China’s change

Date posted: June 12, 2013

One of the most dramatic economic turnarounds of the last 50 years and maybe of all time occurred with China. From an impoverished country with little impact on the world economy, China has dramatically increased its standard of living and is now a major player in international commerce. How do they do it? N.C. State University economist Mike Walden responds.

“Well, there’s a new book that’s been written by a Nobel Prize winning economist, Ronald Coats, who actually documents this. China basically did three things. And this all happened in the late 1970s, 1980s, and ‘90s.

First of all, they created incentives for workers and entrepreneurs. They essentially said, ‘Hey, if you’re a business and you find a market and you can sell things and make a profit, you get to keep those profits.’

And obviously that motivated a lot of people to really start businesses and expand. Secondly, China moved away from the state controlling prices to letting the marketplace — letting supply and demand — set prices. And what this did, many economists would argue, was that it encouraged innovation. It also encouraged frugality, and it made sure that inputs were used in a most efficient way.

And then lastly China moved away from state run monopolies. Really, prior to these changes, the state set up companies, and the companies are the ones that made things and sold things. They moved away from that model to a model like we have, where, really, businesses run by small firms, medium size firms, they’re out there competing. They’re out there looking for customers. Now politically of course China is not in a competitive situation, but economically China really now is a capitalist country.”

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