How Did China Take Off?
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How Did China Take Off? The MIT Faculty has made this article openly available. Please share how this access benefits you. Your story matters. Citation Huang, Yasheng. “How Did China Take Off?” Journal of Economic Perspectives 26, no. 4 (November 2012): 147–170. As Published http://dx.doi.org/10.1257/jep.26.4.147 Publisher American Economic Association Version Final published version Citable link http://hdl.handle.net/1721.1/121058 Terms of Use Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use. Journal of Economic Perspectives—Volume 26, Number 4—Fall 2012—Pages 147–170 How Did China Take Off ? Yasheng Huang hhereere aarere ttwowo pprevailingrevailing eexplanationsxplanations ofof wwhathat causedcaused CChina’shina’s rrateate ofof eeconomicconomic growthgrowth ttoo ttakeake ooff.ff. TThehe fi rstrst viewview ggivesives thethe pprideride ofof placeplace toto T gglobalization.lobalization. AAccordingccording ttoo thisthis vview,iew, ChineseChinese ggrowthrowth startedstarted whenwhen DengDeng XXiaopingiaoping lliberalizediberalized ttraderade andand foreignforeign investmentsinvestments bbyy ssettingetting uupp specialspecial economiceconomic zzonesones iinn tthehe ccoastaloastal pprovinces.rovinces. IInn tthishis vview,iew, CChina’shina’s eexport-orientedxport-oriented mmanufacturing,anufacturing, llargelyargely fforeign-funded,oreign-funded, employedemployed mmillionsillions ooff rruralural mmigrants,igrants, bboostedoosted ttheirheir iincome,ncome, aandnd rreducededuced ppovertyoverty farfar aandnd wwide.ide. TThehe ssecondecond pperspectiveerspective eemphasizesmphasizes tthehe iimpor-mpor- ttanceance ooff iinternalnternal rreforms—especiallyeforms—especially iinn rrural,ural, iinteriornterior rregions—ofegions—of tthehe agriculturalagricultural ppricingricing ssystem;ystem; llandand ccontracting;ontracting; andand thethe entryentry ofof ruralrural businessesbusinesses knownknown asas town-town- sshiphip aandnd vvillageillage eenterprises.nterprises. CChina’shina’s eearlyarly eexternalxternal rreformseforms areare ppoliticallyolitically important.important. SpecialSpecial economiceconomic zzonesones wwereere iideologicallydeologically controversialcontroversial atat thethe ttimeime ttheyhey wwereere iintroducedntroduced aandnd theirtheir eestablishmentstablishment ssignaledignaled a ttriumphriumph ofof tthehe reformistreformist lleaderseaders overover conservatives.conservatives. Also,Also, tthehe iinflnfl oowsws ofof fforeignoreign iinvestmentsnvestments werewere notnot sspontaneous;pontaneous; ttheyhey requiredrequired anan explicitexplicit sshifthift iinn ppoliciesolicies andand legallegal practices.practices. PPolitically,olitically, thethe 19791979 passagepassage ofof thethe LawLaw onon CChinese–Foreignhinese–Foreign EEquityquity JointJoint Ventures,Ventures, onlyonly threethree yearsyears afterafter thethe CulturalCultural Revolu-Revolu- ttionion aandnd ccommittingommitting tthehe CChinesehinese ggovernmentovernment ttoo tthehe pprotectionrotection ooff fforeignoreign ppropertyroperty rrights,ights, wwasas ppathbreaking.athbreaking. BButut tthehe eeconomicconomic ccontributionsontributions ooff fforeignoreign iinvestmentsnvestments ddoo nnotot rremotelyemotely mmatchatch tthosehose ooff CChina’shina’s rruralural iindustry.ndustry. AAtt ttheirheir ppeak,eak, fi rmsrms fundedfunded byby foreignforeign capitalcapital eemployedmployed 1188 mmillionillion ppeopleeople (in(in 22010).010). BByy ccontrast,ontrast, aatt ttheirheir ttroughrough inin 1978,1978, town-town- sshiphip aandnd vvillageillage eenterprisesnterprises eemployedmployed 2828 mmillionillion ppeople.eople. BBetweenetween 19781978 aandnd 11988,988, ■ Yasheng Huang is Professor of International Management, Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts. His email address is [email protected]. http://dx.doi.org/10.1257/jep.26.4.147. doi=10.1257/jep.26.4.147 148 Journal of Economic Perspectives CChina’shina’s ppovertyoverty hheadcounteadcount ddeclinedeclined byby 115454 million,million, bbyy farfar tthehe mostmost impressiveimpressive rrecordecord dduringuring CChina’shina’s threethree decadesdecades ofof reforms.reforms. TheThe contributionscontributions ofof foreignforeign ccapitalapital ttowardoward CChina’shina’s initialinitial povertypoverty reductionreduction duringduring thisthis periodperiod areare miniscule.miniscule. EEmploymentmployment bbyy fi rrmsms ffundedunded byby fforeignoreign ccapitalapital wwasas 660,0000,000 iinn 11985985 aandnd 6660,00060,000 inin 11990.990. TThehe ssameame ttwowo fi gguresures fforor ttownshipownship andand villagevillage enterprisesenterprises areare 69.869.8 millionmillion aandnd 992.72.7 mmillion,illion, rrespectivelyespectively (National(National BBureauureau ooff SStatisticstatistics 22011).011). China’sChina’s take-offtake-off iinn economiceconomic ggrowthrowth startingstarting iinn thethe llateate 1970s1970s aandnd itsits ppovertyoverty reductionreduction fforor thethe nnextext ccoupleouple ooff ddecadesecades waswas ccompletelyompletely a functionfunction ooff itsits ruralrural ddevelopmentsevelopments andand itsits iinternalnternal rreformseforms iinn ggeneral.eneral. DDuringuring tthehe ggoldenolden eerara ofof ruralrural iindustryndustry inin tthehe 1980s,1980s, ChinaChina hadhad nonenone ofof whatwhat aarere ooftenften tthoughthought ooff aass tthehe rrequisiteequisite ffeatureseatures ofof tthehe CChinahina growthgrowth mmodel,odel, likelike mmassiveassive sstate-controlledtate-controlled iinfrastructuralnfrastructural iinvestmentsnvestments aandnd mmercantilism.ercantilism. IInn tthehe 11980s,980s, CChinahina hhadad aann oovervaluedvervalued eexchangexchange rrate.ate. BetweenBetween 19801980 andand 1990,1990, itit hadhad tradetrade defidefi - ccitsits eeveryvery yyearear eexceptxcept 11982,982, 1983,1983, andand 1990.1990. (By(By contrast,contrast, sincesince 19891989 ChinaChina hashas hadhad ttraderade ssurplusesurpluses everyevery yyearear eexceptxcept 11993.)993.) InIn thethe 11980s,980s, thethe householdhousehold consumptionconsumption ttoo GGDPDP rratioatio sstoodtood aatt ooverver 5500 ppercent,ercent, ccomparedompared wwithith 3355 ppercentercent iinn rrecentecent yyears.ears. TToo uunderstandnderstand hhowow CChina’shina’s economyeconomy tooktook ooffff requiresrequires anan accurateaccurate andand detaileddetailed uunderstandingnderstanding ooff iitsts rruralural ddevelopment,evelopment, eespeciallyspecially ruralrural industryindustry spearheadedspearheaded bbyy tthehe rriseise ooff ttownshipownship aandnd villagevillage eenterprises.nterprises. ManyMany CChinahina scholarsscholars believebelieve thatthat ttownshipownship aandnd vvillageillage enterprisesenterprises havehave a distinctdistinct ownershipownership structure—thatstructure—that theythey areare oownedwned aandnd ooperatedperated bbyy locallocal ggovernmentsovernments rratherather tthanhan bbyy pprivaterivate entrepreneurs.entrepreneurs. TThathat tthesehese fi rrmsms ccouldould bbee ssoo ddynamicynamic aandnd eeffiffi cient,cient, yetyet government-owned,government-owned, isis oftenoften ttreatedreated aass a pparadoxaradox inin thethe economicseconomics literature.literature. ThisThis statiststatist viewview ofof townshiptownship andand vvillageillage eenterprises,nterprises, ttogetherogether wwithith tthehe wwidespreadidespread bbeliefelief tthathat CChinesehinese ggovernmentovernment hhasas rretainedetained ttightight ccontrolontrol ooff fi nnance,ance, ledled mmanyany scholarsscholars toto concludeconclude thatthat ChineseChinese ggrowthrowth hhasas ddefiefi eedd tthehe conventionalconventional wisdomwisdom onon thethe importanceimportance ofof privateprivate entrepre-entrepre- nneurshipeurship aandnd fi nnancialancial lliberalizationiberalization fforor ggrowth.rowth. BButut mmyy oownwn hhistoricalistorical nnarrative—formulatedarrative—formulated onon thethe basisbasis ooff vvoluminousoluminous ggovernmentovernment aandnd bankbank ddocumentsocuments aandnd datadata fromfrom tthehe 11980s980s — ddirectlyirectly ccontradictsontradicts tthishis hheterodoxeterodox iinterpretationnterpretation ooff ChineseChinese rreforms.eforms.1 I wwillill sshowhow tthathat ttownshipownship andand vvillageillage eenterprisesnterprises ffromrom tthehe iinceptionnception hhaveave bbeeneen pprivaterivate aandnd tthathat CChinahina uundertookndertook ssignifiignifi ccantant aandnd mmeaningfuleaningful fi nnancialancial liberalizationliberalization atat thethe veryvery startstart ofof reforms.reforms. RRuralural pprivaterivate eentrepreneurshipntrepreneurship aandnd fi nancialnancial reformsreforms correlatecorrelate stronglystrongly withwith somesome ooff CChina’shina’s bbest-knownest-known aachievements—povertychievements—poverty reduction,reduction, fastfast GGDPDP growthgrowth drivendriven bbyy ppersonalersonal cconsumptiononsumption ((ratherrather tthanhan bbyy ccorporateorporate iinvestmentsnvestments aandnd ggovernmentovernment sspending),pending), aandnd aann iinitialnitial ddeclineecline ooff iincomencome iinequality.nequality. TThehe cconventionalonventional vviewiew ooff CChinahina sscholarscholars iiss rrightight aaboutbout oonene ppoint—thatoint—that ttoday’soday’s CChinesehinese fi nnancialancial ssectorector isis completelycompletely state-controlled.state-controlled. HowHow doesdoes oneone reconcilereconcile mymy rreadingeading ooff tthehe hhistoricalistorical evidenceevidence onon