By Mike Walden
Thursday, June 6, 2013 —
When I was growing up in the 1950s, China was our political enemy. My uncle, who lived next to my family, had fought the Chinese army in Korea, so nothing positive was said about China during family gatherings.
Our political relationship with China changed in 1972, when President Nixon surprised the world with his visit to Beijing and historic handshake with Chairman Mao. The U.S. political relationship with China has now been normalized for de-cades.
However, many observers of China say the real turning point in Sino-American relations was not the political thaw that began in 1972 but the change in the Chinese leadership later that decade that directly led to the country’s economic transformation. The new Chinese leader, Deng Xiaoping, was one of the major forces behind taking an impoverished economy and turning it into the economic superpower of today.
What did Deng and his supporters do? This is the subject of a fabulous new book, “How China Became Capitalist,” co-authored by 102-year-old Nobel Prize winning economist Ronald Coase. His story of China’s economic emergence is fascinating, as it was stopped and restarted several times. But the remaking of China’s economy essentially followed three elements.
First was the introduction of economic incentives. A basic tenant of economics is that people respond to incentives. Want people to work harder and businesses to make more; let them keep what they earn in wages and profits. This simple idea – which had been contrary to Mao’s philosophy – was implemented first in farming and then in the economy.
And guess what happened? Chinese productivity and output soared. Poverty was reduced, the middle-class expanded and the country’s standard of living jumped.
Second was releasing the grip the Chinese government had on prices and letting them be set by old-fashioned supply and demand. Under Mao, government bureaucrats controlled the prices of everything from corn to cornflakes. The problem was these top-down regulated prices had no link to the realities of a modern economy. If the price was set too low, shortages resulted when buyers tried to purchase more than companies produced. Conversely, prices established too high gave the opposite – surpluses and waste as producers made more than buyers could afford.
The solution was to free prices and let them be determined by economic conditions. Now, prices would result from interactions between buyers and sellers. China found this system led to reductions in waste, surpluses and – perhaps ironically – prices themselves.
The last shake-up in the Chinese economy has been the hardest, taking on the powerful and protected state-run companies. Such companies, which dominated the Chinese economy under Mao, were inefficient, antiquated, inattentive to consumer desires and costly. Today, although some still exist, they have been pushed aside for the innovative, cost-conscious and fast-changing structure of numerous private companies – none of them guaranteed to survive – constantly competing for the consumers’ purchases.
Some economists argue that the overhaul of the Chinese economy in the last three decades has never been matched in human history. It has brought prosperity to hundreds of millions of Chinese households. But the remake has created new issues, both internal to China and internationally.
A big issue is environmental, specifically pollution. China’s rapid industrialization and almost insatiable need for energy have added to the world’s concern about air quality and climate change. Of course, other developed countries are also big energy users and pollution-producers, so the problem isn’t unique to China.
China’s rapid economic growth, particularly in manufacturing, has redrawn trade patterns and reallocated jobs in the world. Some workers and companies – including in the U.S. and North Carolina – have benefited, while others have lost. But one thing is for sure, any major company today anywhere in the world must consider China both as a competitor in production as well as an opportunity for sales.
Last is the argument that while the Chinese government may be pursuing a hands-off policy for their domestic economy, they very much have hands-on policies in international trade that give them an unfair advantage. Indeed, this has been a contentious point for the U.S., although the evidence for the charge has been intensely debated by economists.
So how did China rebuild its economy within the span of one generation? Easy, they adopted and applied the standard economic principles of incentives, freely set prices and competition, ideas taught every day in Economics 101 classes. But, you decide if this is enough.
Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy.