China is Big Reason Why Global Inequality Narrowed So Fast: Cato Analyst

Posted by on Jan 10, 2015 in Blog | 0 comments

In his Washington Post piece below (excerpted), Mr Marian Tupy, senior analyst at the Cato Institute, hits the nail on the head when he says China is the big reason why the wealth gap between developed and developing countries has narrowed significantly over the past half century.  In spite of Mao’s disastrous campaigns, one after the other for two decades until his death in 1976, his successor Deng Xiaoping, the ultimate pragmatist, dared to break the shackles of the planned economy to save China from economic collapse.

At the tail end of the Cultural Revolution in the mid-1970s, the private economy was still forbidden and everything had to go through the state which dictated paltry rations and industrial coupons for basic living.   People in the cities required cereal coupons to eat – about 33 to 40 catties (36.3 to 44 pounds) of coarse steamed bread or rice a month with little meat, eggs, or oil.  But, there was lots of napa cabbage, nothing BUT cabbage in the winter months.  Industrial workers got up to 50 catties of cereals and more meat, albeit fatty and low quality.   Farmers tilled their tiny “free plots” while working for pitifully low paying work points on agricultural communes.

For clothes, cotton coupons were required to purchase cotton fabrics during a time when man-made fabrics were still a rarity.  Families had to queue up to acquire industrial coupons to purchase bicycles, foot-powered sewing machines, radios, watches, and tiny b & w TVs.  Travel was restricted and special permission had to obtained for leaves from state jobs to visit relatives. It wasn’t until the late 1970s early 1980s until people were allowed to purchase private phone lines at great cost.

Deng Xiaoping’s reforms eventually did away with all that planned era baggage.  Especially after joining the WTO in 2001, China’s economy surged ahead and transformed itself on the back of globalized production.  That spelled the beginning of the end of China’s subsistence economy, putting it on course to become the second largest economy in the world.  Within another decade, it will inevitably be the largest regardless of what the nay-sayers say.

Indeed, the Chinese owe their current prosperity to Deng Xiaoping.

BTW, Mr Tupy mentions China’s 2013 per capita income in exchange rate terms was about US$6,800 but by the measure of purchasing power parity (PPP), it is closer to $10,000.  That’s why, while celebrating China’s remarkable achievements over the last three and one half decades, we should not forget how much farther China needs to go.

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…Consider the spectacular rise of Asia. In 1960, the U.S. was 11 times richer than Asia. Today, America is only 4.8 times richer than Asia.

To understand why, let’s look at China.

Between 1958 and 1961, Mao Zedong attempted to transform China’s largely agricultural economy into an industrial one through the “Great Leap Forward.” His stated goal was to overtake the U.K.’s industrial production in 15 years. Industrialization, which included building of factories at home as well as large-scale purchases of machinery abroad, was to be paid for by food produced on collective farms.

But the collectivization of agriculture resulted in famine that killed between 18 and 45 million people. Industrial initiatives, such as Mao’s attempt to massively increase production of steel, were equally disastrous. People burned their houses to stoke the fires of the steel mills and melted cooking wares to fulfill the steel production quotas. The result was destruction, rather than creation of wealth.

Deng Xiaoping, Mao’s successor, partially privatized the farmland and allowed farmers to sell their produce. Trade liberalization ensured that Chinese industrial output would no longer be dictated by production quotas, but by the demands of the international economy. But following liberalization in 1978, China’s GDP per capita has increased 12.5 fold, rising from $545 in 1980 to $6,807 in 2013. Over the same time period, the Chinese poverty rate fell from 84 percent to 10 percent.

What is true of China is also true in much of the developing world. As Laurence Chandy and Geoffrey Gertz of the Brookings Institution wrote in 2011, “poverty reduction of this magnitude is unparalleled in history: never before have so many people been lifted out of poverty over such a brief period of time.”

Developing countries have made strides in other areas too. Take life expectancy. Between 1960 and 2010, global life expectancy increased from 53 years to 70. In the U.S. over the same period it rose from 70 to 78. Similar stories can be told about child and maternal mortality, treatment of communicable diseases and the spread of technology.

Many Americans point to globalization as a bogeyman, robbing our country of good jobs and resources. But really, the phenomenon has ushered in a period of unprecedented prosperity in many poor countries. Even as we struggle with economic problems at home let us remember the global — and largely positive — perspective on the state of the world.

– Washington Post