How China (Actually) Got Rich

Summary

The transcript discusses China's economic transformation, highlighting its rise from poverty to a global powerhouse. It contrasts China's gradual, state-led market reforms with Russia's disastrous 'shock therapy' approach. China's strategy involved building infrastructure, education, and strategic planning, leading to remarkable growth without fully embracing free-market principles.

Takeaways

• 📈 China's economic growth from 1980 to 2020 was over 75-fold, making it one of the most rapid improvements in modern history.
• 🏛️ In the 1700s, China was considered wealthy, but it declined significantly after decades of war and instability.
• 🌐 Despite global trends towards free market policies since the 1980s, many countries have seen economic stagnation or decline.
• 🆚 In contrast to China's success, Russia's attempt at rapid market reforms led to a catastrophic economic collapse.
• 🏟️ China's state played a leading role in economic development, building infrastructure and setting overall strategies, unlike Russia's 'shock therapy' approach.
• 📉 Russia's 'shock therapy' resulted in hyperinflation, a 40% drop in GDP, and a significant decrease in life expectancy.
• 🚫 The simple removal of price controls and government employment in Russia did not lead to prosperity but instead caused economic devastation.
• 🛠️ China's reforms were gradual and experimental, avoiding the sudden changes that characterized Russia's approach.
• 💡 China's economic strategy involved a 'dual-track pricing' system, allowing state-set prices for quotas and market prices for surplus.
• 🌟 China's state-led market economy has been successful, with the government maintaining control over key industries and land.
• 🌐 The 'shock therapy' approach was a failure globally, and China's gradual reforms were the key to its economic success.

Q & A

What was the economic status of China in the 1700s according to Adam Smith?

Adam Smith considered China to be one of the wealthiest countries that had ever existed.

How did China's economy transform from 1980 to 2020?

China's economy grew more than 75-fold, with the construction of huge new cities and hundreds of millions escaping poverty.

What is the predicted economic future for China in comparison to the US?

Economists predict that China will overtake the US as the largest economy in the world in this decade.

Why is the narrative that China's rise was solely due to the triumph of the free market misleading?

The rise of China was not solely about the triumph of the free market because many other countries that underwent similar market reforms did not experience the same level of growth.

What economic policies were implemented globally since the 1980s and what were their outcomes?

Since the 1980s, free market policies such as liberalizing prices, privatizing industries, and opening up to free trade were implemented globally. However, many economies that were subjected to markets overnight stagnated or decayed.

How did Russia's economy fare during the same period as China's economic rise?

Russia's economy collapsed during the same period that China's economy grew, despite both countries having been largely organized through state commands.

What was the 'shock therapy' economic policy implemented in Russia?

Shock therapy was a policy that aimed to destroy the old planned economy to make space for the market to emerge, involving the elimination of price controls, privatization of state-owned companies and assets, and immediate opening up to global trade.

What were the disastrous effects of 'shock therapy' on Russia?

The effects of 'shock therapy' on Russia included hyperinflation, a 40 percent fall in GDP, increased rates of HIV infections, alcoholism, childhood malnutrition, and crime, and a significant drop in life expectancy for Russian men.

How did China's approach to economic reform differ from Russia's?

China's approach to economic reform was experimental and gradual, with market activities being tolerated or actively promoted in non-essential parts of the economy, unlike Russia's sudden and drastic reforms.

What was China's 'dual-track pricing' system?

China's 'dual-track pricing' system required state-owned enterprises and farmers to deliver quotas to the government at a set price, but allowed them to sell any surplus at market prices.

How did China's state institutions contribute to its economic growth?

China's state institutions were often the drivers at the frontier of new industries, protecting and guaranteeing their own growth, and the state kept control over the backbone of the industrial economy and the ownership of land.

What is the current economic model of China according to the script?

China's current economic model is a state-led market economy where the government effectively owns all land and leverages state ownership through market competition to steer the economy.

Outlines

00:00

🌐 China's Economic Transformation

The script discusses the remarkable economic growth of China from 1980 to 2020, which saw an increase of over 75 times its GDP. It contrasts this with China's past, highlighting its decline after years of war and instability, and positions China's rise as a significant global economic event. The narrative challenges the simplistic narrative that China's prosperity is solely due to free market policies. It points out that many countries that adopted free market reforms during the same period did not experience similar growth, and instead faced economic stagnation or decline. The script uses the example of Russia's 'shock therapy' reforms, which led to economic collapse, to emphasize the importance of a gradual and state-led approach to economic reform, which China successfully implemented.

05:03

📈 China vs. Russia: Economic Reforms

This paragraph delves into the economic reforms of China and Russia, highlighting the stark differences in their approaches and outcomes. While Russia adopted a rapid 'shock therapy' approach, leading to severe economic decline and social issues, China opted for a gradual and experimental method. The Chinese government maintained control over key sectors and implemented a 'dual-track pricing' system, allowing market activities to coexist with state planning. The script emphasizes that China's success was not due to a straightforward adoption of free market principles but rather a state-led market economy where the government played a significant role in guiding economic growth. The contrast with Russia's experience underscores the importance of a balanced and strategic approach to economic reform.

Keywords

💡Economic growth

Economic growth refers to the increase in the production of goods and services of an economy over a period of time. In the video, China's economic growth from 1980 to 2020 is highlighted as the most stunning economic story, with an increase of more than 75-fold, illustrating the rapid transformation and development of the country's economy.

💡Poverty alleviation

Poverty alleviation is the process of reducing or eliminating poverty through various economic and social interventions. The video mentions that hundreds of millions of people in China escaped poverty, underscoring the significant social impact of China's economic rise.

💡Free market

A free market is an economic system where prices are determined by supply and demand with little or no government intervention. The video challenges the notion that China's economic miracle was solely due to the triumph of the free market, arguing that the simplistic narrative of freeing the economy from state control does not fully explain China's success.

💡Liberalization

Liberalization in an economic context refers to the loosening of government controls and restrictions on economic activities. The video discusses how many countries liberalized prices, privatized industries, and opened up to free trade, but not all experienced growth similar to China's.

💡State-led market economy

A state-led market economy is a mixed economic system where the government plays a significant role in directing economic development while also allowing market mechanisms to operate. The video explains that China's economic model is not a pure free market but rather a state-led approach that has been instrumental in its growth.

💡Dual-track pricing

Dual-track pricing is an economic policy where there are two separate pricing systems: one for state-mandated quotas and another for the market. The video describes how China implemented this system, allowing state-owned enterprises and farmers to sell surplus at market prices after fulfilling state quotas.

💡Shock therapy

Shock therapy is a term used to describe the rapid and comprehensive implementation of market-oriented reforms in an economy. The video contrasts China's gradual reforms with Russia's shock therapy approach, which led to economic collapse and social issues.

💡Oligarchs

Oligarchs are a small group of powerful individuals who control a large portion of a country's wealth and economic activity. The video mentions that Russia's transition to a market economy resulted in a hollowed-out wreckage dominated by oligarchs, highlighting the negative outcomes of rapid economic reform.

💡Economic stagnation

Economic stagnation refers to a period of little or no economic growth. The video discusses how many countries that underwent free market reforms experienced stagnation or decay, contrasting with China's rapid growth.

💡Infrastructure

Infrastructure refers to the basic physical and organizational structures needed for the operation of a society or enterprise. The video points out that China's state played a leading role in setting up infrastructure, which was crucial for its economic success.

💡Gradual reforms

Gradual reforms are changes made slowly and in stages, rather than all at once. The video emphasizes China's approach to economic reform, which was experimental and gradual, allowing for adjustments and learning from experience, as opposed to the abrupt changes seen in shock therapy.

Highlights

China's economy grew more than 75-fold from 1980 to 2020, marking the largest and most rapid improvement in material conditions in modern history.

Adam Smith considered China one of the wealthiest countries in the 1700s, but it declined after decades of war and instability.

China's transformation from one of the poorest countries to an economic powerhouse is often misattributed to the triumph of the free market.

Many countries that adopted free market policies in the 1980s experienced stagnation or decay, unlike China's remarkable growth.

Russia, once an industrial superpower, suffered a brutal collapse during market reforms, contrasting with China's success.

China's state played a leading role in setting up infrastructure and guiding economic reforms, unlike Russia's abrupt 'shock therapy' approach.

Russia's 'shock therapy' led to hyperinflation, a 40 percent GDP drop, and a significant decrease in life expectancy.

China's gradual and experimental approach to market reforms allowed it to avoid the catastrophic effects seen in Russia.

China implemented a 'dual-track pricing' system, allowing state-owned enterprises and farmers to sell surplus at market prices.

China's economic development was managed and planned, protecting early-stage industries and controlling investment.

Western free-market economists were critical of China's dual-price system, but China's leaders chose a different path.

China's state-led market economy has been successful, despite predictions of failure by Western economists.

China's government effectively owns all land and uses state ownership to steer the economy through market competition.

The 'shock therapy' approach was a failure worldwide, with Russia's collapse serving as a stark example.

China's gradual reforms were key to its thriving economy, in contrast to the sudden transformations that led to failure elsewhere.

Isabella Weber, assistant professor of economics, provides insights into China's economic rise and the failure of 'shock therapy'.

Transcripts

The single most stunning economic story of the  last few decades has been the rise of China.  

From 1980 to 2020, China’s economy grew more  than 75-fold. Huge new cities were built.  

Hundreds of millions escaped  poverty. It was the largest  

and most rapid improvement in material  conditions on record in modern history.

Let’s go back. When the economist  Adam Smith was writing in the 1700s,  

he considered China to be one of the wealthiest  countries that had ever existed. But after decades  

of war and instability in the 19th and early  20th century, China began a rapid decline.

Up until a few decades ago, China was  one of the poorest countries on earth.  

But now China is an economic powerhouse.  

Economists predict that it will overtake the US as  the largest economy in the world in this decade.  

People called it “the Chinese miracle.” You can hear some people describe this  

“miracle” as a straightforward story of the  free market. They say it’s a simple story:  

“China was poor. Then the economy was freed  from the grip of the state. Now China is rich.”

But this is misleading. China’s rise was NOT about  the triumph of the free market. To understand why,  

we have to look at what happened to other  countries which remade their own economies in  

the same period, often to disastrous effects. Since the 1980s, free market policies have  

swept the globe. Many countries have  undergone far-ranging transformations:  

liberalizing all prices, privatizing entire  industries, and opening up to free trade.

But many of the economies that were subjected to  markets overnight have since stagnated or decayed.  

NONE have had a growth record anything like  the one seen in China. African countries  

endured brutal economic shrinkage. Latin America  experienced twenty-five years of stagnation.  

If we compare China to Russia, the other  giant of Communism in the 20th century,  

the contrast is even more  staggering. Under state socialism,  

Russia was an industrial superpower, while  China was still largely an agricultural economy.  

Yet during the same period that Chinese  reform led it to incredible economic growth,  

Russia’s reform led it to a brutal collapse. Both China and Russia had been economies that  

were organized largely through state commands.  Individual players could only act within the  

structures set by state planning. Think of  playing foosball. Each individual player  

can only be moved along with the rod to  which it is attached. It is a rigid set-up,  

you can only go back and forth or rotate. Market reforms in both Russia and China was  

like moving from foosball to an actual soccer  game. Players now could move freely. But while  

Russia jumped right into the game without  setting up a proper stadium, rules, or jury,  

in China the state took the lead in setting up  all infrastructure. The state built the team,  

it trained the players, educated the  coaches and designed an overall strategy.  

Russia followed the recommendations  of the most quote-unquote scientific  

economics at the time, a policy of so-called  “shock therapy.” As a basic principle,  

the idea was that the old planned economy had  to be destroyed to make space for the market  

to emerge. Think of shock therapy like knocking  over a Jenga tower. After a short period of pain,  

Russia was supposed to emerge as a fully-fledged  capitalist economy, almost overnight.

The leader of the plan announced it was “a way  of destroying Communism in Russia.” When Russian  

president Boris Yeltsin took power, he eliminated  all price controls, privatized state-owned  

companies and assets, and immediately opened  Russia up to global trade. So, what happened?

In a word: catastrophe. Shock therapy was a fatal  

blow to the Russian economy. The shock  therapists had predicted some short-term pain,  

but what they didn’t see coming was how severe,  destructive, and permanent the effects would be.

Consumer prices spiraled out of control.  Hyperinflation took hold. Government  

coffers were looted. GDP fell by 40 percent. The  “shock therapy” recession in Russia was deeper  

and longer than the American Great  Depression by a large margin.

This was a disaster for ordinary Russian  people. HIV infections, alcoholism, childhood  

malnutrition, and crime went through the roof.  Life expectancy for Russian men fell by SEVEN  

YEARS, more than any industrialized country has  ever experienced in peacetime. In 2006, Russian  

life expectancy was still several years LOWER  than it had been in 1986, under the Soviet Union.

It turned out that Russia didn’t get  a successful “free market” overnight.  

Instead it went from a stagnating economy to a  hollowed-out wreckage dominated by oligarchs.

If simply getting rid of price  controls and government employment  

didn’t make a country prosper – and in fact,  destroyed its economy and killed huge numbers  

of people – then clearly the rapid application  of “free markets” was not the simple solution.

But what did China do differently? Let me explain.

When Deng Xiaoping took over  the leadership of China in 1978,  

the country he inherited was STILL desperately  poor. In 1980, China had a per capita GDP of just  

one hundred and ninety-four dollars. That was less  than Sudan and Haiti – and almost HALF of Niger.

The Chinese leadership knew they needed  reform. As I show in my book “How China  

Escaped Shock Therapy,” throughout the 1980s,  the Chinese leadership repeatedly considered  

implementing the same type of sudden reforms that  Russia pursued. The idea of starting from a clean  

slate seemed attractive, and shock therapy was  widely promoted by quote-unquote “scientific”  

economics. Programs for rapid price liberalization  were prepared and then withdrawn, twice.

But in the end, they decided not  to pursue shock therapy. Unlike the  

free-market economists in Russia, the Chinese  leadership approached change like a game of  

Jenga. Take out many pieces at once and the whole  thing falls apart. Take out one piece at a time,  

and you can win the whole game.

Instead of knocking over the Jenga tower, China  reformed itself in an experimental and gradual  

way. Market activities were tolerated or actively  promoted in non-essential parts of the economy.  

China implemented a system of what they called  “dual-track pricing.” State-owned enterprises  

and farmers had to deliver their quotas to  the government at a certain price set by the  

government. But if they managed to produce more,  they could sell their surplus at market prices.

China was learning from the real story  of the world’s most developed nations:  

countries like the United States, Britain, Japan,  and South Korea. Each of these in their own way  

managed and planned the development  of their economies and markets,  

protecting early-stage industries  and controlling investment.

Western free-market economists thought  this system would be a disaster. The  

American economist Milton Friedman wrote an  open letter to Deng’s premier Zhao Ziyang.  

He said that the dual-price system was  a bad idea, and that China should “free  

prices and wages…[in] one bold  stroke.” Just like in Russia.

But China’s leaders didn’t listen. And while  Russia collapsed after following the “shock  

therapy” program, China saw remarkable success.  The state kept control over the backbone of the  

industrial economy, as well as the ownership  over land. As China grew into the new dynamics  

of its economy, state institutions were not  degraded to fossils from the past but were often  

the drivers at the frontier of new industries,  protecting and guaranteeing their own growth.

China today is not a free-market  economy in any sense of the word.  

It is a STATE-LED MARKET ECONOMY. The  government effectively owns all land,  

and China leverages state ownership through  market competition to steer the economy.

The “shock therapy” approach advocated  around the world was a failure.  

While Russia collapsed after  its sudden transformation,  

China’s gradual reforms allowed it to  thrive. And that made all the difference.

I’m Isabella Weber, assistant  professor of economics at  

the University of Massachusetts  Amherst, for the Gravel Institute.