In 1978, farmers in a Chinese village called Xiaogang signed a secret contract that they hid in the roof of a mud hut. The harvest that year had been poor, and the desperate farmers agreed to break their collective farm into individual plots. The most efficient families could keep excess farm produce at home, once the demands of the government and the collective were met. It was an incentive that led to a bumper harvest next year.
All this was akin to high treason on communist China, and the farmers even included a clause to protect their families in case anybody was arrested or executed for owning private property. Others in the group promised to take care of the children till they reached the age of 18. The story of what happened in Xiaogang reached Beijing just at the time that Deng Xiaoping was consolidating his power. Rather than crushing this local experiment, the new leadership used Xiaogang as a model—and soon other villages began adopting similar contracts that encouraged private enterprise. The Chinese economic revolution had begun.
I first read about this incident in a report by National Public Radio earlier this year. The usual narrative about the astonishing progress in China gives most of the credit to the visionary leaders such as Deng. There is no doubt that they played a big role in the makeover of the Chinese economy, as Ezra F. Vogel has documented in Deng Xiaoping and the Transformation of China. But the Xiaogang example suggests that there were changes at the local level as well.
In a new book, How China Became Capitalist, economists Ronald Coase and Ning Wang say that local initiatives were also important. In a recent interview, they explained: “A key empirical finding of our book is that there are actually two Chinese reforms. One was dictated by Beijing. The other resulted from grassroots initiatives.”
“Starving peasants started private farming and township and village enterprises; city residents without a job in the state sector set up the first private businesses in Chinese cities; Shenzhen and other special economic zones were set up as an experiment to co-opt capitalism to save socialism. They all operated outside the protected boundary of socialism,” said Coase and Ning. “During the first decade of reform, ‘marginal revolutions’ introduced entrepreneurship and market forces back to the Chinese economy, while the state-led reform was desperately trying to improve the state-owned enterprises and save socialism. In this sense, China became capitalist with marginal revolutions.”
The 1991 reforms in India were pushed through by New Delhi, since they were executive decisions on taxation, industrial licensing and protection. Most of the reforms that are needed right now require an agreement with state governments, always a tough task but one that was made even tougher by the arrogance of the national government. It is worth asking whether it is time to provide more opportunities for state and local authorities to lead in policy innovation.
Consider a recent example. Mint reported on Monday that the railway ministry is not keen on a proposal by the Kerala government to build a high-speed train line in the state, because of a lack of funds for the project that is deemed to be technically feasible. The state government is expected to fund part of the project. Should state governments necessarily have to run to New Delhi for permission or should they be allowed to go ahead with building rail connections on their own?
The state governments should also encourage local urban authorities to decide on local public goods such as water supply. Economist Isher Judge Ahluwalia has written on how a small town in Maharashtra called Malkapur got 24x7 water supplies. While the state government was an important participant in the project, local leaders backed it to the hilt. “The project had its champion in Manohar Bhaskar Shinde, who had provided leadership for the 24x7 water idea in the period 2005-08 as sarpanch of the gram panchayat. The actual work on the project began in March 2008, after the contract was awarded through competitive bidding. As deputy mayor of the nagar panchayat (the mayor’s position was reserved for a woman), Shinde continued to play a leading role in garnering support for the scheme during its implementation through people’s participation and ensuring that the project was implemented in a transparent manner,” wrote Ahluwalia.
The national government will obviously continue to have a key role to play in economic policy, but it is worth asking whether grassroots initiatives need greater encouragement. The more successful can act as catalysts for change elsewhere. Should elected chief ministers really be running to New Delhi each time for permission from either the government or the Planning Commission? In the words of Coase and Ning, does India need more marginal revolutions?
Niranjan Rajadhyaksha is executive editor of Mint. To read Niranjan Rajadhyaksha’s previous columns, go to www.livemint.com/cafeeconomics