27.11.2019
China’s rapid growth: from a backward agrarian society to an industrial power in just 35 years
Author: And Wen
The industrial revolution in China, which began 35 years ago, is perhaps one of the most important economic and geopolitical phenomena since the initial industrial revolution 250 years ago.
The reason is simple: less than 10 percent of the world’s population is fully industrialized; if China can successfully complete its industrialization, another 20 percent of the world’s population will enter the modern world. China is gradually stimulating new growth in Asia, Latin America, Africa and even in the industrialized West thanks to the country’s enormous demand for raw materials, energy, trade and capital flows. China’s rapid growth has puzzled many people, including economists.
How could a country with 1.4 billion people turn relatively quickly from an extremely impoverished agricultural land into a formidable industrial power, when so many small countries could not do this, despite their more favorable socio-economic conditions? Among the many contradictory views interpreting the rise of China, two of the most popular and ambiguous can be distinguished.
The first considers China’s hypergrowth as a giant bubble designed by the government. It is not sustainable and will collapse because China has no democracy, human rights, freedom of speech, the rule of law, a Western-style legal system, no well-functioning markets, no private banking sector, no intellectual property protection, no innovation (other than copying and stealing Western technologies and trade secrets), as well as many other things that the West has possessed for centuries and that were necessary for the prosperity of the West and technological dominance. According to this view , the bubble will burst, causing damage to the people of China and the environment.
The second point of view considers the sharp growth of China simply as a fate. The country is returning to its historical position: China was one of the richest nations and the greatest civilizations (along with India) at least from 200 BC to 1800, before the beginning of the industrial revolution in England. (See Figure 1.) It was only a matter of time for China to restore its historical glory and reconquer the world. (As Napoleon once said: “Let China sleep, for when the dragon wakes up, it will shake the world”)
But none of these views is supported by serious economic analysis, but is based on prejudices or naive extrapolation of human history. How can a country with all these unfavorable elements for business and innovation grow at a double-digit annual rate for several decades and transform from an impoverished agricultural economy into a formidable industrial power in such a short time? If culture or ancient civilization is the explanation, then why did the Egyptian, Greek or Ottoman Empires not break into the world arena?
This article presents a different view of the rise of China, based on fundamental economic analysis. We hope that this will lead to a better understanding of the miraculous growth of China, but also help to shed light on the failures and successes of many other countries ‘ attempts at industrialization, including the initial industrial revolution itself.
Admittedly, many believe that China’s economic miracle has come to an end. Its economic growth has plummeted from double digits to 7 percent or lower. Its stock market is in turmoil, and its currency is under attack. But keep in mind that the United States experienced 15 financial crises and a four-year civil war before it became world famous.
The country was on the verge of collapse in 1907 after it took over the mantle of a world superpower from the United Kingdom. The US also experienced the Great Depression in the 1930s and the global financial crisis in 2007. Does this mean that it is no longer a “star in the economic sky”?
Some facts about China’s Growth
Thirty-five years ago, China’s per capita income was only a third of that of sub-Saharan Africa. Today, China is the world’s largest industrial power: it produces almost 50 percent of the world’s main industrial goods, including crude steel (800 percent of the US level and 50 percent of world supplies), cement (60 percent of world production), coal (50 percent of world production), vehicles (more than 25 percent of world supplies) and industrial patent applications (about 150 percent of the US level).
China is also the world’s largest manufacturer of ships, high-speed trains, robots, tunnels, bridges, highways, chemical fibers, machine tools, computers, mobile phones, etc.
Figure 2 shows the production results of the five largest countries in the world between 1970 and 2013. In the early 1970s, when President Richard Nixon visited China, it produced very few manufactured goods – a small fraction of the level of the United States. Around 1980, Chinese production began to develop rapidly, bypassing the industrial powers one after another, overtaking the United States in 2010, it became the No. 1 industrial superpower.
Among the many contradictory views interpreting the rise of China, two of the most popular and ambiguous can be distinguished. The first considers China’s hypergrowth as a giant bubble designed by the government.. … The second point of view considers the sharp growth of China simply as fate. … But none of these views is supported by serious economic analysis, but is based on prejudices or naive extrapolation of human history.
“Secret recipe”
How has China achieved this in 35 years? The short answer is that China has rediscovered the” secret recipe ” of the industrial revolution. But what is the secret / recipe, and why hasn’t China found it before?
The British Industrial Revolution was one of the most important socio-economic events in human history – perhaps as important as the discovery of fire and agriculture. Before this revolution, humanity on all continents existed, in fact, at the level of the subsistence minimum, stagnating in the so-called Malthusian trap.
However, the industrial Revolution changed all this: from about 1760, the standard of living in the United Kingdom began to rise sharply, leading to an era of constant growth in per capita income. Thanks to an almost magical increase in living standards and national income, among other things, almost every nation has tried to emulate the British Industrial Revolution.
Unfortunately, only a few were able to achieve this: Northern and Western Europe, the United States, Japan and the “Asian tigers”. Despite the fact that the “Asian tigers” (South Korea, Taiwan, Hong Kong and Singapore) began to industrialize quite quickly after the Second World War, some of them (for example, Taiwan) have now reached a per capita income level that is only about half the level of the United States.
Why have only a few countries succeeded in this? According to the institutional theory, the reason for this is political institutions. Inclusive institutions (for example, democracy) impose restrictions on the elite class, allowing free markets, free trade, private property rights and the rule of law to flourish. This implies private incentives for wealth accumulation, innovation and growth.
On the other hand, extractive institutions (such as dictatorships) imply the absence of not only freedom of choice, but also the protection of private property rights and the rule of law, which leads to a lack of private incentives for hard work, capital multiplication and innovation. The end result of which is poverty. Therefore, the solution to the problem of poverty is simple: democracy.4
But is it so?
Such theories are difficult to reconcile with the facts. First, there are vast democracies with widespread economic stagnation and constant political unrest: Afghanistan, Egypt, Iraq, Libya, Pakistan, Thailand, Tunisia, Ukraine and many others. Secondly, there were many economically strong extractive institutions, such as Germany (from 1850 to the years of the Second World War) and Russia (from 1860 to the years of the Second World War).
Institutional theory also cannot explain the complete failure of economic reforms in modern Russia under conditions of democracy and shock therapy, the rapid industrialization of Japan during the Meiji Restoration, the economic rise of South Korea in the 1960s and 1980s under a dictatorial regime, or the economic miracle of Singapore after independence.
The theory also cannot explain why, with identical political institutions, property rights and the rule of law, there are pockets of extreme poverty and extreme wealth, as well as violent crimes and submission to the law. Such a duality exists, for example, in many US cities. Italy is another example, with its poor regions in the south and rich ones in the north.
China’s Past Failures
What is happening in China is not the first attempt at industrialization, but the fourth in the last 120 years.
The first attempt at industrialization was made between 1861 and 1911. This happened after the defeat of China in 1860 in the Second Opium War. Deeply humiliated by the unequal treaties concluded by the Western industrial powers, the Qing Dynasty, which then controlled China, embarked on a number of ambitious programs to modernize its backward agrarian economy, including the creation of a modern navy and industrial system.
This attempt began eight years earlier than the Meiji Restoration, which led to the successful industrialization of Japan. Fifty years later, China’s industrialization efforts turned into a gigantic failure: the government was mired in debt, and there was no question of any expected industrial base.
Nationwide demands for political reforms, accompanied by popular unrest, eventually led to the Xinhai Revolution of 1911. The “extractive” Qing monarchy was overthrown, and the Republic of China was founded, the first “inclusive” government in China based on Western-style constitutions. The New Republic tried to industrialize China, completely imitating the political institutions of the United States, including democracy and the separation of powers (legislative, executive and judicial branches of government).
At that time, a well-known slogan among the Chinese was :” Only science and democracy can save China.” Revolutionaries from among the educated elite believed that the inability of the monarchy to industrialize and the general backwardness of China were caused by the lack of democracy, political inclusiveness and pluralism (this is exactly what the modern theory of institutionalism claims). However, 40 years have passed, and China remained one of the poorest countries on earth.
In 1949, the republic was defeated by the Workers ‘and Peasants’ Revolutionary Army of China. The new government initiated a third ambitious attempt to industrialize China, this time by imitating the Soviet Union’s centralized planning model. Thirty years later, the efforts made failed again: In 1978, China, in fact, remained in the same Malthusian poverty trap, and the per capita income was not significantly different from what it was during the Second Opium War.
Therefore, the reason for China’s three failures was clearly not the lack of a free market and private property rights: during the Qing Dynasty, perhaps the market system and private property rights were better than in England and the rest of Europe in the 17th and 18th centuries. The reason was not the lack of democracy – the government of the People’s Republic of China was so representative that even members of the Communist Party were allowed there.
On such a path of development, democracy is a consequence, not a cause, of industrialization. Democracy strengthens stability only in industrialized societies. As the following examples show, almost all successful industrialized countries have passed through these key stages of history.
What was different this time?
The fourth attempt to industrialize China began in 1978 under the leadership of Deng Xiaoping. The country rejected the advice of Western economists (unlike what Russia did in the 1990s) and instead adopted a very modest, step-by-step, experimental approach to its economic reforms. Key elements of this approach:
China’s fourth attempt at industrialization mimics the historical sequence of the British Industrial Revolution, despite significant differences in political institutions. (Don’t forget that China is still an authoritarian state.) The British Industrial Revolution has passed through five main stages:
the stage of protoindustrialization, during which agricultural production was developed for long-distance trade;
⦁ the first industrial revolution, during which labor-intensive mass production was carried out for the mass market;
⦁ the boom of the industrial triad, which included mass power supply, locomotive propulsion, and infrastructure to facilitate mass distribution; 5
⦁ the second industrial revolution, during which there was a mass production of mass production tools, such as steel and machine tools (including agricultural machinery), as well as the creation of a large credit system; and
the stage of the welfare state, which includes economic well-being (modern services, unemployment insurance, equal access to health and education and a full-fledged social protection system), as well as political well-being (democracy, human rights, the abolition of the death penalty, the legalization of same-sex marriage).
On such a path of development, democracy is a consequence, not a cause, of industrialization. Democracy strengthens stability only in industrialized societies. As the following examples show, almost all successful industrialized countries have passed through these key stages of history:
The United Kingdom’s path to industrialization:
16 1600-1760: Protoindustrialization in rural areas, organized and financed by rich merchants (for example, through handicraft production7);
17 1760-1830: the first industrial revolution in the textile industry, when looms with a wooden frame and water engines were used for mass production;
18 1830-1850: boom in the industrial triad: energy (for example, coal), transport (for example, railway) and locomotive (for example, steam engine);
18 1850-1900: the second Industrial Revolution, involving the mass production of mass production tools such as iron, steel, chemicals and apparatus; and
После After 1900: entering the stage of the welfare state (for example, universal suffrage in 1928).
The United States ‘ Path to Industrialization:
Before 1820: agricultural production grew in rural areas;
⦁ 1820-1860: the first industrial Revolution – mass production of textiles based on imported or stolen British technologies;
⦁ 1830-1870: boom in the industrial triad, for example, the railway mania in 1828-1873;
⦁ 1870-1940: the second industrial revolution, characterized by mass production of steel, automobiles, telecommunications, chemicals and
механиз mechanized agriculture in the 1940s; and
40 1940s-present: entering the stage of the welfare state after the Second World War with such key steps as the civil rights movement in the 1960s, universal suffrage in 1965, the Violence against Women Act of 1994 and the legalization of same-sex marriage in 2015.
Japan’s Path to Industrialization:
⦁ 1603-1868 (Edo period): commercial agriculture and rural handicraft production flourished amid political stability;
⦁ 1868-1890 (beginning of Meiji): full-fledged protoindustrialization;
⦁ 1890-1920 (including late Meiji): the first industrial revolution based on the mass production of textiles, the use of imported equipment and the export of labor-intensive textile products;
19 1900-1930: boom in the industrial triad (for example, railways);
1920 1920-1941: the beginning of the Second Industrial Revolution; and
1945-1980: continuation of the second Industrial Revolution, democratic reform under the US occupation, entry into the stage of the welfare state.
China’s Way
China has reduced several centuries of Western (and Japanese) development to three decades. His path to industrialization went through three main stages:
197 1978-1988: protoindustrialization. This stage showed the growth of millions of rural enterprises (collectively owned, not privately owned by farmers) in the vast countryside and small cities of China; these enterprises were the engine of growth of the national economy during the first 10 years of economic reform. The number of rural enterprises has increased more than 12 times (from 1.5 million up to 18.9 million), the gross output of rural industry increased more than 13.5 times (from 14% of gross domestic product or GDP to 46% of GDP), the number of rural working peasants increased to almost 100 million by 1988, and the total earnings of farmers increased 12 times. Due to such a phenomenal growth in the supply of basic consumer goods in the mid-1980s, China ended the stage of the economy in conditions of resource scarcity (a typical feature of all countries with centralized economic planning, characterized by rationing of meat, other food products, clothing and other basic consumer goods) and at the same time solved its food security problem. 800 million farmers were the largest beneficiaries of economic reform during this period.
1988-1998: the first industrial Revolution. At this stage, the mass production of labor-intensive lightweight consumer goods in rural and urban areas of China, primarily relying on imported equipment, was demonstrated. During this period, China has become the world’s largest producer and exporter of textiles, the largest producer and importer of cotton, as well as the largest manufacturer and exporter of furniture and toys. Rural enterprises continued to grow strongly, and their employees reached 30% of the total rural labor force in China (not counting migrant workers). The volume of industrial production in the villages increased by 28% per year, doubling every three years (an astronomical increase of 66 times) between 1978 and 2000.
1998 1998 – present: the second Industrial Revolution. This phase was distinguished by the mass production of mass production means. Due to the rapidly and extremely expanding domestic market for intermediate goods, equipment and vehicles, there was a big surge in the consumption and production of coal, steel, cement, chemical fibers, machine tools, highways, bridges, tunnels, ships, etc. In total, 2.6 million miles of public roads were built, including more than 70,000 miles of expressways (46% more than in the United States). 28 provinces (out of 30) have high-speed trains (the total length of which exceeds 10,000 miles, which is 50% more than in the rest of the world).
The triumph of marketism?
Is China’s achievement a triumph of marketism? And yes and no. “Yes” for obvious reasons: Markets create economic incentives for competition, impose discipline on management and the introduction of technologies, and also create Darwinian “creative destruction” to eliminate losers.
But “no” for overlooked reasons: It is extremely expensive for independent, anarchic, uneducated peasants to create cooperatives if there is no social trust and markets; it is also extremely expensive to create a single national mass market and a global market to support the division of labor and mass production; and it is especially expensive to create market regulatory institutions to prevent fraud and deception.
These costs prevented the earlier formation of industries and thus explain the failures of the Qing Dynasty and the Republic of China to kick-start China’s industrial revolution in the 19th century and early 20th century, despite the fact that they had private property rights and even democracy.
The poverty of the peoples is caused by their inability to mass produce consumer goods. However, mass production requires mass markets and mass distribution to make it profitable.
Where does the mass (global) market come from? Early European powers relied on mercantilist state government and paramilitary traders to create monopolistic global markets through colonialism, imperialism, and the slave trade.
In particular, generations of British monarchs and merchants (for example, British East India Co.) helped create for England the world’s largest textile market, cotton supply chains and trade networks that marked the beginning of the initial industrial revolution.
Today, developing countries no longer have such a “privilege” or time to develop such a powerful class of traders to create markets. Consequently, governments play a big role in creating the market.
Therefore, the ongoing industrial revolution in China was not caused by the introduction of technologies as such, but by the constant creation of a market led by a skillful mercantilist government; the creation of a market is based on mutually beneficial trade instead of the methods of gunboat diplomacy of earlier Western powers.
The “secret” in the sequence
Democracy and non-interference do not automatically create a global market. Creating a market requires state power, the right development strategies and the right industrial policy. In fact ,it is very expensive to create a “free” market.9
As we have already seen, the development of the industrial market is a sequential process (from the agricultural and handicraft stage to the proto-industrial market, etc.). No matter how late a country begins to develop, in order to succeed, it must repeat earlier stages.10 It’s like learning math. Throughout the millennia of development, mankind has consistently discovered mathematical knowledge: from numbers to arithmetic, algebra, mathematical analysis, etc.
Despite the fact that mathematical analysis is in today’s textbooks for first-year students of universities, nevertheless, every generation of children must again go through the evolutionary process of humanity to study mathematics. They are not accepted for mathematical analysis at the age of 6; instead, they begin to study numbers (using their fingers, as our ancestors did) and gradually move on.
Modern economic theories, on the contrary, teach poor countries to move forward, to start industrialization by creating advanced capital-intensive industries (such as chemical, steel and automotive industries), modern financial systems (such as a floating exchange rate, free international capital flows and full privatization of state property and natural resources) or modern political institutions (such as democracy and universal suffrage).
But such top-down approaches disrupt the historical sequence of the industrial revolution and lead to political chaos, disrupted development and deformed capitalism in Africa, Latin America, Southeast Asia and the Middle East.
Future challenges
As China industrialized, it caught not only the positive aspects of Western development, but also the negative ones, including widespread corruption and organized crime, unprecedented pollution and environmental destruction, increasing divorce and suicide rates, widespread fraud and business scandals, markets full of “lemons” and low-quality goods, spreading asset bubbles, growing income inequality and class discrimination, frequent industrial accidents, etc.
There are other challenges, for example, the creation of social protection networks, the completion of social and economic reforms in the health and education sectors, the completion of rural urbanization and the modernization of agriculture, the creation of modern financial infrastructure and regulatory institutions, as in the UK and the USA, and the creation of a modern legal system, as in Hong Kong and Singapore.
However, as long as China follows the correct sequence of economic development, these problems should be just difficulties of formation, and not such serious structural obstacles as the Malthusian poverty trap or the middle income trap that many developing countries in Africa, Latin America, the Middle East and Southeast Asia face.
Conclusion
Since the 15th century, capitalism has been built on the principle of” handshake business ” regardless of ideology, religion, culture and state borders. It is this principle that led to the creation of a modern industrial civilization and will continue to change the world.
For half a century after the Second World War, the United States followed one of the most successful strategies of mutually beneficial nation-building in history: It contributed to the reconstruction of Europe and Japan and the development of other poor countries and connected them economically.
China today seems to be taking the banner from the United States forward. In addition, China adheres to win-win development strategies focused on the economy. It implements them through the involvement of global business and the creation of an international infrastructure, regardless of religion, culture, political system and state borders.
The rise of China provides an opportunity for developing countries to follow a new path. But how much each individual country can benefit from the rise of China depends entirely on its own worldview, development strategies and industrial policy.
FOOTNOTES
1 cm. Chang.
2 cm. Jacques or http://wanderingchina.blogspot.com/2008/08/napoleon-and-his-view-on-china.html.
3 see the Malthusian trap, named after the 19th-century British political economist Thomas Robert Malthus, suggests that for most of human history, incomes have mostly remained unchanged, because technological advances and discoveries have only led to an increase in the number of people, and not to an increase in living standards. It is claimed that many countries in tropical Africa are still in the Malthusian trap.
4 cm. Ajemoglu and Robinson.
5 Certain components of the industrial triad develop over time. In terms of energy resources, in the 19th century it was coal, in the 20th century oil and in the 21st century solar energy. From the point of view of communication, in the 19th century it was the telegraph, in the 20th century the telephone and in the 21st century e-mail.
6 The delineations of the stages are approximate and can never be exact, and they often tend to duplicate each other for a significant period of time. But in history, in successfully industrialized countries, the higher stage always appears later than the lower stage, while unsuccessfully industrialized countries tend to directly move to higher stages, skipping earlier stages.
7 Handicraft production was a family production system common in rural areas of Western Europe in the 17th and 18th centuries. The domestic workers involved in this system usually owned their own primitive tools (such as looms and spinning wheels), but were dependent on trade capitalists who provided them with raw materials for the manufacture of fashionable goods that were considered the property of merchants. The intermediate products were transferred by the merchant to another workplace for further processing, while the finished products were delivered by the merchants directly to the market.
8 In this regard, China contributed to the establishment of, and also benefited from, the post-war peaceful world order created by the joint efforts of developing countries, their independence movements and industrial world Powers, especially the United States.
9 cm. Wen for a more detailed analysis.
10 The theoretical foundations of why successful industrialization should go through stages are presented in my next book entitled “Making of an Economic Superpower: Unlocking China’s Secret of Rapid Industrialization”. (Creating an economic superpower:the solution to the mystery of China’s rapid industrialization) See. https://research.stlouisfed.org/econ/wen/sel.
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