Zhejiang Province: A Free-Market Success Story

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The upshot of this analysis is that an average resident in Zhejiang captures 10% more of each increment in economic output than does his counterpart in Shanghai. He is 10% richer, but his government is 10% poorer. Therein lies the fundamental difference between an entrepreneurial economy and a statist economy: The former makes the economy grow but also improves "material prosperity for aggregate bodies of human beings;" the latter increases GDP but allocates most of the gains to the government.

Shanghai vs. Zhejiang

Shanghai itself is rich but an average Shanghainese is not. This is the price and the cost of a statist economy. A detailed examination of GDP and household income data show that these two data series behave in a systematically different fashion between Shanghai and Zhejiang. In the 1990s the ratio of Shanghai's GDP per capita relative to the national means continuously rose, from 4.7 in 1999 to 5.2 in 2004, indicating Shanghai gained relative to the rest of the nation in GDP terms. The same ratio rose in Zhejiang as well, from 1.8 to 2.3, but that's where the similarity between them ends. In Shanghai, household income—again relative to the country as a whole—actually declined, from a ratio of 1.87 in 1999 to 1.77 in 2004. In Zhejiang, household income growth kept pace with its GDP growth. The ratio rose from 1.44 to 1.54.

This comparison gets to the essence of entrepreneurship. 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.

It is high time to dig into data beyond GDP performances in order to distill the correct policy implications. Should China have adopted de Soto's "other path," it would not only have impressive GDP numbers to showcase but also distributed growth dividends, faster income growth, a more solid base of domestic consumption, and ultimately a Chinese population that reaped broad benefits. To achieve these objectives, the Chinese leadership needs to look no further than its own star province, Zhejiang.

Yasheng Huang is a professor at the Sloan School of Management at the Massachusetts Institute of Technology. This article is based on his recent book, Capitalism with Chinese Characteristics, published by Cambridge University Press.