Zhejiang Province: A Free-Market Success Story

Yasheng Huang, a professor at the Sloan School of Management at the Massachusetts Institute of Technology, has written a piece in BusinessWeek that uses Zhejiang and Jiangsu provinces as economic models to explain why China needs to encourage entrepreneurship if it really wants to spread its wealth around:

Jiangsu and Zhejiang represent two contrasting development models in China, a phenomenon first noted in 1986 by Professor Fei Xiaotong, China’s most prominent sociologist. The Zhejiang model is characterized by a heavy reliance on private initiatives, a noninterventionist government style in the management of firms, and a supportive credit policy stance toward private companies. Probably the most famous product of the Zhejiang model is Wenzhou, a city in southern Zhejiang province that today accounts for a disproportionate share of rich entrepreneurs, asset owners, and China’s manufacturing prowess.

Although Wenzhou and Zhejiang represent the triumph of laissez-faire, broad-based, entrepreneurial capitalism, many outside analysts fail to appreciate why China should adopt free-market economics rather than retaining state-owned monopolies and state interventionism. Western observers and many inside the Chinese government focus on a narrow set of economic indicators. Specifically, they track economic performance by GDP data. In terms of GDP performance, the differences between Zhejiang’s economy and the more statist economies of Jiangsu and Shanghai seem to be minor. Zhejiang outperformed these two regions in GDP performance but not by a large margin. …

… Entrepreneurship not only contributes to GDP growth but also to the income growth of average people. Statism, while maybe effective in producing impressive GDP numbers, does not make income grow that much. Between 1999 and 2004, Shanghai experienced a massive construction boom and exploding GDP growth, but an average Shanghai resident actually lost relative to the rest of the country. In Zhejiang, GDP also grew quickly but so did the income of average Zhejiang residents.


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