How China (Actually) Got Rich
Summary
TLDRThe 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
- đ China's economic growth from 1980 to 2020 was over 75-fold, making it one of the most rapid improvements in modern history.
- đïž In the 1700s, China was considered wealthy, but it declined significantly after decades of war and instability.
- đ Despite global trends towards free market policies since the 1980s, many countries have seen economic stagnation or decline.
- đ In contrast to China's success, Russia's attempt at rapid market reforms led to a catastrophic economic collapse.
- đïž China's state played a leading role in economic development, building infrastructure and setting overall strategies, unlike Russia's 'shock therapy' approach.
- đ Russia's 'shock therapy' resulted in hyperinflation, a 40% drop in GDP, and a significant decrease in life expectancy.
- đ« The simple removal of price controls and government employment in Russia did not lead to prosperity but instead caused economic devastation.
- đ ïž China's reforms were gradual and experimental, avoiding the sudden changes that characterized Russia's approach.
- đĄ China's economic strategy involved a 'dual-track pricing' system, allowing state-set prices for quotas and market prices for surplus.
- đ China's state-led market economy has been successful, with the government maintaining control over key industries and land.
- đ 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
đ 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.
đ 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.
Mindmap
Keywords
đĄEconomic growth
đĄPoverty alleviation
đĄFree market
đĄLiberalization
đĄState-led market economy
đĄDual-track pricing
đĄShock therapy
đĄOligarchs
đĄEconomic stagnation
đĄInfrastructure
đĄGradual reforms
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. Â
From 1980 to 2020, Chinaâs economy grew more than 75-fold. Huge new cities were built. Â
Hundreds of millions escaped poverty. It was the largest Â
and most rapid improvement in material conditions on record in modern history.
Letâs go back. When the economist Adam Smith was writing in the 1700s, Â
he considered China to be one of the wealthiest countries that had ever existed. But after decades Â
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. Â
But now China is an economic powerhouse. Â
Economists predict that it will overtake the US as the largest economy in the world in this decade. Â
People called it âthe Chinese miracle.â You can hear some people describe this Â
âmiracleâ as a straightforward story of the free market. They say itâs a simple story: Â
âChina was poor. Then the economy was freed from the grip of the state. Now China is rich.â
But this is misleading. Chinaâs rise was NOT about the triumph of the free market. To understand why, Â
we have to look at what happened to other countries which remade their own economies in Â
the same period, often to disastrous effects. Since the 1980s, free market policies have Â
swept the globe. Many countries have undergone far-ranging transformations: Â
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. Â
NONE have had a growth record anything like the one seen in China. African countries Â
endured brutal economic shrinkage. Latin America experienced twenty-five years of stagnation. Â
If we compare China to Russia, the other giant of Communism in the 20th century, Â
the contrast is even more staggering. Under state socialism, Â
Russia was an industrial superpower, while China was still largely an agricultural economy. Â
Yet during the same period that Chinese reform led it to incredible economic growth, Â
Russiaâs reform led it to a brutal collapse. Both China and Russia had been economies that Â
were organized largely through state commands. Individual players could only act within the Â
structures set by state planning. Think of playing foosball. Each individual player Â
can only be moved along with the rod to which it is attached. It is a rigid set-up, Â
you can only go back and forth or rotate. Market reforms in both Russia and China was Â
like moving from foosball to an actual soccer game. Players now could move freely. But while Â
Russia jumped right into the game without setting up a proper stadium, rules, or jury, Â
in China the state took the lead in setting up all infrastructure. The state built the team, Â
it trained the players, educated the coaches and designed an overall strategy. Â
Russia followed the recommendations of the most quote-unquote scientific Â
economics at the time, a policy of so-called âshock therapy.â As a basic principle, Â
the idea was that the old planned economy had to be destroyed to make space for the market Â
to emerge. Think of shock therapy like knocking over a Jenga tower. After a short period of pain, Â
Russia was supposed to emerge as a fully-fledged capitalist economy, almost overnight.
The leader of the plan announced it was âa way of destroying Communism in Russia.â When Russian Â
president Boris Yeltsin took power, he eliminated all price controls, privatized state-owned Â
companies and assets, and immediately opened Russia up to global trade. So, what happened?
In a word: catastrophe. Shock therapy was a fatal Â
blow to the Russian economy. The shock therapists had predicted some short-term pain, Â
but what they didnât see coming was how severe, destructive, and permanent the effects would be.
Consumer prices spiraled out of control. Hyperinflation took hold. Government Â
coffers were looted. GDP fell by 40 percent. The âshock therapyâ recession in Russia was deeper Â
and longer than the American Great Depression by a large margin.
This was a disaster for ordinary Russian people. HIV infections, alcoholism, childhood Â
malnutrition, and crime went through the roof. Life expectancy for Russian men fell by SEVEN Â
YEARS, more than any industrialized country has ever experienced in peacetime. In 2006, Russian Â
life expectancy was still several years LOWERÂ than it had been in 1986, under the Soviet Union.
It turned out that Russia didnât get a successful âfree marketâ overnight. Â
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 Â
didnât make a country prosper â and in fact, destroyed its economy and killed huge numbers Â
of people â then clearly the rapid application of âfree marketsâ 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, Â
the country he inherited was STILL desperately poor. In 1980, China had a per capita GDP of just Â
one hundred and ninety-four dollars. That was less than Sudan and Haiti â and almost HALF of Niger.
The Chinese leadership knew they needed reform. As I show in my book âHow China Â
Escaped Shock Therapy,â throughout the 1980s, the Chinese leadership repeatedly considered Â
implementing the same type of sudden reforms that Russia pursued. The idea of starting from a clean Â
slate seemed attractive, and shock therapy was widely promoted by quote-unquote âscientificâ Â
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 Â
free-market economists in Russia, the Chinese leadership approached change like a game of Â
Jenga. Take out many pieces at once and the whole thing falls apart. Take out one piece at a time, Â
and you can win the whole game.
Instead of knocking over the Jenga tower, China reformed itself in an experimental and gradual Â
way. Market activities were tolerated or actively promoted in non-essential parts of the economy. Â
China implemented a system of what they called âdual-track pricing.â State-owned enterprises Â
and farmers had to deliver their quotas to the government at a certain price set by the Â
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 worldâs most developed nations: Â
countries like the United States, Britain, Japan, and South Korea. Each of these in their own way Â
managed and planned the development of their economies and markets, Â
protecting early-stage industries and controlling investment.
Western free-market economists thought this system would be a disaster. The Â
American economist Milton Friedman wrote an open letter to Dengâs premier Zhao Ziyang. Â
He said that the dual-price system was a bad idea, and that China should âfree Â
prices and wagesâŠ[in] one bold stroke.â Just like in Russia.
But Chinaâs leaders didnât listen. And while Russia collapsed after following the âshock Â
therapyâ program, China saw remarkable success. The state kept control over the backbone of the Â
industrial economy, as well as the ownership over land. As China grew into the new dynamics Â
of its economy, state institutions were not degraded to fossils from the past but were often Â
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. Â
It is a STATE-LED MARKET ECONOMY. The government effectively owns all land, Â
and China leverages state ownership through market competition to steer the economy.
The âshock therapyâ approach advocated around the world was a failure. Â
While Russia collapsed after its sudden transformation, Â
Chinaâs gradual reforms allowed it to thrive. And that made all the difference.
Iâm Isabella Weber, assistant professor of economics at Â
the University of Massachusetts Amherst, for the Gravel Institute.
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