Poverty to Powerhouse: The Secret of China's New Economy

Poverty to Powerhouse: The Secret of China's New Economy
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Who cares about China?

Well, as it turns out, more people than you might think.

With 1.3 billion inhabitants, one in every five people on Earth lives in China. And while the U.S. national debt climbs to record numbers, the Chinese economy seems to be doing the opposite. In fact, China now holds $1.15 trillion in U.S. Treasury securities—over 8% of the total—making them the largest foreign holder of U.S. debt. This from a country that half a century ago couldn’t feed itself!

What happened? How did a poverty-stricken nation rise to an economic powerhouse poised to take a leading role on the global stage of the future? Any story of the Chinese economy is at the same time the story of the world economy of tomorrow.

When Mao Zedong and the Red Chinese took control in 1949, China was an agricultural economy, little changed from its imperial history. The people of China were still “peasants” working with hand tools and primitive farm implements. Having almost no industry to speak of, China was in the same condition it had been in for centuries at that point—broke, nearly powerless and hardly able to hang together as a country.

And while the political frailty changed with the Communists coming to power, the economy did not. In fact, it got worse. The forced collectivism of Mao’s “Great Leap Forward” in the late 1950s resulted in a catastrophic famine in which over 30 million people died. Economic policies based not on natural law but ideology equated to criminal mismanagement of the country. And although the famine ended, the Cultural Revolution of the 1970s did little to increase the economic well-being of a country which, since the 19th century, had lived in poverty.

However, all of this was to change. One of the most remarkable stories of modern history is the meteoric rise of the Chinese economy in the late 20th century. In an astonishing turn of events, between the years of 1978 and 2010, China suddenly experienced a period of unprecedented economic growth, with an average increase of 9.5% per year according to some estimates. Amazingly, China’s economy abruptly surpassed nearly every other on the planet, becoming second only to the United States.

When viewed from this lens it begs the question: what happened in 1978? After years of Communist rule and poverty and with no change of government, the entire national economy suddenly began a streaking skyrocket across international graphs. Anyone who has ever run a business would be envious of that kind of growth. It would be interesting indeed to discover what management methods and policies were implemented at that time. The answer to the question, “What happened in 1978?” might well be the answer to questions which face all countries and corporations.

So what did happen in 1978?

The opposite of what happened in 1958—the year which began the period known as China’s Great Leap Forward. These two time periods are a wonderful study in natural economic law. China’s Great Leap Forward of 1958-1961 was the only time during the 20th century in which the Chinese economy shrunk. The economic boom starting in 1978 was quite the opposite, with skyrocketing expansion that shocked the world.

The following, written by philosopher and management expert L. Ron Hubbard, gives a sharp insight into what happened. Mr. Hubbard writes:

“WHEN YOU REWARD DOWN STATISTICS AND PENALIZE UP STATISTICS YOU GET DOWN STATISTICS.

“If you reward nonproduction you get nonproduction.

“When you penalize production you get nonproduction.

“The welfare state can be defined as that state which rewards nonproduction at the expense of production. Let us not then be surprised that we all turn up at last slaves in a starved society.”

To understand the full story of how this relates to China we must return to 1958, the year Mao Zedong’s Great Leap Forward was begun. It had been nearly 10 years since the Communists took power and Mao desperately wanted to industrialize the nation yet had no money to do it. The “Great Leap Forward” was the name of the plan that was supposed to rapidly expand China’s economy through massive national effort, thus allowing the country to modernize in a very short period of time. The methodology decided upon to accomplish this was to greatly accelerate the country’s communist policies. Rather than allowing each peasant to work his own land as had been done for centuries, Mao would now force people across the nation into collectives. The concept was that the government, now controlling the entire output of the country, could divide it equally. Additionally, because the government was in possession of the entire national grain supply they could sell it overseas to make a profit, thus funding the industrialization of China.

However quite the opposite happened. Farmers who had successfully cultivated their own plots of land for years were forced to implement new and unworkable farming methods. People in cities were given an allotment of grain regardless of whether the farmers in the country had any to give. Farmers no longer got the fruits of their own labors and, most insidiously, government agencies who produced nothing were well fed and in control of all the country’s resources.

The economy crashed. Widespread famine in China killed as many peasants in those three years as bullets and bombs killed soldiers from all the nations involved in World War II. By the time the “Great Leap Forward” ended in 1961 the economy had shrunk—despite an enormous amount of effort exerted to expand it.

The Cultural Revolution of the next decade was aimed at removing those expressing dissatisfaction with Mao and his policies. The consequent political purges did nothing for the economy and by the time Mao died in 1976 food supplies were running dangerously low. Warnings were in the air that the country was once again facing another economic collapse.

However this time something remarkable happened. There was to be no collapse, but quite the reverse. Starting in 1978 the new leader of the Chinese government, Deng Xiaoping, implemented a series of remarkable reforms that were to change the course of history. The country began two solid decades in which entrenched government policies were reversed. Collectivism was ended and farmers were allowed to work their own land again. Individuals were given the right to own individual property. Private enterprise was not only allowed, but was encouraged. Special economic zones were created, foreign investments courted and deregulation was engaged upon on a massive scale. Through the 1990s, whole industries which had been state run were now privatized and sold off. The GDP soared. Wages increased six-fold. China began its dizzying ascent to take its place amongst the top producers on the planet.

In a stroke of masterful brilliance Deng Xiaoping had been insightful enough to realize that production and survival is not based on ideology but on economic law—and acted forcefully to fix it. Communist, capitalist or socialist—all countries and companies are subject to the same economic basics, much as we are all equally subject to the laws of physics. No one is exempt.

In allowing private ownership and production on a nationwide scale, Deng forthrightly and rapidly aligned his whole country along the natural law given above. He didn’t DO anything to solve it—he created an economic environment which allowed others to grow the economy. By allowing economic freedom, people who were high producers were allowed to survive better and own more. Individual production and efforts were recognized and rewarded. A person could receive the fruits of his own efforts and the standard of living accordingly exploded.

China offers a lesson that every business has to learn at some point, from mom and pop shops to multinational corporations—if you penalize production, you will get nonproduction. If you reward nonproduction, you will get more nonproduction.

This has countless applications in day-to-day life. Promote only those employees who are stellar producers. Invest only in those things which give the best ROI. Pay based on production and don’t pay for something that doesn’t produce.

Of course someone could say this is written out of self-interest or personal gain. However, like it or not, this is the only system where everyone wins. History has proven that this is not just “fair”—it is compassionate. Rewarding individual production gives more production and with increased production, everyone survives better. Penalizing individual production leads to no production, no products, nothing.

And with nothing to give, no one gets anything they need.

_______________________


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