MIT Economist Cracks Big Puzzle of China's Rise

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Most of us may believe that Robert Mugabe's undermining of democracy is bad news for Zimbabwe's economy.

But if we conclude that China created material prosperity and spawned wildly successful entrepreneurial ventures such as computer maker Lenovo Group Ltd. without constitutional democracy and its appurtenances, then we can't -- at least on purely economic grounds -- argue that Zimbabwe needs them.

Equally useless then would be the heaps of empirical evidence that economists have uncovered suggesting a causal relationship between property rights and growth.

If the most fascinating economic miracle of our times can soar in an institutional vacuum, then surely others can, too.

Now, that may only sound right to Mugabe and his cronies. So what's missing here?

The answer, according to Massachusetts Institute of Technology economist Yasheng Huang, is simple: The conventional view of China is deeply flawed.

Institutions, as Huang argues in his forthcoming book, titled ``Capitalism With Chinese Characteristics,'' have mattered as much in China as elsewhere, only their effect doesn't show up as neatly....

Huang has dug into China's Ministry of Agriculture data to show that in 1985, out of the 12 million businesses classified as ``town and village enterprises,'' more than 10 million were privately owned. The conventional view that Chinese TVEs were controlled by local governments is a myth.

So what exactly changed in the relationship between the government and the people to cause this extraordinary surge in rural capitalism? And that, too, just a few years after Mao's Cultural Revolution, when private possession of a book -- let alone a business -- could get a person arrested.

``China then and now does not have well-specified property rights security,'' Huang says. ``But China in the early 1980s moved very far and fast toward establishing security of the proprietor. One should never underestimate the incentive effect of not getting arrested.''

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