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Social Education 81(2), pp 93– 97 ©2017 National Council for the Social Studies International Economics ’s Rapid Economic Rise: A New Application of an Old Recipe

Yi Wen and Scott Wolla

Thirty-five years ago, China was one of the poorest nations on Earth. Its per capita ment for mutually beneficial trade, and income was only one-third of that of sub-Saharan Africa. But a miraculous trans- hard work is rewarded with profits, then formation has taken place. The Chinese , as measured by GDP, is now self-interest will drive people to pro- second only to the United States.1 Among other things, China is the world’s largest duce and sell them producer of , , , , aluminum, passenger cars, high-speed trains, to others. The motive would ensure ships, tunnels, , highways, , cell phones, , robots, that producers produce what people air conditioners, refrigerators, washing , furniture, fertilizer, agricultural want, and would incentiv- crops, as well as college students.2 In a single generation, it has been transformed ize them to produce efficiently accord- from a backward agrarian nation into a powerhouse (see Figure 1).3 ing to the best available and And yet, even after 35 years of rapid , China is far from being a offer their goods at competitive prices. wealthy nation—its GDP per capita (an indicator of ) is $14,300, Over time, new would be while GDP per capita in the United States is $56,100.4 It is no wonder that many invented, industries would upgrade and have taken an interest in China’s historic rise. In this article, we will examine China’s would develop. What was the through a series of key questions. recipe for economic development in this framework? Economists often suggested an institutional recipe that included a mix of these ingredients: the , private rights, open and com- petitive markets, and democratic political instructions.6 This recipe seemed to work well in some cases. For example, South Korea emerged from II after defeat- ing in 1948 and became an economic powerhouse in a very short time—due largely to this institutional mix. It provided a stark contrast to communist North Korea, in spite of sharing so many variables in common. But when the story is examined more closely, one discov- ers that the economic transformation, which started in the 1960s, was under Are Democratic Institutions a (i.e., democracy and the dictatorial rule of Park Chung-hee. Necessary Precursor to Economic rights), markets would emerge and In fact, several historical examples sug- Development? would then be created by mar- gest that democracy is not a prerequisite The standard model for economic ket participants.5 These ideas go back for economic growth. Germany’s growth development in the twentieth century to ’s description of the invis- from 1850 to , Russia’s went something like this: If nations set ible hand of the marketplace: If the eco- growth from 1860 to World War II, and up the right institutional framework nomic conditions provide the environ- Japan’s industrialization during the

March/April 2 017 93 Bikes are parked in front of a poster a picture of the Central District area, outside a construction site in Beijing, China, October 19, 2016. REUTERS/Jason Lee

Restoration all took place under mon- style constitution with separation of pow- How has China’s Economic archy.7 In short, the experience of many ers and democratic elections (much like Development been Like the nations involves economic development the institutional reforms proposed by West’s Industrial ? apart from democracy. Or, as Nobel later economists). The rallying cry was The Industrial Revolution began in Great Laureate argued in “only science and democracy can save Britain in the . For centuries, com- his aptly named treatise China.” These efforts also failed, leaving mercialized and rural indus- and Freedom, capitalism is a necessary China as one of the poorest nations on tries focused on long distance trade; the condition for democracy, not the other Earth. The Communists rose to power aim was to use rural surplus labor to way around.8 in 1949 and established a Soviet-style generate wealth for the merchants, rely- central planning model that attempted ing on a unified domestic market and What other Economic to leapfrog from a backward economy international trade facilitated by Great Development Recipes has China into the modern , again Britain’s vast colonial . This envi- Tried? by using a top-down model, only to fall ronment led to the division of labor and China has tried several strategies to three decades later.9 Once again, China specialization, which increased produc- industrialize. The late Qing Monarchy was stuck in a trap. tivity, spurred economic growth, and (1861–1911) tried to modernize its It seemed as though China had used opened new trade opportunities. This backward agrarian economy by building every known recipe: monarchy, con- initial phase provided a foundation for modern industry in the cities and indus- stitutional democracy, and communist the First Industrial Revolution, which trializing from the top down. It pursued . However, one recipe introduced simple machines into the its policies for 50 years, failed, and was remained: the more gradual, bottom-up and process to allow overthrown by the Xinhai Revolution approach of economic development for mass of goods in 1911. The new government attributed used by and the United in . The unified domestic and backwardness to lack of democracy and States—the one we know as the Industrial global world market allowed these established the Republic of China. The Revolution. mass-production industries to flourish. Republic’s leaders adopted a Western- As trade volume rose and the market

Social Education 94 deepened, the demand for new forms of ment. The strong -led development 75 percent in 1977 to 33 percent in 2012; energy, power, and transportation trig- approach featured bottom-up industrial and the number of , books gered a Second Industrial Revolution. policy, gradual and sequential reforms, and TV channels expanded by hundreds The Second Industrial Revolution fea- social order, and political stability.10 fold.11 tured of the means The bottom-up gradual reforms in of mass production such as , steel, China started solving China’s food Why did China’s Reforms chemicals, and machinery. Eventually security problem without privatizing the Beginning in 1978 under Deng economic success and rising living stan- public ownership of land; rather, it cre- Xiaoping Succeed when Earlier dards led to social changes such as the ated incentives for farmers—giving them Efforts had Failed? National Insurance Act and universal flexibility in decision-making and allow- Deng Xiaoping’s bottom-up, gradual suffrage in Britain. ing them to profit from crops in excess process of development began with A striking similarity can be found in of a quota. These reforms resulted in a reforms to key economic sectors, start- U.S. history. After more than a 100 years boom in agricultural activity starting in ing with the agricultural sector, and then of rural development, the first American 1978. The process started with indus- moving to the light industrial sector, the Industrial Revolution started in the early trializing primitive rural economies. It heavy industrial sector, and finally to the nineteenth century with technologies then moved to light industry and finally financial sector. This process allowed adapted from the British textile and rail heavy industry, in a process that mir- the mass market to develop sequentially industries (–1860s); during this rored the British Industrial Revolution. along with the industrial base, which period, the U.S. government continued This process had a dramatic social and was necessary to support China’s own to nurture America’s domestic market economic impact—the annual economic Industrial Revolution, stage by stage. In by building a nationwide network growth rate increased from 3.6 percent other words, as farmers and rural popula- and playing a leadership role in the (average from 1952-1978) to nearly 10 tions realized the gains of the early indus- construction of America’s railroad sys- percent (average 1978–2012); the share trialization, their improved standards of tem. The first stage of industrialization of the labor force in agriculture fell from living and purchasing power helped fuel created a unified domestic market far larger than Britain’s; this ushered in the second American Industrial Revolution, which involved mass production of steel, automobiles, telecommunications, “James Percoco shows teachers how to bring chemicals, and mechanized agriculture history alive within their classrooms… (1870–1940). Again, rising living stan- a wonderful resource.” — Ken Burns dards led to , such as the civil rights movement and the expansion Take the Journey of social programs in the 1960s. Teaching American History Through Place-Based Learning China’s economic transformation By James Percoco; Foreword by Milton Chen; Afterword by Cathy Gorn began in 1978 under Deng Xiaoping, In Take the Journey, author, historian, and educator James Percoco who replaced the top-down, com- invites you and your students to the places where many events in mand economic policies that had been American history happened. The Journey Through Hallowed Ground is a 180-mile National Heritage area encompassing such historic adopted by the Communist Party since sites as the Gettysburg battle eld and Thomas Jeerson’s home, it came to power in China in 1949 with Monticello. Filled with students’ voices and an enthusiasm for American history, Take the Journey oers practical and easy- a market-oriented approach. China took to-implement lessons, classroom-tested materials, and ways to a very gradual, experimental approach meet state standards without sacri cing teacher creativity or that used a bottom-up reform plan, and hands-on learning. So bring your students along and let them discover the twists and relied on central and local governments turns oered by history and the Journey Through Hallowed Ground. to play a bigger role in market creation, #HistoryJourney starting in the rural areas. In the absence March 2017 | Grades 5–12 | 224 pp/ | $22.00 Price re ects of a well-financed class of and a 25% Educator business leaders who helped create uni- Free Shipping on all orders. No Code. No Minimum. fied markets in the and Discount the United States, China relied on gov- ernment officials (from central and local 800.988.9812 levels) to provide conditions for markets www.stenhouse.com to emerge within a controlled environ-

March/April 2 017 95 rising demand, and helped sustain the by starting its industrialization process in While the concept has become main- economic transformation as it spread to the big cities by imposing heavy-indus- stream, it is not without controversy.16 new industries. For example, fueled by trial technology and modern institutions Britain and the United States pro- rising demand and increasing produc- before the market and other economic duced a lot of during their tivity, China’s total production of components had developed.14 China Industrial Revolution before they moved increased from 330,000 tons in 1985 learned that the mass market and its from heavy industrial manufacturing to to 8.5 million tons in 2002—a 23-fold economic infrastructure had to develop a cleaner, more service-based economy. increase in 17 years. Cotton fabric pro- before and alongside the stages of indus- After they acquired an elevated standard duction increased from 1.9 billion meters trialization so it could thrive. of living, they began to address inequal- in 1985 to 32.2 billion in 2002—a ity and environmental quality. China, 15-fold increase. By the early 1990s, the What Does the Future Look Like too, has moved from light industry to included 24,000 enter- for China’s Economy? heavy industry and will transition to prises and employed about 8 million, China has come under pressure from the a cleaner, more sophisticated service- making it China’s largest manufacturing world community to adopt social welfare based economy in the future. As noted industry and accounting for 20 percent programs and environmental standards above, China is under increasing pres- of its total exports. that mimic those of Western industrial- sure to adopt higher pollution standards; But this market did not emerge on ized nations. China’s hesitancy to adopt but those who are making these demands its own—the government played a vital these reforms has been criticized by pol- can look at the recent history of Western role by supporting its development with icy and opinion leaders in other devel- nations to see that development has political stability, social trust, and infra- oped nations, who view China as back- taken time. And China’s development is structure. In a sense, these supports acted ward. Those who would impose these no exception.17 as government-provided public goods. expectations on China forget that China Of course, concerns about global cli- While Mao’s regime focused on heavy is still in the early stages of development mate change have transformed the con- industry and ignored market creation, (relatively speaking) and its people are versation about environmental quality. Deng encouraged market creation (start- far from wealthy. From the Chinese per- When Britain, the United States, and ing in the rural areas) and promoted the spective, these expectations violate the other developed nations were industrial- labor-intensive textile industry because historical sequence of development. izing, pollution was largely seen as a local it was consistent with China’s compara- Some economists suggest that it is only issue. China’s economic development is tive advantage: it had an abundance of in the latter stages of development that situated in a different context because of labor, it did not require advanced tech- an economy can afford luxuries such as the massive size of its industrial efforts, nologies, it had low entry costs, and environmental quality and social wel- the large amount of pollution emitted, the domestic and international markets fare programs. This idea, pioneered by and the point in history at which they for were huge. Earlier efforts to economist Simon Kuznets in the 1950s, are moving through the heavy industry industrialize from the top down ignored is sometimes referred to as the “grow first, process of development. The focus now these factors.12 Under Deng’s reform, clean up later” strategy. It suggests that is on the global nature of the threat: that land was not privatized in rural areas but the first concern of an emerging econ- China’s pollution could degrade envi- instead remained collectively owned by omy is lifting its people out of poverty ronmental quality for the global popu- the farmers, which dramatically reduced through economic growth.15 The indus- lation.18 the transaction costs of building rural trialization process that makes economic industries and public infrastructure. growth possible is often accompanied Conclusion It’s tempting to rush the stages of by an increase in China tried democracy, monarchy, economic development, expecting an (as incomes rise at different rates) and and communism in attempts to indus- economy to leap from agrarian to indus- a decrease in environmental quality trialize, but failed. However, it found trialized. But in some ways economic (industrialization produces pollution). success when it followed a historical development is similar to matura- Kuznets suggested that as an economy sequence rather like Britain’s Industrial tion—it often occurs in distinctive stages. grows and its people become wealthier, Revolution. The lesson that emerges is Consider how students learn mathemat- they will begin to social justice and twofold: (1) Economic development is ics. Math has developed as an academic environmental quality and will make a process with stages—one cannot leap- discipline over thousands of years, but the necessary choices to achieve them— frog to the final stages without enduring every generation must begin with basic including paying for them. So, in a sense, the earlier ones; (2) Expecting mature arithmetic—it cannot jump into calculus environmental quality and social wel- and sophisticated institutions to emerge in kindergarten.13 In the same way, China fare are luxury goods—demand for them from underdeveloped economies is failed when it attempted to leap forward tends to increase as income increases. not realistic—they take time to develop

Social Education 96 and will sometimes need government People’s Republic of China from 1953,” Working support. The economic transforma- Paper No. 21397 (National Bureau of Economic Research, July 2015). tion occurring in China has improved 12. Wen and Fortier, “The Visible Hand: The Role the lives of hundreds of millions of of Government in China’s Long-Awaited people, and it is still in process. Yet Industrial Revolution.” 13. Yi Wen, “China’s Rapid Rise: From Backward perceptions of China’s dramatic rise to Industrial Powerhouse in are sometimes skewed by China’s mas- Just 35 Years,” The Regional Economist (April 2016). sive . While the Chinese 14. Wen and Fortier, “The Visible Hand: The Role economy is the second largest in the of Government in China’s Long-Awaited world, on a per capita basis, its people Industrial Revolution.” 15. Bruce Yandle, Maya Vijayaraghavan, and (on average) enjoy a standard of liv- Madhusudan Bhattarai, “The Environmental ing ranked 113th.19 And as its massive Kuznets Curve: A Primer,” Property and Environment Research Center (May 2002), economy continues to develop and www.perc.org/articles/environmental-kuznets- grow, the world is applying pressure curve. for more rapid social and environ- 16. David I Stern, “The Rise and Fall of the Environmental Kuznets Curve,” World mental change. As China continues Development 32 no. 8 (2004): 1419–1439. to develop economically, some see its 17. “The East is Grey,” The Economist (Aug. 10, rise as , while others see 2013), www.economist.com/news/briefing/ 21583245-china-worlds-worst-polluter-largest- a historical connection that reminds -green-energy-its-rise-will-have. Prepare Students them of Mark Twain’s quip: “History 18. In fact, China just played a leadership role in joining hands with the U.S. by ratifying the Paris for College, Career, does not repeat itself, but it often agreement at the G20 meeting in rhymes.” Hangzhou, even though China is still a develop- ing nation in terms of per capita income and and Civic Life standard of living. See Roberta Notes Rampton and Nathaniel Taplin, “U.S., China Our inquiry-based approach 1. Using GDP at (PPP), Ratify Paris Climate Deal, Setting Stage for G20,” China is already the largest economy. See (Sep 4, 2016), www.reuters.com/article/us-g20- to global issues promotes Central Intelligence Agency, The World china-idUSKCN1190I7. the skills required by the C3 Factbook: www.cia.gov/library/publications/the- 19. Using GDP per capita (at purchasing power par- world-factbook/rankorder/2001rank.html#ch. ity, PPP), estimated 2015. See Central Framework and Common 2. Yi Wen and George E. Fortier, “The Visible Intelligence Agency, The World Factbook: www. Core standards . Hand: The Role of Government in China’s cia.gov/library/publications/the-world-factbook/ Long-Awaited Industrial Revolution,” Federal rankorder/2001rank.html#ch. Reserve Bank of St. Louis Review (Third Quarter 2016): 189–226, https://dx.doi. org/10.20955/r.2016. 189–226 www.choices.edu 3. The figure is reproduced from Wen and Fortier, “The Visible Hand: The Role of Government in China’s Long-Awaited Industrial Revolution,” Textual Analysis available at https://research.stlouisfed.org/public ations/review/2016-09-12//the-visible-hand-the- role-of-government-in-chinas-long-awaited- Critical Thinking industrial-revolution.pdf. 4. See Central Intelligence Agency, The World Multiple Perspectives Factbook: www.cia.gov/library/publications/the- world-factbook/rankorder/2001rank.html#ch. 5. Daron Acemoglu and James Robinson, Why Global Awareness Nations Fail: The Origins of Power, , and Poverty. (New York: Crown Business, 2012). Civic 6. Gerald W. Scully, “The Institutional Framework and Economic Development,” The Journal of Political Economy (1988): 652-662. 7. Yi Wen, “China’s Rapid Rise: From Backward DIGITAL AND PRINT Agrarian Society to Industrial Powerhouse in CURRICULUM RESOURCES Just 35 Years,” The Regional Economist (April Yi Wen, Ph.D., is Assistant Vice President and 2016). Scott Wolla, Ph.D., is Senior Economic Edu- 8. Milton Friedman, Capitalism and Freedom cation Specialist at the Bank of ( of Chicago Press, 2009). St. Louis in Missouri. 9. Wen and Fortier, “The Visible Hand: The Role of Government in China’s Long-Awaited Industrial Revolution.” The opinions expressed in this article are those 10. Ibid. of the authors and not those of the Federal 11. Anton Cheremukhin, Mikhail Golosov, Sergei Reserve Bank of St. Louis or the Federal Guriev, and Aleh Tsyvinski, “The Economy of Reserve System.

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