Global and Domestic Imbalances: Why Rural China is the Key

author: Yasheng Huang, Sloan School of Management, Massachusetts Institute of Technology, MIT
published: Aug. 12, 2010,   recorded: June 2009,   views: 462
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Contrary to popular thinking, China owes its astonishing economic expansion not to far-sighted government policy but to hundreds of millions of entrepreneurial peasants. Yasheng Huang’s research reveals not only how small-scale rural businesses created China’s miracle but how that nation’s recovery from the global recession and righting the massive East-West trade imbalance depend on this same under-acknowledged sector.

Huang begins with questions, including why China produces so much relative to its own consumption. He shows graphs dramatically illustrating the rise of China’s GDP with a concurrent drop in domestic consumption. A nation that doesn’t consume what it produces must export. Huang has pounded away at the question of this drop in consumption. He rejects explanations pointing at a Chinese bent for thrift, and believes instead that households have become impoverished in the midst of the nation’s decades-long boom.

Huang’s research analyzed previously unexamined data to resolve this paradox and produce a novel thesis, detailing the rise and fall of rural entrepreneurship in China. In the 1980s, enabled by government liberalization, tens of millions of peasants began home-grown private businesses, from small-scale manufacturing to service delivery. They supplemented meager agricultural incomes, generating profits that they used to better their standards of living. The Chinese economy boomed. But in the 1990s, a new regime took over, taxing the grass-roots entrepreneurs and pouring money into infrastructure and state-run enterprises. Politicians imposed steep fees on education and healthcare, soaking the newly minted rural capitalists. GDP rose, but household incomes dipped, as hundreds of millions pinched pennies instead of generating profits. The Chinese made lots of things that they couldn’t buy. A global trade imbalance ballooned.

The recession has struck the rural Chinese especially painfully (they make up 70% of the nation’s population). More than 100 million who had migrated to cities for work have lost their jobs with the shutdown of factories, and there has been a “virtual collapse in non-farm business income growth,” says Huang. New Chinese policies have begun to attend to rural issues, such as abolishing rural taxation, reducing fees, and spurring microfinance. This should help increase household income. But in key areas like land reform, there’s only been talk. Huang believes a Chinese stimulus package aimed at reinvigorating the building boom won’t do nearly as much good for the economy as liberalization of social policies and attempts to unleash once again the productive energies of the rural poor.

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