The first action that altered China's modern history was not the result of careful planning by the elite leaders of the Communist government in Beijing, but a secret meeting of eighteen peasants in a remote village. The peasants were not motivated by grand aspirations to change history or restore China's greatness. They acted on instinct, driven by the simple need to avoid fleeing from their homes or starving to death.
The historic meeting took place on November 24, 1978, about two years after the passing of Chairman Mao, who led the Chinese Communist Party to defeat the Nationalists. Mao founded the People's Republic of China in 1949. His government spent the next thirty years engaged in Soviet-style political campaigns and illusionary economic activities, all designed to build China into a Communist superstate that could rival the Western imperialists. After three decades of collectivization movements, China practically eradicated private property ownership, wiped out commercial activities, suppressed all capitalist thoughts, and turned all citizens into members of the state. All economic activities were planned and dictated by the state.
The vast peasant population in China was, just like the city dwellers, confined to the place where they were born by the hukou system, a population management mechanism to limit mobility and thus potential unrest. Used by various Chinese emperors, hukou essentially “made the state a feudal master over its farmers,” notes Ted Fishman in China Inc.: How the Rise of the Next Superpower Challenges America and the World. “By 1960, the Communists had all but sealed most of the country's people off, not just from the world, but from China's own cities.”1
As members of the state workforce, the peasants worked in commune teams and followed farming programs rigidly prescribed and seriously enforced by the government. They had to grow exactly what the government told them and in ways the government dictated, regardless of their local context. “All farmers in China know this joke,” write Guidi Chen and Chuntao Wu, well known for their writings about Chinese agriculture. “There are only four people in China who know about farming—Secretaries of the Community Party Commission of the province, the prefecture, the county, and commune. They tell the farmers what to grow, when to sow, how much to grow, when to harvest and how much they will receive at the end of the year.”2
The results of these tight controls were disastrous. “In the 20 years between 1958 and 1978, Chinese society was practically in a state of stagnation,” summarized Deng Xiaoping, the reform-minded leader who has been credited for the reforms responsible for China's recent surge. “Neither the national economy nor people's living standards had significant improvement.”3
In 1978, China was one of the world's poorest nations, with nearly one-third of a population over 900 million living under the poverty line set by China. Using the international standard of poverty (per capita cost of living below $1.00 a day), more than half of China's population lived in poverty.4 Its per capita GDP in 1980 was $193, lower than Chad's and Burkina Faso's. The annual income for Chinese farmers was 133 renminbi (RMB)—about $19.00—in 1978.
Then came the “secret meeting” of eighteen peasants in an isolated village in Anhui Province, a meeting that would soon be enshrined as the beginning of the new China.
“It was just after dinner on November 24, 1978,” Chen and Wu write in Stories of Xiaogang Village, recounting the meeting that changed China:
Xiaogang Village, without electricity, let alone street lights, was already in pitch darkness. The cities might still be busy and noisy, but there was only complete silence in the village, for most of the village members had gone to bed.
All of a sudden, the dogs began barking. Eighteen men of the Xiaogang production team sneaked out of their houses. They quietly walked toward the house of Yan Lihua in the piercingly cold northwestern wind, heads down and arms wrapped around them.5
The meeting site had been chosen after much deliberation, according to Chen and Wu. Yan Lihua lived alone in a five-room house at the west end of the village, away from others and thus ideal for keeping the meeting a secret. His grandfather, parents, and two brothers had all starved to death during the 1961 famine.
The meeting had to be secret because at the time, such meetings were illegal. What the villagers decided to do that night could have landed them in prison, even sentenced them to death. Their decision was to divvy up the village land and assign plots to each family, allowing them to work their own land. “I have two conditions,” Yan Hongchang, the village leader, reportedly said. “First, Xiaogang Village has been receiving grains from the government every year, but from next year on, we must set aside enough grains for the government and collective upon our first harvest.” Yan's second condition was to keep this a secret: “What we will do is to maintain the appearance of working in teams. We will keep it from the above. No one is allowed to tell outsiders or our government leaders. If you do, you are the enemy to all of us.” He promised his fellow villagers, “If you agree to these two conditions, I dare to take the lead.” Their response was even bolder than what he'd asked: “If our team leader is imprisoned for breaking up the team,” one of the villagers said, “the rest of the villagers will take care of his land and support his children until [they reach the age of] eighteen.” The eighteen peasants drew up a simple agreement in plain language: “We divvy up the land and assign to each family. Head of each family sign and stamp to agree that if it works, we guarantee payment to the government and will not ask the government for food anymore. If not, we leaders will rest in peace even if imprisoned or beheaded. All members of the team also promise to support our children until they are eighteen years old.” Below the agreement were twenty names, each representing one family in the village. The peasants signed the document with red fingerprints. Two families were absent because the heads of their households had not returned from a begging trip. Their relatives signed the document on their behalf.
Team leader Yan Hongchang then dated the agreement: December 1978. This was a calculation error. The villagers were used to the Chinese lunar calendar, but Yan wanted to make it as official and formal as possible, so he decided to use the Gregorian calendar. Normally there is a one to two months' difference between the two calendars. Since it was October on the lunar calendar, Yan thought it must be December. He realized his mistake only two days later when he looked at a calendar on display at the state-owned Supply and Consumption Society on a shopping trip.
The mistake hardly mattered. In the next year, this village of twenty families produced sixty thousand kilograms of grains, about the total amount produced by the village between 1955 and 1970: their gamble had paid off. The secret was quickly discovered by neighboring villages—and, of course, the government. Fortunately, the top leaders were ready for change, and this risky experiment became a model for reform in China. By 1982, China had dismantled most communes and adopted what the government called the family responsibility system, which in essence restored family farming and gave each family independent control over its livelihood. As a result, crop yields rose, and the national grain harvest shot up from 304.8 million tons in 1978 to 407.3 million tons in 1984, basically solving the food shortages that had plagued China for the previous three decades.
The December 1978 agreement has been on exhibit in the Museum of Chinese Revolution, in Tiananmen Square in Beijing, as a significant artifact of China's modern development. The story of the meeting has been told and retold by state media as the beginning of China's success for more than three decades. As appealing as this Hollywood “little-guy-saves-the-world” story is, it's hard to believe eighteen peasants had the capacity or power to change China. But they happened to do the right thing at the right time under the right leader. Had they done the same five years earlier, their fears would have been realized: they would have been punished like so many others who had dared to challenge the communist government.
But the Chinese government was ready to change. A month later, in December 1978, the Chinese Communist Party held its own historic meeting, and not in secret. The Third Plenum of the Central Committee of the Chinese Communist Party was held in Beijing from December 18 to December 22. The four-day meeting ended Mao's dogmatic ideology and began a new era of reform and openness led by Deng Xiaoping. The peasants of Xiaogang Village became an excellent example of the new China, and they have been not only pardoned but also lauded as heroes.
China clearly does not owe its recent rise to a benevolent and foresighted leader or to its well-educated scholar-officials, but to a group of uneducated peasants desperate to make a living. The moral of the story is not that commoners can challenge authority, but that when commoners are left alone, they can do great things. The story illustrates the constraining effect of government planning and the liberating power of autonomy. When autonomy is granted, people become more motivated and, because they are free to act, more creative in designing solutions to their problems.
China's recent economic growth is not the result of wise planning. It is the result of government retreating from overregulation. Since 1978, the Communist government has dramatically loosened its control of economic and social activities, making room for individuals to exercise their own free will. One of the most significant changes has been the legalization of private enterprises.
About the same time that the peasants in Xiaogang Village held their secret meeting, an illiterate, self-labeled “fool” merchant in the same Anhui Province challenged China's leaders again. Nian Guangjiu, founder of the Fool's Sunflower Seeds, a household brand name in China, employed twelve people to help with his sunflower seed business. According to the Marxist doctrine about exploitation, a private business with over eight employees becomes capitalist and thus engages in exploitation. Was Nian a capitalist and therefore should have been banished from Communist China? The debate raged not only among academics but also among political leaders. It lasted until 1982 when China's leader, Deng Xiaoping, settled the debate with a typical Deng-style verdict: Let's wait and see. By then, Nian had expanded his business to over 140 employees. Deng's verdict saved him and hundreds of thousands of other merchants.6
“Wait and see” was a clever political strategy employed by Deng Xiaoping to maneuver through a tough political situation. Privatization and marketization were still considered a threat to dogmatic communism. Instead of fighting head-on, the pragmatic Deng famously used his “cat theory” to put the issue to rest: “It does not matter if a cat is black or white. It is a good cat as long as it catches mice.” Instead of arguing over communism versus capitalism, he directed the nation's attention to economic development. What did it matter if progress was communist or capitalist as long as it improved people's lives and strengthened the nation? “Cross the river by feeling the stones” was another Deng maxim that made room for the Chinese to explore different (often illegal at the time) forms of economic activity.
Alas, Nian got in trouble again. In 1987, he was charged with embezzlement. He protested the charge and was rumored to have slapped the Communist Party leader of the local government. How could it be “embezzlement” if he spent his own money? The embezzlement charge was dropped, but Nian was still given a three-year prison sentence in 1991 for hooliganism. Once again, Deng saved him. On his famous Tour of the South in 1992 to restart China's economic reform, which had stalled after the massive student demonstration in 1989, Deng, now retired from his official position but still the most powerful political leader in China, told Nian's story: “At the beginning of reform in the countryside, there was the incident of the Fool's Sunflower Seeds. Many people were uncomfortable with him because he became a millionaire. They wanted to do something about it, but I said no, because if we touched him, people would doubt our policy. The loss outweighed the gain.”7
Nian was released almost immediately. This was his third time in jail. In 1963, he'd been jailed for peddling fish and in 1966, for peddling nuts. Reflecting on his prison terms, Nian was extremely grateful to Deng Xiaoping: “I know he did not only speak out for me. He spoke out for many fools.”8
These “many fools” were China's first entrepreneurs. Despite the severe consequences of engaging in private commercial activities in a culture that looked down on merchants, a large number of individuals secretly took on entrepreneurial activities prior to 1978. They knew that if the government discovered their activities, they would be jailed or even put to death. But like Nian and the peasants in Xiaogang, their need to survive was so strong that they took the risk. With nearly 1 billion people living in impoverished conditions, there were plenty of people desperate to make a decent living at any cost. All they needed was Deng Xiaoping to speak out for them.
Deng Xiaoping spoke out not only for Nian and his fellow peddlers and for the peasants who divvied up the state land, but also for all aspiring entrepreneurs in China. Although he never held the official highest position, Deng became China's de facto leader in 1978. Under his leadership, the Chinese government went through historic reforms to allow its citizens to make their own decisions.
First, in 1978, the Third Plenum of the Central Committee of the Chinese Communist Party gave peasants permission to make decisions about their farming activities and to trade the surplus of their production. More important, it allowed farmers to move away from their land to work in the mushrooming “township and village enterprises”—small-scale industrial or commercial businesses owned by local villages or township—work for other farmers, or set up shops in the city to sell agricultural produce.
The 800 million peasants thoroughly enjoyed their new autonomy. It was they who supplied the first fuel for China's global ascent.9 They became much more productive as farmers, so they had surpluses. They began to sell their surpluses to each other and to city dwellers. Some farmers seized the opportunity to become full-time merchants, entrepreneurs who collected surplus agricultural goods from individual farmers and sold them in the city. Others specialized in transporting these goods over long distances, making a profit from price differences. Still others began to focus on vegetables, meat, poultry, and fish instead of the traditional rice, wheat, and corn in response to the needs of their new customers. That shift brought them enough capital to develop their small businesses into large enterprises. They began to employ their fellow villagers, which provided more opportunities for others to earn cash and improve their standard of living.
Over the past thirty years, according to the World Bank, China has lifted more than 600 million people out of poverty. The proportion of Chinese people living under the poverty line dropped from 85 percent in 1981 to 15.9 percent in 2005, and most of that decrease had been achieved in the first decade after 1978.10
Farmers also began to venture into entirely new markets, making and selling daily necessities such as clothing, shoes, and household supplies. The Communist government had either completely neglected or deliberately ignored daily consumer products. Moreover, to curtail capitalism, it had also instituted an extremely inflexible distribution system. As a result, even the most basic necessities, such as salt, oil, food, clothing, and paper, were in short supply and had to be rationed. The empty shelves and cold attendants in state-run stores spelled opportunity for the newly liberated farmers, especially those in areas where land was limited. Wenzhou, a mountainous area in southeastern Zhejiang Province where there was little land suitable for farming—on average, half of 0.08 acre—became the first hotbed of private enterprise. Wenzhou merchants became famous all over China as they moved about the country selling their wares and buying raw materials. Like Xiaogang Village, Wenzhou also became a model and experiment field for the new economy. As a result, it quickly became one of the wealthiest areas in China. Gross domestic product in Wenzhou had jumped from 1.32 billion RMB in 1978 to 258.8 billion RMB in 2009, almost a two-hundred-fold increase.
In 1979, in addition to granting farmers economic freedom, the government allowed city dwellers the freedom to operate small businesses. Faced with 8 million unemployed youth, most of them who had just returned from their “reeducation” in remote rural areas, and other ex-convicts, the Chinese government permitted the establishment of individually operated repair shops, artisan crafts, retail stands, restaurants, and other service businesses. These individually owned businesses are called getihu. In 1980, a nineteen-year-old girl in Wenzhou was granted the first getihu license. By 1999, the number of getihu in China had grown to over 30 million. By 2013, it had surpassed 40 million, with some 80 million people working as or for getihu.11 Many of the getihu evolved into private enterprises as they gained more capital and expanded their businesses.
Economic freedom paid off for China. It improved productivity in the countryside and solved employment problems in the city. It generated capital for investment and a large consumer base able and eager to buy goods and services. Furthermore, the early entrepreneurs served as examples, motivating many others to be more enterprising. With their newly acquired wealth, the pioneer entrepreneurs also forced the Chinese to reexamine some of their cultural values. Seeing uneducated peasants and ex-convicts becoming millionaires made the traditional elites—city dwellers and government employees, that is, almost all of whom had secure public sector jobs at the time—begin to question their own choices. As a result, some began to abandon their “iron rice bowl” (secure job) and xiahai—“enter the sea”—which means to join or start a private business.
Among the many who “entered the sea,” Liu Chuanzhi is perhaps the best known. He quit his position at the Chinese Academy of Sciences in 1984 and started a computer company that eventually became Lenovo, one of the largest computer makers in the world. It purchased IBM's microcomputer business some twenty years later.
Increased productivity on Chinese farms also resulted in a massive number of eager and hungry laborers who would work for any price under any conditions. They were obedient and compliant: the Confucian values that had been inculcated in every generation for thousands of years had been reinforced by thirty years of Communist government. These hard-working and tractable farmers proved an irresistible workforce for global manufacturers looking for cheap and easy-to-manage laborers. Companies could keep their labor and management costs as low as possible because this docile workforce could be organized and mobilized to fit their changing needs. Once its laborers were allowed to move around the country, China turned into the world's factory. By 2012, one of every three Chinese citizens of work age (fifteen to sixty-four) was a migrant worker, giving China a total of more than 260 million migrant workers.12
In addition, the booming private sector pushed the Chinese government to reform its state-owned enterprises. According to Justin Yifu Lin, a Chinese economist and former vice president of the World Bank, China's private enterprises became more productive than state-owned enterprises.13 Because they did not have the same access to resources and markets as the government-owned enterprises, they had to act more creatively and competitively. As a result, they worked harder; had better management, better services, and better products; and could be more flexible and responsive to markets. To save the state-owned enterprises, the government had to learn from the private enterprises. The lesson? To grant the state-owned enterprises more autonomy.
When he spoke out for the peasants of Xiaogang and Nian Guangjiu (the sunflower seeds peddler), Deng Xiaoping didn't have a road map to China's ultimate economic prosperity. “This was not something I figured out…This was a surprise,” he told a Yugoslavia delegation in 1987, referring to the rapid economic development in China's rural areas. “Our rural reforms have been developing rather fast and farmers have become very motivated. The development of the village and township industries took us by complete surprise…but these are not the achievement of the central government…If the central government has anything to do with this [achievement], that is we made the right policy to give them the autonomy.”14
Although Deng was talking about the achievement in rural areas, his words are true for China's economic development over the past three decades. It was not foresight or wise planning by the central government that led to China's global rise. On the contrary, it was gradual withdrawal of government planning and regulation to create an environment that allowed people to exercise their autonomy. As Deng said, if the government deserved any credit, it was for leaving people alone and letting them be—which had been the fundamental principle of good governance in ancient times.
Like Bruce Lee's art of fighting without fighting, governance without governing was the highest form of government in traditional Chinese philosophy. Rooted in the Taoist thinking of no interference and following nature, Confucius was the first to utter the words “wu wei er zhi”(governing without action) and connect the phrase to government: “May not Shun [one of the most respected leaders of ancient China and thus a model for all rulers] be instanced as having governed efficiently without exertion? What did he do? He did nothing but gravely and reverently occupy his royal seat.”15 In Chinese history, when emperors followed this philosophy, they often achieved great prosperity. The two most prosperous periods in Chinese history, set forth as examples for emperors, are the early Han dynasty under Emperors Wen and Jing and early Tang dynasty under Emperor Taizong, the one who popularized keju.
The Chinese government not only freed its people to work, but also allowed them the autonomy to consume. “Under the policies of Deng Xiaoping's ‘market socialism,’ ” wrote Russell Belk and Nan Zhou, researchers at the University of Utah, in 1987, “consumers are being allowed as well as encouraged to want things that would have been totally unthinkable at the time of Mao Zedong's death a decade ago.”16 With nearly 1 billion people suddenly allowed to consume more than necessities, China became an irresistible market for any manufacturer.
Coca-Cola was one of the first to reenter that market after being banished from the Middle Kingdom for thirty years. Coke's success was great for the company, but even greater for the world's relationship with China. If the Opium Wars had the effect of making the Chinese realize the superiority of Western technology, the battle to reintroduce Coke had the effect of addicting the Chinese to Western consumer goods. The many twists and turns of Coke's reentry also forced changes in government regulations, created new business models for China, and pioneered direct foreign investment. Most important, it won an ideological battle by convincing the Communist leaders that consuming Western goods was neither capitalist nor an act of treason.
China's recent growth has been the result of a series of policies that have been generally lumped together as reform and opening up. If the stories of the peasants in Xiaogang Village and the Fool's Sunflower Seeds exemplify the domestic reforms, the return of Coca-Cola illustrates China opening up to the outside world.
Coca-Cola had nurtured dreams of returning to China ever since 1949, when it was ousted as the Communists took control of the country. In 1972, it set up an office in Beijing, shortly after the PRC replaced Taiwan as the sovereign country in the United Nations. In 1976, it approached the Chinese Liaison Office in the United States to express its intention to export products and establish bottling plants in China. Tong Zhiguang, then secretary of commerce in the Liaison Office and later vice minister of the Chinese Ministry of Foreign Trade, met with the Coca-Cola team but told them that China was not ready. He later explained why to the author of Thirty Years of Battle: Personal Experiences with the Four Great Debates of Reform and Opening-up: “Chinese born after the founding of New China have only seen Coca-Cola in movies, and the Coca-Cola in movies have always been associated with American soldiers. After the Korean War, Coca-Cola meant far more than a drink. China could not accept Coca-Cola because it represented the Western lifestyle.”17
Coca-Cola's prospects began to look better after the death of Mao in 1976. A year later, Tong returned to China to work for the state-owned China National Cereals, Oils, and Foodstuffs Import and Export (COFCO), the government's exclusive importer and exporter for the entire food industry. A Coca-Cola executive invited Tong to another meeting in Beijing and told him that their primary target consumers in China were not the Chinese but foreign tourists. Furthermore, the company had no relationship with American soldiers, the executive said. It was only a business that made money by selling sweetened carbonated water. Put simply, Coca-Cola wanted to be wherever there was a desire for its product.18
Tong seemed to have been convinced. He brought the issue to his company, which then sought permission from the central government to start talks with Coca-Cola. In 1978, COFCO, holding a hand-written permission slip from Vice Premier Li Xiannian, who later became China's president, began substantive negotiations with Coca-Cola at the Beijing Hotel, where another meeting, at a much higher level, was taking place on the same floor at the same time. President Jimmy Carter's diplomats were talking with the Chinese about normalizing the US-China relationship. On December 13, 1978, Coca-Cola and COFCO signed their agreement: Coca-Cola would set up bottling plants and sell its products in major Chinese cities and tourist areas. Until the plants were built, Coca-Cola would ship products to China. Days later, the US and Chinese governments released a joint communiqué to normalize their diplomatic relations.
The first three thousand bottles of Coke arrived in Beijing from Hong Kong in 1979. Foreign media gave the auspicious event almost hour-by-hour coverage. Coca-Cola had become the first foreign company to sell in Communist China.
But the construction of the first bottling plant didn't go as smoothly as the first shipment. Even selecting a location proved a challenge. Coca-Cola initially wanted to build in Shanghai, where it had its first plant in 1927. But Shanghai rejected the offer vehemently, condemning the acceptance of Coca-Cola as a national betrayal by which China would enslave itself to foreigners, import the American lifestyle, and damage national industries. The first plant ended up in a Beijing factory that prepared Peking duck. And with that compromise, Coca-Cola became the first foreign enterprise to run a factory in China since 1949.
After spending nearly $1 million, Coca-Cola saw its first plant go into production in 1981. “An old comrade in the party's leadership raised another round of concerns,” wrote Ma Licheng in his book Thirty Years of Battle. “Cannot Chinese drinks meet the needs of the people or foreigners? Must we drink Coca-Cola? This is a blatant act of treason.”19 The “old comrade” demanded an explanation from COFCO, which responded by saying that Coca-Cola products had Chinese ingredients and the distribution of products would be limited.
But it wasn't.
In 1982, Coca began to promote its products in mainstream markets in Beijing. In an effort to change the tastes of the Chinese, who were used to tea and thought Coke tasted like cough medicine, Coca-Cola mounted a campaign that gave out free balloons and chopsticks. Attracted by the giveaways, Chinese customers responded with great enthusiasm. But the promotion backfired when Chinese media launched another round of criticism against Coca-Cola. Beijing Daily sent an internal communication to the Politburo Standing Committee of the Chinese Communist Party accusing COFCO of wasting precious foreign currency. Chen Yun, one of the most influential figures in the Politburo, decreed that “not a single bottle of Coke should be sold to Chinese.” And overnight, all Coca-Cola products disappeared from shops serving domestic customers. It eventually took Zhao Ziyang, then premier of China and later secretary general of the Communist Party, to lift the injunction and allow Coke to be sold to the Chinese again.
Despite the challenges, Coca-Cola succeeded in the end. China has become Coca-Cola's third largest market in the world, after the United States and Mexico. It has invested over $5 billion in China. More important, Coca-Cola has blazed a trail for other foreign companies—Pepsi, KFC, McDonald's, Coors, Budweiser, IBM, Apple, Dell, Procter & Gamble, Walmart, Sheraton, Hilton, Volkswagen, Ford, General Motors, Boeing, and Airbus. China joined the World Trade Organization (WTO) in 2001, opening its vast market to virtually every business.
By opening its market to foreign businesses, China brought in capital, technology, and talent from the West. Through joint ventures and acquisitions, Western businesses helped transform some of the least productive state-owned companies and private enterprises. Western companies also provided opportunities for Chinese businesses to be part of the global supply chain and thus gain access to the global market. As a result, hundreds of millions of jobs were created. These jobs made it possible for hundreds of millions of peasants to move into factories, restaurants, and shops, alleviating China's population pressure and transforming its vast population from a liability into an asset. These new jobs generated higher income for hundreds of millions of people, increasing their purchasing capacity and enlarging their appetite. Bicycles, wristwatches, and manual sewing machines were the “big three” items in the 1970s, but today the Chinese have become consumers of houses, cars, vacations abroad, French wine, and American universities.
The story of Coca-Cola's return to China is yet another example reminding us that China's economic growth has not been the result of deliberate planning by an authority figure with great foresight. Rather it has been the result of the government's adapting to the demand of the market and people by retreating from planning and regulating. After decades of isolation from the outside world, the Chinese government gradually opened up and allowed foreign business to access its market, resources, and labor force. It has been this opening up, coupled with the autonomy now granted to China's people, that has generated the miraculous growth of the past three decades.
China's economic growth created enough wealth for the government to invest in awe-inspiring skyscrapers, space programs, and infrastructure; advance military technologies; purchase properties and natural resources overseas; and put up spectacular shows such as the 2008 Olympics Games in Beijing and the 2010 World Expo in Shanghai. As a result, the world is experiencing another wave of Sinomania and Sinophobia, four hundred years after the last one.
“China is in big trouble,” wrote the Nobel laureate economist Paul Krugman in a July 18, 2013, op-ed piece in the New York Times.20 Krugman believes that China's “whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits,” calling the “China model” into question. “You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be.”
Krugman is not the only one to begin questioning the China model. After China's economic growth rate slowed, for the first time in three decades, to 7.5 percent in 2012, Michael Schuman wrote in Time, “The recent slowdown is not a temporary cyclical blip or solely the knockoff effect of the tepid global recovery. China's growth model is broken and can't be so easily fixed.”21
Some think this is just a temporary slowdown and the Chinese economy will continue to grow. Stephen Leeb, author of Red Alert: How China's Growing Prosperity Threatens the American Way of Life, believes Paul Krugman is wrong in his prediction about China in the same way he was wrong about Singapore before. In a July 27, 2013, Forbes blog post, Leeb pointed out that Krugman predicted the end of rapid growth in Singapore and other Asian economies such as South Korea, Taiwan, and Hong Kong. “Of course, things did not work out that way,” wrote Leeb. “Singapore and the other Asian nations have since grown voluminously.” Leeb thinks “what Krugman and many others missed was the foundation for much higher productivity, and indeed Singapore has since proven second to none in leveraging the advantages of modern technology.” He argues that today's China, like Singapore twenty years ago, “houses many productivity drivers.” One of them is urbanization, which “promises their populace greater education” and “should also strongly drive up productivity and efficiency, as will the vast majority of Chinese infrastructure spending.”22
The Chinese government showed its appreciation for Leeb's message by placing a Chinese version of the blog in a prominent place on its state-run Xinhua news agency's home page. In an effort to instill confidence in its people, the Chinese government acknowledged the slowdown but promoted it as a deliberate action. “The slowdown is natural,” announced Xinhua, in response to a report of slow growth for seven consecutive quarters since 2012, reported by the Chinese Statistics Bureau in July 2013.23 “In fact the slowdown is an intentional policy choice of the Chinese government,” continued Xinhua. “The policy makers are keenly aware that only when freed from the psychological shackles of ‘GDP only’ and focusing on structural adjustment and further reforms will the Chinese economy be able to move to a higher level.” “No one believes that the Chinese economy will have a hard landing,” said Chinese Minister of Finance Lou Jiwei in an interview with Xinhua in July 2013.24
“The statistics show that the growth rate of Chinese economy is gently slowing down, at 7.9% at the end of last year, 7.7% in the first quarter of this year, and 7.5% in the second quarter,” Xinhua declared in another article the same month. “This means the slowdown of the Chinese economy is intentional, gradual, steady, and anticipated.”25
Whether it is intentional or inevitable, it has happened. The Chinese economy has slowed down. This slowdown, however interpreted, indicates the end of an era for China. The Chinese leadership installed in March 2013 has decided to work on an “upgraded model” instead of fixing the old one. Premier Li Keqiang has made it clear that the government would not provide short-term stimulus to avert the slowdown. Instead, China has adopted a series of policies that have become known as Likonomics, a portmanteau of Chinese premier Li Keqiang's name and “economics.” (The construction parallels “Reaganomics,” coined to refer to the economic policies of President Ronald Reagan.) Likonomics aims to bring more economic structural reforms, reducing governmental interference and increasing urbanization.26
The Chinese government's active pursuit of an upgraded model declares the current inadequacy of the old model that fueled China's growth and was admired by so many outsiders. While the old model has indeed brought China thirty years of high-speed growth, it has reached its limit and must be replaced. “If China's economy can be said to have gone through the ‘Bronze Age’ and ‘Silver Age’ over the last thirty some years,” noted a widely circulated article in the state-run Shanghai Securities News in July 2013, “today's new leadership is working hard to create an upgraded model to usher in a brand new ‘Golden Age’ driven by innovation.”27
Innovation is what's missing from the old model. China's economic rebirth was the result of the same scenario that made China the number one empire before the Industrial Revolution: a large population left alone by an autocratic government. China grew fast by offering the world the least expensive and most compliant and motivated workforce. But now the population is shrinking and labor costs are on the rise. Population dividends are drying up. Low-level jobs that once enriched China are leaving for countries with even less expensive labor, such as Vietnam. It is thus no surprise that China's new leadership has decided to pursue an innovation-driven economic model.
Zhen Haixiong, deputy chief editor of Xinhua, summarized China's urgent need for moving toward an economy driven by innovation in the July 29, 2013, issue of Outlook Weekly, the agency's official news magazine:
After over thirty years of rapid development, our nation has made enviable progress and certainly become the world's second largest economy. In the meantime, a number of problems have become increasingly prominent and unavoidable: unbalanced structure, low productivity and efficiency, rising labor costs, limited energy and resources, and constraints of the environment. These problems suggest that the traditional model of development cannot continue. The decisive battle for China's near and long term development is to focus our major efforts on scientific and technological innovations and realize the innovation-driven development strategy.28
But innovation does not come easily. It does not come simply as a result of economic policies or the desires of a government. It comes from creative individuals. Can China's education produce such individuals?