China's Economic Miracle

From Mao's Famine to Modern Mastery – Navigating the Terrain of China's Economic Evolution

In the vast world of national economic successes, none shine as brightly as the tale of China's economic miracle. Chinese example is a story marked by seismic shifts in culture, bold policy reforms, and the resilience of a people determined to reshape their destiny. From the abyss of Mao Zedong's disastrous Great Leap Forward, a phoenix emerged, propelling China into an era of unprecedented growth.

Beyond the statistics and economic indicators lies a profound transformation, a story that transcends borders and challenges conventional wisdom. From the communal struggles of the Great Leap Forward to the entrepreneurial spirit unleashed by agricultural reforms, let us uncover the intricate layers of China's economic resurgence.

Photo by Li Yang on Unsplash

The example of China’s growth is the greatest economic story in the history of the world. Today, China is unrecognizable from its former version. If one wishes to take a look into the future, to understand how our cities will look like, it is enough to visit one of the economic centers in China. From its roads and omnipotent skyscrapers to its advanced technologies, China has it all. Currently, China is the second biggest economy in the world, standing proudly right behind the United States in terms of GDP, and with the estimates that it will overtake the US economy completely by 2030.

However, China’s road to the stars was paved with hardships and challenges, making its story even more extraordinary. So, how did China get to where it is now? After the so-called "century of humiliation", which is used to describe the period in Chinese history beginning with the First Opium War (1839–1842), and ending in 1945, China underwent incredible economic transformation in the following decades. But before it could ever go through such transformation, it had to pass through hell and so it did.

China’s Darkest Hour

This hell was called “The Great Leap Forward” and it marked Mao Zedong’s dream of raising agricultural and industrial productivity to unprecedented levels in China. The year was 1957 and Mao Zedong set forth a goal for farmers, who constituted the majority of the Chinese population, to produce such high levels of grain, that they would not only be able to feed themselves but also the exponentially growing number of the country’s industrial workers, who would ensure that China catches up with the rest of the world. To say that the plan was ambitious, would be an understatement.

Mao proclaimed out loud in front of the whole world, that China would produce more steel than Britain within 15 years. He later said that China would overtake Britain in terms of steel production in just 1 year later. To achieve this, state spending on industrialization rose very rapidly, while state spending on agriculture fell. Even farmers were asked to produce steel in the backyards of their farms. The so-called backyard furnaces were meant to augment the need for greater steel production throughout China.

One big paradox has emerged as a result of this policy. Official reports claimed an increase in grain output, but the reality on the ground witnessed a decline. The reports, painting a picture of a surplus, fueled record-breaking grain exports for the country. As a result of this, there was a stronger push from Mao's administration to facilitate exports for financing additional industrialization. What was the outcome? There was an actual under-production of grain, coupled with massive grain export. To make things worse, communal farm kitchens were ordered to give grain away for free to anyone who wanted it. By 1959, the supplies of grain were completely gone and China had found itself amid a ravaging famine. This has led to starvation and death of millions of Chinese. It is unclear just how many people have died because of famine, but it is estimated that the number is somewhere between 15 and 40 million people, making this event the greatest economic disaster in all of world history.

The Economic Rebirth

It was only after Mao died in 1976, that China witnessed the rebirth of its economy, following a period of total confusion. It was in this historically short period, that the leaders of regional governments were bold enough to try and implement new policies, aimed at fostering economic growth.

It was through small agricultural gains that China was able to start growing economically. Central to this success was the implementation of agricultural reforms, that gave production rights to farmers, holding them accountable for a quota of production and allowing them to keep what remained. This idea was formalized into a general scheme known as the Household Responsibility System (HRS), forming a nascent free market in additional grains and allowing farmers to meet the market with other non-grain crops in high demand. This has finally incentivized farmers to increase their production and to start behaving entrepreneurially. As a result of this policy, agricultural productivity rose to about 3 times the growth of the previous 5 years of that system.

Similar to this, there was a form of residual control, we’ll call it, of control of assets and entrepreneurial freedom given to something called the Township and Village Enterprises, or TVE. Essentially a township and village enterprise was a local production facility for a wide variety of products and services. TVEs sold basic clothing, basic consumer goods, and all the things you might normally look for in local shops. Rather than producing exclusively for the state, TVEs were allowed to operate with some of the incentives of the market economy, without private ownership. Additionally, they have not only used their cheap local labor, but also the increased savings from the farmers that were now productive, and imported it back into further production and further localization. The profits from TVEs went to local officials instead of officials in Beijing and other regional centers.

So, what was the driving force behind this economic rebirth? Chinese people are perceived today as hard-working and work-oriented individuals, and the reason for this lies in the cultural heritage of Confucianism. In essence, Confucianism is an ancient Chinese belief system, which focuses on the importance of personal ethics and morality. Central to this belief system is the Confucian Work Ethic, which consists of hard work, but also encompasses other values including loyalty to the organization, thrift, dedication, social harmony, a love of education and wisdom, and a concern for social propriety. This is all part of the success formula that we call today China.

An additional factor, which is crucial even today for China’s success is power. In both theory and practice, power is necessary to create order, and order is required to create value. The state also needs the power to enforce property rights or the contractual arrangements that mimic them. Without that power, opportunism is too great, and the talents and energies of the masses are used in wasteful protective activities.

Where Does China Stand Now?

In 1978, China implemented capitalist reforms, where it gradually transitioned away from the so-called state-owned-enterprises. In recent years, the country has been in transition from predominately an industrial to a consumer-based spending economy. Over the years, initial reforms focused on agriculture but soon spread to the services and light manufacturing sectors. Today, major sectors and industries driving the economic growth of China include the services sector, agriculture, manufacturing, and technology.

In 2020, the service sector in China represented 54% of economic output, compared to 44% in 20120. A healthy services sector is a sign of healthy domestic consumption, which increases the wealth of individuals. Manufacturing and industrial sector amounts amounted to 38% in 2020, which has declined from 45.5% of GDP in 2010. Chinese goods within the manufacturing and industry sector include iron, steel, aluminum, textiles, cement, chemicals, toys, electronics, rail cars, ships, aircraft, and many other products.

China exports many goods globally, including to the U.S. The top exported goods for China at the end of 2020 were machinery, electrical equipment—such as personal computers—furniture, bedding, lighting, and plastics. China has a thriving automobile manufacturing industry and is the world's largest car manufacturer. As of September 2021, China produced more than 12.8 million vehicles versus 8.5 million produced in the U.S. year to date.

Agriculture is the third-largest sector in China, representing 7.5% of the country's total output as measured by GDP as of the end of 2020. The share of GDP is down from 8.94% in 2013. China produces many agricultural goods, including corn, rice, wheat, soy, cotton, peanuts, and apples. China also produces 69% of the world's nectarines and peaches, while it's the leader in peanut, rice, and wheat production as of 2020.

These trends are likely to continue, as China moves to the status of a fully developed country and is deemed to likely overtake the US to become the world’s biggest economy.