Getting the China Story Right

Business book challenges conventional ideas about China's economy

The Economist cites Prof. Yasheng Huang's book as of the best economics and business books of 2008.  Photo: Ed Quinn

The Economist cites Prof. Yasheng Huang's book as of the best economics and business books of 2008. Photo: Ed Quinn

The Economist cites Prof. Yasheng Huang's book as of the best economics and business books of 2008.  Photo: Ed Quinn

The Economist cites Prof. Yasheng Huang's book as of the best economics and business books of 2008. Photo: Ed Quinn

In the early 1980s, Nian Guangiu, a poor farmer in one of China’s poorest provinces, seeded a revolution by taking common sunflower seeds, adding a salty flavor, and naming the concoction Idiot’s Seeds. (He thought he was good for nothing, hence the designation.) The salty, stir-fried snack became wildly popular, first in Shanghai, then nationwide.

Contrary to its moniker, Nian’s scheme was revolutionary in several ways: In a country where all sunflower seeds were perceived similarly, Nian differentiated his product by giving it a salty twist and bestowing it with brand identity. Within five years, Nian grew his snack enterprise to one of the country’s largest private firms.

Nian’s venture is the real story behind China’s phenomenal economic growth, says Yasheng Huang, professor of political economy and international management at the MIT Sloan School and author of Capitalism with Chinese Characteristics: Entrepreneurship and the State (2008). Citing it one of the best economics and business books of 2008, The Economist lauded Huang for “brilliantly predicting, a year ahead of other commentators, China’s steep economic decline.”

Huang’s provocative study throws conventional wisdom about China on its head. The humble farmer Nian, and millions like him, created China’s true economic miracle, he argues. Getting the China story right, he says, depends on recognizing the existence of two Chinas: one, vibrant, scrappily entrepreneurial and rural; the other, urban, state-controlled, and marred by corruption, pollution, and proliferating social inequities. China’s strong capitalistic lean — and its resulting heft in the global marketplace — hinges on its rural development, not urban, says Huang. He shows China’s march to capitalism is not the result of gradual 1980s reforms that intensified and became far-reaching in the 1990s. The latter decade, he demonstrates, reversed earlier reforms and brought devastating consequences.

NEW EVIDENCE

Getting the China story right also hinges on data, especially close scrutiny of details that are often opaque. Original research on China is rare and devilishly challenging. Statistics are notoriously inaccurate. Most analysts rely on gross domestic product (GDP) and foreign direct investment. Huang went beyond these superficial data, plumbing thousands of bank documents and other business and state memos, most never before examined by Western researchers.

Armed with new empirical evidence, Huang shows China’s immense economic growth was fueled by rural, bottom-up entrepreneurial activity in the 1980s. Not tied to the soil, tens of millions of peasants like Nian became market-driven manufacturers and service-business owners. The vast majority of their enterprises were privately owned, not government-run collectives. State banks provided financing; access to credit was easy. Political leaders didn’t intervene with abstract ideological policies, but with compromises and innovative approaches. Small-time entrepreneurs were free to make profits, and they did. It was a rural rags-to-riches capitalism.

The 1990s was a study in contrast. China’s post-Tiananmen Square leadership reversed the policy, investing heavily in cities, rolling back rural reforms, and repudiating liberal-leaning political policies. The bias toward massive state-connected enterprises and foreign multinational investment produced urban landscapes dotted with steel and skyscrapers. GDP continued its skyward growth.

The urban boom, however, came on the backs of rural entrepreneurs. Private countryside businesses were squelched with massive taxation and red tape, tightening credit, and a growing central authoritarianism. Nian’s fate is telling: He was arrested in 1989 on a trumped-up charge of corruption; a year later the authorities shut down his firm. “It was an inglorious end to a once-sensational brand — and brand-name — of Chinese indigenous capitalism,” writes Huang.

REVERSING THE DAMAGE

The tale of two decades also reflects the enormous damage wreaked by the 1990 reversals on economic and social well-being. The sharp rise in illiteracy is one of the most blatant signs: The number of illiterate adults rose from 85 million to nearly 114 million between 2000-2005, a devastating legacy of the 1990s’ hike in educational fees. Likewise, personal income growth sharply declined and income inequality sharply rose, with 92 million more people joining the ranks of the impoverished since the late 1990s. Huang’s thesis also explains why the Chinese economy is now slowing. Low personal incomes depressed the country’s consumption, increasing China’s dependency on the troubled US economy.

Reversing these downward slides demands focusing on the countryside, says Huang. “If you don’t improve the welfare and income of the majority” — 70% of China is rural — “by definition you can’t get it right for the country. Many other countries — such as Latin America in the 1960s — have paid a price for not getting rural development right. My fear is that the Chinese have repeated that mistake.”

Huang’s research also points to another mistake — ignoring the low-tech entrepreneurial sector. Rectifying this bias, albeit on a small scale, is one aim of two MIT programs he devised and co-developed. China Lab and India Lab bring together business students from MIT Sloan and Asian universities to solve issues of Asian entrepreneurs. “As an MIT professor, it’s illegal for me to be anti-technology,” he says tongue-in-cheek, “but my philosophy is to make a special effort to include low-technology. These programs allow me to put my ideas of economic development into practice” — essentially, helping boost the options for an untold number of Nians.

by Orna Feldman |

 

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