Monday, October 09, 2006
Zhejiang’s rural entrepreneurs are a model for China
By Yasheng Huang
October 1 2006 19:29
During his recent trip to China, Hank Paulson, the US Treasury secretary, made his first stop in Hangzhou, capital of Zhejiang province. This carefully choreographed trip was thought to signal where Mr Paulson thinks the country’s future lies.
This is a long overdue approach. Unlike his predecessors, who liked to tour the skyscrapers in Shanghai, Mr Paulson understands the China miracle – that its impressive development came from the same dynamics that create growth and wealth elsewhere, namely bottom-up entrepreneurship and a market-based financial environment. It is time to get the China story right and understanding the rise of Zhejiang is the way to do it.
In the 1970s, Zhejiang was ranked in the middle of the country in terms of per capita gross domestic product; today it is number four, after Beijing, Tianjin and Shanghai. To some extent, this is an unfair comparison. The three regions above Zhejiang are cities and do not have an agricultural sector. Zhejiang, while heavily industrialised, still has a substantial rural population. In a like-for-like comparison, Zhejiang is the richest province in China.
But even this GDP comparison understates the achievement of Zhejiang because GDP may not reflect accurately the wealth of a country or a region. Many of the economic practices in China, such as forcible demolitions of residential houses to make way for government projects, can temporarily increase GDP growth but have a devastating effect on wealth creation. Because it is more market-driven, Zhejiang has avoided some of the most egregious mistakes of this kind.
Let us look at some other indicators of wealth creation. In 2004, according to data released by the Chinese government, urban residents in Zhejiang earned an interest income that was 4.5 times that of Shanghai and a dividend income that was 5.3 times. Why is there this difference between Zhejiang and Shanghai despite the fact that Shanghai has a higher per capita GDP and many more skyscrapers so admired by foreigners? The answer is that many more people own and operate successful small businesses in Zhejiang. According to the same survey data, Zhejiang has an entrepreneurial population 3.4 times that of Shanghai on a per household basis.
Wealth creation and flourishing creativity best illustrate the contrast between a bottom-up, entrepreneurial, market-oriented model and one based on massive government investment, industrial policy visions of the state and heavily subsidised foreign direct investment. China would be lucky if, as Mr Paulson hopes, the Zhejiang model was adopted by the rest of the country.
The Zhejiang model also provides a way out of two intractable problems facing China – its struggling rural sector and its troubled banking system. Chinese officials often argue that they need foreign management know-how to solve the country’s banking problems. They actually need a trip to Zhejiang. The banks in Zhejiang are the best performing in China. One bank manager told me that his Zhejiang branch made a profit equivalent to the combined profit of all the branches of his bank in China. The reason is neither mysterious nor complicated. Banks in Zhejiang began to lend to private sector companies long before the rest of the country and now Zhejiang has a healthy corporate sector that invests wisely and services its debt.
Many forget that Zhejiang was largely agrarian in the 1970s. Here is the connection between the Zhejiang model and the way to solve China’s rural problems. Chinese peasants are extraordinarily entrepreneurial. Many of the largest businesses in Zhejiang today were founded by rural entrepreneurs in the 1980s. The bastion of Chinese capitalism, Wenzhou in Zhejiang, was a rural and rustic town in the 1980s. No matter how much western economists tout FDI and foreign trade as a way to reduce poverty, the simple fact is that more than 80 per cent of China’s poverty reduction occurred in the first five years of the 1980s when China had no FDI and very little trade.
What mattered was a propitious environment in rural China – not only improving agricultural terms of trade but also deregulation, reducing the role of the state and improving access to finance in rural China.
Nationwide in the 1980s more than 60 per cent of the small-scale urban entrepreneurs came from the countryside. In the 1990s these productive rural policies continued in Zhejiang whereas they were rolled back elsewhere.
Entrepreneurship alone does not lead to value creation; it has to be matched with resources and property rights’ security. Zhejiang has done a better job in matching its entrepreneurship with resources. To move to a Zhejiang model requires a fundamental change in the way the Chinese political elite thinks about the peasantry. The view in the 1990s was that the rural problem was an issue of labour compensation – FDI was needed and massive industrial zones were created to generate wage-earning opportunities. This view is not wrong but excessively narrow.
The more fundamental issue in rural China is that of capital gains. China needs reforms to enable its rural residents to reap the benefits from their entrepreneurial talents and business capabilities. The new leadership since 2003 has moved in this direction and moral support from Mr Paulson can only help.
*The writer teaches at MIT Sloan School of Management and is author of "Capitalism with Chinese Characteristics" ¶ 4:04 AM
October 1 2006 19:29
During his recent trip to China, Hank Paulson, the US Treasury secretary, made his first stop in Hangzhou, capital of Zhejiang province. This carefully choreographed trip was thought to signal where Mr Paulson thinks the country’s future lies.
This is a long overdue approach. Unlike his predecessors, who liked to tour the skyscrapers in Shanghai, Mr Paulson understands the China miracle – that its impressive development came from the same dynamics that create growth and wealth elsewhere, namely bottom-up entrepreneurship and a market-based financial environment. It is time to get the China story right and understanding the rise of Zhejiang is the way to do it.
In the 1970s, Zhejiang was ranked in the middle of the country in terms of per capita gross domestic product; today it is number four, after Beijing, Tianjin and Shanghai. To some extent, this is an unfair comparison. The three regions above Zhejiang are cities and do not have an agricultural sector. Zhejiang, while heavily industrialised, still has a substantial rural population. In a like-for-like comparison, Zhejiang is the richest province in China.
But even this GDP comparison understates the achievement of Zhejiang because GDP may not reflect accurately the wealth of a country or a region. Many of the economic practices in China, such as forcible demolitions of residential houses to make way for government projects, can temporarily increase GDP growth but have a devastating effect on wealth creation. Because it is more market-driven, Zhejiang has avoided some of the most egregious mistakes of this kind.
Let us look at some other indicators of wealth creation. In 2004, according to data released by the Chinese government, urban residents in Zhejiang earned an interest income that was 4.5 times that of Shanghai and a dividend income that was 5.3 times. Why is there this difference between Zhejiang and Shanghai despite the fact that Shanghai has a higher per capita GDP and many more skyscrapers so admired by foreigners? The answer is that many more people own and operate successful small businesses in Zhejiang. According to the same survey data, Zhejiang has an entrepreneurial population 3.4 times that of Shanghai on a per household basis.
Wealth creation and flourishing creativity best illustrate the contrast between a bottom-up, entrepreneurial, market-oriented model and one based on massive government investment, industrial policy visions of the state and heavily subsidised foreign direct investment. China would be lucky if, as Mr Paulson hopes, the Zhejiang model was adopted by the rest of the country.
The Zhejiang model also provides a way out of two intractable problems facing China – its struggling rural sector and its troubled banking system. Chinese officials often argue that they need foreign management know-how to solve the country’s banking problems. They actually need a trip to Zhejiang. The banks in Zhejiang are the best performing in China. One bank manager told me that his Zhejiang branch made a profit equivalent to the combined profit of all the branches of his bank in China. The reason is neither mysterious nor complicated. Banks in Zhejiang began to lend to private sector companies long before the rest of the country and now Zhejiang has a healthy corporate sector that invests wisely and services its debt.
Many forget that Zhejiang was largely agrarian in the 1970s. Here is the connection between the Zhejiang model and the way to solve China’s rural problems. Chinese peasants are extraordinarily entrepreneurial. Many of the largest businesses in Zhejiang today were founded by rural entrepreneurs in the 1980s. The bastion of Chinese capitalism, Wenzhou in Zhejiang, was a rural and rustic town in the 1980s. No matter how much western economists tout FDI and foreign trade as a way to reduce poverty, the simple fact is that more than 80 per cent of China’s poverty reduction occurred in the first five years of the 1980s when China had no FDI and very little trade.
What mattered was a propitious environment in rural China – not only improving agricultural terms of trade but also deregulation, reducing the role of the state and improving access to finance in rural China.
Nationwide in the 1980s more than 60 per cent of the small-scale urban entrepreneurs came from the countryside. In the 1990s these productive rural policies continued in Zhejiang whereas they were rolled back elsewhere.
Entrepreneurship alone does not lead to value creation; it has to be matched with resources and property rights’ security. Zhejiang has done a better job in matching its entrepreneurship with resources. To move to a Zhejiang model requires a fundamental change in the way the Chinese political elite thinks about the peasantry. The view in the 1990s was that the rural problem was an issue of labour compensation – FDI was needed and massive industrial zones were created to generate wage-earning opportunities. This view is not wrong but excessively narrow.
The more fundamental issue in rural China is that of capital gains. China needs reforms to enable its rural residents to reap the benefits from their entrepreneurial talents and business capabilities. The new leadership since 2003 has moved in this direction and moral support from Mr Paulson can only help.
*The writer teaches at MIT Sloan School of Management and is author of "Capitalism with Chinese Characteristics" ¶ 4:04 AM
