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ABSTRACT
China is undergoing its long-awaited industrial revolution. There is no shortage of commentary and opinion on this dramatic period, but few have attempted to provide a coherent, in-depth, political-economic framework that explains the fundamental mechanisms behind China’s rapid industrialization. This article reviews the Embryonic Economic Development theory put forth by Wen (2016a). This article reviews the Embryonic Economic Development theory put forth by Wen . It illuminates the critical sequence of developmental stages since the reforms enacted by Deng Xiaoping in 1978: namely, small-scale commercialized agricultural production, proto-industrialization in the countryside, a formal industrial revolution based on mass production of labor-intensive light consumer goods, a sustainable ‘industrial trinity’ boom in energy/motive power/infrastructure, and a second industrial revolution involving the mass production of heavy industrial goods. This developmental sequence follows essentially the same pattern as Great Britain’s Industrial Revolution, despite sharp differences in political and institutional conditions. One of the key conclusions exemplified by China’s economic rise is that the extent of industrialization is limited by the extent of the market. One of the key strategies behind the creation and nurturing of a continually growing market in China is based on this premise: The free market is a public good that is very costly for nations to create and support. Market creation requires a powerful ‘mercantilist’ state and the correct sequence of developmental stages; China has been successfully accomplishing its industrialization through these stages, backed by measured, targeted reforms and direct participation from its central and local governments.
Disclosure statement
No potential conflict of interest was reported by the authors.
Timelines
A Macro View of Industrial Revolution
SOURCE: Estévez-Abe (Citation2008) and Wen (Citation2016a, Citation2016b) and the references therein.
United Kingdom
Proto-industrialization: from the 1600s (Age of Discovery) until 1760
Rural production of basic goods, coordinated and financed by wealthy merchants under the ‘putting out’ system (see endnote 13).
First Industrial Revolution: 1760 to 1830
Mass production of textiles, reliant on wood-framed and water-powered machinery.
Second Industrial Revolution: 1830 to 1900
1830–1850: Boom in the industrial trinity of energy (e.g. coal), transportation (e.g. ‘macadam’ roads, railroads, and canals), and locomotive power (e.g. the steam engine).
1850–1900: Mass production of the means of mass production, such as iron, steel, chemicals, and machinery.
Welfare State: after 1900
Political rights and social services, such as the National Insurance Act in 1911 and universal suffrage in 1928.
United States
Proto-industrialization: before 1820
Rural production of basic goods by household artisans.
First Industrial Revolution: 1820 to 1860
Mass production of textiles driven by water power, especially along New England’s fast-moving rivers, such as the first cotton-spinning mill (Blackstone River, Pawtucket, RI) founded by Samuel Slater.
Second Industrial Revolution: 1860 to 1940
1830–1870: Boom in the industrial trinity of energy, transportation, and locomotive power, such as the 1828–1873 railroad surge and use of steam power after the Civil War.
1870–1940: Mass production of the means of mass production, such as steel, automobiles, telecommunications, chemicals, and mechanized agricultural systems.
Welfare State: after 1940
Political rights and social services, such as the civil rights movement in the 1960s and the Violence Against Women Act in 1994.
Japan
Proto-industrialization: before 1890
Rural production of basic goods by household artisans along with development of commercial agriculture. First stages in the Edo period (1603–1868) under political stability, and later stages in the early Meiji period (1868–1890).
First Industrial Revolution: 1890 to 1920
Mass production of textiles, relying on imported machinery and exports of labor-intensive products.
Second Industrial Revolution: 1920 to 1960
1900–1930: Boom in the industrial trinity of energy, transportation, and locomotive power, especially railroads.
1920–1941: Mass production of the means of mass production, such as steel, automobiles, telecommunications, chemicals, and mechanized agricultural systems.
1945–1960: Continuation of second industrial revolution (under Allied occupation until 1952).
Welfare State: after 1960
Political rights and social services, such as the minimum wage enacted in 1959 and the modern current national health insurance system enacted in 1961.
China
Proto-industrialization: 1978 to 1988
Rural production of basic goods by collectively (not privately) owned enterprises.
First Industrial Revolution: 1988 to 1998
Mass production of textiles, relying on imported machinery and exports of labor-intensive products. Became largest producer and exporter of, among others, textiles, cotton, furniture, and toys.
Second Industrial Revolution: 1998 to the present
Boom in the industrial trinity of energy, transportation, and locomotive power. Mass production of the means of mass production, with a surge in the extraction and consumption of coal and production of steel, cement, machine tools, infrastructure, etc. (e.g. 70,000 miles of highway, almost 50% more than the U.S. total).
Recent Regimes and Events in China
SOURCE: Sullivan (Citation2007), Bruton, Lan, and Lu (Citation2000), and Wen (Citation2016a) and the references therein.
1
1644–1912 Qing Dynasty, also known as Manchu Dynasty
Successor to Ming Dynasty (1368–1644).
Economic prosperity is offset by an expanding population.
Authoritarian government strained by substantial new territories, unable to secure military and cultural stability to match Western powers.
Overthrown in Republican Revolution.
1912–1949 Republic of China
Strongly influenced by Western governments’ success.
Promoted democracy and science through ‘New Culture Movement.’
Attempted to assert control in face of internal revolts and external (Japanese) aggression.
Government fled to Taiwan after being overthrown by the communists.
1949-Present People’s Republic of China
New leadership under communist government led by Mao Zedong.
Initial attempts to engineer economic reform (e.g. Great Leap Forward) were catastrophic failures.
Renewed efforts under Deng Xiaoping kickstarted China’s industrial revolution.
2
1842 China defeated by British in First Opium War.
1860 China defeated by British in Second Opium War; Qing monarchy attempts to establish modern navy and industrial infrastructure.
1895 China defeated by Japanese in Sino-Japanese War.
1900 Boxer Rebellion.
1911 Qing monarchy is deep in debt; social unrest leads to the Xinhai Revolution, which overthrows the monarchy and establishes Republic of China (the nation’s first ‘inclusive’ government).
1912 Republic of China commences under Sun Yat-sen, who is soon replaced by Yuan Shikai.
1919 May Fourth Movement: Students and workers protest China’s acceptance of Treaty of Versailles, which relinquished land (formerly under German control) to Japan. Surge in Chinese nationalism.
1921 Chinese Communist Party organizes in Shanghai.
1937 Japan invades China.
1945 Mao outlines his ‘New Democracy.’ War with Japan ends.
1949 Communists/People’s Liberation Army occupy Beijing and Shanghai. Mao Zedong proclaims founding of People’s Republic of China. Chiang Kai-shek’s government flees to Taiwan.
1950–1952 Land reforms implemented.
1953 Five-Year Plan of economic growth and development begins. Mutual Aid Teams organized in Chinese countryside. Chinese Communist Party Central Committee authorizes Agricultural Producers’ Cooperatives.
1955–1956 Mao Zedong intervenes to speed up formation of rural Agricultural Producers’ Cooperatives, greatly increasing their numbers, but severely disrupts agricultural production.
1958–1961 Great Leap Forward. Food crisis intensifies.
1966 Cultural Revolution begins. Little Red Book is published.
1967 Deng Xiaoping and Liu Shaoqi accused of crimes against Chinese Communist Party.
1969 U.S. partially lifts trade embargo against China.
1972 U.S. President Nixon visits China.
1973–1974 Deng Xiaoping ‘rehabilitated’ as vice premier, addresses United Nations General Assembly, reappointed as vice chairman of Chinese Communist Party.
1976 Deng Xiaoping purged from Party; Mao Zedong dies.
1977 Deng Xiaoping, once restored to Party, begins push for major reforms.
1984 Deng Xiaoping tours Special Economic Zones and advocates for continued economic reform; U.S. President Reagan visits China.
1986 China becomes member of Asian Development Bank.
1989 Tiananmen Square incident.
1992 Deng Xiaoping visits Special Economic Zones in Shenzhen, leading to further economic reforms. China’s military spending increases 13%. National Party Congress approves plans for Three Gorges Dam project. One million workers laid off from inefficient state-owned enterprises. At 14th National Party Congress, principle of ‘socialist market economic system’ is promoted.
1993 Jiang Zemin appointed president of People’s Republic of China.
1994 U.S. extends most-favored nation status to China, separating human rights and trade issues.
1995 China adopts its first banking laws, the Law of the People’s Bank of China. China Construction Bank and Morgan Stanley launch China International Capital Corporation, first joint venture investment bank in China. China formally requests to join World Trade Organization.
1996 Kelon becomes first Chinese township enterprise listed on the Hong Kong stock exchange.
1997 Deng Xiaoping dies.
2001 China enters World Trade Organization.
2003 China surpasses U.S. as world’s largest recipient of foreign direct investment. Four million families in China own automobiles.
2004 China becomes sixth-largest economy in the world. China publicizes several of its billionaires. Provisions to protect human rights and private property incorporated into Chinese constitution. China reaches 87 million internet users.
2005 China replaces U.S. as Japan’s largest trade partner, with foreign exchange reserves second only to Japan. End to global textile quotas leads to surge in exports from China to U.S.
2010 China becomes second-largest economy in the world.
2012 The Three Gorges Dam, the world’s largest power station, becomes fully functional after 18 years of construction at a cost of 148 billion yuan ($22.5 billion).
Notes
1. For a profile of a typical Chinese local government official and his role as a ‘public merchant,’ see Chapter 6 in Wen (Citation2016a).
2. Also see Wen’s (Citation2016b) short article in the Federal Reserve Bank of St. Louis Regional Economist.
3. In 1949, China’s peasant population as a share of its total national population remained at more than 90%, not much changed since the Second Opium War around 1860. Average life expectancy remained as low as 30–35 years and the literacy rate was only 15–25%.
4. For example, the young Mao Zedong was a high-ranking official member of the republican government in the early 1920s.
5. One extremely important legacy of Mao’s era, seldom mentioned and appreciated in the existing literature, is the critical level of ‘social capital’ (including social trust in general and farmers’ abilities to organize themselves) and a unified national market with a potential size of four times that of the U.S. market. As mentioned earlier and discussed later, social trust and national unity are fundamental pillars of a unified ‘free’ market on which the division of labor is based.
6. The first time was in 1966 at the start of the Cultural Revolution, and the second was around 1976 after the Cultural Revolution but before Mao’s death. See Vogel (Citation2013).
7. See Marangos (Citation2007) and Williamson (Citation2004).
8. To conserve space, this article does not provide a systematic analysis on why such developmental strategies fail. Interested readers are referred to Wen (Citation2016a) for such an analysis and critical evaluation of these development policies.
9. According to Studwell (Citation2013, 17), ‘In the 1920s, when 85 percent of Chinese people lived in the countryside, life expectancy at birth for rural dwellers was 20–25 years. Three quarters of farming families had plots of less than one hectare, while perhaps one-tenth of the population owned seven-tenths of the cultivable land.’
10. During the Great Leap Forward, there were 6 million village factories created. But most of them were forced to shut down after 1962 due to the great famine. But a fraction of them survived because of the protection of local villagers. The initial 1.52 million village firms in 1978 were the legacy of the Great Leap Forward and served as the catalyst of China’s long-awaited rural industrialization. Of course, the benefits achieved by Mao’s communist regime do not deny or excuse the hardships and crimes perpetrated against the Chinese people – including violating human rights during the Cultural Revolution. Actually, the Cultural Revolution might have destroyed some of the social capital (mostly social trust) built by Mao in the 1950s and early 1960s. However, this loss of trust did not occur in the rural areas. And it was that sustained social capital in the rural areas that was the most critical for setting off China’s proto-industrialization.
11. See Mendels’s (Citation1972, Citation1981) analysis of the phenomenon of proto-industrialization in European economic history and the literature stimulated by this. What is most puzzling about China’s proto-industrialization is that it did not occur in Qing Dynasty China or during the Republic era, despite a market system and well-protected private property rights in the rural areas.
12. Housing has been one of the major areas of growth during China’s industrialization. We refer interested readers to ‘The Great Housing Boom of China,’ a working paper by Chen and Wen Citation2017, forthcoming in American Economic Journal: Macroeconomics).
13. ‘The putting-out system exploited the benefits of the division of labor to the full’ (from the Oxford Encyclopedia of Economic History Citation2003, 101; see also International Encyclopedia of the Social Sciences Citation2008). The putting-out system was family-based domestic manufacturing prevalent in the rural areas of western Europe during the seventeenth and eighteenth centuries. It appeared even earlier in sixteenth century Italy. Domestic workers typically owned their own primitive tools (such as looms and spinning wheels) but depended on merchant capitalists to provide them with the raw materials to fashion products that were deemed the property of the merchants. Semi-finished products would be passed on by the merchant to another workplace for further processing, while finished products would be taken directly to market by the merchants. Even independent domestic craftsmen working on their own also relied on merchants to introduce their products in distant markets.
14. Under the putting-out system, tools of production have often been owned by the peasant households, but sometimes by the merchants who have rented them to the peasant workers.
15. Mercantilism is economic nationalism for the purpose of building a wealthy and powerful state based on commerce and manufacturing. It has sought to enrich the country by restraining imports of manufactured goods and encouraging exports of manufactured goods. In short, it emphasizes and promotes manufacturing over agriculture and commercialism over physiocracy. However, most of the literature on mercantilism views it simply as a form of protectionism or pure pursuit of trade surplus or gold reserves and overlooks the key point of commerce and, again, manufacturing. An economy relying solely on agriculture has nothing to benefit from mercantilism. But a nation intending to build on manufacturing can benefit greatly from mercantilism because manufacturing stimulates the division of labor and generates the economies of scale. The historical importance of mercantilism in the sixteenth to eighteenth centuries in Europe as the prototype of capitalism and the key step leading to the British Industrial Revolution can never be emphasized enough. Indeed, the promotion of manufacturing inherent in mercantilism has seldom been appreciated by classical economists, including Adam Smith and David Ricardo, unlike Friedrich CitationList ([1841] 1909). One example of the impact of mercantilism on economic development is the nineteenth century American industrial revolution based on the ‘American System,’ which was an economic development strategy envisioned by Alexander Hamilton (1755–1804) in 1791 and vigorously implemented throughout the nineteenth century to win global competition with Great Britain. (Hamilton’s idea was not immediately adopted in the 1790s and the initial decade of 1800s.) It consisted of several mutually reinforcing parts: high tariffs to protect and promote the American infant manufacturing sector in the north; a national bank to foster commerce, stabilize the currency, and rein-in risk-taking private banks; maintenance of high public land prices to generate federal revenue; and large-scale federal subsidies for roads, canals, and other infrastructures to develop a unified national market – financed through tariffs and land sales. Also see Ha-Joon Chang’s (Citation2003) ‘Kicking Away the Ladder: Development Strategies in Historical Perspective’ for many examples of mercantilism and the historical role it played in Western economic development. However, many Latin American countries in the middle twentieth century also adopted various forms of mercantilism (e.g. import substitution industrialization) but failed miserably. The reasons behind such successes and failures are precisely what Wen’s (Citation2016a) book is about.
16. Some historians believe that slavery and trans-Atlantic trade helped finance the British Industrial Revolution. Plantation owners, shipbuilders, and merchants who were connected with the slave trade accumulated vast fortunes that established banks and large manufactures in Europe and expanded the reach of capitalism worldwide. For scholarly articles on the critical contributions of slavery and trans-Atlantic trade to the Industrial Revolution, see, e.g. Williams (Citation1994). Kriedte, Medick, and Schlumbohm (Citation1981, 131) provides a related perspective: ‘For England, which was politically and militarily the most successful country, the “virtual monopoly among European powers of overseas colonies,” established during the phase of proto-industrialization, was one of the central preconditions which carried proto-industrialization beyond itself into the Industrial Revolution.’ Economic historians Pomeranz and Topik (Citation2013, 104) argue that opium trade ‘not only helped create Britain’s direct [trade] surplus with China, but made possible even the larger surplus with India. Without those surpluses, Britain could not have remained the West’s chief consumer and financer, and the Atlantic economy as a whole would have grown much more slowly.’
17. With China’s institutional arrangement of public land ownership and the administrative power of local governments (a legacy of Mao’s communism), farmers and peasants were able and willing to pool their savings to form the initial capital (cash and land assets) necessary for an initial investment in an establishment that by design was collectively owned, with profits and work opportunities equally shared among village farmers. Although land had been leased to individual families since 1978 under the family-responsibility system, the nature of the public ownership of land had not changed; acquiring land for industrial purposes, then, was not a great hurdle for the village farmers and the local governments. The managers of such collectively owned establishments were often the village officials, who were often democratically elected and viewed as natural leaders (China’s earliest CEOs). Although Deng disbanded the communes that had been created under Mao’s regime, the legacy of the Great Leap Forward and its communization movement made it easy to reintroduce collectively owned organizations. The high degree of trust among these village families and the leadership of the local governments enabled Chinese farmers to overcome the prohibitive transaction costs of contracting in an agrarian society where the legal system and law enforcement were lacking. In essence, they trusted fair income distribution and risk sharing and credit payments.
18. See the boxed insert on village firms for more details. The source is Wen (Citation2016a) and the references therein. For the original data, see Zhang and Zhang (Citation2001 [in Chinese], Appendix Table 1).
19. But with one critical difference: Chinese farmers in the 1980s were experienced with self-organizational skills and endowed with social capital gained through Mao’s Great Leap Forward and rural cooperation movements.
20. In the sixteenth to eighteenth centuries in Europe, the lack of social trust and the associated transaction costs in forming corporations in rural areas were mitigated and overcome by the entrepreneurial, risk-taking, profit-seeking merchants, who were less financially constrained and more experienced in long distance trade. But, again, it took centuries for Europe in general and England specifically to form such a powerful merchant class through commercialism, colonialism, imperialism, mercantilism, and the trans-Atlantic slave trade. This process of forming markets in Europe, England, and elsewhere around the globe under colonialism can be thought of as ‘natural market fermentation,’ where the key agents are the powerful merchants. This global market creation process is also extremely costly and requires that trade be secured and enforced by military pressure. European overseas explorations and trade were extremely capital-intensive because of the colossal costs and risks involved. Most long-distance trade carried out by European merchants included armed trade and was endorsed and supported militarily by their governments. This context is captured in the words of the famous Dutch merchant and warrior Jan Pieterszoon Coen to the Dutch monarch: ‘Your Honours should know by experience that trade in Asia must be driven and maintained under the protection and favour of Your Honours’ own weapons, and that the weapons must be paid for by the profits from the trade; so that we cannot carry on trade without war, nor war without trade’ (see Bown Citation2010, 7).
21. As important as it was in further stimulating China’s labor-intensive industry, many economists wrongly attribute China’s rapid industrialization to its successful entrance into the WTO. India and Indonesia, for example, both became members of the WTO in early 1995, 6–7 years before China did in late 2001. Yet WTO membership did not trigger an industrial revolution in these two countries. The key difference between China and India or Indonesia was that China had already begun its industrial revolution at the time of its WTO entry, whereas India had not. Hence, WTO membership meant very different things for these countries: It meant a larger export market for mass-produced Chinese goods, but simply more inflow of foreign-produced goods for India and Indonesia.
22. Compared with wool and other types of natural fibers, cotton is also more easily manipulable for the production of clothing.
23. More details can be found in Wen (Citation2016a). To illustrate, the United States became the world’s textile superpower (superseding Great Britain) around the middle of the nineteenth century before it became the global manufacturing superpower in the late nineteenth century; Japan became a textile superpower in the early twentieth century before it became a manufacturing superpower around the middle of the twentieth century; China became the world’s textile superpower in 1995 before it launched its second industrial revolution in heavy industries. These same development steps were taken by France, Germany, South Korea, Taiwan, Hong Kong, and many other economies, all with dramatically different geographic locations, population sizes, and cultural and institutional environments.
24. This is essentially the view of Friedrich CitationList ([1841] 1909) as established in The Natural System of Political Economy. Even institutions in developed nations (such as the U.S. Department of Energy) maintain tight connections with foreign policy and international politics.
25. China waited until 1997–1998 to start substantially reforming its state-owned enterprises (SOEs); by then, China had essentially already finished its first industrial revolution. Because China’s SOEs were located mostly in urban areas and large cities, such a measured development strategy enabled the SOEs to perform at least two important functions in facilitating China’s economic transition and industrialization: (i) to maintain and stabilize urban employment during the rural-based proto-industrialization and first industrial revolution; and (ii) to play a leadership role in promoting and transferring more advanced production technologies to rural industries. (China’s rural industries received most of their technology and engineers from SOEs in nearby cities.) But once rural industries caught up with SOEs in technology and China broadly finished its first industrial revolution in mass-producing labor-intensive light consumer goods, the historical role of China’s small to medium-sized SOEs (which were based on mass production technology to begin with) was finished and naturally yielded to newly formed but more-productive and better-managed private or collective enterprises. During the first 2 years of SOE reform between 1998 and 2000, about 21.4 million SOE workers were laid off, mostly in the textile, mining, military defense, and machinery sectors. However, because of prohibitive costs in finance and technological barriers to form large-scale private heavy industries, China privatized only the small to medium-sized SOEs, which could be easily absorbed or substituted by the private sector. But it kept its large heavy-industrial SOEs under the so-called ‘grasping the large and letting go of the small’ nationwide SOE reform. This by no means implied lack of reform for the remaining large SOEs. The government forced the remaining large heavy-industrial SOEs to reform management structure, upgrade technologies, and confront domestic and international competition. The success of China’s high-speed rail companies is a good example of such a measured and targeted SOE reform strategy.
26. The private patent system has not been as important in the advancement of science and technology as institutional economists have claimed – not even during the British Industrial Revolution (see, e.g. Boldrin and Levine Citation2008; Mokyr Citation2008). In fact, Boldrin and Levin use historical evidence (e.g. the inventor James Watt and his steam engine) to argue that intellectual property rights have hindered innovation rather than stimulated it throughout history.
27. See, e.g. Lau, Qian, and Roland (Citation2000). Also see the literature’s discussions on China’s ‘grasping the large, letting go of the small’ reform strategy implemented since 1997 for its heavy industries. For a definition, see http://en.wikipedia.org/wiki/Grasping_the_large,_letting_go_of_the_small.
28. For example, some of China’s military defense companies shifted from manufacturing weaponry and tanks to manufacturing durable consumer goods such as motorcycles and automobiles in the early 1990s. The world’s largest producer of high-speed trains used to be a money-losing firm that produced steam engines back in the 1960s under Mao.
29. Judged by such criteria, China’s privatization of small to medium-sized firms such as labor-intensive textile firms was extremely successful, but its market-based reforms in the education and healthcare sectors were disastrous. In retrospect, China should have waited until private hospitals and clinics (or private schools) were well-developed and sufficiently competitive with their public counterparts before introducing profit-motivated reforms into these public sectors. Such a waiting period could also allow the government to develop sophisticated regulations in such important welfare-sensitive areas. Hence, as China is currently undergoing its second industrial revolution, it must be extremely careful in taking a measured, dual-tracked, and gradualist approach to financial-sector reforms and privatization of its heavy industries. The danger and risk of a Russian-style collapse under ‘shock therapy’ still exists.
30. During its first industrial revolution period in 1815–1860, the United States spent $188 million to build canals, 73% of which was financed by state and local governments (see Chandler Citation1977). In the same period, the territory of the United States expanded enormously, after taking Texas and California from Mexico. Then, after preventing the succession of the cotton-rich Southern states through the Civil War and a long period of government-led railroad expansion, the United States successfully created the largest unified domestic market in the world.
31. For example, Indian leader Jawaharlal Nehru (in 1946) said, ‘No country can be politically and economically independent, even within the framework of international interdependence, unless it is highly industrialized and has developed its power resources to the utmost.’ Chinese leader Mao Zedong (in 1943) said similarly that ‘Without the establishment of heavy industries in China, there can be no solid national defense, no well-being for the people, no prosperity and strength for the nation.’ (See Lin Citation2009, 20).
32. In other words, universal suffrage is not the same thing as the rule of law, the rule of law is not the same thing as the market mechanism, and the market mechanism is not the same thing as private property rights. For example, research scientists working for Pfizer (one of the largest U.S. pharmaceutical companies) do not own their intellectual property at all, but they still work very hard to develop new drugs. The United States finished its second industrial revolution during 1880–1940 without universal suffrage.