The rise of China's economy - The Economy of the Pacific Basin

Business Economics, April, 1994 by William H. Overholt

China's economic success, in contrast to that of the Soviet Union, is due to profoundly different economic and political strategies. China has emphasized areas where limited government investments would produce rapid growth and job generation. Farms were given back to the farmers, foreign investment was encouraged, and priority was given to light and medium industry where limited investment resulted in a surge in output. Politically, reform was divided into manageable phases to develop popular support.

MORE THAN ANY other country, China has stood at the pinnacle of world technology and income for the past 2000 years. But for the past two centuries China has experienced weakness abroad and fragmentation at home, and its people have lived in unspeakable poverty. As late as the early 1980s, more than 100 million Chinese had to subsist on an annual income that was less than the cost of a good dinner in New York.

All this is becoming a thing of the past. The Chinese economic takeoff that began with the implementation of Deng Xiaoping's 1979 economic reform plan is eliminating such poverty at a rate previously limited to South Korea, Taiwan, Hong Kong and Singapore. Before China accomplished this feat, virtually any observer would have judged such rapid growth to be impossible for a nation comprising one-fifth of the world's population and an exceedingly diverse economy.

China's economic success has not been confined to raw economic growth. By 1991 foreign trade had risen to $166 billion, signifying that China had moved from autarky to being one of the world's major trading powers. China's exports climbed from a mere $14.8 billion in 1979 to $85 billion in 1992. Not only did exports rise, but they also became more sophisticated; in 1985 manufactured goods comprised only half of China's exports, whereas by 1991 they comprised more than three quarters of all exports.

In 1992 alone foreign investors poured $11.2 billion into China and signed agreements for $57.5 billion of future investments. By 1993 these numbers were approaching $20 billion and $100 billion, respectively. At the end of 1991, it had 37,215 foreign-funded enterprises that were producing $12.05 billion of exports, or just under 17 percent of the nation's total exports. In 1992 alone, the government approved an additional 47,000 foreign investment projects. Inflation, although periodically a serious problem, peaked at only half the levels experienced by South Korea in the late 1970s and one-hundredth of the levels experienced in Poland and the former Soviet Union.

THE BASIS OF SUCCESS: CHINA VERSUS THE SOVIET UNION

The differences between Chinese and Soviet performance derive from profoundly different economic and political strategies. Much of the West has long believed a myth that China is an impoverished version of the Soviet Union and must inexorable follow the latter's failures--because, after all, both were communist countries. On the contrary, China has been following a model of development more similar to South Korea than to its formerly communist bedfellows. Based on analysis of neighboring Asian countries, including most notable South Korea, Taiwan, Hong Kong and Singapore, China's strategy of development has been distinctively Asian. For the Western shopper, there is very straightforward evidence. In major department stores the shoes, shirts, sweaters and toys that once carried labels saying "Made in Korea" or "Made in Taiwan" now mostly says "Made in China." Virtually none say "Made in Russia."

From the lessons of the neighboring small countries, then, Deng Xiaoping and his colleagues derived superior strategies in four areas: economics, politics, administration, and financial markets.

ECONOMICS

Following the examples of the New Industrializing Economies, China gave priority to industries and sectors where limited government investments would produce rapid growth. First, Beijing gave the farms back to the farmers, generating huge increases in productivity, income, and output with negligible state investment; the state's role was largely limited to issuing a legal ruling and using the existing administrative apparatus to enforce its decisions. Second, China was very encouraging to foreign investment. Although the incentives and rules governing foreign investment have required continual refinement, they were sufficiently generous to attract the huge amounts mentioned above. Finally, China gave priority to light and medium industry, where limited initial investment quickly yields a surge of output. Just as Taiwan and Hong Kong had flooded world markets with textiles, garments, shoes, toys, and consumer electronics in the 1960s and 1970s, China quickly became a global force in these same products for the 1980s and 1990s. As in the smaller Asian economic takeoffs, these policies caused an explosion of growth, consumer goods production, personal income, exports, and foreign exchange earnings.

In contrast, the Soviet Union neglected agriculture, was so ambivalent about foreign investment that it attracted very little, and devoted excessive attention to heavy industry. Gorbachev's early programs emphasized massive equipment imports, building more machines, intensified use of machine tools, organization of industry under superministries, improvement of the petroleum industry, and reorganization of the automobile and high technology sectors--all of which were capital-intensive industries. The later debate over privatization also focused excessive attention on industries with huge capital requirements and long leadtimes, rather than the sectors of low costs and quick payoffs. The result of this Soviet strategy, and of some other East European strategies, including most notably Poland's, was a collapse of production simultaneous with unbearable inflation.