Human Side Of Economics
By Bernardo M. Villegas
Learning from and about China
(First of three parts)
Recent news about the Chinese economy is that it has ended extreme poverty, as reported by Chinese President Xi Jinping. This is in keeping with what was promised by Xi five years ago when he vowed to eradicate poverty by 2020, a pillar of the Communist Party’s goal to build a “moderately prosperous society” by the 100th anniversary of its founding to be celebrated in July of this year. The World Bank uses $1.90 per person per day as the poverty line although China uses a higher and more demanding $2.25 to determine who among the population are living in abject poverty. Using this higher figure, the data show that in the one generation, between 2000 to 2020, China was able to reduce the poverty incidence from 49.8% to 0%. Despite this extraordinary feat, there are still nitpicking critics who say that China should use even a higher poverty line of $5.20 because it is already an upper-middle income country with a per capita income of more than $10,000 (as compared to ours of little less than $4,000). In fact, these critics are unwittingly highlighting the “human miracle” of a poor country that was able to literally lift itself by its bootstraps by improving its GDP per capita from $940 in 2000 (at that level China was still a Third World country at the beginning of the Third Millennium) to an incredible 10 times more of $10,410 in 2020. No other country on this planet has ever accomplished such a transformation of its economy in such a short period. In stark contrast, the Philippines, by making so many mistakes in economic strategy over the last 50 years, did a very poor job of increasing the $1,000 per capita that already prevailed in the 1960s to less than $4,000 by 2020. This dismal failure kept our economy at the level of a low-middle income economy for half a century.
These figures I am quoting are from the World Bank and from the international statistics outfit Statista. According to the World Bank, China has lifted more than 800 million people out of extreme poverty since turning to market reforms in the late 1970s and 1980s under Deng Xiaoping, after the death of Mao Zedong in 1976. It is important to point out that there are two periods since 1978 that can account for the so-called “human miracle” that we are now witnessing in China. The first period was the emphasis on economic growth through market-oriented reforms that liberalized trade and opened up the Chinese economy to massive Foreign Direct Investments, especially from Taiwan, Japan, and the United States. This period lasted one generation until the beginning of the Third Millennium. During this stage, the focus was on growing the economy through encouraging people to be rich. Remember that Deng Xiaoping had a memorable slogan: “It is glorious to be rich!” and “It doesn’t matter what the color of the cat is as long as it catches mice!” The ideology was taken from neoliberalism that assumed that there would be a “trickle down” to the poor if more and more people become rich. Neo-liberals believe that a rising tide raises all boats. It is clear that the experience of China with neo-liberalism was no different from what happened in the West. There was little trickle down even with double-digit growth rates of GDP at 10% to 12% annually, as evidenced by the fact that by 2000, the poverty incidence was still close to 50% which meant that half of the population were still living in dehumanizing poverty, not too different from the conditions prevailing then in the Philippines and most Third World countries.
The real battle against poverty came after 2000, especially during the regime of Xi Jinping, when the State refocused its equivalent of our Build, Build, Build program on the inner and poorer provinces. There were massive investments in rural infrastructures, especially farm to market roads, irrigation systems, post-harvest facilities, and other services needed by the poor farmers. Huge government expenditures were channeled to basic education and health. Their equivalent of our Social Amelioration Program was sustained without let up. It was during this period that the majority of the 800 million liberated from poverty were directly targeted. There was no belief in the trickle-down effect of the market.
The name of the game was direct poverty targeting for which Xi Jinping is famous.
The question must be asked, though, is how did the Government raise all those massive funds needed for direct poverty targeting? The answer is obvious. The funds were raised through the vertiginous growth that the Chinese economy experienced immediately after the end of the infamous Cultural Revolution of Mao Zedong. As one of the most authoritative books on Modern China by Martin Jacques (When China Rules the World) reports: “The process of reform began in 1978 with the creation of a handful of special economic zones along the south-eastern seaboard, including Guangdong Province, in which the rural communes were dismantled and the peasants were given control of the land on long-term leases and encouraged to market their own produce.” The first step then was the development of the rural areas and incentivizing farmers to increase their productivity through what was called “the responsibility system.” Then the second step was to open up the economy to world trade and to foreign direct investments. As Jacques wrote: “In response to the challenge posed by an increasingly globalized economy, the Chinese leadership, mindful of the need to accelerate the process of reform, opted for one important element of shock treatment. During the ‘90s, by dismantling tariff barriers and allowing huge flows of foreign direct investments — in contrast to the economic strategy pursued by Japan, South Korea, and Taiwan — they created a brutal competitive environment in which domestic companies desperately sought to survive against far richer and more advanced Western and Japanese rivals. This rapid opening up enabled the Chinese economy to take advantage of enormous flows of foreign capital (that reached more than $100 billion annually) and had the merit of forcing Chinese companies to learn from the outside world….”
From these preliminary reflections on the “human miracle” of China, that will be celebrated by the Chinese Communist Party in July this year, we can draw out the following lessons. First, our attempts to grow more rapidly and, more importantly, to eradicate poverty, have not been very successful in the past 20 or so years because we failed to start, as China did, with the prerequisite of rural and agricultural progress as a foundation of high and inclusive growth. Fortunately, there are signs that under the leadership of Secretary William Dar, our agricultural sector is showing signs of significant improvements in the food and agribusiness sector (which managed to grow during some quarters even amidst the catastrophic drop in GDP last year).
We should make sure that we will continue to have the right leadership in both the Department of Agriculture and the Department of Agrarian Reform in the coming years. Second, we should support the initiative of Speaker Lord Allan Velasco and his colleagues in the House of Representatives to convince three-fourths of the Senate to amend the restrictive economic provisions in the Philippine Constitution of 1987 so that, like China, we can accelerate our economic growth to the range of 8% to 10% of annual GDP growth after the pandemic. Thus, we can emulate the way the Chinese economy was able to attract massive foreign direct investments during their critical stage of economic take-off during the 1980s and 1990s. These FDIs can do much to generate the necessary funds which the Government direly needs to directly target poverty eradication as well as to attract both advanced technology and skilled professionals who will help us especially during the transition of our country towards a fully digitalized economy.
Bernardo M. Villegas has a Ph.D. in Economics from Harvard, is Professor Emeritus at the University of Asia and the Pacific, and a Visiting Professor at the IESE Business School in Barcelona, Spain. He was a member of the 1986 Constitutional Commission.
