How China Take Of

Journal of Economic Perspectives—Volume 26, Number 4—Fall 2012—Pages 147–170

How Did China Take Off ?

Yasheng Huang

here are two prevailing explanations of what caused China’s rate of economic growth to take off. The first view gives the pride of place to globalization. According to this view, Chinese growth started when Deng Xiaoping liberalized trade and foreign investments by settingup special economic zones in the coastal provinces. In this view, China’s export-oriented manufacturing, largely foreign-funded, employed millions of rural migrants, boosted their income, and reduced poverty far and wide. The second perspective emphasizes the importance of internal reforms—especially in rural, interior regions—of the agricultural pricing system; land contracting; and the entry ofrural businesses known as township and village enterprises. China’s early external reforms are politically important. Special economic zones were ideologically controversial at the time they were introduced and their establishment signaled a triumph of the reformist leaders over conservatives. Also, the inflows of foreign investments were not spontaneous; they required an explicit shift inpolicies and legal practices. Politically, the 1979 passage of the Law on Chinese–Foreign Equity Joint Ventures, only three years after the Cultural Revolution and committing the Chinese government to the protection of foreign property rights, was pathbreaking. But the economic contributions of foreign investments do not remotely match those of China’s rural industry. At their peak, firms funded byforeign capital employed 18 million people (in 2010). By contrast, at their trough in 1978, township and village enterprises employed 28 million people. Between 1978 and 1988,

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Yasheng Huang is Professor of International Management, Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts. His email address is yshuang@mit.edu.
doi=10.1257/jep.26.4.147http://dx.doi.org/10.1257/jep.26.4.147.

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Journal of Economic Perspectives

China’s poverty headcount declined by 154 million, by far the most impressive record during China’s three decades of reforms. The contributions of foreign capital toward China’s initial poverty reduction during this period are miniscule. Employment by firms funded by foreign capital was 60,000 in 1985 and660,000 in 1990. The same two figures for township and village enterprises are 69.8 million and 92.7 million, respectively (National Bureau of Statistics 2011). China’s take-off in economic growth starting in the late 1970s and its poverty reduction for the next couple of decades was completely a function of its rural developments and its internal reforms in general. During the golden era of ruralindustry in the 1980s, China had none of what are often thought of as the requisite features of the China growth model, like massive state-controlled infrastructural investments and mercantilism. In the 1980s, China had an overvalued exchange rate. Between 1980 and 1990, it had trade deficits every year except 1982, 1983, and 1990. (By contrast, since 1989 China has had trade surpluses every yearexcept 1993.) In the 1980s, the household consumption to GDP ratio stood at over 50 percent, compared with 35 percent in recent years. To understand how China’s economy took off requires an accurate and detailed understanding of its rural development, especially rural industry spearheaded by the rise of township and village enterprises. Many China scholars believe that township and village enterpriseshave a distinct ownership structure—that they are owned and operated by local governments rather than by private entrepreneurs. That these firms could be so dynamic and efficient, yet government-owned, is often treated as a paradox in the economics literature. This statist view of township and village enterprises, together with the widespread belief that Chinese government has retained tight...