China’s True Economic Miracle

For all their differences, Mao Zedong and the Chinese reform leadership of the 1980s had something in common: They both recognized the huge entrepreneurial potential of China’s rural residents.

Mao went to great lengths — through the commune system and the “Great Leap Forward” — to destroy those potentials because he understood the political ramifications of unleashing them.

Even though China’s political system is laden with urban biases, the Chinese reformers in the 1980s recognized these same potentials — and created a policy environment to permit and to encourage their realization. The result was a decade of vibrant, grassroots, bottoms-up entrepreneurship in China’s massive countryside in the 1980s.

Today, we can observe one lasting legacy of the rural origins of Chinese capitalism: Many of the largest manufacturing private-sector firms hails from the backward, predominantly agricultural provinces of China.

Let’s look at some empirical evidence.

Kelon Group, until 2005 China’s largest refrigerator maker, was founded by Wang Guoduan, an entrepreneur in rural Shunde county in southern Guangdong province. Huanyuan, China’s largest air conditioner maker, is based in the agriculture province of Hunan. And China’s first automobile exports will not come from Shanghai — but more likely from the agricultural hinterland of Anhui province, where Chery is located.

The Hoep Group is even more interesting. The four brothers who started a business in quail eggs abandoned their urban residency and founded their company in a rural part of Sichuan province. Today, it is China’s largest agribusiness firm.

In contrast, very few of China’s successful corporate giants in competitive manufacturing industries are based in the metropolitan, industrial centers such as Beijing, Shanghai and Tianjin. (Firms in politically connected sectors, such as real estate, are another story altogether.)

This is puzzling. One would have thought that these urban centers possessed ample and propitious conditions for growth and development of businesses. They have human capital, agglomeration economics, export market linkages and high incomes.

But none comes close to producing the microeconomic success stories that have come out of some of the initially poorer agricultural provinces. The reason is that the economic policies in rural China were far more liberal than those in urban China.

Zhejiang province is widely acknowledged to be a huge economic success. The province, located south of Shanghai, is home to half of China’s largest private-sector firms. It is also rich, especially as measured in asset terms.

In 2004, an average urban Zhejiang resident earned an income from owning stocks and bank deposits that was multiples of what an average Shanghai resident earned.

But what is often lost in the Zhejiang story is that the province was poor and deeply agrarian as recently as the 1970s. It was ranked No. 13 among Chinese provinces in per capita GDP in the late 1970s. In 1978, 32.2 million out of a population of 37.5 million resided still in rural areas.

The Wenzhou region of Zhejiang province is typical of the province. Today, Wenzhou is the bastion of Chinese capitalism. Its businesses dominate European markets in garments, shirts and cigarette lighters — and the region has begun to venture into electronics and petrochemical products.

Wealthy individuals from Wenzhou export a massive amount of capital to the rest of the country, making or breaking real estate markets in Shanghai, Beijing, and Guangzhou. In all of China, it is only in Wenzhou that the highways and airports have been financed on private capital.

All this private wealth was built on a rural foundation. Of 5.6 million Wenzhou residents, only 550,980 had an urban registration in 1978, just below 10%. The region was poor and inconvenienced by high mountains on three sides and ocean on the fourth. For years, Wenzhou lacked basic transportation infrastructures such as a seaport, an airport and highways to nearby locations.

So, why was capitalism in China was rooted in the rural areas? For whatever its faults, the Maoist leadership invested heavily in the health and educational sectors of rural China.

A comparison with India is illustrative. As early as the mid-1960s, China led India across a host of social indicators, including life expectancy, school enrollment and literacy.

The greatest contrast with India is that in China, rural entrepreneurship was able to grow out of the traditional agricultural sector on a massive scale. Rural Indians, in contrast, are hampered by a poor endowment of human capital, making it impossible for them to start entrepreneurial ventures remotely on the scale of the Chinese.

The second reason is that, even at the height of the Cultural Revolution, there was still some residual capitalism in rural China. This is, in part, due to a structural factor — agriculture is much harder for the government to plan as compared with industry.

There was also a political factor. The Cultural Revolution, however sweeping and penetrating, was largely an urban affair — and may actually have undermined the urban political control of the countryside.

How so? In a planned economy, the urban centers are always more state-owned than the rural areas, inadvertently allowing for some breathing room for capitalism there.

The Cultural Revolution also inflicted a severe political shock on China’s urban economy, seriously constraining the supply side of the economy. The massive supply constraints, in turn, created shortages that the rural entrepreneurs rose to fulfill.

Thus, ironically, the Cultural Revolution — however disruptive to the Chinese economy as a whole — might have laid the foundation for the post-reform takeoff of rural entrepreneurship. This dynamic explains an otherwise puzzling phenomenon noted by a number of scholars — namely that even at the height of the Cultural Revolution, some rural residents were engaged in fairly large-scale private-sector activities.

Editor’s Note: This feature is adapted from “Capitalism with Chinese Characteristics: Entrepreneurship and the State,” by Yasheng Huang. Reprinted with the permission of Cambridge University Press. Copyright (c) Yasheng Huang 2008. All rights reserved.