China gave birth to several products that helped change the course of history, such as gunpowder, the compass, and paper money. But its greatest gift to the world has been something different: Setting an example of how capitalist economic policies can help liberate hundreds of millions of people from a life lived in bare subsistence poverty.
The current U.S.-China trade tussle makes it easy to forget just how rapidly China became a global economic power. When China began its economic reforms 40 years ago, it had an agriculture focused economy that was only about 6% the size of the U.S. economy, despite having more than four times as many people. About 90% of the country’s population lived in poverty.
These conditions were a catalyst for the country’s leader, Deng Xiaoping, to announce wholesale economic changes in December 1978. These changes involved liberalizing the state-controlled economy and trading more with other nations. The following July, the United States and China signed an agreement focused on formalizing trade relations with each other. About a week later, Beijing approved a measure to ease the tax and regulatory burden on foreign companies investing in designated Chinese cities — Shenzhen, Zhuhai, Shantou, and Xiamen. The latter measure had an especially dramatic effect in igniting the country’s long-term economic growth.
Consider how capitalism transformed Shenzhen. In 1979, it was a fishing village with a population of just 30,000. The introduction of free-market policies into this newly designated special economic zone unleashed investment that triggered a boom. The city achieved an extraordinary 22% annual average growth rate from 1980 to 2016, according to the Economist. Today, Shenzhen is home to 12.5 million people and serves as the headquarters of some of the world’s largest companies, such as Tencent, Huawei, and ZTE Corp. Poverty has been nearly eliminated, and per-capita GDP was nearly $50,000 in 2016 which is on par with some U.S. states.
Shenzhen’s achievements are a microcosm of China’s progress over the past four decades. It represents a period in which socialist economic principles were abandoned and more than 700 million people moved out of poverty. Today, the national poverty rate in China is just 3%, and the country is an economic juggernaut.
The special economic zones enabled this progress, as did several other free-market reforms. China permitted foreign investors to create wholly-owned subsidiaries, allowed private parties to set their own prices for goods and services, and implemented a “household responsibility system” that gave rural households the freedom to decide what they would produce on their land and how much to produce.
Similarly, the government reduced tariffs on imports, as well as the share of imports subject to licensing requirements. Farming, which employed 77% of the labor force in 1977, was gradually freed from state control.
The policy changes helped enable large-scale capital investment, and in tandem with other reforms, China’s economy became more efficient and more productive. In 1978, state enterprises generated about 80% of China’s GDP, while rural communes produced the other 20%. Today, the private sector accounts for more than 60% of China’s GDP and 80% of its employment.
Other developing countries followed China’s lead, with the result that more than one billion people have escaped poverty over the past 40 years; a pace of material progress without precedent in human history. In 2008, when the Commission on Growth and Development, chaired by Nobel laureate economist Michael Spence, explored the sources of this progress, two of the leading factors it identified were the maximization of opportunity connected to the global economy and the reliance on markets to allocate resources.
China has recently made a sharp turn toward economic isolationism and protectionism, moves that lead to trade conflicts like the one that’s underway with the United States. But whatever the outcome of the current conflict, it shouldn’t obscure China’s enduring contribution to the world. This nominally communist nation has demonstrated how capitalism can create a dramatic rise in living standards in the world’s most-populated country.
Amid the great progress in China and other developing countries (such as India), there are still more than 700 million people living on less than $1.90 per day, according to estimates. Mastering the fundamental lesson of the past which shows how well free-market capitalism works can help provide a road map to a future marked by greater prosperity and less poverty.
Mr. Harvey is the founder of the DKT Liberty Project. Mr. Rees is a writer on international affairs.
