To Get Rich is Glorious

Challenges Facing China's Economic Reform and Opening at Forty

Jacques deLisle, Avery Goldstein

• Publisher: Brookings Institution Press
• ISBN:
  9780815737261
• Topic: Volkswirtschaftslehre
• Subtopic: Entwicklungsökonomie

Assessing prospects as China's reform enters middle age

In 1978, China's Deng Xiaoping launched the economic reforms that have resulted in one of history's most dramatic and profound national transformations. The reforms, which have evolved and expanded during the ensuing four decades, removed institutional and policy obstacles to economic growth, tapped China's immense reserves of labor and entrepreneurial talent, and opened the country to foreign capital and investment. China has developed a more high-tech and service-based economy—currently the world's second-largest—and it now sends companies and capital abroad in keeping with its new status as a leading force in international trade and investment.

But China also faces daunting challenges in sustaining growth, continuing the unfinished agenda of economic transformation, addressing the adverse consequences of economic success, and dealing with mounting pressure and suspicion from the United States and other long-standing trade and investment partners. China also confronts uncertainties and risks stemming from the project to expand its influence across the globe, the so-called Belt and Road Initiative. In all these matters, China's current leader, Xi Jinping, seems determined to make his own lasting mark on the country and on the country's effort to become a leading global power.

In this book, leading experts offer insights into the many difficult issues China now faces, including development of its rural economy, urban industrial policy, public finance, and international trade and investment. The authors—drawing on perspectives from economics, political science, and policy analysis—provide historical context, drawing lessons from four decades of reform in China, and they analyze the difficulties for China's economy as the reform era moves into its fifth decade.

Readers looking for a comprehensive assessment of where China's economy stands today, and its future prospects will find it in this book.

PART I

Enlivening the Domestic Economy

ONE

China’s Domestic Economy

From “Enlivening” to “Steerage”

BARRY NAUGHTON

Much of what happened in China after 1978 is captured in the conventional phrase “enlivening the domestic economy.” The descriptive term is evocative and accurate, and it has the additional merit that the English term faithfully reproduces the imprecision of the Chinese original, and in particular the ambiguity about the subject. Who was responsible for enlivening the economy? In any case, the Chinese economy came alive, and coming alive, the Chinese economy and China itself were transformed.

At the very beginning of the process, the veteran leader and economist Chen Yun famously likened the economy to a bird in a birdcage, which he argued should be given as much room as possible while also being constrained inside the “cage” of planners’ intentions. By giving certain sectors—notably, agriculture—more space within the cage, Chen Yun certainly succeeded in enlivening that part of the economy. Yet it is also clear that the Chinese economy burst out of the constraints envisaged by a relative conservative like Chen Yun and transformed itself as soon as the constraints placed on it were loosened. The Chinese economy enlivened was also the Chinese economy unbound.1

The metaphor of enlivening, however, gradually became a less effective description of the Chinese economy as it moved into the twenty-first century. It is not that the economy became less lively—far from it. Rather, as the features that powered very high-speed growth faded, China’s policy-makers became less attracted to policies of enlivening and decontrol, and more intent on locating and developing new drivers of economic growth. Envisioning potential growth primarily in hi-tech “emerging industries,” and eager to create a competitive advantage where it did not yet exist, Chinese policy-makers became increasingly intent on guiding the economy toward a hi-tech future. For policy-makers, this new effort at “steerage” is to be built on the foundation of the market economy that China has become. Their new ambition is an affirmation of enlivening, but not a continuation of it, since policy-makers today have very specific ideas about the direction in which the economy should go. As a result, China today is, for better or worse, on an economic trajectory that is quite different from the earlier decades of reform.

Enlivening and the Growth Miracle

Understanding enlivening requires that we make a link with broader processes of economic growth. Looking back, it is clear that Chinese reform and the enlivening of China’s economy coincided almost perfectly with a so-called “growth miracle.” A growth miracle is the historically unique situation where an economy is able to transform itself completely within a thirty- or forty-year period. There have been eight or nine of these miracles—defined as an economy’s GDP growing at 7.5 percent over twenty-five years or more—of which all but one have been in East Asia.2 The basic experience of the growth miracle is, therefore, not unique. But for any economy, it can only happen once, and only at a particular developmental conjuncture. This is because growth miracles are possible only when an economy combines specific demographic and structural characteristics: in particular, a growth miracle can only begin when a traditional society has completed the first stage of its initial demographic transition. When the demographic transition has occurred, death rates have fallen as society becomes healthier, while birth rates have just begun to fall as better-off families begin to limit fertility. This creates a “baby boom” that enters the labor force about twenty years later. If modern economic growth has begun by the time the baby boom hits the marketplace, growth can accelerate. If, in addition, agriculture is healthy enough to begin releasing labor on a massive scale, this growth acceleration can be sustained long enough to propel the economy into a rapid-growth phase for twenty-five years or more.

The growth miracle, then, is not an inevitable phase of development. A country can fail to accelerate when the opportunity is there, or it can get knocked off the miracle-growth trajectory by poor economic policy-making or by adverse external conditions. The growth miracles we have observed have all been cases of an economy taking advantage of a once-in-a-lifetime opportunity to pass through the ordinary phases of development at warp speed. This was true of Japan from 1950 to 1973; true of Korea, Taiwan, Hong Kong, and Singapore; and true of China. Figure 1-1 shows that China was passing through a period of especially rapid labor-force growth in the 1980s, with employment growing at 3 percent annually. Organic labor-force growth was accentuated by the return to the city of millions of sent-down youth and the return to work of millions of politically marginalized people. China had to find an economic strategy that would provide jobs for these people. This helps explain the tremendous importance of enlivening in China. The enlivening of the Chinese economy took place under specific circumstances that permitted the economy to take advantage of unusual opportunity, unleashing the potential of the growth-miracle phase. At the same time, policy-makers were under enormous pressure to provide enough new jobs to absorb this maturing baby-boom, and they also imposed draconian birth-control policies on this group of young people.

FIGURE 1-1 Growth of employment (Source: China Statistical Yearbook, 2018, p. 110)

China, therefore, went through a growth miracle that was similar in nature to earlier growth miracles, but was the biggest, fastest, longest, and overall most dramatic transformation of an economy in history. At every stage of this explosive transformation, enlivening played a critical catalytic role. Indeed, one way to narrate the history of China’s transformation after 1978 concisely is to tell it as a story of seven waves of enlivening.

Outside the Core: The First Three Waves of Enlivening

The first great enlivening took place in the farm economy from 1979 through 1983. In the first step, constraints on farmers were relaxed beginning on what is, by convention, the very first day of the reform era. When the communiqué of the Third Plenum of the Eleventh Central Committee was published in December 1978, it called for giving agriculture a chance to “catch its breath.” This vague promise was quickly made good as policy-makers eased off on agricultural procurement quotas and provided better prices to farmers for their output. The liberalization of farm policy was a major policy shift, but it was not until the grant of land to the farmers, spreading nationwide between 1980 and 1982, that the farm economy was really enlivened. With various systems of contracting land to farm households, farmers were given the freedom to decide what to farm, when to farm, and when not to farm. The results are, of course, known to everyone: the farmers who had struggled to feed China for the previous twenty years, left to themselves, quickly produced surpluses that have been more than enough to provide abundance and diversity to China’s mass middle-class society.3 The relaxation of the food constraint, in turn, gave policy-makers much greater room for maneuver, economically and politically, and set the stage for future waves of reform.

In parallel with the transformation of the agricultural economy, but logically dependent upon it for success, was the liberalization of the rural nonagricultural economy. This was the second great wave of enlivening. Left to their own devices, farmers found they could squeeze out a portion of household labor for nonagricultural tasks. Once farmers and villages were allowed to set up businesses, and send out salesmen and purchasing agents to support those businesses, a new explosion of labor-intensive manufactures emerged from the Chinese countryside. These new producers dramatically transformed the availability of simple but diverse products that broke the bleak monotony of consumer-goods supply under the planned economy. In addition, these new “township and village enterprises” (TVEs) provided competition for the state-owned enterprises (SOEs) that had been exploiting their monopoly position in industrial-product markets since the 1950s.

As policy-makers absorbed the lessons of the rural transformation, they began to allow a parallel relaxation in the urban economy. Cities were enlivened first by an explosion of small-scale private businesses that transformed services, retail, restaurants, and then small-scale industry. It took the personal approbation of Deng Xiaoping to allow a seller of dried melon seeds from Anhui (Shazi Guazi) to expand a private business beyond household scale. Spanning a decade from about 1983 through 1993, China’s cityscapes came alive. Indeed, the “internal opening” of Beijing to small-scale retail business after 1993 was one of the quickest signals that China had resumed liberalization after the post-Tiananmen reform rollback. To be sure, there was at this time no protection for the property rights of private corporations, but when the dams were torn down, there was an enormous reservoir of pent-up labor and entrepreneurship ready to step in and make China’s small-scale sector an important contributor to growth and prosperity.

Cracking the Core: Enlivening the State Sector

After the initial three waves of enlivening had taken place, Chinese policy-makers developed the will to engage the “hard core” of the socialist economy, large-scale state industry. These big SOEs were floundering during the 1990s, due to the enhanced competition from TVEs and private firms. Their situation was increasingly critical, as the net profit (after deducting losses) of all industrial SOEs declined, essentially to zero, in 1997. Yet the flip side of the impending bankruptcy of the SOEs was the fact that alternate businesses and ownership forms had reached sufficient scale to absorb the workers, land, and disused structures shed by bankrupt or collapsing SOEs. Moreover, an intensive effort to build fiscal, taxation, banking, and regulatory institutions appropriate to a market economy—sketched out in the 1993 Third Plenum (of the Fourteenth Central Committee)—achieved substantial success during the mid-1990s, sufficient to guide a profound institutional restructuring. As a result, it was possible to enliven the large-scale industrial sector by subjecting the state-owned enterprises to the nearly full brunt of competitive pressures for the first time in their history.

Self-evidently, the restructuring of state-owned industry was not the simple happy story of enlivening such as that which took place in the rural and private sectors. During a drastic and painful period from about 1996 to 2002, the state enterprise workforce shrank by more than 40 percent, and the majority of smaller industrial SOEs went out of business. Many laid-off workers were unemployed for years before either being gradually absorbed back into the labor force at lower wages and status, or accepting early retirement and withdrawing from the formal labor force.

Despite this mid-term pain, the SOE reforms were in the end a story of enlivening as well. The remaining SOEs were substantially restructured around the turn of the century. A considerable number of them were remade into joint-stock corporations, and most of them created corporate subsidiaries that were listed on the Chinese stock market. These surviving SOEs largely recovered their footing, returned to profitability, and made a positive contribution to China’s growth during the first decade of the twenty-first century. As figure 1-2 shows, by 2005–2007, state industry had returned to profitability, displaying trends very close to nonstate industry. During the first half of the time period shown in figure 1-2, the profitability gap with nonstate firms was essentially closed. Through painful reforms, even the state sector had been enlivened.

Enlivening a Modern Economy

As the earliest enlivening measures were running out of steam, and as the state sector was absorbing the shock to which it had been subjected, the greatest enlivenment of all was finally building strength. Beginning in the 1990s, but accelerating steadily into the 2005–20...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• Introduction. China’s Economic Reform and Opening at Forty: Past Accomplishments and Emerging Challenges
• Part I. Enlivening the Domestic Economy
• Part II. Opening to the Outside
• Acknowledgments
• Contributors
• Index