Industrialization

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Chinese Rural Industrialization
in the Context of the East Asian Miracle

Justin Yifu Lin

&
Yang Yao

China Center for Economic Research
Beijing University
Chinese Rural Industrialization in the Context of the East Asian Miracle

One remarkable feature of China’s economic development in the last twenty years is its rapid rural industrialization centered at the development of numerous small-scale rural enterprises (REs) established by townships, villages, and individuals.[1] Some other economies such as Taiwan also took the same road to rural industrialization, but the magnitude of China’s scale is unprecedented. In 1978, only 9.5% of the rural labor force were engaged in industrial activities, and only 7.6% of rural income was contributed by the non-farm sectors; by 1996, 29.8% of the rural labor were working in local industry, and non-farm income accounted for 34.2% of rural total income. This remarkable growth, although remaining controversial regarding its role for enlarged regional income disparity, has brought more equal income distribution at the local level. The magnitude and speed of China's rural industrialization have spurred wide attention in international academic community. Several competing theories have been developed in the literature trying to explain the success. Culture theory could be applied to signify the role of cooperative culture in the Chinese village in enhancing RE development. The new growth theory could be applied to emphasize the positive externality created by the accumulation of knowledge, and recently of social capital, in promoting sustainable growth. Fascinated by the perversion of public firms owned by local governments, a large body of the literature focuses on the positive functions of the vaguely defined property rights in promoting REs' rapid growth. This body of literature emphasizes the positive role of local governments, noticeably, those at the township and village levels, in helping REs meddling through China's half market-half plan economy to get accesses to precious financial and material resources as well as to walk through the maze-like bureaucratic hierarchy. Yet, another theory explaining the REs’ success points to their alignment with the comparative advantage of rural China. This explanation, classical as it surely be, is often overlooked in economists' search for new and exotic theories, yet it may be able to explain China's successful rural industrialization as well as the wide regional disparity in its vast territory. The aim of this paper is to synthesize the different explanations as well as to present an overview of the development and characteristics of the Chinese REs. An econometric analysis is conducted to test various competing theories explaining the success of the REs. The rural industrialization history of the Chinese provinces in the last thirty some years is analyzed. Among other results, the analysis has reached the following conclusions. First, provincial diversity in RE development is strongly linked with the capital stock in the rural area; in other words, a province with a comparative advantage in industry relative to agriculture has a larger RE sector. Second, a lighter SOE sector at the outset of the development helps a province develop a larger RE sector. This result suggests that a province that initially abided by China's comparative advantage in labor intensive industries laid a better stage for its future RE development. Thirdly, a larger share of public REs hinders the overall RE development in a province in the reform period. This last result contradicts the prediction provided by many theories advocating the vaguely defined property rights widely observed in Chinese REs. We also place the Chinese experience in the context in East Asia and compare it to other East Asian countries, noticeably, Thailand. Surely enough, the Chinese experience has its unique features that are specific to its recent historical...
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