8-30. Some experts suggest that China will need to transition from its export-manufacturing based economy to an economy based on domestic consumption and an enhanced service sector.

To make this transition, what changes in China’s economic and other public policies need to be made? China’s successful industrialization and remarkable economic development in the decades following Mao-Tse Tung’s death in 1976 provides a wonderful example of the theory of competitive advantage and the Heckscher-Ohlin theorem discussed in Chapter 6. The economic policies championed by Deng Xiaoping and his successors have unleashed the entrepreneurial talents of Chinese businesspeople and unshackled millions of Chinese peasants from the chains of rural poverty.

This economic miracle was in large part due to the low wages that were paid to Chinese workers and the adoption of foreign technology, often transferred through foreign direct investment. The low wages in turn resulted from the migration of millions of rural Chinese, eager to escape the backbreaking labor and low incomes earned in farming, to urban areas. With so many people living in rural areas, a typical plot of land was too small to benefit from mechanized labor;

every stage of the crop cycle, from planting to weeding to fertilizing to harvest, was done by hand. When Deng liberalized China’s economic policies, residents of rural inland China, particularly teenagers and young adults despairing of being condemned to eke out a living from the land like their parents and grandparents, migrated first to the new economic zones in Shenzhen and Xiamen and later to coastal cities such as Tianjin and Qingdao to seek work in the new factories sprouting up. Each year, thousands of new factories were built, and each year millions of rural Chinese journeyed to them in hopes of a new life. All told, the journeys of rural Chinese to the cities of coastal China represented the largest internal migration in the history of the world—some 250 million people. Because the flow of new labor matched the needs of the new factories, the price of labor stayed low.