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You Decide: What's behind China's economic boom?
Story Date: 5/28/2013
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Source: Dr. Mike Walden, NCSU COLLEGE OF AG & LIFE SCIENCES, 5/24/13
When I was growing up in the 1950s, China was our political enemy. My
uncle, who lived next to my family, had fought the Chinese army in
Korea, so nothing positive was said about China during family
gatherings.
Our political relationship with China changed in 1972, when President
Nixon surprised the world with his visit to Beijing and historic
handshake with Chairman Mao. The U.S. political relationship with
China has now been normalized for decades.
However, many observers of China say the real turning point in
Sino-American relations was not the political thaw that began in 1972
but the change in the Chinese leadership later that decade that
directly led to the country’s economic transformation. The new Chinese
leader, Deng Xiaoping, was one of the major forces behind taking an
impoverished economy and turning it into the economic superpower of
today.
What did Deng and his supporters do? This is the subject of a fabulous
new book, How China Became Capitalist, co-authored by 102-year-old
Nobel Prize winning economist Ronald Coase! Coase’s story of China’s
economic emergence is fascinating, as it was stopped and restarted
several times. But the remaking of China’s economy essentially
followed three elements.
First was the introduction of economic incentives. A basic tenant of
economics is that people respond to incentives. Want people to work
harder and businesses to make more; let them keep what they earn in
wages and profits. This simple idea --which had been contrary to Mao’s
philosophy -- was implemented first in farming and then in the rest of
the economy.
And guess what happened? Chinese productivity and output soared.
Poverty was reduced, the middle-class expanded and the country’s
standard of living jumped.
Second was releasing the grip the Chinese government had on prices and
letting them be set by old-fashioned supply and demand. Under Mao,
government bureaucrats controlled the prices of everything from corn
to cornflakes. The problem was these top-down regulated prices had no
link to the realities of a modern economy. If the price was set too
low, shortages resulted when buyers tried to purchase more than
companies produced. Conversely, prices established too high gave the
opposite -- surpluses and waste as producers made more than buyers
could afford.
The solution was to free prices and let them be determined by economic
conditions. Now, prices would result from interactions between buyers
and sellers. China found this system led to reductions in waste,
surpluses and -- perhaps ironically -- prices themselves.
The last shake-up in the Chinese economy has been the hardest, taking
on the powerful and protected state-run companies. Such companies,
which dominated the Chinese economy under Mao, were inefficient,
antiquated, inattentive to consumer desires and costly. Today,
although some still exist, they have been pushed aside for the
innovative, cost-conscious and fast-changing structure of numerous
private companies -- none of them guaranteed to survive -- constantly
competing for the consumers’ purchases.
Some economists argue that the overhaul of the Chinese economy in the
last three decades has never been matched in human history. It has
brought prosperity to hundreds of millions of Chinese households. But
the remake has created new issues, both internal to China and
internationally.
A big issue is environmental, specifically pollution. China’s rapid
industrialization and almost insatiable need for energy have added to
the world’s concern about air quality and climate change. Of course,
other developed countries are also big energy users and
pollution-producers, so the problem isn’t unique to China.
China’s rapid economic growth, particularly in manufacturing, has
redrawn trade patterns and reallocated jobs in the world. Some workers
and companies -- including in the U.S. and North Carolina -- have
benefited, while others have lost. But one thing is for sure, any
major company today anywhere in the world must consider China both as
a competitor in production as well as an opportunity for sales.
Last is the argument that while the Chinese government may be pursuing
a hands-off policy for their domestic economy, they very much have
hands-on policies in international trade that give them an unfair
advantage. Indeed, this has been a contentious point for the U.S.,
although the evidence for the charge has been intensely debated by
economists.
So how did China rebuild its economy within the span of one
generation? Easy, they adopted and applied the standard economic
principles of incentives, freely set prices and competition, ideas
taught every day in Economics 101 classes. But, you decide if this is
enough!
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