues from the point of view of the total GDP, within 30 years, in terms of the growth rate of total GDP, China has broken the record. The other qualification is poverty relief. Within these 30 years of time, the largest poverty relief happened in China. That is a very important issue. Then the third aspect is the relative economic development. The so-called relative economic development is measured by the per capita GDP compared with the world frontier. For example, if we take the United States per capita GDP as a world frontier, then comparing with the world frontier from the beginning of these 30 years to the end of these 30 years, what is the change level? Actually, these three aspects are closely related. Number one issue is the population of China. Given China is the most populous nation, given the size of population, then once you have a fast relative economic growth, the growth of relative economic development, then you have this total GDP increase. So these are intimately related. Another intimately related issue is that at the very beginning of the Chinese economic reform, China was one of the poorest nations. This is actually a key point. When the reform started, if we are talking about relative economic development level, China was about something like 120th of the US level. That's significantly below the level of the average Africa per capita GDP. We are talking about such a very, very low level. It's desperately poor. So starting from this very low level, and then after 30 years, nowadays the Chinese relative development level is close to one quarter of the US level. It started from 120th up to nearly one quarter. So in that sense, it's a huge change. So if we only look at these factors, then yes, this is the biggest event in economic history. But some other claims are without the qualification can be exaggerations. So when people talk China as a superpower, for example, if we look at the per capita GDP level, it's less than one quarter of the US level. So if we compare China with Soviet Union at its peak time, Soviet Union was more significantly more than one third of the US per capita GDP level. So China is still below that level. So we have to keep in mind in our understanding. And also when we talk about this growth rate, the key point is that the starting point was very, very low. Actually, that's terribly important. So without understanding that, talking about the rise of China can be misleading. So because at the beginning, China was so weak, so poor. So in general, the whole national economy is at a poverty level. So when we talk about this growth achievement in China in the recent four decades, we always associate this with the economic reform. So why reform? This is the key issue actually. So at the beginning of the establishment of the People's Republic of China, the Chinese per capita GDP level relative to the US level was one of the 20th. When the reform started, the level is about the same, the relative development level. It's slightly higher, but it's so marginal, so basically we could ignore that. So in 1950, the level was 5% of the US level. In 1980, it was 6% of the US level. So basically, there was no substantial change in the first 30 years of the People's Republic of China. So then why reform is so important? It's so clear that before the reform, basically there's no catch-up. And also, we know what happened before the economic reform. So there were two disastrous movements. One is the great leap forward movement, the other is the Cultural Revolution. So reform means no great leap forward movement, no Cultural Revolution, and the whole way of organizing the economy has to be changed. So there is a sort of misleading explanation about China, saying that China was essentially a planned economy and then changing to a market economy. This is not quite accurate. The so-called centrally planned economy, usually by describing in this way, implies the Soviet model. Since 1950, when China established the People's Republic of China established this system, they fully implemented or copied the Soviet model. But since 1958, China has changed the institution. So it's no longer a Soviet type of centrally planned economy anymore. So the institution has been changed, centrally planned, being abandoned. So it becomes administratively planned but not centrally planned economy. So I characterize that kind of system as a regionally decentralized totalitarian system because in the political economy, the Soviet system is described as a totalitarian system. China changed that a little bit in terms of administration. So although the whole economy, the overall society is governed in a totalitarian way, but in terms of administration, in terms of resource allocation is regionally decentralized in the sense that the local governments control substantial amount of resources and they manage their local economies. So based upon this institution, there are two waves of changing from the Soviet system into this kind of a Chinese type of administratively planned economy, which I call the regionally decentralized totalitarian system. So based upon this kind of institution, at the end of the Cultural Revolution, the economic reform started. Then in the earlier decades of the economic reforms, the major strategy is regional competition. So this so-called regional competition is qualitatively different from market competition. Here the competition is not in the sense of profit maximization. It's not in the sense of competition in the market. Instead, these are a sort of tournament competition that the local governments are ranked. So they compete for ranking. They compete to become number one. So for example, within the city, you have several, so about ten counties and the counties within the city, they wanted to become number one. They compete for the number one position. And within a province, you are going to have roughly about ten cities and each city, they are competing each other. They want to be the number one in the province. And in the whole nation, you have a little bit more than 30 provincial level regions. They compete each other as well. And here the key issue is what are the targets of the competition. So at the earlier stages of the economic reform, the competition target is GDP growth rate. And turns out this is a very effective approach in terms of promoting the economic reform and growth. So this is how the reform is associated with growth, or growth is associated with reform. Because in order to grow, the regional governments have to find their way. So to grow actually is a big challenge, how to grow. This is a big challenge. So at the very beginning of the reform, there were lots and lots of emphasis on the reform of the state sectors. But turns out that is not working well, that didn't work well. And the first successful reform was in agriculture. Actually it involves the land reform. It's a partial privatization. Partial means there is no fundamental change in ownership, but the using rights have been privatized. So with using rights and also the exchange of using rights, these are privatized. So based upon that, there is a sort of industrial revolution in the sense of the rural industrial development. So at the very early stage of the economic reform, most of the growth actually occurred in this area, the so-called township village enterprises. Starting from a very low base up to the mid-1990s, the largest sector is this sector in the whole Chinese economy. And that actually is also the base for the private sector when the private sector became partially legalized in the 1990s. So then in the whole 1990s and early 21st century, China had a very rapid growth of the private sector. From zero to nowadays, it's more than half of the GDP being produced by the private sector. So if we look at the Chinese constitution, both the state constitution and the parties constitution, then we find that by constitutions, party constitution and the state constitution, private sector was not allowed until 2002, the change of parties constitution, and 2004, the change of the state constitution. So until the early 21st century, private sector was not legal. However, up to that point, the private sector was already half of the GDP. So if we are talking about the so-called China miracle, what is the miracle? This is the miracle.