China | David Lampton | Deng Xiaoping | Mao Zedong

China is shaking off the rust from the old Iron Curtain days and moving foward with the world's most ambitious Industrial Revolution-ever.
In the 1970's Merrill Weingrod spent a lot of time in Taiwan. Then the owner of a Massachusetts-based leather-goods company, Weingrod could see that a lot of manufacturing in his industry was moving to lower-cost Asia; to stay competitive, he would trek to Taiwan to forge alliances and visit partner factories. Each time he visited Taipei, the capital, he was struck by the frenzied pace. "You'd get up at five in the morning and go out in the street, and it would be completely full of people running around," says Weingrod, who is now CEO at China Strategies, a consultancy with offices in Providence, Rhode Island, and Shanghai that advises companies looking to do business in China. "It was the most hyperkinetic, frantic, entrepreneurial­-driven place you could imagine." When he would socialize with his Taiwanese counterparts, the same question kept popping up. "If it's this insane in Taiwan with 20 million people, what is going to happen when China opens up?" says Weingrod. "The Taiwanese would just look at you and smile."

Obviously, Weingrod's colleagues in Taiwan - which China still claims as one of its provinces, despite the fact that it has operated autonomously since 1949 - knew something about the economic potential of its mammoth Communist neighbor. But they probably never could have guessed that China would become the economic behemoth it is today. Indeed, since launching major economic reforms in 1978, this country of 1.3 billion people has undergone a dramatic revolution, moving from a centrally planned, largely agrarian economy to one that is largely capitalist, industrialized, and increasingly sophisticated.

And it has happened in the relative blink of the eye. In less than three decades, China has accomplished as much, and in some ways far more, in terms of transforming its rural, agriculturally based economy, than the United States did in twice the time, at least by some estimates. Historical comparisons are tricky, though, particularly considering the times in which each economic revolution took place; the United States was relatively early to industrialize, with industrial progress often coming hand in hand with new inventions in manufacturing, while China's tardiness has allowed it to adopt methods and approaches that had already proved successful.

Not surprisingly, this wholesale transformation has produced profound changes in the lives of the Chinese and, given the country's huge population and economic openness, in people all around the globe as well. Since the beginning of the reforms, Chinese GDP has grown tenfold, averaging about a 10 percent bump each year. And, by official estimates, the number of people in rural poverty has been reduced from 250 million in 1978 to 29 million in 2003. In 2005, China was the world's third-largest­ exporter, behind the United States and Germany, sending more than $750 billion worth of goods overseas.

With the liberalization of the economy, foreign investment has poured in - to the tune of more than half a trillion dollars since 1978. Just in Shanghai, the hub of the country's economic activity, there were 14,400 wholly foreign-owned companies at the end of 2003, as well as 13,000 more underwritten by foreign money. The proliferation of factories and economic opportunities in the cities has prompted the largest rural-to-­urban migration the world has ever seen.

The list goes on and on. Yet for all the benefits economic reforms have brought, there is a daunting list of challenges faced by both China's Communist Party policymakers as well as by business and political leaders around the globe. How, for instance, can China adequately provide proper housing and infrastructure for the countless millions moving to their cities? How can they halt and begin to roll back the terrible environmental damage that has accompanied their fast development? Around the world, urgent questions about how to stanch wholesale job losses, prompted by companies moving operations to China, are being hotly debated.


AN UNLIKELY STORY
There's little doubt that China will be at the center of the world's attention in this century. But to understand how the country came to take on such an important global role, one has to go back to the 1970s and the aftermath of the leadership of China's authoritarian Communist ruler, Mao Zedong. For almost three decades, from 1949 until his death in 1976, Mao ruled China as a dictator, determining the shape and direction of the country's most important social and economic policies.

From an economic point of view, says ­David Lampton, dean of faculty and director of China studies at Johns Hopkins University's School of Advanced International Studies, Mao's rule was devastating. "Mao had some accomplishments, but he left a legacy of economic chaos," he says. In particular, the Great Leap Forward (the disastrous effort to industrialize China's economy) and the Cultural Revolution (Mao's attempt to affirm the dominance of his political ideology) caused widespread famine, death, and dislocation.

Broke, isolated, and backward, China was not just ready for change but desperately in need of it by the time Mao died. The impetus for reform was certainly the dire living conditions of most Chinese. But also important, says Lampton, was the collective sense that China could and should be outperforming its neighbors - South Korea, Taiwan, Hong Kong, and Singapore, collectively known as the East Asian Tigers - who were then in the midst of their own spectacular economic growth spurts. "It was a sense of Chinese pride. The characters [spelling out China in the Chinese language] mean 'middle kingdom,' halfway between heaven and earth," says Lampton. "It's an exalted sense of China's role in the region and the world. But the reality was it was an extremely poor country."

China's power vacuum ultimately was filled by Deng Xiaoping, who had previously­ risen and then been purged during Mao's rule. Deng was a far different leader than Mao. Having been educated in France, he was more worldly and more open to foreign ideas than his predecessor, who had done little traveling. At the core of Deng's leadership style was devotion not to ideology but to pragmatism. Indeed, Deng was fond of an old Chinese saying, one that summed up his approach to economic reform: "It doesn't matter if the cat is white or black, as long as it catches the mouse."

"They field-tested their ideas. They would try something in one place and spread it if it worked and drop it if it didn't," says William Overholt, director of the Center for Asia Pacific Policy at the RAND Corporation, a think tank in Santa Monica, California. "They were pragmatic and went with what worked."

What worked, it turned out, was undoing many of the underlying structures and rules of China's Communist-era economy. Early on, Deng confronted a cornerstone of Mao's rural policies: the agricultural communes. During his rule, Mao had forced farmers and peasants - the vast majority of the population - onto large collectives in which all the output from the land went into a central fund. Deng eliminated the communes and gave individual farmers rights to use parcels of land. Hoping to boost production and encourage and spur individual enterprise, Deng told farmers that they could keep whatever they produced, beyond what they owed the state. The promise of individual gain had a big impact. "China was probably, at that point, about 85 or 90 percent peasants," says Lampton. "So he could energize 85 to 90 percent of the population economically simply by doing away with communes and drawing a link between, 'You work on this piece of land, and the more you get out of it, the more you'll keep.' "


A CONTINUING PROCESS
Slowly, through the 1980s to today, China has continued to reform its economy. In the beginning, China had very little capital to fund its transformation into an industrial economy, so Deng, ever cautious, allowed a small amount of foreign investment. "First they allowed Special Economic Zones near Hong Kong to deal with the outside world and set up a few state companies to trade and invest with foreigners," says Overholt, who is also the author of The Rise of China. When the first economic zones proved successful, cities around China clamored for the same opportunity to boost trade and lure investment. Through homegrown entrepreneurs, joint ventures with foreign companies, and now wholly foreign-owned ­ventures, new manufacturing plants - making everything from shoes to electronics - have popped up everywhere.

Other important policy initiatives have followed and are ongoing, including the difficult task of breaking up large, inefficient state-owned industries and reforming the banking system. But as important as policy has been in this economic revolution, China has been aided by other, less-obvious factors. A vitally important one has been the financial and business expertise the country has been able to draw upon from legions of overseas Chinese, many of whom fled the Communist regime, and others who are the ancestors of people who emigrated during previous troubled times. In places like Hong Kong and Singapore, Europe and the United States, the Chinese diaspora flourished. And when their homeland finally opened back up to the outside, many were eager to both invest and provide guidance.

Also important, and very much lacking­ in other formerly Communist countries, was a remembrance of how to operate in a capitalist economy. "This is a big difference between China and the Soviet Union," Lampton­ says. "The revolution in Russia was in 1917, and so by the time you get to the fall of the Soviet Union, in 1989, you are into this revolution 70-plus years. Therefore, in Russia, there wasn't really anybody left who remembered operating a market economy. It had been wiped out." In China, on the other hand, where Mao ruled for less than 30 years, the skills necessary to build businesses and be entrepreneurial - not to mention to formulate policies that encouraged these things - were not yet completely eradicated.

As China continues to grow at such a fast clip, it also has been helped by its citizens' somewhat remarkable (particularly in comparison to most Americans) ability to stash away money they earn. "They have a very high national savings rate," says Robert Dunn, an economics professor at George Washington University in Washington, D.C. "That, of course, enables them to invest a tremendous amount in plant equipment and infrastructure and whatever they need, because they've got a lot of savings."

Just where all that investment is going has been very much on display for frequent visitors to China, particularly in Shanghai. In the 1990s, there was so much construction going on that the city looked different from month to month. "If you were away for six months, the city never looked the same," says Weingrod, who travels often to China. "You couldn't get your bearings based on where you saw the buildings, because the buildings you remembered from last time were often blocked out by new ones."


GROWING PAINS
It's not difficult to find people who have legitimate concerns about China's ascendance. Any U.S. congressman whose district has seen a factory close down and move operations to lower-cost China is bound to ­express concerns about job losses, as are leaders in other traditionally cheap manufacturing centers, like Mexico, which has also lost considerable business to Asia. Worries about religious and political freedom - after all, the country is still ruled by the Communist Party, which squelches dissent and views that it deems threatening - as well as China's willingness to forcefully assert its claimed sovereignty over Taiwan, are but a few of many major issues.

But it's not just foreigners who worry about where China is headed and how its development will progress. The Chinese themselves are well aware of the challenges they face as they try to continue the blistering growth; in fact, in their latest five-year plan, the Chinese set themselves the goal of boosting the nation's gross domestic product by 45 percent by 2010. "Any American policy-maker who actually knew what the agenda of China's leaders was in terms of the problems they face every morning when they get up probably wouldn't have the courage to get out of bed," says Lampton.

Indeed, the list of challenges is long and daunting. How, for instance, will China, whose demand for energy to fuel its growth is massive, get what it needs? How will the country provide pensions and health care to a rapidly aging population now that the Communist-era social safety net is gone? Problems of disparity - common in market economies -have also surfaced. "The disparity of income has become very rapidly much more unequal," says Lampton. In fact, according to Lampton, the per capita GDP of people in rural areas is $320, while in cities it's over $1,000. There also remains plenty of poverty in rural and urban areas.

The mass of people flocking to the cities, particularly those on the east coast, where investment and development are greatest, is straining urban areas' abilities to cope. "There are just too many people, and there isn't enough housing, roads, or infrastructure," says Dunn. "It's getting very crowded."

Environmental degradation is an increasing concern as well. "The environment in China is under stress on every front. It's not simply a matter of air or water or land - it's everything," says Elizabeth Economy, Director for Asia Studies at the Council on Foreign Relations in New York and author of The River Runs Black: The Environmental Challenges to China's Future. By various estimates, China has 16 of the 20 most polluted cities in the world. According to Economy, the Chinese government believes that 400,000 people die each year prematurely as a result of respiratory diseases related to air pollution. Five of China's seven major river systems are considered highly polluted, and the government estimates that 300 million people drink polluted water each day.

In addition to damaging health and biodiversity, environmental problems take a serious toll on China’s economic plans. In places where lakes and rivers have dried up, factories don’t have the energy necessary to operate. “You can see instances where they have put the brakes on [the economy] at least for periods of time,” says Economy. “There’s an enormous impact on industry, hydropower, and agriculture. Local economies have certainly changed because of what’s going on with the environment.”

Still, despite the many challenges China faces, there are few who believe the country’s economic expansion and reform will be derailed. For the most part, experts say, China has done an amazing job of making the right decisions at the right time. “The fact that their cities function well and their social and geographic groups have improved their condition is a miracle of management,” says Overholt. He actually likens China’s situation to a man being chased by a bear. To him, there’s only one way for China to continue to stay ahead of all its difficult challenges: to keep its economic growth brisk and continue the sometimes difficult process of reform.

“Here’s a guy running fast and being chased by a bear, and so far he’s staying ahead of the bear,” says Overholt. “But he had better keep running and running.”
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