CHINA'S BOOMING ECONOMY: DO THE RISKS OUTWEIGH THE OPPORTUNITIES?

• Author: Weidenbaum, Murray L.

"Those who take the freedoms of the private enterprise system for granted should not forget that the government still is puffing many of the strings in the Chinese economy."

This is a time of fundamental change in the global marketplace. It's like the middle of the 19th century, when European nations dominated the world economy, then the U.S. elbowed its way into the club of industrialized nations.

In the middle of the 20th century, when Western nations dominated the world economy, Japan elbowed its way into the club. In both cases, the world economy continued to grow, if not to accelerate, although the monopoly was broken. In absolute terms, each nation experienced growth in its production and exports, although their relative shares of the world market declined.

Today, China stands at the threshold of a similar breakthrough. By some widely used measures, it already is a larger economy than Germany. China, in effect, is in a race with Japan for second place--just behind the U.S. There has been no dramatic equivalent of the Berlin Wall coming down, but, since 1979, China has been moving toward capitalism and economic expansion--a step at a time and just partially.

Leader Deng Xiaoping was the driving force. He made that decision on practical, rather than philosophical, grounds as the economic superiority of capitalism became obvious. While China had difficulty feeding itself, Taiwan and Hong Kong were booming. Deng substituted economic incentive and technology for Mao Zedong's ideology, unity tot class struggle, and experts for "red" loyalists.

It is fascinating to recall that private agriculture--rather than private industry--was the entering wedge. After selling the required amount to the government, a farmer could sell the rest in the market. That is the incentive of capitalism--produce more and earn more--and it worked! To save face, they called it "market socialism." The results were impressive. By 1990, pork consumption doubled; the number of flesh eggs eaten tripled; and luxury fruits and vegetables became commonplace.

The reform of industry followed agriculture, but more slowly. Special Economic Zones were set up to promote exports. Coincidentally, all tour were near Hong Kong or Taiwan. Tax breaks and other capitalistic incentives lured foreign business. Deng eliminated the three socialist "irons" that had inhibited economic growth in China: the "iron rice bowl" that had guaranteed jobs; "iron chains" that had guaranteed management tenure; and the "iron wages" that had guaranteed pay never would be cut.

Most of those foreign businesses were not from the obvious places--Japan, the U.S., or Western Europe. Rather, they were overseas Chinese who were investing in their traditional homeland. The Special Economic Zones were a smashing success. Foreign investment in the zones expanded very rapidly and now accounts for large shares of China's exports. Guangdong Province--adjacent to Hong Kong--became the wealthiest part of China. Guangdong is almost an extension of Hong Kong. Xiamen near Taiwan also has boomed, although not to the same extent as Hong Kong.

Other parts of China seeking to copy the success in the southeast haven't done as well yet. Some of the more urban areas are tied down by socialist approaches to production. The rural areas lack transport: and other...