Mathematical Logic of Dual-System Transition and Simulated Outlook for Future Economic Growth

In countries with a dual system, institutional distortions are a common state of economic operations. By comparing the distorted values of economic variables resulting from the non-correctable part of their dual system with the standard values of economic variables generated by market economy countries and their own market system part, we can derive the institutional distortion difference. By using the institutional distortion difference, which is a key endogenous variable in the analysis concerning the establishment of the quantitative relationship between system reforms and GDP, we can calculate the factor surplus, consumption surplus and asset surplus associated with the distortions in a dual system economy. In addition, it is possible to calculate the resulting loss of output, consumption and assets, based on the reverse logic that “we actually do not have something we should have”, and to simulate the output, consumption and asset potential to be unlocked by system reforms, based on the reductive logic that “what we should have is what we can have if we aim for the standard value”. This paper argues that the natural economic growth rate under a dual system is significantly different from the natural economic growth rate in a unitary market economy. The natural economic growth rate in a dual system is moderate and low during the industrialization phase, with growth potential being locked up in institutional distortions, so reforms are needed to unlock it. The natural growth rate in a unitary market economy is characterized by liquidity shortage in times of recession, for which we adopt expansionary economic policies as the main stimulus. Our simulations lead to the conclusion that if China fails to fully implement system reforms in the future, the natural economic growth rate will be 1.50%-2.50%. Considering China’s dual system and low rate of land development, this paper gives a growth model adapted to the in-depth reform of China’s future dual system and the implementation of major development strategies, makes simulated projections and finds that China’s economic growth rate can be maintained at 5.00%-6.00% during the pre-2035 development phase