Roots of China's miracle

FE Team | Published: October 27, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

Yasheng Huang
In designing his economic policy programme for the next five years, President Hu Jintao is well advised to seek counsel from someone virtually unknown to those Chinese who came of age in the 1990s. He is Wan Li, 91 years old and still intellectually alert.
Mr Wan was a special guest at the opening session of the 17th Communist party congress in Beijing last week. It was he, more than anyone else there, who put China on the right track. In the 1980s he was a vice-premier in charge of agriculture, and before that he was the party secretary of the impoverished Anhui province.
It was in Anhui that the true Chinese miracle began. In December 1978, 18 households in Xiaogang village made a secret decision to privatise their rural output. Fearing reprisals, the households entered into a pledge - written in blood - to support the families of their leaders should they be arrested.
Mr Wan did not arrest them. On the contrary, he endorsed the experiment and bravely defended it in the face of withering attacks from conservatives. The experiment, which became known as the household responsibility system, was adopted by 90 per cent of villages in Anhui within a year and by the rest of the country a few years later.
Mr Wan was then promoted to vice-premier. In that position, he worked tirelessly to support rural financial liberalisation, lengthening the leasehold of farmland, removing employment restrictions on private businesses, deregulating rural-urban trade, curtailing the power of party officials in the countryside and introducing grassroots democracy to village governance.
The result was that rural household income per capita galloped ahead at more than 10 per cent a year in the 1980s. Western economists may tout foreign direct investment and globalisation as the reasons for China's poverty reduction. But the true credit lies with the rural reforms. The vast majority of China's poverty reduction came in the first half of the 1980s. Also during that period, income distribution improved.
A defining characteristic of Mr Wan and other leaders of the 1980s was that they respected the inclinations and actions of farmers rather than imposing their own visions.
The 1980s reforms were a classic example of a bottom-up, wisdom-of-the-crowd success story. A market economy, in essence, is an economic democracy. Mr Wan once told his subordinates always to assume that they were in the wrong if the farmers wanted to do something different from them.
It is truly unfortunate that China in the 1990s deviated from these market-conforming policy principles. In the 1990s, rural China was starved of financial resources in order to support industrial development in the cities. The effect of the urban policy bias was dramatic. Rural income growth collapsed from double-digit annual increases in the 1980s to about 4 per cent a year in the 1990s. Since then, under the leadership of Mr Hu, it has recovered to 6 per cent.
China will succeed or fail not because of how many skyscrapers Beijing and Shanghai have but as a result of the economic fortunes of its vast countryside. Domestic consumption will not grow if rural incomes do not improve and if rural residents are forced to save for their medical and educational expenses. China will not be a true market economy if rural land rights are not secure and if its financial system does not serve the most dynamic force in the economy - innovative rural entrepreneurs.
It may be counter-intuitive to think that China's high-technology future depends on its countryside - but not if you believe in market principles. The success of low-tech businesses in rural China will force urban companies to innovate in their production and technology to maintain their competitive edge. The rural stagnation of the 1990s sent millions of migrants to the cities in search of jobs. Urban companies, never short of labour, were flooded with tens of millions of eager job-seekers and they did what any rational owners and managers would do in similar circumstances - they favoured labour-intensive production at the expense of research and development.
There are other long-term costs, including the fact that the children of these rural migrants failed at schools. Due to the massive policy mistakes in the 1990s, China may have produced another uneducated generation.
In the past five years, Mr Hu has formulated many worthy objectives, such as creating a harmonious society and raising the living standards of average people above gross domestic product growth. He will realise these objectives more effectively if he can listen to Mr Wan and his colleagues, such as Tian Jiyun and Du Rensheng. These visionary leaders from the 1980s, who were marginalised in the following decade, were founders of the economic miracle. Its future success depends on how quickly and completely China returns to the model of the 1980s.
The writer, from MIT Sloan School of Management, is author of 'Capitalism with Chinese Characteristics' (Cambridge University Press, 2008)
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