Global Poverty Amid Global Plenty: Getting Globalization Right DANI RODRIK
phase of China’s post-1978 growth.
Another challenge was how to provide a
semblance of property rights when the state
remained the ultimate owner of all property.
Privatization would have been the conventional route, but it was ruled out by the Chinese Communist Party’s ideology.
Once again, an innovation came to the
rescue. Township and village enterprises
(TVEs) proved remarkably adept at stimulating domestic private investment. They
were owned not by private entities or the
central government, but by local governments (townships or villages). TVEs produced virtually the full gamut of products,
everything from consumer goods to capital goods, and spearheaded Chinese economic growth from the mid-1980s until the
mid-1990s. The key to the success of TVEs
was the self-interest of local governments,
which would reap substantial income from
their equity stake in the enterprises.
China’s strategy to open its economy to the world also
diverged from received theory. The Chinese leadership
resisted the conventional advice to remove trade barriers.
Such an action would have forced many state enterprises
to close without doing much to stimulate new investments in industrial activities. Employment and economic
growth would have suffered, threatening social stability.
The Chinese decided to experiment with alternative
mechanisms that would not create too much pressure
on existing industrial structures. While state trading
monopolies were dismantled relatively early (starting
in the late 1970s), what took their place was a complex
and highly restrictive set of tariffs, nontariff barriers
and licenses restricting imports. These were not substantially relaxed until the early 1990s.
In particular, China relied on Special Economic Zones
(SEZs) to generate exports and attract foreign investment. Enterprises in these zones operated under different rules than those that applied in the rest of the
country; they had access to better infrastructure and
could import inputs duty free. The SEZs generated incentives for export-oriented investments without pulling the rug out from under state enterprises.
What fueled China’s growth, along with these institutional innovations, was a dramatic productive transformation.
The Chinese economy latched on to advanced, high-productivity products that no one would expect a poor,
labor-abundant country to produce, let alone export. By
CHINA’S ABILITY TO
SHIELD ITSELF FROM
THE GLOBAL ECONOMY
PROVED CRITICAL
TO ITS EFFORTS TO
BUILD A MODERN
INDUSTRIAL BASE.
markets. That this happened in a country with a complete lack of private property rights (until recently) and
run by the Communist Party only deepens the mystery.
China’s big break came when Deng Xiaoping and
other post-Mao leaders decided to trust markets instead of central planning. But their real genius lay in
their recognition that the market-supporting institutions they built, most of which were sorely lacking at
the time, would have to possess distinctly Chinese
characteristics.
China’s economy was predominantly rural in 1978. A
Western-trained economist would have recommended
abolishing central planning and removing all price controls. Yet without a central plan urban workers would
have been deprived of their cheap rations and the government of an important source of revenue, resulting
in masses of disgruntled workers in the cities and the
risk of hyperinflation.
The Chinese solution to this conundrum was to graft
a market system on top of the plan.
Communes were abolished and family farming restored, but land remained state property. Obligatory
grain deliveries at controlled prices were kept in place,
but once farmers had fulfilled their state quota they
were now free to sell their surplus at market-deter-mined prices. This dual-track regime gave farmers market-based incentives and yet did not deprive the state of
revenue nor deprive urban workers of cheap food. 6 Agricultural productivity rose sharply, setting off the first
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