Summer School 6: China, Taiwan and how nations grow rich

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0:25Welcome back, everyone, to Planet Money Summer School, economic history of the world. We've spent a lot of this semester talking about capitalism gone wrong, the panics and the busts, the schemes and the cons. So today we are going to visit a time period where capitalism did some amazing things. And we'll ask, how can governments harness the free market to make their countries richer? This is lesson number six, The Asian Miracle. I'm Robert Smith. In the middle of the 20th century, China and its neighbors in East Asia were poor, mostly rural economies. China had been wrecked by a brutal civil war.

1:03Taiwan had become the home of people fleeing from that conflict. Japan and Korea were rebuilding after wars of their own. And then in the later half of the 20th century, they started their comeback. Today, we wanted to focus specifically on China and Taiwan during this time, when they showed a burst of economic progress rarely seen on this globe. Our summer school professor today is an expert in the Asian economies. He was born in Taiwan and grew up in South America. From the Booth School of Business at the University of Chicago, Cheng Tai-xie. Hi, great to be here. It's hard to get your head around how quickly the countries in East Asia change.

1:40So in China, for instance, in the year 1960, millions of people died of starvation under Mao Zedong. And now it's the second largest economy in the world. And other countries in the region saw the same sort of remarkable growth. Can you give me a sense of how big a deal this is? I think it's clear that it's been an incredible transformation. Where most of these countries were in the 1950s and the 1960s is that there were mostly poor agrarian societies. It's a miracle in almost all senses of the word, dramatic societal, political, and economic transformation, just within a generation. Is there a unifying sense of like one thing they all had going for them?

2:21They all had their backs against the wall. There's this sense that they either got to do something or else they were going to go to hell. They weren't going to be able to survive as a society. On today's show, we will have two stories, one from China and one from Taiwan, about how places with their backs against the wall can figure out how to become rich. And after each story, we'll have our professors show us the big lessons in how a government can help or hurt a fragile economy. First up, a secret document signed by starving farmers shows an entire nation the way forward. After the break.

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3:51You can also invest on your own and trade on Think or Swim. Visit Schwab.com to learn more. This message comes from Insperity. Excellence takes drive, work, perseverance. Tiger Woods brings it to the course. Insperity brings it to your business. Want to be the best? Work with the best. Insperity. How you HR matters. Learn more at insperity.com slash tiger. Twelve years ago, Planet Money went on a reporting trip to China to do a bunch of episodes. And this one is my favorite. It really shows the radical changes China had to go through to get to where it is today. David Kestenbaum and Jacob Goldstein took one of China's famed bullet trains, and they traveled out to the rural countryside.

4:36They had heard a story about something that happened in a small village in 1978 that transformed China. I'll let David and Jacob take it from here. The village is called Jiaogang, and we went there. It's very nice to meet you. Thank you for talking to us. No problem. Thank you. Oh, no, it's no trouble. Thank you for coming. This is Yen Jinchiao. And by the way, none of the people we talked to in Zha Gong spoke English. So what you're hearing here is a translation. Yen Jinchiao, he's one of the people who started China on this path to bullet trains. And one of the really fun things about reporting on China's economy is, well, so if you're in the U.S.

5:16and you want to talk to one of the founding fathers of the U.S. economy, you want to talk to Alexander Hamilton, you're out of luck. He's been dead for hundreds of years. But in China, a lot of these key people, they're still around. Yan Jin Chao is not an economist. He's not a politician. He runs a small restaurant in Zhao Gong. 30 years ago when all this happened, he was a farmer.

5:39Yan Jin Chao opens a big metal gate behind his restaurant, and he takes us out to the fields where he used to farm. Back in 1978, everyone here worked on a collective farm. Look, you can grow things in winter.

5:54Mount Zitong had just died, and it was still basically the height of communism in China. And on our visit to this village, we actually spent a long time just trying to figure out how the system worked on a communist farm. The basic idea was that people would work together for the common good. And in this world, as Yan Jinchao explains it, nobody owns anything. I used oxen to farm, but they weren't mine. They belonged to the group. Back then, even a piece of straw belonged to the group. Individuals didn't own anything. At one meeting with Communist Party officials, one farmer asked, what about the teeth in my head?

6:32Do I own those? No, was the answer. Your teeth belong to the collective. Everything in this world was centrally planned. The farmers were told what to plant by a Communist Party official from outside the village, and sometimes they were told to grow rice, even if they didn't have enough water to properly grow rice. Yen Jin Chao says, Back in this era, every morning a whistle would blow to mark the start of the work day. Sometimes the guy blowing it would have to blow it twice. The farmers would drag themselves out of their huts and go to work on the fields. At the end of the day, the whistle would blow again and everyone would stop.

7:06You'd get points for working all day, but it didn't matter how much or how hard you worked. You just had to show up. Even if you had decided to go out early and pull weeds or something, it wouldn't make a difference for you. Work hard, don't work hard. Everyone gets the same. So people don't want to work. And after the harvest, the government collects what everyone has grown and gives the village an allotment of food. But in the case of Xiaogang, the allotment was never enough. So they were hungry all the time. Their kids never had enough to eat. And Yan Jin Chao and the other Xiaogang farmers, they had to walk to other villages and beg for food.

7:45We were farmers. We were supposed to produce food. To beg for food was not honorable.

7:54We felt very ashamed. It was hard to knock on doors and beg for food. My face was burning. This is the way things were all over China. This is basically the way the entire economy was set up. So the farmers in Zhaogang were starving, and they needed to do something. One farmer in particular was pushing for a change. His name, Yan Hun Chang. We tracked down Yan Hun Chang as well. And we talked to him in this open garage attached to his house. There were sacks of grain piled up along the walls. He smoked cigarettes the whole time. It was this really cold, rainy day. And he told us that out of desperation, the farmers came up with an idea.

8:33But the idea they had was so dangerous, they had to call a secret meeting to discuss it. That day, it was about five in the afternoon. We met at Yanlihua's home. This was a secret meeting. We snuck in one by one. There were 18 farmers crowded into this small room. Yan Jinchao was there. Were there enough chairs for all of you? There were no chairs back then. How could there be chairs? Some of us crouched, some sat on the floor. There were some little tiny stools. But we had no chairs back then. Yan Hun Chang says everybody there was afraid to talk, so finally he spoke up. I said, everyone is here and knows what this is about.

9:29Everyone knew. But no one dared to speak. So I spoke up.

9:39I said we're all here because we have to find a way to save ourselves. To save themselves, they have an idea that is both revolutionary and as old as dirt. Rather than farm as a collective, each family gets to farm its own plot of land. And if a family grows a lot of food, that family gets to keep some of that food. You own what you grow. But owning in communist China in 1978, that's something like treason. I was scared. But if you were too scared, you wouldn't be able to do it. And that wouldn't work. So in this little dirt-floored room by the light of a broken-down oil lamp, these farmers are talking about this idea.

10:23The older farmers who remembered the days before communism, when they could farm their own land, they said, we have to try this. But a lot of the guys in the room, they were really scared. Most people said, yes, we want to do it. But there were others who said, I don't think this will work. This is like high-voltage wire. Back then, farmers had never seen electricity, but they had heard about it. They knew if you touched it, you would die. But they decide they have to do this. The alternative is to continue begging and going hungry. They decide they need to write this down, write down a contract laying out how this is going to work, and put their names on it so they're all bound to it, so no one can go back on it.

11:09Do you remember the exact words that you wrote?

11:14I wrote it myself. Of course, I remember. Can you tell it to us?

11:23We will divide up the farmland between the families. Each family will give a share of the crop to the government and the collective at the end of the year. If we are put in prison or executed, we will not complain. They are, in a sense, the first capitalists of modern China. Their livelihood is in their own hands. If it works, they'll have enough to eat. If they get discovered, they could be killed. But one by one, the farmers come forward to sign on to the contract. They realize they need to hide this thing. And eventually, Yan Hunchang winds up slipping it inside a piece of bamboo in the roof of his house.

12:01Yan Jinchao remembers the first day he went out to farm after they signed the contract. It just felt different. I felt comfortable in my heart, energized. I could really show off my abilities. Did you work harder than before? Of course I worked harder. We all did. because whatever I produced was mine. If you didn't work hard, that's your loss.

12:34And we all secretly competed. Everyone wanted to produce more than the next person. That got people working hard. It's amazing to think this is the same land, they have the same tools, it's the same farmers, but just by changing the economic rules, just by saying you get to keep some of what you grow, everything changes. We started to work before the sun came up, and we worked until it was dark. This working all the time thing actually gets them into trouble. Yen Jin Chao says the neighbors noticed it, and they started to suspect something funny was going on. Why were these crazy farmers going out to work before the whistle blew, before dawn?

13:16And why were they working so late? And at harvest time, there was an even bigger problem. It was impossible to hide. They had an enormous harvest. It was more food, according to Yan Hun Chang, than they had grown in the previous five years combined. It was both exciting and terrifying. Eventually, word of what's happening in Xiaogong makes it up the chain of command through the Communist Party to the very top, to Deng Xiaoping, the guy basically running China at this time. Deng Xiaoping is one of the pro-reform guys. At this moment, he is poised to become the key reformer who creates China's modern economy.

13:53Deng Xiaoping has been wanting to change the way farming works in China. And he likes what's happening in Xiaogong. But this is still communist China. It's just two years after the death of Mao. And lots of people are opposed to what's going on in Xiaogong. So Deng can't say anything bad about Mao or collective farming. Deng's big picture idea is let's not worry about whether something is capitalist or communist or socialist. Let's worry about whether it works. There's this famous quote that's attributed to Deng that, David, we actually heard all the time when we were in China. It doesn't matter if a cat is white or black.

14:25As long as it catches mice, it's a good cat. Deng Xiaoping doesn't stand up in public and give these Xiaogong farmers medals. He's quieter about it. He decides to have these two writers tell the story. He calls them in and says, I support this. You guys should go tell the Xiaogong story to the rest of China. And pretty soon, people all over China are farming like the people in Xiaogong. Farmers own what they grow. The government starts trying out other economic experiments. Factories spring up in cities along the coast. China lets foreign companies in. Coca-Cola opens a plant in Beijing. And China's economy grows like crazy.

14:58And this crazy economic growth, it has gone on and on for more than 30 years now. Since the farmers in Xiaogong signed that contract, something like 500 million people in China have risen out of poverty. They've moved from mud huts with dirt floors and oil lamps to houses with electricity. When you ask about what happened in that hut in 1978, everybody agrees. Everybody tells the same story. But when you ask about what has happened in Xiaogang since then, Yan Hun Chang and the party officials, they tell two very different stories. The official version is that everything in town is great. New factories are springing up.

15:34There are lots of jobs. Xiaogang is living happily ever after. Yan Hun Chang says he's had a different experience. He says he started a few businesses over the years, but once they became profitable, the government took them away from him. He also says those new factories springing up around town, a lot of them are just empty. Local officials say none of this is true. The tension you hear, though, really throughout the Xiaogong story between free enterprise and state control, that is everywhere in China today. The government has let go of some parts of the economy, but it's holding on tightly to other parts.

16:09David Kestenbaum and Jacob Goldstein from a Planet Money episode. from 2012. We're bringing back in our summer school professor, Cheng Tai-xie, to talk about how we got from that document signed by farmers to the complicated Chinese economy we have today. Hey, Professor. Nice to be here. So as we heard in the story, in the 1980s, the Chinese government relaxed a lot of the controls they had over the economy, not just the collective farming they got rid of. Price controls allowed some businesses to compete. But how were they trying to balance government controls and economic freedoms. What was the theory here?

16:45Maybe the best way to describe how they were going about this process is this famous saying by Deng Xiaoping, which is they were trying to cross the river by touching the stones. They didn't have an overarching theory or any grand plan of how they were going to cross the river. They were just going to go step by step, you know, trying to find a way to get out of the desperate economic situation that they were in. The ideology will kick in later. I know a lot of the liberalization of the economy came to a halt after 1989. That's when we saw the protests in Tiananmen Square and the government crackdown.

17:19What starts to happen to the new business freedoms that we heard about in the story? What we start to see in a couple years after that was this beginning of what I'm going to call this new economic model. It was the strengthening of the control of the party and there's some local leaders, some local party organizations that realized that, hey, I can do something with this power. And what they meant by doing something is that they can make these deals with local entrepreneurs in which they say, we work together. I'm going to smooth the path for you and we can do business together. So this became the model.

18:03It's almost like the economic model of a mafia boss in which you're always going to need the mafia boss. But the mafia boss is on your side. And what we saw in China in 20 years after 1989 is that the mafia boss was so incredibly powerful, was so entrepreneurial, and was so effective that this is when we saw sort of the blossoming of the private sector in China, the growth of these enormous, big Chinese private firms. And this is at the local level, helped by local party officials. But then at the national level, we start to see something else, right? Something economists call industrial policy.

18:47What is industrial policy? I define industrial policy as being the government deciding what are the industries it wants to invest in and subsidizing whatever area they choose. In the 2000s, China's official industrial policy was called the 16 Strategic Industrial Policy. What they did was that they basically announced that 16 industries, these were things like steel, aluminum, cars, that only certain state offers would be allowed to produce in these strategic industries. So this was Chinese industrial policy. This was a state deciding what were the industries that China was going to dominate in and who was going to be allowed and who was not going to be allowed.

19:39So still this mix of tight government controls in some areas, some economic freedom in other areas, stone by stone, I guess. We'll hear more from our professor after our second story about Taiwan and a different model of how a government can encourage economic growth. And I should note that Professor Xia and I talked much more about how the current leadership in China is trying to reestablish tighter control over their economy. That's a bonus episode in Planet Money Plus. Sign up at plus.npr.org. After the break, how Taiwan went from a rural economy to making the semiconductor in the device you're probably listening to right now.

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21:47With Veeam plus Security AI, you can see your entire data estate in real time. Because when resilience, security, governance, and AI trust come together, innovation moves safely and faster. Learn more about accelerating safe AI at scale at Veeam.com. We're back, putting the world into economic history of the world. In the second half of our lesson, we are going to hear another approach to growing an economy. Taiwan is about 100 miles off the coast of mainland China, and they face some of the same struggles. But without the Communist Party, it picked a different form of industrial policy to make itself into a technological superpower.

22:28You probably already know that Taiwan is the center of innovation in manufacturing semiconductors, companies like TSMC. But this wasn't an accident. It was the dream of one man in Taiwan, K.T. Lee. In 2022, Kenny Malone and Ramtin Arablui from NPR's ThruLine podcast told us the story of how Lee lured industry, and specifically in the story, one business genius, back to Taiwan from the United States. K.T. Lee was an economics minister and then finance minister and then basically minister at large in Taiwan. And in 1979, he oversaw the very funky and cool name task force of STAG, a.k.a. the Science and Technology Advisory Group.

23:11And so Taiwan, guided by KT Lee and his colleagues, poured money into building up the research and development at Taiwan's universities. They set up national laboratories that would share discoveries with the private tech sector Taiwan hoped to develop. And this is when KT Lee rolls up his sleeves. He started crossing over the Pacific to try and convince Taiwan's tech talent to come back. Bringing these people from Taiwan together and saying, look, if you come back, you know, we will supply you with laboratories. We'll supply you with all of the infrastructure that you need. This is Tom Gold, a professor of sociology at UC Berkeley, author of a book called State and Society in the Taiwan Miracle.