Birth of the Chinese Dragon

by Shweta Chopra


For most laymen, common examples of growing, developing economies are India and China. There are constant comparisons between the two countries on news channels and in newspapers. Despite being two very different countries in terms of the political structure and institutional factors, the two are similar in many ways: in terms of the population sizes they support, the high economic growth they are experiencing vis-à-vis the rest of the world, among others. We have some amount of knowledge about India’s economic growth story and how it began, but China’s unprecedented growth story is something most of us are unclear about.

We need to begin with a little bit of history. The People’s Republic of China came into being in 1949. For most part of the twentieth century it remained poor, torn by civil war and ruled by a communist dictatorship. Millions died in the famines of the 1950s due to failed government policies. China did not always show the tremendous growth it does today.

In 1978, after years of state control of all productive assets (things that contribute to economic growth), the Chinese government embarked on a major program of economic reform. In an effort to awaken a dormant economic giant (considering its size and scope the Chinese economy had a lot of potential as is apparent now), it encouraged the formation of rural enterprises and private businesses, liberalized foreign trade and investment, and invested in industrial production and the education of its workforce. By nearly all accounts, the strategy has worked spectacularly and led to China's productivity growth (refers to growth not attributed to capital accumulation, but instead the increase in the productive capacity of resources like labour and capital).

It’s very likely that a lot of the previous paragraphs went over your head. Let's break it down and understand it point by point.

Rural Enterprises

Prior to the 1978 reforms, nearly four in five Chinese workers were in agriculture industry. By 1994, only one out of two were. Reforms expanded property rights in the countryside and started a race to form small non-agricultural businesses in rural areas. Higher prices for agricultural products also led to more productive farms and more efficient use of labor. This can be understood by applying common sense. Higher prices mean more expensive consumption. To sustain the expensive consumption, productivity and efficiency must be enhanced at the workplace. Together these forces induced many workers to move out of agriculture and into more opportunistic sectors. The resulting rapid growth of village enterprises drew millions of people from traditional agriculture to manufacturing.

Private Businesses

The post-1978 reforms granted greater freedom to private enterprises (those enterprises that were not government initiatives). They became free to sell some products in the private market at competitive prices, grant bonuses to good workers and fire bad ones, and retain some portion of the enterprise's earnings for future investment - all of which were highly regulated by the State prior to 1978. The reforms also gave greater room for private ownership of production, and these privately held businesses created jobs, developed much-wanted consumer products and earned important hard currency for the economy through foreign trade. The profit motive of private enterprises automatically ensured that they functioned with efficiency and so this sector played an important role in the productivity increase the Chinese economy began to witness.

Foreign Trade and Investment

China's Open-Door Policy, that welcomes foreign investment, is a huge factor in its growth. Cumulative foreign direct investment, negligible before 1978, reached nearly US $100 billion in 1994. This foreign money was invested in building factories and in other businesses and hence helped create jobs in the economy.  China was linked to international markets, and this led to tremendously important transfers of technology from the developed world to China. This has greatly assisted China in becoming one of the largest goods manufacturers in the world. In addition, opening up the Chinese economy boosted exports, which rose 19 percent a year during 1981-94. Strong export growth is one of the driving forces of the Chinese economy. Chinese export products are sold all over the world at abnormally low rates in order to beat the competition. This export growth means that domestic Chinese firms which produce these exports, earn more profits and prosper.

Education

The Chinese commitment to education (one positive outcome of its previous communist regime) paid off by 1978. There was a huge reservoir of skilled and potentially productive workers ready to flood the economy at the time the reforms came into being.

The entire growth process is highly complex and institutional factors, like the history of Chinese governance and the character of the citizens, come into play. However, these broad reform initiatives are the main reasons for the birth of the Chinese Dragon (as China’s economy is referred to) as we know it today.
Though all this sounds very impressive China, like India, still has a long way to go before it can be considered an economic superpower. Its communist structure restricts the freedom available to its people. A lot of people are also unemployed or dislocated from this modern-day China. Nothing is perfect, but there is no doubt that the story of how the Chinese Dragon came into being is fascinating and commands attention.