For all of China’s economic achievements, the heyday of its entrepreneurs lies more than 20 years in the past. Renewing that era’s rural capitalism would yield more balanced growth and go a long way toward reducing today’s trade tensions.
Many of China’s leading manufacturing firms are based in backward rural provinces such as Guangdong and Hunan. The first indigenously de signed automobile to reach Western markets, for example, will probably come not from Shanghai but from the agricultural hinterland of Nian’s Anhui Province, home of Chery Automobile, which builds small cars for the domestic market. China’s largest food-processing and agribusiness firm, the Hope Group, is based in the interior province of Sichuan, the country’s biggest producer of rice, wheat, and other crops. The four brothers who founded the business, originally as a purveyor of quail eggs, held highly prized permits that allowed them to live in urban areas, but they went to rural Sichuan in search of greater economic freedom.
China in the 1980s was a hopeful place for the rural majority. But what happened in the 1990s? Let us revisit Nian Guangjiu, the sunflower seeds merchant. In September 1989 he was arrested on the charge of embezzling state property, an accusation so outrageous— after all, he owned his own company— that a higher court overturned the verdict. The same court nonetheless dispatched him to jail, albeit for the crime of “hooliganism,” sentencing him to three years in prison for having had immoral relationships with 10 women. (Upon hearing the verdict, Nian reportedly commented, “No, 12.”)
Nian’s fate signified a new economic and political order for China’s rural entrepreneurs. After the trauma of the Tiananmen Square crackdown in 1989, China’s conservative leadership tightened controls on the private sector. Credit dried up, and because rural China had the larger private sector it was disproportionately affected. This crackdown eased beginning in 1993, but the leadership then began to shift its policy emphasis away from rural areas. The new pro- urban bias, a classic scourge of many developing countries, intensified. One consequence was a sharp reduction of financial resources flowing into rural China. Many of the unofficial financial operations that had supplied critical start-up funding to rural entrepreneurs were shut down, and the nonstandard forms of finance they had relied upon (such as loans from extended-family members and informal groups) were criminalized. Some individuals were sent to jail for pooling capital to start their own businesses. My research shows that the percentage of rural households able to get access to credit fell by more than half from the 1980s to the ’90s, and that fixed-asset investment in rural areas slowed drastically in the 1990s.
One avenue of material improvement remained open to rural Chinese: migrating to the coastal cities to work in factories. Many took this route. There is no question that the pay in urban centers was much better than it was on farms back home. But the flood of workers depressed wages in the cities. In Guangdong Province, average pay for migrant workers increased at only about one- third the rate that GDP did. Slow wage growth meant that Chinese migrant workers, unlike middle-class urbanites elsewhere in the world, were not able to consume much of what they produced. But the excess production had to find a market. China became an export- driven economy as a result.
It is rare in the economic arena to have one policy instrument that can solve multiple problems, but just such a tool lies within the grasp of China’s leaders. To reduce its reliance on exports, to achieve more equitable growth, and to increase its efficiency, they need to rethink their policies toward the rural economy. China’s policy elites are still in the grip of the traditional groupthink view that people from the countryside are fit only to contribute labor, not product and process innovations that we customarily associate with entrepreneurship.
In The Other Path: The Invisible Revolution in the Third World (1989), the seminal book that inspired the title of this essay, Peruvian economist Hernando de Soto showed the power of land and asset reforms in unleashing grass roots entrepreneurship in developing countries. In China, there is some encouraging evidence that the leadership group that came to power with President Hu Jintao in 2003 is finally beginning to show an appreciation of these forces. Some old policies are being repudiated. Modest land and financial reforms have been introduced, and at the just-concluded National People’s Congress there was discussion of further lifting the residential restrictions that inhibit people’s mobility in rural China. These changes point in the right direction, but they must be implemented on a larger scale if China is to repeat the growth miracle of the 1980s. The most convincing evidence that things are beginning to change is that manufacturers in coastal areas of Guangdong Province have begun to experience upward pressure on wages. That matters because it indicates that they now have to compete for workers with rural businesses in the interior, which seem to be reviving. This bodes well for China’s efforts to rebalance its economy and move quickly toward a growth model powered by domestic income and consumption.
For the United States, it would be far more productive to help China with this transition than to berate it for its exchange-rate policies. This kind of change is not alien to China in the wake of Deng Xiaoping’s reforms, and there is much that it can learn from the American experience creating the Small Business Administration and various credit-guarantee programs for entrepreneurs. Instead of making a case for freedom and individual choice on the grounds of human and political rights, which can be culturally contentious and divisive, the United States can frame the discussion in economic terms, highlighting its own considerable success at fostering a free and supportive environment for entrepreneurs. The United States has a deep and substantial interest in seeing China succeed in this transition, as do many millions of ordinary Chinese and all of those whose lives are tied to the global economic order.
But many observers failed to ask a basic question: “Where did the government of such a low- income country get the money to finance all this impressive urban infrastructure?” The answer: rural China. In the 1990s, as skyscrapers sprang up in Beijing and Shanghai, the rate of rural income growth went down. Low income growth then led to low consumption growth. Household consumption fluctuated between 40 and 45 percent of GDP throughout the 1990s but then began a decline in 2000, from 46 percent to today’s 35 percent. (In most other countries, consumption usually averages between 60 and 70 percent of GDP.) This was the beginning of the economic imbalances that put production far ahead of consumption— facilitated, one should add, by de mand created by excessive American consumption fueled by credit bubbles. The trade tensions with the United States and all the charges and counter charges about currency manipulation are basically the result of this startlingly low consumption/production ratio.
How did rural Chinese fare in the 1990s? Not very well. Their income growth rate fell sharply, from seven to eight percent annually in the 1980s to around four percent in the 1990s. At the same time, surcharges by the state on basic education and health care services rose, increasing economic pressures on families and reducing their ability to buy goods and services.