As emerging markets continue to find their places in the global economy, a question remains: What mechanisms are most effective at stimulating economic growth in developing countries?
China makes a strong case for institutional reforms and structural transformations. In the last three decades, the country has undergone tremendous economic growth and development — largely due to its transition from a central-planning system to a market-based one.
But that’s only part of the story. My research team and I have found that changes in household behavior, savings habits, wage structures, income distributions and population policies have also had an impact on China’s economy and, more specifically, influenced the performance of its financial, labor and real estate markets.
Let’s take a closer look at this research, which explores China’s transformation and implications for other emerging markets.
- The Modernization of Agriculture: In China, the modernization of agriculture has accelerated the growth of per capita income. Here’s why: When agriculture relies on traditional technology, industrial development reduces the relative price of industrial products, but it has a limited effect on per capita income because labor is still largely agricultural. Growth is not sustainable until this relative price drops below a certain threshold, which in turn induces farmers to adopt modern technology. This leads to a rapid increase in per capita income.
- The Right Blend of Institutional Reforms: Our team developed a model that demonstrates how relaxing foreign ownership controls and improving contract enforcement encourages multinational companies to produce new products in developing countries. In other words, the combination of both reforms has a powerful impact on the introduction of product varieties. Moreover, ownership liberalization and judicial quality played an important role in raising China’s margin of processing exports from 1997 to 2007.
- Population: Looking at data from population censuses and Urban Household Surveys, we found that population control policies — such as the one-child policy — influence household savings decisions in China. More specifically, adults in various life stages save more money than the average U.S. household for reasons such as:
- Future old-age security concerns
- A lighter burden of dependent child care
- The customary need for adult children to provide old-age support to elderly parents
The paper “Population Policies, Demographic Structural Changes and the Chinese Household Saving Puzzle” further illustrates how population control policies have brought profound socioeconomic changes for China and provides a rationale for relaxing the one-child policy in order to spur spending.
- Economic Policies and Institutions: Over the past decade, the internal and external macroeconomic imbalances in China have risen to unprecedented levels. In 2008, China’s national savings rate soared to over 53 percent of its GDP, whereas its current account surplus exceeded 9 percent of GDP.
My research found that the structural cause of these imbalances is a set of policies and institutions embedded in the economy. The accession of China to the World Trade Organization has also dramatically amplified the effects of these structural distortions.
A Child in the Chinese Cultural Revolution
My perspective is strongly influenced by my childhood experience growing up in the shadow of the Chinese Cultural Revolution, which broke out under Chairman Mao Zedong in 1966. At that time, thousands of highly educated individuals were targeted for “re-education” programs, and my family was no exception. In 1969, when I was three years old, we were forcibly displaced to a province in the Chinese countryside.
There, I experienced extreme poverty. When a car passed by our village, dozens of children, all naked, would run after it because they had never seen one before. I learned very quickly what rural-urban disparities looked like in China. I also learned what a powerful role government can play in the economic success or failure of a country.
China’s profound institutional transformations in the past three decades make it an ideal learning laboratory for studying development.
China’s current elevated economic status is a model of what institutional and structural reforms can mean for a developing country. And this is why we, as business leaders, must seek new opportunities to propel emerging markets forward.
Indeed, our world depends on it.
This post contains discussions from “Modernization of Agriculture and Long-Run Growth” by Dennis Yang and Zhu Xiaodong, Journal of Monetary Economics (2013), “Aggregate Savings and External Imbalances in China” by Dennis Yang, Journal of Economic Perspectives (2012), and “Population Policies, Demographic Structural Changes and the Chinese Household Saving Puzzle” by Suqin Ge, Dennis Yang and Junsen Zhang.