Zhejiang Province: A Free-Market Success Story

China's Zhejiang and Jiangsu provinces seem similar, but household income in entrepreneurial Zhejiang shows an economic model to be followed

By Yasheng Huang

"All our indicators are better than those of Ningbo [in Zhejiang province], except per capita income," said Wang Mang, then-mayor of the city of Suzhou in China's Jiangsu province, in 2004. He was contrasting the performance of two well-known provinces in China, Jiangsu and Zhejiang. These two provinces, often lumped together in China and referred to as Jiang-Zhe in Chinese, on the surface look remarkably similar. Both are coastal: One is located north of Shanghai (Jiangsu) and the other south (Zhejiang). Both are rich: Zhejiang and Jiangsu rank as No. 1 and No. 3, respectively, in per capita gross domestic product in the country. (This calculation excludes Beijing, Shanghai, and Tianjin.) Both have grown very fast, averaging around 10% GDP growth annually in the past 30 years.

Look a bit closer, though, and the differences between these two provinces will manifest themselves. The former mayor of Suzhou touched on one difference: Compared with Zhejiang, Jiangsu has everything on its side—foreign direct investment, high-tech industrial parks (with heavy support from another FDI-heavy economy, Singapore), bank loans, and massive investments—except for the thing that matters the most, per capita GDP. In fact, other measures would show even bigger differences between the two provinces. The per capita household income, which measures the actual income received by Chinese households, is much higher in Zhejiang than in Jiangsu. Zhejiang households also have larger asset incomes—the incomes received from savings, property transactions, and leases. An average urban resident in Zhejiang earned an asset income 3.4 times that of his counterpart in Jiangsu.

There is another difference between them: Both provinces are rich, but they are rich for different reasons. To put it simply, Zhejiang is rich because it has grown faster; Jiangsu is rich because it has always been rich. In 1980, Zhejiang was ranked No. 7 in the country in terms of per capita GDP, compared with Jiangsu's No. 3 position. Zhejiang's catch-up story makes its performance doubly impressive. These differences are not mere statistical abstractions. They have real welfare implications. In 1990 an average resident in these two provinces had a roughly identical life expectancy at birth: 71.4 years in Jiangsu and 71.8 years in Zhejiang. In 2000 the gap increased: 73.9 years in Jiangsu and 74.7 years in Zhejiang. An average rural resident in Zhejiang consumes and owns more telephones, PCs, color TV sets, and cameras than his counterpart in Jiangsu. He also lives in a bigger house.

"The Other Path"

What sets Zhejiang apart from Jiangsu? Two words: indigenous entrepreneurship. In Peruvian economist Hernando de Soto's seminal book, The Other Path, De Soto documented the barriers to indigenous, small-scale entrepreneurs in his native country and the massive, self-inflicted harm to a poor struggling economy because of policies repressing indigenous entrepreneurship. There are many regions in China that resemble de Soto's Peru. Jiangsu is one of them and so is a city widely admired by Westerners—Shanghai. In these regions, the reigning economic model is to court, woo, and placate foreign investors while imposing onerous regulatory and financial constraints on indigenous entrepreneurs. The rationale—to the extent there is one—is that foreign investments bring technology and management knowhow whereas indigenous entrepreneurship is shabby and low-tech is to be shunned. For complex reasons, this technocratic view of economic development has never been a prevailing ethos in Zhejiang.

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.