The Rise and Fall of Rural Entrepreneurship in China

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This was originally published here, on Brown EP. Written by Lily Hoffman.

China’s swift recovery from the 2008 recession underscored the nation’s emerging role as a major exporter in the global economy. However, by the spring of 2009, demand for Chinese goods from the global North, mainly the United States, had plummeted, which in turn revealed China’s economic dependence on importing countries. This imbalance between Chinese exportation and American importation arose in the 1980s, when China underwent agricultural and fiscal decentralization and the United States faced soaring deficits from tax cuts and the costs of the Cold War. With savings and a significant trade surplus, the Central Bank of China began to purchase U.S. Treasury bonds, and thus launched its role as America’s main creditor. The following is a general overview of the current economic situation: The Chinese government artificially weakens its currency by printing more yuan to buy US dollars. With this money, China then purchases U.S. treasury bonds, which spikes the demand for bonds and therefore increases bond prices. As bond values rise, interest decreases, which reduces the cost of borrowing for the United States.

The absence of Chinese domestic consumption demands its mammoth exportation. As a result, China today faces modifying domestic policy in order to spur rural demand or, at the chagrin of the United States, foster foreign direct investment in the global south. In the 1980s and early 1990s, Chinese private entrepreneurs confronted substantial legal restriction, such as fines, taxes, and risks of expropriation for expanding a firm past seven employees, yet the private economy managed to expand. Informal group rules, including included reciprocating individual success and self-regulating loans from friends and family, established a partial legal system of entrepreneurship. The most distinct instance of an endogenous market shaping the official rules of the national economy is the decollectivation of agricultural land. When the Anhui Province divided its land to be cultivated by individual households in order to increase its productivity, other communities began to mimic this structure. When efficiency in these select areas skyrocketed, the massive influx of food productions prodded the central state to decollectivize land in 1980. Following land decollectivation, Deng Xiapong implemented a series of economic policies that moderated central planning and thus promoted individual consumption.

The first entrepreneurs who began to experiment with this evolving “free market” were rural entrepreneurs, those with little social responsibility: “private enterprise, starting with a small marginalized sector of entrepreneurs who initially decoupled from socialist production to start illegal to semilegal business, eventually developed into an irrepressible economic force.”[1] During this transitional era of increasingly liberal policy, the “pioneers of private enterprise” in China’s countryside began to respond to an emerging market demand in light crafts, including kitchenware and textiles.[2] The CCP even encouraged individual industrialists. At the 1983 conference for collective and private sectors, for example, Hu Yaobang, a senior official in the CCP, declared that the fiscal “contributions” of private entrepreneurs were “glorious” and sought to eliminate the suspicion towards the private sector.[3] Though the 1990s gave rise to more radical reform, the 1980s gave birth to the rural entrepreneur: a producer and a consumer.

By the mid-1980s, rapid industrialization in Chinese port cities due to foreign investment mirrored its internal commercial growth. Xiaoping implemented the Open Door Policy in 1978, which created special economic development zones along the coast of China. The aim of these SEZs was to liberalize the market in order to attract foreign investment. Deng gradually expanded the reach of this policy after its economic success: in 1980 the first four special economic zones (SEZs) were established; in 1992 there were sixty SEZs.[4] China initially sought to emulate Japan by specializing in the production of high-end technology products; however, the enormous cheap labor source in China quickly shifted these SEZs to low-cost manufacturing economies. Thus began China’s role as an exporter.

The SEZs marked a switch from a budding rural, consumer driven economy to a nation engulfed by a massive inflow of foreign capital. In her book, Contagious Capitalism: Globalization and the Politics of Labor in China, Mary Gallagher contends that the eradication of the rustic capitalist was deliberate, a result of direct government policy. After three decades, the result of this policy is evident in China’s full integration into the global economy. China’s East Asian counterparts, Korea and Taiwan, which are both export-based economies, limited foreign investment and encouraged internal growth.[5] As a result, both boast efficient and advanced private sectors. In contrast, China’s persistent backing of foreign investment destroyed its domestic industrialization.

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[1] Ho Fung, The PRC Dilemma, page 36.

[2] Ho Fung, The PRC Dilemma, page 80.

[3] Huang Capitalism with Chinese Characteristics, page 93.

[4] http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/China_SEZ.html

[5] Gallagher, page 24.

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