200 PART one  Principles and Concepts

Case Study 4

Understanding a Development
Miracle: China

An Extraordinary Performance business decisions. But China has also adopted activ-

F rom 1978 to 2011, the economy of China grew at ist industrial policies, pushing exports of increasingly
an average rate of close to 9% a year, an unprece- higher skill and technology content, and it embarked
dented achievement for any economy in history, let on its period of rapid growth around 1980, more
alone the world’s most populous nation, with over than a decade before significant trade liberalization.
19% of global population. China’s income per cap- But often overlooked is that China’s agricultural
ita by 2012 was approaching six times what it was in productivity growth was also very high. Moreover,
1978, when reforms began. Growth was three times much of China’s growth in the 1980s and early 1990s
the rate that would be considered respectable by was due to rural township and village enterprises,
the recent standards of most low-income countries. which had a quasi-cooperative and quasi-municipally
China has also experienced the world’s most owned character. There has been less privatization
dramatic reductions in poverty. The World Bank’s of state-owned enterprises than in most developing
most recent estimate is that just 12% of China’s countries. In the meantime, countries in Africa, Latin
population lives on less than $1.25 per day (27% America, and elsewhere that have most closely fol-
below $2 per day). This means that hundreds of lowed the free-market model have generally not done
millions fewer people were living in extreme pov- particularly well. While all schools may find some-
erty in a span of just three decades. Reductions in thing in China to let them claim it as vindication of
extreme poverty in China are far faster and greater their favored development policies, it is also clear
than anywhere else in the world. that if China were performing dismally, each could
(and likely would) find reasons why its own theories,
Debate on Sources of Success including free-market theory, predicted such a failure.
For such a stunning record, the roots of China’s suc- There have been many special explanations for
cess remain a source of disagreement. The Chinese China’s remarkable success. Many of them contain
experience seems to change everything—but does part of the truth, but such dramatic success is more
it? And if so, in what ways? Success has a thou- than the sum of these parts. Let us review some of
sand fathers, and all the major traditional and new the explanations.
schools of thought on development want to claim Regional “Demonstrations.” The presence
China as their most important case in point. China of regional “demonstration” models has been
is hailed as an example of the benefits of markets, crucial. Japan was emulated by other countries
trade, and globalization. Yet by conventional mea- in the East Asian region. Hong Kong provided
sures, institutions in China remain quite weak. For an additional example for China, as did China’s
example, the World Bank’s 2013 “Ease of Doing Busi- archrival Taiwan. Taiwan, Hong Kong, and South
ness” index ranks China poorly, at No. 96—worse Korea focused on export-oriented industrialization
than Russia, Mongolia, Zambia, or Serbia. Manufac- strategy at a time when world trade was growing
tured exports are a key to China’s growth, and market rapidly (see the end-of-chapter case studies for
incentives have played a primary motivational role in Chapters 12 and 13).

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 CHAPTER 4  Contemporary Models of Development and Underdevelopment 201

Leveraging the Lure of a Billion Consumers By led to the shift from a lower-growth to a higher-
the late 1980s, the locus of regional growth shifted growth equilibrium. But much more generally,
to China as investors began to pour investments the government of China has used its centralized
into China in large part because of the allure of its authority to coordinate investments across indus-
eventual market of more than 1.3 billion consum- tries. Moreover, government negotiation of licenses
ers. Government played off potential investors who and other business agreements helped ensure that
wanted access to China’s consumers, demanding China got more favorable deals than many other
and getting extensive technology transfer, public developing countries that relied on private com-
and private Chinese business partnerships, local pany-level business transactions, although in this,
content, and other concessions in exchange for the role model lessons from South Korea was also
the right to sell to Chinese citizens. Although the a benefit.
market was limited at first by both low incomes Health and Education Investments The cen-
and government policies, early investors found tral planning of China’s first decades after
high incentives to export from several special eco- its 1949 Communist revolution were by most
nomic zones on the southeast coast. These inves- measures a failure. Industry was highly inef-
tors discovered that China offered very cheap labor ficient. As many as 30 million people died in a
with unusually high skills and work habits for its late-1950s famine caused by poor central plan-
income level. ning decisions and political pressures that led
Export-Led Investment and Growth  Once early party and government officials to regularly
investments built up a sufficient critical mass, overstate the harvest prospects. As Amartya Sen
agglomeration benefits of concentrated economic stresses, famines rarely occur in democratic coun-
activity kicked in (see Chapter 7). The more pro- tries with a free press. Such disasters were only
ducers located in China, the greater the benefits for partly offset by the early and ongoing emphasis
an increasing number of suppliers to operate there. on basic health and education in China and then
At this point, investments started to feed on them- on reductions of fertility through China’s one-
selves in a cumulative causation. In the meantime, child policy (see the case study for Chapter 6).
when wages began to rise, companies could set up But these basic first steps on education, health,
production farther west, or migrants from the west and eventually fertility helped set the stage for
could move to the new industrial centers. Given growth and poverty reduction when later com-
China’s population of hundreds of millions of low- bined with market incentives. One of the results
income farmers, expectations were formed that is the apparently higher educational and skill
this process of wage restraint could continue for an level of factory workers for given wages in
extended time—although a string of wage increases China in comparison to its competitor countries.
beginning in 2010 began to challenge these expec- Productivity Growth There has been consider-
tations as financial analysts argued that the Lewis able debate about whether rapid growth in other
turning point had been reached (see Chapter 3). East Asian countries is the result of capital accu-
Coordination After the bloody crackdown on mulation or productivity gains. Alwyn Young,
Tiananmen Square protests in 1989, there was con- Paul Krugman, and others have concluded that
siderable doubt about whether the reforms would South Korea and other Asian Tigers grew more
continue and therefore whether investment and from investing heavily in capital assets such as
growth would remain high (making other invest- machinery and factories than by improved worker
ments profitable). The Chinese leader Deng Xiaop- efficiency. Wing Thye Woo concluded that most of
ing paid a 1991 visit to the southern China regions China’s growth came from the reallocation of labor,
that had been leading in growth and reform and particularly from agriculture to other activities, and
proclaimed, “You should be bolder and develop that sustainable total factor productivity progress
faster.” A rapid burst of investment and growth, as was much lower, on the order of 2% per year.
well as policy reform, followed his speech and its But for the case of China, Zuliu Hu and Mohsin
subsequent publication. It has been suggested that Khan concluded that productivity gains explained
in effect this served to coordinate expectations and more than 42% of China’s growth in the formative

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202 PART one  Principles and Concepts

1979–1994 period and that productivity had over- expertise is greatly enhanced by available human capi-
taken investment by the early 1990s as the largest tal. China made judicious use of the advantages of back-
source of growth. This was considered surprising, wardness by targeting areas that were less developed
in part because of the breathtaking pace of capital and less encumbered by the legacy of existing institu-
tions, although it was fortunate in this regard that the
investments in China. But on the other hand, when
backward regions were in close proximity to Hong
China’s rapid growth began in the late 1970s in the
Kong and Taiwan.
areas close to Hong Kong, while it was clear that
a large volume of investment funds was flowing Thus, the China case also illuminates complemen-
from capital-abundant Hong Kong (a British crown tarities, a recurrent theme of this chapter.
colony at the time) to capital-scarce China, the big-
ger story was the flow of productive ideas over Reform on the Margin
the Hong Kong border, a barrier that had long pre- As examined in detail in Chapter 2, developing
vented the transfer of both capital and know-how. inclusive institutions that protect property rights
Of these two factors, it often seemed that the ideas and enforce contracts, and place checks on execu-
were more important than the finance. tive authority and the power of elites such as
There is widespread concern that by now, China through the rule of law, have demonstrated impor-
has entered an investment bubble stage in which tance in long-term economic development. China
many investments are of dubious quality, particu- appears to be an outlier, in that such protections are
larly in real estate and some infrastructure and demonstrably weak. Yet it is extremely difficult to
industrial sectors. Even so, the rapid pace of devel- navigate the course from bad to good institutions.
opment in China has been unprecedented. It is rarely possible to follow a straight line on the
Recent research by Xiaodong Zhu, Loren Brandt, map, as a vortex of obstacles are encountered, and
and their coauthors has provided new documenta- the ship of state itself may be the cause of many of
tion that productivity growth, rather than mere fac- the problems. The process of getting the institutions
tor accumulation, has been a very important source right is one of starting with a clear understanding
of China’s rapid growth of output. In particular, of both formal and informal local rules, and mov-
Zhu has presented well-regarded evidence that ing toward an eventual goal even when it cannot
productivity growth in the nonagricultural, non- be seen clearly—in the presence of initial and then
state-owned sector is the most important source of newly emerging constraints and opportunities,
growth in China. Noting that productivity is still chartering what may seem to outsiders as large
well below that of the United States, he argues that deviations off-course. A metaphor used by the post-
there should still be significant opportunities for Mao paramount leader Deng Xiaoping may also
productivity to continue to grow rapidly in China reflect in part this type of step-by-step, graduated
by adopting foreign technology, learning best pro- process—“crossing the river by feeling the stones.”
duction practices, and improving institutions and In China, the way that market incentives were
policies, particularly to allocate capital more effi- introduced and used seems to have been almost as
ciently. important as the fact that they were introduced at
In another study, Ashoka Mody and Fang-Yi all. One of the most important features of the past
Wang of the World Bank examined the causes of quarter century of economic history in China has
industrial growth in China and concluded: been the very gradual implementation of reforms.
China’s approach has been the opposite of that of
…much of the action came from region-specific influ- many eastern European countries such as Russia
ences and regional spillovers. Regional influences
and Poland, which opted for a “big bang,” a sud-
included the open-door policies and special economic
zones that successfully attracted investments from over-
den comprehensive changeover to a free-market
seas Chinese to particular locations. Existing regional economy. (Hungary and Slovenia are two coun-
strengths, especially high-quality human capital and tries in that region that pursued a more gradualist
infrastructure, also contributed to growth. Our results strategy.) China has introduced new and transi-
illuminate the interplay between conditions conducive tional institutions that exist side by side with pre-
for growth—for example, the contribution of foreign vious institutions of central planning for extended

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periods. In the former Soviet Union and eastern clarified). But the TVEs played a unique role in spur-
Europe, central planning was abolished almost ring growth and spreading the benefits of develop-
immediately, and economic depression, with drops ment to rural areas.
in output of up to 50%, ensued before gradual Reforms in the late 1970s and 1980s favored
recovery. In contrast, China kept the central plan- agriculture and entrepreneurship in the rural areas
ning system partially intact for an extended period. where most of the poor lived, and poverty fell as
Previous quotas for buyers and sellers at fixed income rose. From at least the early to mid-1990s,
planned prices were maintained. Reform was the terms of trade shifted toward industry and
instead introduced on the margin. After filling their urban areas. Yasheng Huang makes a strong case
quotas, producers were free to buy and sell at mar- that this represented an important turning point,
ket-determined prices; resales were generally not associated with growing inequality and other seri-
prohibited. This “dual-track” system simulated the ous challenges.
allocational efficiency of a more competitive market Still, strong average growth continued through
economy and created strong incentives for firms to many changes. As outlined by Yingyi Qian, China’s
improve efficiency and increase output, in a man- transitional institutions have served a dual pur-
ner less threatening to the status quo. pose: to improve efficiency while compensating the
Moreover, while in other transition and devel- losers (and thereby preserving legitimacy or at least
oping countries state-owned enterprises (SOEs) reducing the chance of political backlash). Provided
were sold off to private investors fairly quickly, in that the quotas were enforced—and for the most
China these remained in government hands for an part they seem to have been in the transition in
extended period. The government tried to reform China—the dual-track allocation system protected
them internally, with limited success. But at the the interests of those who had benefited from and
same time, China has allowed and encouraged a planned on receiving inputs at fixed, low prices. As
new, more efficient sector to grow up around them. a result, these agents did not oppose or undermine
In recent years, China has privatized or closed reforms and indeed could benefit further to the
many of the smaller SOEs. Many larger SOEs con- degree they could learn to produce more efficiently
tinue to operate in a relatively inefficient manner, and operate in markets effectively. The system was
and some economists have suspected for years that largely phased out many years later, after the eco-
their accumulating indebtedness will eventually nomic landscape had changed dramatically.
pose significant financial risks to the economy. But The vague local-government ownership of the
the counterargument proposes that if the economy TVEs provided protection for investors who feared
can continue to grow rapidly, it is also possible government hostility toward private property and
that China may stay ahead of this problem with- worried about expropriation. The impression that
out experiencing a financial crash. Eventually, as these companies were owned by the township or
employment opportunities continue to expand, village protected the de facto private owners. Once
more of the larger SOEs can be privatized or closed. reform proceeded to a certain point, these de facto
Further, for the first nearly two decades of reform, owners were able to “take off the red hat,” as the
from the late 1970s to the mid-1990s, at the local saying went in China, and assume full ownership
level, township and village enterprises (TVEs) were in exchange for considerations to local government,
encouraged. The TVEs were vaguely owned by local and taxes replaced direct revenue transfer out of the
government, but their private entrepreneurs and TVEs. Qian shows how similar arguments apply
employees held “vaguely defined” property rights, to fiscal and financial reforms. Under the reforms,
as Martin L. Weitzman and Chenggang Xu termed local government continued to have a responsibility
them. These TVEs accounted for a very large share to provide revenue to the central government, but
of industrial output growth in China. Finally, after local government was allowed to keep a large share
the Chinese economy had grown nearly fourfold, of collections on the margin before local and cen-
the majority of these TVEs were privatized in the tral revenue collection was fully separated. Govern-
late 1990s—by this point the private entrepreneurs ment also allowed anonymous banking accounts
had triumphed (or their underlying control became for a long transition period, to credibly constrain

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204 PART one  Principles and Concepts

the ability of the government to arbitrarily impose States at its long-run rate of just 1.9%, China would
high individual taxes on successful entrepreneurs; still not catch up until close to 2040.
Qian judged the program a success despite the fact A high rate of domestic saving is associated with
that this diverges from what is considered normal a trade surplus. Savings have been extremely high
best practice in advanced Western countries. and rising in China. As of 2011, China was saving
Yingyi Qian’s insightful explanation is: nearly half of its national income—an astounding
and unprecedented rate compared to the coun-
The difference between China and Russia is not at all
that China has established best-practice institutions and try’s own past rates (already a high 35% in 1990)
Russia has not. The difference lies in the institutions in and in relation to the high rates that have gener-
transition.…The real challenge in reform facing transi- ally prevailed in East Asia. Such high rates are not
tion and developing countries is not so much know- consistent with the pivot toward increasing local
ing where to end up, but searching for a feasible path consumption as an engine of growth.
toward the goal. Therefore, it focuses on transitional It is now generally accepted in China and inter-
institutions, not best-practice institutions.…The gen- nationally that continuing to grow at such high
eral principle of efficiency-improving and interest-com- rates is essentially impossible. Before China grew
patible institutional change is simple, but the specific rapidly, South Korea did so, and before South
forms and mechanisms of transitional institutions often
Korea, Japan did. The later a country starts modern
are not. Successful institutional forms usually are not a
straightforward copy of best-practice institutions. They
economic growth, the faster it can grow because the
need not be and sometimes should not be. They need distance from traditional methods to the frontier
not be because room exists for efficiency improvement technology of the day grows greater over time. But
that does not require fine tuning at the beginning. They the pace of catch-up generally slows as an economy
should not be because the initial conditions are country- gets closer to the technology frontier and needs
and context-specific, requiring special arrangements.… to innovate. Policymakers in China are actively
Understanding these mechanisms sometimes needs an preparing for this challenge. Despite its extraordi-
appeal to the counterintuitive second best argument, nary record to date and considerable resources at
which states that removing one distortion may be coun- its disposal, the substantial challenges that China
terproductive in the presence of another distortion. faces in its attempt to reach developed country sta-
Finally, for peasants in parts of China where the tus should not be underestimated. There are some
rural sector has done well, earlier land reforms have other limits and caveats to China’s success and to
been among the causes—with the revolution setting the lessons that other countries can learn from it.
the stage and the late-1970s reforms giving greater Poverty and Vulnerability  Life can indeed
incentives to individual farmers. Land reform has be harder than ever for the millions remaining in
been notoriously difficult to implement in other extreme poverty, such as rural peasants in some
parts of the world. Remittances from migrant work- parts of the country facing the loss of security; offi-
ers have fueled a service-sector boom in some rural cial corruption, including reports of official land
areas, and prices received by farmers have gener- grabs from peasants; rising local taxes; and mini-
ally risen, particularly near urban areas. mal improvements in technology or skills. At the
same time, despite the growth in average wages,
inequality in China—once quite low—has been
China’s Coming Challenges rising dramatically; inequality has now reached
China’s successes do need to be kept in perspective. approximately the same level as in the United
Since 1980, China has grown about 4½ times faster States, worst among the developed countries.
than the United States, as measured by per capita Environment and Pollution Moreover, the
output. As a result, China has been closing the rela- environmental crisis in China is reaching epic pro-
tive gap in living standards. In 1980, China’s income portions. A majority of the most polluted cities in
per person was only 2% of that in the United States, the world are located in China, and health problems
but by 2012, it had grown to over 15%. But even if are growing. Water resource problems, erosion, and
China’s output per person continued to grow at its loss of habitat undermine the prospects for sustain-
unprecedented recent rate of 8.4% and the United able development. The extreme air pollution is now

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causing not just misery but deaths and other serious the industrial ladder beyond resource-based activi-
and growing health problems. This reached historic ties. This will also be the real test for China.” As the
proportions in the so-called Beijing “airpocalypse” IMF concluded in its October 2013 World Economic
of January 2013, when pollution indicators exceeded Outlook, “There is strengthening conviction that
40 times World Health Organization standards; China will grow more slowly over the medium term
many other cities such as Tianjin and Harbin have than in the recent past.” The alternative is probably
been severely affected. There are very few historical wasteful and unsustainable investment that would
precedents for prolonged pollution exposure of this result in serious economic crises. The question for
magnitude. But a 2013 joint study by China, United China will be how it can maintain somewhat more
States, and Israel university researchers estimated modest but historically still high growth, of perhaps
that air pollution in China has already decreased live 6.5%, sustainably over the next three decades. An
expectancy north of the Huai River by an amazing 5.5 economy growing at this rate must have a different
years, including increases in lung cancer, heart attack, structure of investment than an economy growing
and stroke. at 10% (as China did in 2010). Making these adjust-
Moreover, China’s looming water shortages threaten ments will not be easy. Developing innovative capac-
to curtail industry, coal production, and agriculture. ity will be an important part of the answer; first steps
Some of China’s environmental challenges result from are being taken, but better institutions may be needed
global climate change; but many if not most result to sustain the momentum.
from poor national management of the environment. Addressing Structural Imbalances  There are sev-
Although China produces about one-tenth of global eral other imbalances in China’s economy that may
output, it consumes nearly one-fifth of the world’s lead to problems going forward. The World Bank
energy production. Coal accounts for more than 70% pointed out in its 2013 Global Economic Prospects that
of China’s electricity production. Coal generates more “ongoing rebalancing efforts remain a priority, as
greenhouse gases than any other significant energy does engineering a gradual decline in its unsustain-
source. Coal production also uses a lot of water. The ably high investment rate.” The report also stressed
rapid expansion of coal use is placing major demands that “should investments prove unprofitable, the
on China’s increasingly scarce water supply, adding servicing of existing loans could become problem-
to the growing demands stemming from irrigation atic—potentially sparking a sharp uptick in nonper-
and expanding cities. China is now the world’s larg- forming loans that could require state intervention.”
est emitter of greenhouse gases such as CO2, and emis- China’s very large export surplus has come
sions have been growing rapidly (see Chapter 10). under great criticism, as this was widely argued to
Product and worker safety Since 2007, highly be one of the underlying causes of the global finan-
publicized scandals concerning the safety of food, cial crisis. One cause of the surpluses is probably
drugs, and other consumer products threatened the the undervaluation of China’s exchange rate, esti-
international public image of Chinese-made prod- mated to be at least 20%. Undervaluation has been
ucts. Indeed, product safety standards are low, and used by a number of East Asian economies as an
their regulation is lax. Foreign and local investors, industrial strategy for encouraging expansion of
and government, all share in the blame. China’s the manufacturing sector (notably in the 1960s and
regulatory institutions will need to catch up with the 1970s by South Korea and Taiwan; see Chapter 12),
progress made in other aspects of national economic but those economies were much smaller than that
development. of China. Note, however, that as recently as 2009
Avoiding the Middle-Income Trap Chinese offi- analysts estimated rates of overvaluation of up to
cials and researchers are also concerned about sus- 40%, approximately double the estimates of just
ceptibility to the “middle-income trap” and are four years later; and the external surplus as a share
engaging discussions with Latin American coun- of GDP has decreased to a correspondingly degree
tries on this topic; Huang Yiping and Jiang Tingsong since then (see Chapter 12 for details on measure-
stressed that what “really trapped many Latin Amer- ment and analysis of international trade). Indeed,
ica and Middle East middle-income countries was by 2013, some manufacturers found themselves
lack of innovation capability. They failed to move up struggling to adapt to a less overvalued currency.

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206 PART one  Principles and Concepts

Inevitably, more China-based firms will engage all credit to GDP ratio increased from about 120%
in direct foreign investment in their export destina- in 2008 to close to 200%. This again connects to Chi-
tion countries such as the United States, just as Japan na’s unprecedentedly high investment rate and low
and South Korea did before them; but this will be a consumption rate; adjustment is now essential, and
drawn-out process due to China’s still relatively low indeed has begun, but the extent of the imbalances
(if strongly growing) average productivity level, suggests that the transition from investment-led to
and also probably national security worries arising consumption-led growth will be unusually long and
in Europe and Japan as well as in the United States. difficult, and is very unlikely to be entirely smooth.
Another factor in the large trade surplus is Chi- Political Weaknesses  There are also political weak-
na’s high rate of savings, mentioned earlier, where nesses. On the one hand, some analysts make a case
the savings rate, long well above international for the strengths of more authoritarian regimes, at
averages, increased dramatically in the 1998–2010 least in early stages of development and when
period (when it peaked at approximately 49% of leadership fosters a developmental state. But on
national income). the other hand, this may make for a less flexible
In parallel, investment as a share of GDP, long response to changing circumstances and difficul-
over 40%, reached an unprecedented 48% by 2010, ties in escaping a possible middle-income trap.
before moderating slightly. Part of the uptick in Some leaders in China have called for urgent
recent years was due to an active response to the political reforms. And the dramatically wors-
2008 global economic crisis. The adjustment to ened inequality in China may undermine not just
sustainable investment and growth rates will be political stability but ultimately opportunities for
extremely difficult to accomplish without major and future growth (for details on the challenges of ris-
possibly prolonged disruptions. Yet in one sense the ing inequality for growth and development, see
scope of the problem may also be somewhat exag- Chapter 5).
gerated by the way national statistics are prepared, Relatedly, China will need to find a way to con-
which as Jun Zhang and Tian Zhu argued in a 2013 tinue its ongoing institutional reforms, whether
study does not account for hidden consumption by through implementing new and productive transi-
the growing number of high-income citizens, the tional institutions or more fundamental change. In
rent-equivalent consumption of owner-occupied their 2012 book, Why Nations Fail, Daron Acemoglu
housing, and reported corporate expenses that are and James Robinson make an extraordinary argu-
actually more like private consumption. On the ment that institutional weaknesses will ultimately
other hand, on the other side of the balance sheet, stall development in China. In their argument, insti-
the extraordinarily high investment—with evidence tutions in China closely resemble the ”extractive”
showing that a significant amount of it is at political systems of other failed states where crony
very low productivity—has not been challenged, capitalism is the norm, vested interests are pro-
and these statistics (including international trade tected, and potentially disruptive entrepreneurs are
and finance data) must be considered and better blocked. They conclude that growth in China will
understood as a whole. ultimately be “unlikely to translate into sustained
The huge indebtedness of the state-owned enter- economic development.” While relatively few ana-
prise (SOE) sector and other public debt (such as lysts think the challenges are this steep, undoubt-
local government loans using land collateral) is edly the needed reforms will be politically difficult
thought by some financial commentators to be likely to undertake.
to eventually lead to a significant financial crisis— The much-anticipated economic and social
though other analysts argue that China can “grow policy changes announced at the Third Plenum
its way out of” these problems. in November 2013 promised a further “unleash-
For years, analysts have expressed concerns about ing” of market forces with their rhetoric promo-
the risk of “bubbles” (see Chapter 13) developing in tion from a “basic” to “decisive” role—even if some
financial and housing markets, due to very high rates details were left vague, and some predictions for
of debt-financed investment. The potential problem reform were not realized (particularly in the field
has only worsened: just from 2008 to 2013, the over- of finance). But left unambiguous was that the

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 CHAPTER 4  Contemporary Models of Development and Underdevelopment 207

Communist Party monopoly on political control a shrinking workforce and the need to support a
remained unchallenged—and indeed seemed to large retired population. It is a challenge common
have been reinforced. to many modern societies but may be particularly
Finally, despite the extraordinary economic acute in China due to its one-child policy that has
growth in China, Richard Easterlin has found that been in effect since about 1980, which has greatly
improvements in happiness and satisfaction in the accelerated the demographic transition. There was
country simply have not kept pace, particularly a slight relaxation of this policy at the Third Ple-
among the bottom third. num in November 2013, to allow urban families for
Managing Urbanization The scope of urban- which either husband or wife is an only child to
ization in China has been called the largest migra- have a second child (previously this was allowed
tion in human history, and indeed it has been only if each was an only child). But this change
breathtaking. For the first time in its history, China may have very limited impact on fertility because
has become a more urban than rural society, with of the high cost of raising children in China’s cities.
the halfway mark believed to have been crossed The very high ratio of males to females (see Chap-
sometime in 2011; as recently as 1980, more than ter 8) remains another serious demographic chal-
80% of Chinese citizens lived in rural areas. Before lenge that may lead to continued distortions.
2030, China may reach the “Urban Billion” mark. There are several explanations of China’s histor-
Chongqing featured in the vignette in Chapter 1, ically unprecedented high savings rates (approach-
growing from 200,000 in the 1930s, to about 2 mil- ing 50% by some measures), but many of them
lion during the Cultural Revolution of the 1970s, relate to the unusual demographic challenges;
to now over 30 million people in the metropolitan they include “life-cycle” saving for retirement by
area. In the south, Shenzhen was transformed from an aging population that lacks social security, pre-
a fishing village near Hong Kong to another mega- cautionary savings due to increased income uncer-
city in just a couple of decades. But conditions of tainty because of fears about catastrophic family
ordinary people in many cities do not correspond events such as major illnesses or layoffs, poor
to the media images of postmodern skyscrapers, as financial intermediation, and—in an influential
most are moving to large tracts of sometimes bleak, new theory of Shang-Jin Wei and Xiaobo Zhang—
uniform apartment buildings, crawling in epic traf- competitive saving by parents of sons who now
fic jams through a vast urban sprawl—and indeed greatly outnumber daughters due to China’s
inhaling the “breathtaking” air pollution—in a pic- growing sex-ratio imbalance and compete for pro-
ture simultaneously of public overinvestment in spective wives by offering larger houses and other
some areas and underinvestment in others. wealth. High savings may be associated with the
apparent property bubble that some economists in
Demographic Challenges China believe has become dangerous—yet China
China also has a rapidly aging population. For has demonstrated a capacity for managing chal-
the last decade of the twentieth century and first lenges, and considerable reserves for addressing
decade and a half of the twenty-first century, crises.
China has benefited from a demographic dividend
(see Chapter 6), in which by global standards an Other Limits to Emulating China’s Policies
unusually large fraction of its population has been There are other limits to the lessons of China’s
of working age (neither too young nor too old to growth for other developing countries. China is
be active in the workforce). This “dividend” occurs quite homogeneous, overwhelmingly populated
in the process of economic development after the by members of the Han ethnic group. In Africa and
drop in births per woman but before the previous other parts of the world, ethnic diversity is associ-
larger cohorts retire, allowing for rapid income ated with slower growth, though only in countries
growth. China is now entering a phase in which a that also have incomplete or nonexistent political
large fraction of its working population will begin freedoms. Clearly, China is lacking in many free-
to retire. One challenge is the need to implement a doms. There may be limits to the ability of other
modern pension system. Another is to respond to countries to carry out China’s brand of centrally

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208 PART one  Principles and Concepts

designed and implemented policies for transition hand, there are clear limits to the ability of other
and directed growth when either broader demo- developing regions to emulate the success of China.
cratic freedoms are in place or greater ethnic diver- Not only do other developing countries differ in
sity is present. Finally, China, like much of the rest geography, demography, institutions, and allure to
of East Asia, has a relatively poor endowment of foreign investors, but also other regions may find
natural resources. Many development specialists themselves starved for investments that are redi-
have concluded that this lack is actually more of a rected to China while remaining unable to compete
benefit than a drawback. Natural resource abun- with China’s impressive combination of low wages,
dance encourages political infighting for control high skills and know-how, and agglomeration of
over the revenues, while manufacturing success is economic activity. Some East Asian countries have
more important when a country does not have nat- greatly benefited from the surge in import demand
ural resources to fall back on. It requires more ini- from China. The commodity price boom of recent
tiative and more efforts to upgrade technology and years, which has stimulated demand in several
skill. In terms of geographic advantages, East Asia countries in Africa, is significantly attributable
is also much less plagued than Africa and other to growth in China. And China itself has a good
developing regions by problems such as malaria chance of continued high, albeit moderated growth,
and other tropical diseases for which medicines are provided it manages the next phase of its transi-
not readily available, the difficulties and disadvan- tion carefully. In the meantime, many developing
tages of tropical agriculture, and the problems of countries that have hoped to rely more on manu-
landlocked countries. factured exports view the success of China as much
The experience of China assures us that the East as a threat as an opportunity. Growth in China will
Asian miracle is not a fluke due to special local factors continue to be a central theme in the global devel-
in economies such as South Korea and Taiwan. opment drama—both in its huge economic impact
It gives us much greater confidence when we say and the policy debate spurred by its extraordinary
that “real development is possible.” On the other achievements.  ■

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