With its rapid and stable economic growth, what China has achieved in the past four decades of reform and opening-up is nothing short of a miracle. This is especially true given the fact that every few years, speculation re-emerges about a coming “China crash” among the media and even some renowned economists.

The truth is that China is the only emerging market economy that has never been stricken by a systematic financial and economic crisis in the last 40 years. What's more, when crisis occurred elsewhere, China played a stabilizing role.

The best example could be found in the 1997-1998 East Asia financial crisis. East Asian economies developed very well before the sudden collapse in 1997. It was a common view at the time that it would take them 10 or even 20 years to recover. But they managed to resume fast growth rates by 2000.

How can this misjudgment happen and why was the academic community so pessimistic? I think their biggest mistake lies in their under-estimation of China's role. The Chinese yuan did not depreciate and remained an anchor for the whole region. While other countries were busy dealing with crisis, China scored an 8 percent growth rate and stimulated the recovery in surrounding regions.

Another example is the 2008 global financial crisis. Judging from various indicators, this overwhelming crisis seemed even more devastating than the Great Depression, which was triggered by the New York stock market breakdown in 1929.

But the world managed to avoid the worst scenario of 1929, because countries decided to adopt common proactive fiscal policy and defended the world's free trade at the G20 summit held in Washington at the end of 2008, and also because China has played a crucial part in preventing another depression. By the end of 2008, China unveiled a 4-trillion yuan stimulus package right after the summit and restored growth in the first quarter of 2009, which contributed to the growth of other emerging markets in the second quarter. In the second half of 2009, negative growth was stopped and signs of recovery began to emerge in developed countries. China's contribution was widely recognized by the international community.

Since the Chinese economy has maintained stable and rapid growth and made a huge contribution to the world, why does the “China crash” rhetoric re-emerge in very few years?

Starting in 1978, China became the first socialist county to initiate reform and opening-up, but China was not the only one looking for transition. Entering the 1980s and 1990s, nearly all socialist countries with planned economies were seeking transformation to a market economy. The issues they need to deal with and the goals they've set out to achieve are the same as China. In fact, it was not only the socialist planned economies but all developing countries that were striving for transition. Prior to the 1980s, their economies were steered by the government, with constant crisis bursting out now and then. That's why almost every developing country was working to transform their economy from government-led to an open market one in the 1980s.

There was a consensus in the academic community during the transition period of the 1980s to the 1990s: Considering that government intervention often led to failure in planned economies, the popular Washington Consensus was that if a transition to market economy was to be attained, market economy systems and institutions must be established at one go. Therefore, the first requirement is marketization, i.e., letting prices be determined by market competition and letting prices lead resource allocation. The second requirement is privatization. The popular belief at that time was that as long as enterprises were state-owned, prices of the market would fail to play a role in resource allocation. The third requirement is stabilization. If prices are to allocate resources, they need to be kept stable. How, then, can the prices be kept stable? It requires zero deficits on the government's part. If the government has any deficits, it will monetize them, which in turn will cause high inflation. In this case, market mechanism will also fail to function.

This theory seems quite logic and convincing. In 1992, Larry Summers, then the World Bank chief economist and later serving as US Treasury secretary, president of Harvard and winner of the John Bates Clark Medal, wrote an article expressing the commonly held consensus in the academic community: For the transition from a socialist planned economy to a market economy, shock therapy must be adopted to implement the marketization, privatization and stabilization capsulated in the Washington Consensus; only in this way can the transition be achieved.

However, China did not follow the Washington Consensus. Instead, China has adopted a gradual dual-track approach since 1978. On one hand, subsidies and protection were kept for existing state-owned enterprises; on the other hand, market access was given to new private players in some labor-intensive industries. This approach has enabled both the visible and invisible hands to play a part in transition.

In the late 1980s and early 1990s, there was a common belief that China's gradual dual-track approach of keeping government intervention and opening the market at the same time was the worst way of transition, which would make the economy worse than during planning period. In an article published at the world's top journal Quarterly Journal of Economics, economists Andrei Shleifer, Robert Vishny and Kevin Murphy built a theoretical model to prove this approach as the worst ever by building a theoretical model. They believed that the not-so-common corruption in a planned economy would grow rampant along this dual-track, which would lead to a worsening income disparity.

Such problems did indeed arise during China's transition, which in turn enhanced their belief that China's approach was the worst of all.

But no one can deny the fact that since 1978, China has maintained fast and stable economic growth and that market resources are more and more abundant. How could this growth be explained? The common view back then attributed China's development to the transformation of surplus labor in rural areas to industrial labor in cities, which improved efficiency. So as long as China's growth slowed down, they would say that with so many problems, China's way just won't work and they would pick up the China Crash rhetoric.

Then what happened to countries that adopted the shock therapy? Instead of the stable and rapid growth that China experienced, they suffered from economic collapse, stagnation and more frequent crisis, with growth rates even lower than that of the 1960s and 1970s. What's more, the corruption and income disparity problems that happened in China also afflicted them, but to a much more serious degree.

China's progressive dual-track approach was regarded as the worst at that time, but looking back from where we stand now, the best performers are those who have taken this approach. What were then regarded the best ways with convincing theoretical and logical support, in fact brought collapse, breakdown, constant crisis and worse performance.

Justin Yifu Lin is dean of the Institute of New Structural Economics of Peking University and used to work as the chief economist of the World Bank.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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