Monday, August 17, 2009

This in from ... China: A Tale of Two Provinces

The inimitable Scott Sumner was preparing for a trip to China. In discussing just how big and diverse it is and how we rarely recognize that fact (because we focus on countries instead of on people, as a forthcoming article of mine discusses), he turns to a fascinating retelling of the Chinese miracle that has happened since 1978.

In the standard version, the Chinese government, led by the heroic Deng Xioaping [left], gave farmers some limited property rights and began letting price mechanisms decide some food production choices. The agrarian economy transformed and hundreds of millions of starving people could now be fed. This brought support for further reforms as the coastal (non-ag) areas received the blessings of the market system and grew much faster than the relatively neglected inland regions. Today the primary concern of developmentalists seems to be much more on the inequality between coastal/inland and urban/rural rather than on absolute living standards.

To VERY briefly summarize Prof. Sumner (a less brief version quoting parts of his blog is below), Jiangsu Province was the 3rd richest agrarian province in 1978 and Zhejiang 7th. They are marked in red on the map. Both are next door to Shanghai, China's New York City, both were relatively open to trade, and after 1978 were required to grant foreigners the same levels of property protection for foreigners. Domestic protection levels varied, however, with Zhejiang being more market-friendly to natives.

Today Zhejiang is not only the richest province (Jiangsu still 3rd), despite Jiangsu getting more foreign direct investment (FDI), but the average income of the people there is roughly equivalent to its production while Jiangsu's inhabitants own only a third of their production (the rest goes back to foreigners). Zhejiang also scores very highly in terms of human development (health and education). So the inequality problem may be too little free market rather than the oft-supposed too much (alternatively, too little equality under the law). The rest of the post is worth a read if you have a minute:
To give you a sense of how complicated China is, ... [Prof. Huang of MIT] observed that both [provinces] had similar histories of being relatively prosperous and open to trade. ... In the 1980s, however, the provincial leaders in Zhejiang province were much more encouraging of private business. Although we think of the economic reforms starting in 1978, a huge ocean liner turns very slowly. The government of China does not just wave a magic wand and order changes, rather change often bubbles up from the bottom. So the leaders of Zhejiang province, and even more so the early entrepreneurial pioneers in business, were risking their lives. Just imagine if China had decided to abandon the economic reforms and go back to the Cultural Revolution.

BTW, a brief digression that libertarian readers might find inspiring. The rural reforms began in late 1978 in a single village in Anhui province [some members of which are pictured right]. Each family in the commune was assigned their own plot of land. This decision was incredibly risky, so everyone took a blood oath to secrecy. Gradually other villages started to copy them. When the government saw that the reforms were successful, they eventually gave them their blessing. But it was not the sort of top-down change that is often portrayed in the West. It was the Chinese people that took the lead, and the leaders followed. In an earlier post I called this agricultural reform the single best thing that has ever happened in world history. [I'd put it top 10 non-religious.]

Yasheng Huang points out that the 1980s have been widely misunderstood. The industrial revolution occurred mainly in the countryside, where free enterprise was encouraged. ... These reforms actually led to a reduction in income inequality in the 1980s, not the increase many Westerners assume occurred. Why? Because the growth was fastest in rural areas that had been much poorer than the cities. Of course since 1990 the cities have grown faster, and income inequality has indeed worsened. Huang argues that that is because government policy favored the cities after 1990.

Back to Zhejiang [pictured right. Jiangsu is pictured left]. After the party leaders adopted a business-friendly policy, economic development in Zhejiang province took off. Since 1978 Zhejiang has gone from 7th to 1st in per capita provincial GDP, while Jiangsu, which has also grown fast, stayed at 3rd. But the most interesting part of Huang’s argument concerned foreign investment. Which province do you think attracted the most foreign investment? Surprisingly it was Jiangsu, the slower growing province. The reason was that after the economic reforms began the central government provided secure property rights for foreign investors in all of China’s provinces. In contrast, property rights for local business was much more iffy. ... [Huang then uses a clever comparative advantage argument that this really isn't surprising at all: If both provinces are equally accommodating to foreigners, but one does a better job attracting domestic talent, the domestics will tend to work in one province and the foreigners in the other.]

... We found that the difference between Jiangsu and Zhejiang was even more dramatic if you looked at personal income, rather than GDP per capita. In relatively market-oriented cities in Zhejiang province, such as Wenzhou [right], the firms are mostly owned by locals, and GDP per person is only slightly higher than the personal income per person. In contrast, in a Jiangsu city like Suzhou, much of the industry is foreign-owned and GDP per person is roughly 3 times higher than personal income per person. The people in Suzhou produce a lot of output, but much of the income flows out of the country to the owners of the foreign enterprises. So even in two seemingly similar coastal provinces, there are vast differences in the economic structure. ...

Professor Huang argues that many of the Chinese problems that are blamed on free market reforms are actually caused by a lack of free markets. ... In my view the social indicators in China would look better, not worse, if market reforms had occurred at a faster pace. And once again I think Zhejiang province is the best example. Not only did their incomes grow much faster than in neighboring Jiangsu, despite all the foreign investment flowing into Jiangsu, but their Human Development Index score is now highest among all non-urban Chinese provinces. If market reforms were really the cause of China’s social problems, you wouldn’t expect the social indicators in Zhejiang to be so good. ... [Zhejiang Normal University pictured right, another Jiangsu shot on the left]

I often think about the little village in poor Anhui that started it all. Wouldn’t the secret pact of Mr. Hongchang and the other 12 families of Xiaogang village make an inspiring Hollywood story? Don’t hold your breath, there’s still more films to be made glorifying Che Guevara. Of course Che would have preferred China’s pre-reform agricultural policy. The one that led to mass famine. The one that the brave peasants of Anhui rebelled against.

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