How the “China Model” lifted 850 million people out of poverty

In 1989 more than 9 out of 10 Chinese were living in extreme poverty (defined by the World Bank as living on less than $1.90 per day).  Today, that proportion has been reduced to about 1 out of 100.  The World Bank has described China’s development during this period as “the fastest sustained expansion by a major economy in history.”

Or, to put it another way:  “In less than forty years, China has quintupled its share of global output, and transformed itself from a poor country and source of cheap toys and textiles to a fierce competitor in high-end manufacturing, advanced technologies, and military might.”  (p. 1 Red Flags)

Near the beginning of this transformation, Chinese leader Deng Xiaoping announced that economic development was aimed in part at providing “four big items… to consumers in the countryside: a bicycle, a sewing machine, a radio and a wristwatch.”  (p. 6) 

Today’s economic goals are a bit more ambitious.  The government plan “Made in China 2025,” includes such goals as leading the world in robotics, information technology, and clean energy within the next five years.  The plan also aims for China to produce 70% of the component parts in its products domestically.  This will reduce imports and also create “self-sufficiency for domestic companies [which] would then enable Chinese companies to compete for a greater foothold in global markets.”

In a TED talk about some of the implications of all this growth, Harvard Professor Graham Allison noted that:  “If you have two dollars a day, most of your [time] is spent trying to find enough food to eat for you and your family, just barely struggling to survive… [But today] from Louis Vuitton stores in Beijing to a buzzing stock exchange in Shanghai, the trappings of capitalism are ubiquitous in China… Former Czech president, Vaclav Havel… put it best:  ‘All this has happened so fast, we haven’t yet had time to be astonished.’”

How did China do it?

Scholars who have studied this success and how it could be applied in other countries call it the “China model.”  While experts have actually proposed a number of different “China models,” all agree that the central feature in China’s success has been the government’s unrelenting focus on the economy, and its willingness to do whatever it takes to raise living standards.  And, oh yeah, the China model also assumes an authoritarian government that can crush all opposition.

As William Overholt put it in his fascinating book China’s Crisis of Success, p. 9:  “The policies required for rapid growth entail enormous social dislocations. And [in democratic countries] political leaders who consider imposing such dislocations reasonably fear for their jobs.”  But strong dictators don’t spend a lot of time worrying about their job security, so they can take whatever steps they deem necessary to grow.

In capitalist economies, companies must make a profit, or they will go out of business.  At least that’s the theory.  (Unless they are like Uber, Lyft, Tesla, Pinterest, Spotify, Zillow, Snapchat, and Pinterest, all companies that are valued at over $1 billion, despite the fact that they have never made any money.  Investors are gambling that the stock prices of these tech giants will not crash the way Napster, Lycos, Kozmo,, and many other companies did in 2001 when the dot com bubble burst.)

In China, a significant portion of the economy is controlled not by private capitalists who are motivated by profit, but rather by “State Owned Enterprises,” companies financed by state-owned banks that do not need to ever make a profit.  Instead, they primarily aim to meet government objectives, such as increasing the Gross Domestic Product (GDP), by any means necessary.

Communist ideological purity is no longer an important goal.  Instead, “socialism with Chinese characteristics,” as the economic system is called, adapts Marxism-Leninism to China’s unique needs, as they exist at a moment in time.  For example, “Deng Xiaoping Theory” guided action in the 1980s when China was a very poor country.  But it has now been replaced by “Xi Jinping Thought” which outlines policies and principles which better fit the needs of a growing economic power.

Near the beginning of China’s transformation, according to Bloomberg News, “many outside the communist country expected that as its economy became more capitalist, its politics also would become more democratic. They didn’t. Instead, the Chinese system, which puts stability and cohesion ahead of individual freedoms, became adept at delivering prosperity, with the Communist Party still firmly in control.”

The geopolitical implications of China’s success are hard to overstate.  A few years ago, a South Sudanese politician named Anthony Kpandu “led a delegation to China. What he saw there blew him away: modern industrial parks, high-speed trains, gleaming infrastructure, dazzling skylines. ‘It was magnificent,’ he enthused. ‘You can’t believe it, but it’s there. I’ve never seen anything like it.’ 

Reactions like this, along with China’s focus on building relationships in the underdeveloped world, contribute to “a growing fear in the West that developing countries are finding the… ‘China model’ more appealing than liberal democracy.”

According to former Wall Street Journal writer Dinny McMahon in his book China’s Great Wall of Debt (p. 52) “The key to China’s success lies in the scale and speed at which it’s been able to build [the] infrastructure” that so impressed Mr. Kpandu.  They built “big shopping malls, huge dams, luxurious mega-hotels in small cities, the world’s greatest railroads” (China’s Crisis of Success p. 62) and more, whether each individual development made sense or not.  When state-owned banks decided whether to finance a new project, they were often less concerned with profits or even repayment than they were in supporting the government’s growth program.

China developed new standards of efficiency during this building boom.  In the United States, if a skyscraper is scheduled to be completed within one year, no one will be very surprised if it actually takes two years or more.  Someone will then be sure to say “Well, Rome wasn’t built in a day.”  But as Graham Allison has noted (Destined for War, p. 13), at the height of China’s building boom “Someone… forgot to tell the Chinese.  By 2005, the country was building the square foot equivalent of today’s Rome every two weeks.

They did this with remarkable construction techniques, like the company named Broad Sustainable Building (BSB) which built a 57-story skyscraper in a little less than three weeks.  A CNN report of this astonishing construction includes a time lapse video showing the building going up.  The article explained that “By preparing more than 2,700 modules in a factory for four months before site work began, BSB says it was able to assemble the structure at the rate of three stories per day — like a giant vertical jigsaw pieced together from a minutely detailed set of instructions.”

Of course, an enormous national program like this building boom has not been without problems.  One is that China’s banks had to borrow money to pay for unprofitable projects, and as a result “China’s debt accumulation could be among the fastest in modern history” (China’s Great Wall of Debt, Kindle loc 107).  China’s national debt now stands at $5.5 trillion, which represents about 48% of its GDP. 

That is indeed an enormous debt problem, but it’s not as bad as ours.  US national debt currently stands at $26.7 trillion and is growing fast.  It is projected to exceed 100% of GDP next year for the first time since World War II.  And the US actually ranks only 8th in the world in the debt to GDP ratio.  Number one is Japan whose debt is 234% of its GDP.  Greece, Portugal, Italy, Bhutan, Cyprus and Belgium also have higher debt to GDP ratios than the US.  Put it all together, and the picture is a world economy built on a foundation of hopes for the future rather than capital.  This is one of the reasons that some economists think a significant portion of the world’s wealth is a house of cards which could come crashing down in the wake of covid, as explained in a recent New York Times article entitled Why the Global Recession Could Last a Long Time.

Another problem which resulted from China’s rapid economic growth is an enormous gap between rich and poor.  850 million people may have increased their income, but a few have become billionaires while most others are struggling to join the middle class.  One would not expect to the rich do better than the poor so openly in a “Communist” country.  That is such an important issue, in China and around the world, that it will be the topic of a separate post in this blog.