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How China Grew Rich, from The Undercover Economist

How China Grew Rich, from The Undercover Economist - THE...

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Unformatted text preview: THE UNDERCOVER ECONOMIST Expasmg I/V/yy The Ric/7 Are Ric/7, ‘ T/ye Paar/lee P007”— And My Ybu Cem Never Buy A Decent Used Car! Tim Harford UNIVERSITY PRESS OXFORD UNIVERSITY PRESS Oxford University Press, lnc., publishes works that further Oxford University’s objective of excellence in research, scholarship, and education Oxford New York Auckland Cape Town Dares Salaam HougKongr Karachi Kuala Lumpur ,Madrid Melbourne iMexieo City Nairobi New Delhi Shanghai Taipei Toronto \K'ith offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Copyright © 2006 by Tim Hartord Published by Oxford University Press, Inc 198 Nladison Avenue, New York, New York, 10016 \wvwouptom Oxford is a registered trademark of Oxford University Press All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means electronic. mechanical, photocopying. recording, ot otherwise, without the prior permission of Oxford University Press. Library of Congress (:ataloging—imPuhlieatiou Data Harford, Tim, 1973— The undercover economist / Tim Hart-0rd. pi cmi ISBN—13: 978~0—19—518977—3 ISBN—100195189719 11 Economic history, 1990— 21 Economics 3. Consumer education I Title HC59i151H35 2005 33019'0511—dc22 2005010297 7 9 8 6 Printed in the United States of America on acid—free paper To Debora/9 Hmfbm’, Fran 1714072165, and Stella Hdsz’rd—famz‘ly . . . past, present, andfitz‘m’e. TEN How China Grew Rich “My God,” I said. I was standing with my wife in the “Renmin Gongyuan,” the People’s Park, in the middle of Shanghai. Renmin Gongyuan is the Central Park of the twenty—first century. It gave me the same dizzying rush as my first visit to Manhattan. Walking out into the space of the park allowed us to feel the full visual impact of Shanghai’s skyscrapers. One was a modern—day Chrysler build- ing, with a striking crown of four mirrored tines meeting at a perfect point; the entire tower was rotated forty—five degrees around its axis so that the top forty floors sat at a diagonal to the bottom forty. Another building boasted a vast glass atrium hang— ing suspended sixty floors above the city. Not every design was in the best of taste: one had a domed penthouse that looked like it had been stolen from the set of a fifties flying—saucer movie. There must have been thirty skyscrapers, half a dozen of which were on an incredible scale. All of them were brand new. “le God,” said Fran. “When were you last in Shanghai?” “r Ten years ago.” “How many of these buildings were up ten years ago?” She thought for a moment. 'flll’. I'Nl)li1{(j()\‘ I“, R ECONOMIST “You see that one?” C‘ The boxy forty-story office building over there?” “No. That one just beneath it.” She was pointing to a twelve— story red—brick building, dwarfed on every side by more mod— ern constructions. “I see. Yes.” “That was the tallest one standing ten years ago.” “My God,” I said. The ambition of it all was simply exhilarating. In just a decade, the builders of Shanghai had put up a fair imitation of Manhat— tan. What New Yorkers would have made of it, I don’t know. It made us Londoners feel like country bumpkins. Yet it could all have been so different. For most of the twenti— eth century, China was poorer than Cameroon. In 1949, when the People’s Republic of China came into being, the world’s larg— est country was torn by civil war and ruled by a communist dicta— torship. In the late 19505, millions of people died in a famine induced by the failed policies of the government. In the 19605, the university system was destroyed by the Cultural Revolution, when millions of educated citizens were forcibly relocated to work in the countryside. After all this, how did China become the great— est economic success story in history? Two farming revolutions A visit to Shanghai is enough to provoke the question. Clues to the answer can be found all over China. I picked up several of them on a train to the inland Chinese city of Zhengzhou. The train itself was the first clue: it was more comfortable, faster, and more punctual than those back in England. China’s road and rail network appeared to be in superb condition. Sec— ond, the Chinese seemed to have an excellent education system— I was soundly but politely thrashed at chess by a PhD in }1()\\ (.IHNA hula“ Kit.“ economics, a young man who had never been outside China but who spoke mildly and thoughtfully in good English. Third, al— though the train was packed, there were few children and no large families. China’s “one child family” policy has created a society where women have time to work and where the bulk of people are neither old nor young but in middle age, saving for the future. Those vast savings have provided the investment money for the roads, the trains, and more. At the minimum China clearly had the human resources, infrastructure, and financial capital required by traditional models of economic growth. Yet it did not always seem as though these resources would be well used; we already know that without the right incentives they will be wasted. Under Mao, that waste was legendary. China’s initial develop- ment efforts were two—pronged: massive investment in heavy in— dustry such as steel, plus application of special agricultural techniques to make sure that China’s vast population was fed. The policy focus was understandable. China’s northern prov— inces are rich in high—quality coal, which logically could pro— vide the basis of an economic revolution. Coal, steel, and heavy manufacturing had been the basis of the industrial revolution in the leading economies: the United Kingdom, the United States, and Germany. Meanwhile, agriculture had to be a priority for any Chinese government because there was barely enough fer— tile land to feed the country’s hundreds of millions of people. From the window of the train to Zhengzhou I was looldng out over Henan, China’s most densely populated province. It is a freezing desert. This two—pronged push was called the “Great Leap Forward.” It seemed to make sense, but it was the greatest economic failure the world has ever seen. NIao conducted economic policy based on the hidden premise that if people tried hard, the impossible would happen. Zeal alone was sufficient. Villagers were ordered to build steel furnaces in their backyards but had no iron ore to put into them. Some villagers melted down good iron and steel— tools, even doorknobs—in order to meet the quotas demanded ’I'IIIC [NIHCRCUVFR l2(l().\1().\llS'I‘ by the state. Even Nlao’s personal doctor worried about the wis— dom of a policy to “destroy knives to produce knives.” The steel that emerged from the furnaces was unusable. If industrial policy was a farce, agricultural policy was a trag— edy. The Great Leap Forward had already pulled many workers off the land to labor at the furnaces or in public works like dams and roads. Mao ordered the people to kill grain—eating birds, and the population ofinsect pests exploded as a result. NIao person— ally redesigned China’s agricultural techniques, specifying closer planting and deeper sowing to increase yields. Rice planted so closely together could not grow, but party officials, anxious to please iMao, staged shows of agricultural and industrial success. When NIao traveled by train to admire the fruits of his policy, local officials built furnaces in strips along the railroad and brought rice from miles away to replant, at the officially specified density, in adjacent fields. Even this Charade could not be maintained without the use of electric fans, which were used to circulate air and prevent the rice from rotting. Crop yields fell, of course, but even this would not have been disastrous without the state’s insistence that the policy was work— ing. When the defense minister raised the issue of the famine in a ministerial meeting, he was punished and ordered to write a “self—criticism.” Less powerful figures who denied that there was a surplus were tortured. While crops were failing, China doubled its exports of grain from 1958 to 1961 as a symbol ofits success. In Henan province, across which we were traveling in comfort just forty—five years later, state grain stores contained enough food to provide for the people but remained shut because the official government position was that there was a grain surplus. Mean— while, people starved to death outside in the snow. Some were left unburied, others were eaten by desperate family members; neither fate was uncommon. Estimates of the death toll from the famine range from 10 million to 60 million people, roughly the entire population of England, or of California and Texas combined. Even Chinese HOH' (,HIVA GREH' RICH g0vernment figures later acknowledged that 30 million peop had died, although they blamed bad weather. In the “world of truth” described in chapter 3, such disaste: cannot happen. iVIistakes, certainly, will be made—perhaps m01 frequently than under central planning. But the mistakes sta small; in market economies we call them “experiments.” If ver ture capitalists back them, they do not expect many to succee< When they succeed, they make some people rich and bring ir novation to the whole economy. When they fail—which is mor often than not—some people will go bankrupt, but nobody wi die. Only command economies can promote experimentation 0 such a fatally extravagant scale and suppress informed criticisn (Mao was not alone. The Soviet president, Nikita Khrushchei made a similar mistake following a visit to the United States, whe he ordered Soviet fields to be replanted with the corn he had see growing in Iowa. The failure was a catastrophe.) It is worth re membering that market failures, while sometimes serious, ar never as tragic as the worst failures of governments like Mao’s. In 1976, after many more crimes against his own people, Mar died. After a short interregnum, he and his followers were re placed by Deng Xiaoping and his allies in December 1978. Jus five years later, the change in China’s economy was incredible Agricultural output, always the headache of the Chinese plan ners, had grown by 40 percent. I/Vhy? Because those planner had brought the “world of truth” into China. As we discoverer in Cameroon, incentives matter. Before 1978, China had soml of the most perverse incentives in the world. Before Deng took power, Chinese agriculture had been lo cally organized into collectives of twenty or thirty families. Peopl: were rewarded with “work points,” which were awarded base( on the output of the collective as a whole. There was little op portunity for personal improvement either through extra effor or ingenuity. As a result there was little of either. The government also purchased and redistributed food fron regions that produced a surplus, but did so at a severely depresset price, discouraging more fertile regions from making the mOSi 'I‘lll" L‘Nl)l"R(l()\'FR l‘.(.()f\’()_\1]5'l by the state. Even Mao’s personal doctor worried about the wis— dom of a policy to “destroy knives to produce knives.” The steel that emerged from the furnaces was unusable. If industrial policy was a farce, agricultural policy was a trag— edy. The Great Leap Forward had already pulled many workers off the land to labor at the furnaces or in public works like dams and roads. lVIao ordered the people to kill grain—eating birds, and the population of insect pests exploded as a result. Mao person— ally redesigned China’s agricultural techniques, specifying closer planting and deeper sowing to increase yields. Rice planted so closely together could not grow, but party officials, anxious to please Mao, staged shows of agricultural and industrial success. When AIao traveled by train to admire the fruits of his policy, local officials built furnaces in strips along the railroad and brought rice from miles away to replant, at the officially specified density, in adjacent fields. Even this charade could not be maintained without the use of electric fans, which were used to circulate air and prevent the rice from rotting. Crop yields fell, of course, but even this would not have been disastrous without the state’s insistence that the policy was work- ing. When the defense minister raised the issue of the famine in a ministerial meeting, he was punished and ordered to write a “self—criticism.” Less powerful figures who denied that there was a surplus were tortured. While crops were failing, China doubled its exports of grain from 1958 to 1961 as a symbol ofits success. In Henan province, across which we were traveling in comfort just forty—five years later, state grain stores contained enough food to provide for the people but remained shut because the official government position was that there was a grain surplus. Adean— while, people starved to death outside in the snow. Some were left unburied, others were eaten by desperate family members; neither fate was uncommon. Estimates of the death toll from the famine range from 10 million to 60 million people, roughly the entire population of England, or of California and Texas combined. Even Chinese HOW CHINA GREVV RICH government figures later acknowledged that 30 million peopli had died, although they blamed bad weather. In the “world of truth” described in chapter 3, such disasters cannot happen. Mistakes, certainly, will be made—perhaps more frequently than under central planning. But the mistakes stay small; in market economies we call them “experiments.” If ven- ture capitalists back them, they do not expect many to succeed. When they succeed, they make some people rich and bring in— novation to the whole economy. When they fail—Which is more often than not~some people will go bankrupt, but nobody will die. Only command economies can promote experimentation on such a fatally extravagant scale and suppress informed criticism. (Mao was not alone. The Soviet president, Nikita Khrushchev made a similar mistake following a Visit to the United States, wheri he ordered Soviet fields to be replanted with the corn he had seen growing in Iowa. The failure was a catastrophe.) It is worth re— membering that market failures, while sometimes serious, are never as tragic as the worst failures of governments like Mao’s. In 1976, after many more crimes against his own people, Mao died. After a short interregnum, he and his followers were re— placed by Deng Xiaoping and his allies in December 1978. Just five years later, the change in China’s economy was incredible. Agricultural output, always the headache of the Chinese plan— ners, had grown by 40 percent. Why? Because those planners had brought the “world of truth” into China. As we discovered in Cameroon, incentives matter. Before 1978, China had some of the most perverse incentives in the world. Before Deng took power, Chinese agriculture had been lo- cally organized into collectives of twenty or thirty families. People were rewarded with “work points,” which were awarded based on the output of the collective as a whole. There was little op- portunity for personal improvement either through extra effort or ingenuity. As a result there was little of either. The government also purchased and redistributed food from regions that produced a surplus, but did so at a severely depressed price, discouraging more fertile regions from making the most 'l‘llF, I‘NIHQIUIUVFR l-7(I()_\'();\IIS'I of their agricultural land. Many rural workers were underem- ployed. The very system that was designed to boost China’s agri— cultural output and make the nation self-sufficient was undermining it. China’s output of grain, per person, was as low in 1978 as it had been in the mid—1950s, just before the Great Leap Forward. Deng had little time for such folly and immediately embarked on a program of reform, announcing that “socialism does not mean poverty.” To improve agriculture, he had to get the incen— tives right. He started by raising the price paid by the state for crops by nearly a quarter. The price paid for surplus crops rose by more than 40 percent, substantially increasing the incentive for fertile areas to produce more crops. At the same time, a few collectives experimented with subcon— tracting land to individual households. Instead of clampng down, the government allowed the innovation to see whether it would work, just as a market economy allows small—scale experiments. Households who were renting land from collectives had every incentive to work hard and think of smarter ways of doing things because they were rewarded directly for their successes. Crop yields immediately increased. The experiment spread: just 1 per— cent of collectives had used the “household responsibility sys— tem” in 1979; by 1983 98 percent had switched to the system. These reforms were linked with a number of other pieces of liberalization: the retail price of grain was allowed to rise, further increasing the incentive to produce what was needed. Restric— tions on trade between regions were eased, so that each region could enjoy its comparative advantage. Production quotas were soon abandoned altogether. The results were dramatic: agricultural output expanded by 10 percent a year in the first half of the 1980s. More impressively still, more than half ofthe increase was attributable, not to work— ing harder or using more machinery but to more efficient farm- ing and harvesting methods. Much of that productivity increase was directly attributable to the abandonment of the collective system. In the five years following the reforms, the average real HOH' CHINA GRIWV RICH income of farmers doubled. It was not Mao but Deng, by using the power of markets and prices, who had achieved the great leap forward. All these statistics are best understood by thinking back to chap— ter 3 and the world of truth. Partly by accident, partly by benign neglect, and partly by design, Deng introduced the world of truth to Chinese agriculture. Those who had good ideas, good luck, and who worked hard, prospered. Bad ideas were quickly aban— doned. Good ones spread rapidly. Farmers grew more cash crops and devoted less effort to crops that were difficult to grow; all of this was the unsurprising result of introducing a price system. China had begun to travel along the so—called capitalist road. Such a journey cannot be completed on rice alone. The suc— cess of the agricultural reforms created the momentum and popu— lar support for Deng to continue. Attention needed to be turned to the rest of the economy—and to cities like Zhengzhou. Investing for the future Zhengzhou is not a stunning city like Shanghai. It is ugly and crowded and, despite being a major railroad intersection, some— what insular: we spent nearly a week in the Zhengzhou area without seeing a single foreign face. In its own way, though, Zhengzhou is as impressive as Shanghai. A city the size of Lon— don far from the Western world, affectionately described by our guidebook as “a sprawling paradigm of ill—conceived town plan~ ning,” Zhengzhou at least demonstrates that China’s economic revolution has spread beyond the coastal provinces. Forty-story high-rises loom solidly over the enormous train station; there are plenty of modern banks, huge department stores and hotels, and brutal concrete overpasses. Advertising is everywhere. To construct such buildings, rails, and roads requires an enor- mous investment. Economists have a label for the roads and fac— tories, homes and office buildings, which result from investment: they call such constructions “capital,” and all sustained develop— ment needs capital. Capital can come from private investors, both ’l‘lrll’ L' XI) 13‘, R(I() \'l-' R I"(.'()i\'() MIST domestic and foreign, who hope to recoup profits, or it can come from the government, either by taxing people and investing the proceeds, or by a program of compulsory saving. Common sense suggest...
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