Lessons from Chinese Development?

What, if any, lessons does the example of Chinese development have for Africa? I recently attended a panel discussion on development research with reference to Africa, which came at the end of a World Bank workshop on growth and job creation in Africa (PREM), held at St. Catherine's College in Oxford. This workshop also marked the start of the Oxford Centre for the Study of African Economies' (CSAE) annual conference, which invites development economists primarily from African countries to present their work and offers them with a forum for exchange.

During the panel discussion there was mention of the "lessons from China's development for Africa" and I want to outline and assess the arguments.

aboIt was suggested that China's stellar rise at the end of the 70s, and throughout the 80s up to today was the outcome of, or at least considerably influenced, by three factors/events:

1. the increase in agricultural productivity, which came as 'the' first significant reform to the economic system in China;
2. the creation of non-farm employment opportunities in rural areas;
3. the opening up and rapid growth in the coastal region, coming some years after the first two events, and in part driven by the controlled migration of labour from inland ('central') provinces.

Given the complexity of the actual historical events, mentioning just three points certainly over-simplifies the whole affair. Still, I think not many people would argue with the central significance of these events for China's development.

The point I'd like to make in the following is that it is (for want of a better word) dangerous to draw conclusions from the Chinese experience for development in a typical African country - I will take Malawi as an example, as it is landlocked and resource-poor, although I don't think the comments would be much different if I had taken Ghana or Tanzania...

First, some more comments on the three factors/events:
Re (1): Agricultural productivity indeed rose significantly following the emergence of the 'household-responsibility' system in rural areas. As Justin Lin (1987) points out, this system was first introduced by a number of brave farmers in Anhui province, who took matters into their own hand, secretly privatising the land they were working on and detaching themselves from the production plan they were subject to. This reform, which was later given the blessing by the local authorities and eventually was rolled out across China, led to a massive productivity boost in agriculture and led to the emergence of rural markets.

So much for the event. But what was the situation prior to this reform?
Firstly, China's economic was de-facto operating in autarky. Secondly, agriculture, like the rest of the economy, was collectivised; productivity records were dire, and a lot of surplus labour was sitting around doing nothing. My first point is related to the system: a major share of the boost in agricultural productivity in China post-1978 was due to the inefficiency of the system that prevailed at the time. Without institutional constraints and given the right incentives, Chinese farmers destroyed the X-inefficiency which existed in the sector. My second point is related to price-controls: the smart thing about the household-responsibility system was that the central production 'plan' continued to exist (including price-controls) to satisfy minimum food requirements, but that the farmers could sell their surplus over and above the plan on the open market (shuangguizhi - dual track system with market prices prevailing on the margin). The price-controls safeguarded the farmers from excessive risks of going it alone in the market. Thirdly, as I pointed out, as China was a de-facto closed economy without any imports able to undercut the local produce prices, the system of price-controls could be maintained.

Re (2): The rural employment opportunities emerged in the form of Town and Village Enterprises (TVEs), which as one member of the panel pointed out were ingenious organisations in that they were collectively-owned at the local government level (we're talking counties or below), but run as profit-making enterprises, i.e. the incentive structures were just right. These enterprises could employ all those surplus workers in the agricultural sector, while producing the goods that were demanded locally (and in urban areas) in the aftermath of the agricultural productivity boom. It's simple: the peasants could earn more from their crop, so that their demand for other goods increased, and this demand was satisfied by the rural enterprises (recall, that there was no or hardly any international trade going on). The TVEs' management knew exactly what goods were demanded at the local level, they had access to credit whilst not being constrained by any production plan, and since they initially had no competition it didn't really matter that the goods produced were of relatively poor quality - they were available, and that's better than nothing. At the same time, the rural-based TVEs faced comparatively lower taxation, while urban enterprises remained state-owned (SOEs), continuing to operate within the production 'plan', so that TVEs, which were run as profit-maximising firms, could dig away at the former's monopoly-rents in the urban areas.

So, a number of factors were crucial for this explosion in profitable rural enterprises (Naughton, 2007 talks of the "Golden Age of TVE development" between 1978 and the mid-1990s: surplus labour, rising local demand for goods, limited competition from the urban enterprises or outside/imports, preferable taxation.*

Re (3): After a number of years, following a couple of experiments, by the early nineties China's economic development was safely under way. The unrest of 1989 caused some uncertainty, but at the latest following the Southern Trip by Deng Xiaoping in 1992 China's seaboard provinces were basically given the go-ahead to the outward-oriented industrialisation drive that has changed the country and has given it the 'workshop of the world' title. There were Special Economic Zones, followed by open ports, where domestic firms located and produced goods for export, and where foreign firms were invited to come and enjoy the tax-incentives and other benefits on offer. A lot of the goods produced here were (and to an extent still are) labour-intensive manufactures, which are assembled/stitched together by locals and more recently an estimated 150m migrant workers (young, and contrary to the developments in some developing countries both male and female) from central provinces, who spend a couple of years in the coastal boom areas and then return to their home counties to settle down. While the coastal areas and their manufacturing and services sectors have boomed over the last 10 to 15 years, the agricultural sector has not done so well. Equally, the TVEs, which can justly be regarded as the major drivers of the early development, have lost their force: many of them closed down or were turned into private enterprises. Much of the development in urban/sea-board areas has been linked to privatisation and the competitive market environment that evolved over time (plus of course export-production, FDI, etc.), but the foundations for this second phase were built in the first, rural development phase.

So what can Malawi learn from China's development? I would argue not very much, since the pre-conditions, as well as the environmental factors prevalent in China at the time are very different from those Malawi faces today. In order to illustrate this point, I would argue that Malawi could learn from China...

(a) if it had a grossly inefficient collective agricultural sector where incentives were so distorted that it eventually would lead the farmers to 'rebel' against the prevailing system;
(b) if the government were to agree to introduce price controls for agricultural goods;
(c) if Malawi were cut off from international trade (especially in interplay with (b));
(d) if the first stage of agricultural productivity increase were so successful that not only could peasant households afford the risk to send one of their members to work in a local factory/workshop, but also that they earned so much from their increased yield that their demand for goods would rise considerably; and if again, (c) there were no international traders that would offer all these goods at a cheaper price;
(e) if this local demand for non-farm products were so great that budding entrepreneurs would pinch themselves at the opportunities provided by an uncontested market with pretty strong demand;
(f) if there were entrepreneurship at the local level which could enter freely into producing goods at a profit without considerable administrative, business-environmental or contractual issues (access to land, buildings, power, water, virtually no taxation);
(g) if once all these things were going really well, after around 5 to 10 years, there would be more labour freed from the land to move across the border to neighbouring Tanzania, which (in a separate exciting development) suddenly exported heaps of labour-intensive manufacturing goods from its efficient ports and which crucially would not mind that all those Malawians suddenly came over the border and entered wage-employment in the coastal boom-regions (perhaps the South African entrepreneurs could play the equivalent role of the Hong Kong and Taiwanese in China, outsourcing their own manufacturing to Tanzania).

Essentially, I cannot see how Malawi could in any way pursue the same reforms as China, since the institutional, demographic, political and political economy environment between 'China then' and 'Malawi now' are just too different. I therefore believe that trying to draw policy implications from China's development course for African countries is not appropriate. Instead, if one were determined to learn from the Chinese, why not look at development strategies of individual provinces in the interior. Gansu, with its mix of ethnicities, for instance, or Sichuan, until recently (when parts of it was chopped off to create Chongqing municipality) the most populous province, could be argued more convincingly to act as examples for the struggle for development in African countries.

A final point in the China story: the household responsibility reforms was kick-started in Anhui province in 1978. Today, although it has some development cherries of its own (or rather "Cherys" - as one of China's most successful domestic automotive OEMs of that name is based in the province), the province is still rather backward compared with its superstar neighbours Shanghai, Jiangsu and Zhejiang (GDP pc in 2005 was around RMB 8,700, or just over US$1,000. This compares with RMB 51,000, RMB 24,500 and RMB27,700 for the three regions mentioned respectively; in 2005 only 3 out of 31 provinces/municipalities/autonomous regions had lower GDP pc; NBS 2006).

Footnotes

* We're suppressing that probably the level of education was relatively high in China [for its level of development], and that the existing administrative structure, with counties organised around county capitals etc. was conducive to the development of local markets

References

PREM: http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPOVERTY/EXTEMPSHAGRO/0,,contentMDK:21652959~pagePK:210058~piPK:210062~theSitePK:2743783,00.html

Justin Yifu Lin (1987) The Household Responsibility System Reform in China: A Peasant's Institutional Choice
American Journal of Agricultural Economics, Vol. 69, No. 2 (May, 1987), pp. 410-415.

Barry Naughton (2007) The Chinese Economy - Transitions and Growth. Cambridge/Mass. & London: MIT Press.

NBS [National Bureau of Statistics of the PRC] (2006) China Statistical Yearbook 2006, Table 3-9, Gross Regional Product (2005). China Statistics Press.

Posted by Mark Koyama on March 19, 2008 at 02:5