Albert Park, Professor of Economics, University of Oxford

 Industrialization and balanced growth  Rural enterprise development  Comparison with Taiwan  Opening to the outside world  Migration and urbanization  Labor regulation and labor market informality  Conclusions: lessons for Mozambique

 Agriculture contributes to industrial growth  Keeps food prices and industrial wages low  Agricultural growth increases demand for industrial goods through rising income and demand for inputs  Savings from rural income can help finance industrial investment  Higher agricultural productivity releases labor for industry  Implication: investments in agriculture and improved incentives/higher prices can fuel industrial growth

Millions of workersShare of national employment By the mid-1990s, rural enterprises accounted for 20 percent of national employment, 28 percent of industrial output, and 48 percent of exports

“All sorts of small enterprises boomed in the countryside, as if a strange army appeared suddenly from nowhere.” Their emergence “was not something I had thought about. Nor had the other comrades. This surprised us.” --Deng Xiaoping in 1987

 Initial reforms in agriculture raised prices, improved incentives, and increased rural incomes  Gradual market liberalization eased tradeoff between agricultural prices and urban wages  Free entry into new market niches, with little regulation or taxation  Relatively undistorted output and input prices  Well-educated labor force  Active leadership by local government leaders  Collective ownership (township and village enterprises, or TVEs) until the mid-1990s, followed by widespread privatization

 “Rural” industry heavily concentrated in coastal areas, peri-urban areas  Many failed government efforts to replicate success of TVEs in interior regions  High administrative decentralization led to excessive dispersion of industrial activity  More recently, enterprises have become more spatially concentrated in peri-urban locations, often in industrial clusters

 Initially, the government was skeptical that Taiwanese firms could produce goods of sufficient quality to export  One survey in the early 1950s found that only 241 of 400 factories and 337 of 600 products passed minimum quality standards  Led to early protectionist period ( ), focus on domestic market

SME share of manufacturing consistently high, also key to service sector

 Rapid growth of rural incomes and domestic demand in early stages (with protectionism)  Non-distortionary macroeconomic policies encouraged labor-intensive production  Well-educated labor force  Active government role in developing new technologies in agriculture and industry  Major infrastructure projects facilitated growth with equity (unlike China)

 Since 1979 when Deng normalized diplomatic relations, China has been committed to opening its economy to the world  1979 Foreign Direct Investment law  Permissive emigration policies  Gradual trade liberalization  WTO accession agreements unprecedented in opening domestic markets to foreign competition  This approach was courageous, it prioritized gains from globalization (esp. technology transfer) over risks from foreign competition

 Income tax rate of 15 percent  No income tax-first 2 profitable years  50 percent less income tax-years 3-5  More tax benefits for large investments (over $5 million)  Imported inputs (and some consumption goods) exempt from duties  No export duties  Free remittance (after tax)

 4 Special Economic Zones,  16 Open Coastal Cities, 1984  288 Open Coastal Cities, 1988  Limited early success….  ….until the 1990s

 Strong infrastructure  Preferential policies, including taxation, land rights, less regulation  Focus on exports, joint ventures  Provincial-level authority in economic administration

 Red tape, legal environment, price distortions for inputs, overvaluation, political risk  Early FDI mostly in tourist and property sectors, not export-oriented  Difficulty attracting high tech firms (2/3 simple labor-assembly)  Eventual success attributable to persistence, willingness to experiment, patience

 Estimated million rural migrants in urban areas today  In 2003, migrants accounted for 21% of rural workforce, 29% of rural income. 43% of rural population lives in a family with at least one migrant  Barriers to migration have eased over time, but migrants still receive unequal treatment and most work in the informal sector

Migration has fueled rapid urbanization in China

NBS=National Bureau of Statistics RCRE=Research Center for Rural Economy (Ministry of Agriculture) PBC=People’s Bank of China

 1994 Labor Law  Established basic conditions for employer-worker relations, including minimum wage, overtime pay, labor contract, social insurance provision, etc.  2008 Labor Contract Law  Provided greater employment security. After 2 fixed-term contracts, or 10 years of employment, contract must be open- ended  Increased severance pay (one month’s pay for each year of service)  Internationally, law considered highly protective of workers

After long period of steadily increasing informality, notable reduction in Informality since 2005.

 Flexible labor regulation likely contributed to employment gains during the period of labor- intensive manufacturing  New regulations arose when labor became scarce and China began shifting to higher value added products  Stricter labor regulations reflect rising societal aspirations but could constrain employment in the future

 China’s experience included failures as well as successes, but pragmatic approach was consistent  Gradualist reforms  Experimentation  Strong motivation of local leaders  Industrial development success factors  Agricultural growth  External openness and outward orientation  Investments in human capital  Undistorted output and input prices  Active government leadership  Appropriate labor regulations for different development stages