How China got rich?

After much delay to deal with JBU budget issues, I've finally finished reading "The Undercover Economist." The last chapter, about how China got rich, was particularly intriguing. The crux of the argument is that China already had a lot of the necessary pieces (well educated people, access to world markets via Hong Kong & Taiwan, and huge labor and capital supplies), but they were missing the necessary incentive systems to develop. Deng put those in place, and voila, the most rapid economic expansion in the history of the world.

But how Deng put those incentives in place is fascinating. He didn't use "shock therapy" the way Russia and some of the E. European countries tried (and mostly failed). Instead, he insured that the state economy would continue with its current structures and quotas . . . but no more than that. Any extra production from the state businesses would go back to the businesses, not the state. Since it's the marginal production (the last unit) that matters, this allowance for profit on the margins revolutionized the economy while the assurance that the old system would not be (immediately) destroyed avoided most of the panic and revolutionary chaos that occurred elsewhere.

The basic argument here is an old one that revolutions do not happen because people are poor or miserable. They occur because people with a little (or a lot) fear that what they have will be taken away from them. But in order to produce more, people need to know that that "extra" production will go to them and not just back into "the system." Deng managed to address both ends of this change continuum, and the spectacular growth in the new areas (which, crucially, included new competitors at the local and international levels) soon dwarfed the old state economy.

What lessons then for JBU? One of my main arguments related to health care policy at JBU is that we need to move to a system where decisions "on the margin" redound to the benefit of the individuals making the decision instead of to JBU as a whole. An HSA system, for example, would do much more of that than our current structure does. But the second half of the equation is that the change is much easier to do if you can assure people that at least initially, they won't lose anything. You need to "buy out" the inertia and potential political opposition of the old system and allow the new resources to flow to those who are most "productive."

I've tried to apply this fairly straightforward thinking in a variety of areas (such as the ancillary budget system, the loads and caps documents, the various innovation funds, and our summer scholarships), but the big challenge in all of these cases, as was also true of the Chinese situation, is that redirecting "new" resources requires that you're actually generating new resources. Growth is the key to change. The new incentive system that China implemented probably would not have been enough if it didn't have to the other factors in its favor (as India has not, for example) to work from.

In JBU's case, the reason that we've been able to do any of the above "new" ideas is that we've had increasing student numbers, lots of money from fund-raising, discipline within our current spending to insure that the new money doesn't just do old sinkholes, and, most importantly, good people who can develop and implement these new ideas.