How Did China Take Off?

There are two prevailing perspectives on how China took off. One emphasizes the role of globalization—foreign trade and investments and special economic zones; the other emphasizes the role of internal reforms, especially rural reforms. Detailed documentary and quantitative evidence provides strong support for the second hypothesis. To understand how China's economy took off requires an accurate and detailed understanding of its rural development, especially rural industry spearheaded by the rise of township and village enterprises. Many China scholars believe that township and village enterprises have a distinct ownership structure—that they are owned and operated by local governments rather than by private entrepreneurs. I will show that township and village enterprises from the inception have been private and that China undertook significant and meaningful financial liberalization at the very start of reforms. Rural private entrepreneurship and financial reforms correlate strongly with some of China's best-known achievements—poverty reduction, fast GDP growth driven by personal consumption (rather than by corporate investments and government spending), and an initial decline of income inequality. The conventional view of China scholars is right about one point—that today's Chinese financial sector is completely state-controlled. This is because China reversed almost all of its financial liberalization sometime around the early to mid 1990s. This financial reversal, despite its monumental effect on the welfare of hundreds of millions of rural Chinese, is almost completely unknown in the West.