SUSTAINABILITY INSIGHTS

SUSTAINABILITY INSIGHTS is a new occasional series from WGI that provides valuable short articles from experts and other stakeholders around the key issues of global sustainability. While some articles will directly address the United Nations Sustainable Development Goals (SDGs), others will offer important perceptions on related topics that impact global development and human well-being.

The authors in this series are all WGI interns and students.

Education for Her

 

Joy Kong

September, 2020

Sustainable Real Estate Development and Impact Investing

 

Qixuan Wang

August, 2020

The world of the 21st century is different from that of a century ago. Population growth, industrial and educational development, intercontinental travel, and technology present the planet with greater possibilities than ever, but also greater challenges. While it is well known that bursts in technology have led to the possibility of the planet supporting billions more people than was thought possible even fifty years ago, it is also commonly understood that the combination of more people, energy consumption, trash production, and carbon emissions have created an environment where if changes are not made, the planet may well be doomed. Even if climate change is controlled, pollution and overcrowding can threaten the physical and mental health of every living creature, human and animal alike. Moreover, resources are finite. In light of these challenges, 21st century life practices must become more sustainable if life and the planet are to survive. It is small wonder then, that in September 2015, the General Assembly of the United Nations confronted issues of sustainability by enacting the 2030 Agenda for Sustainable Development, with sustainability defined broadly (United Nations, 2015). The agenda contains seventeen global goals with 169 specific targets designed to create a sustainable world. The preamble to all the work needed to reach these goals is the Universal Declaration of Human Rights: “We reaffirm the importance of the Universal Declaration of Human Rights, as well as other international instruments relating to human rights and international law” (United Nations, 2015, n.p.) 

Housing is a specific part of the agenda, as noted in Goal 11, which is, “Make cities and human settlements inclusive, safe, resilient and sustainable” (United Nations, 2015, n.p.). The targeted items for action that are part of the measurement for achievement of this goal areensuring sustainable housing, transportation networks, protection of natural resources, access to open green areas and parks, and the construction of edifices in less developed areas using native materials (“Sustainable Goals,” 2020). Presumably, that means that in a stony area, homes would be seen as sustainable if they were built of stone, and in forested area, wood would be a more preferable basic building material. 

To be sure, real estate is not one of the major areas within the agenda, which is all-encompassing. But if real estate development is not a major focus for sustainability, it is arguable – and this paper makes that argument – it will be palpably harder for any of the other goals to be met. For example, health care and public health are important and laudable sustainable goals for 2030. It is axiomatic, though, that the ways and designs in which people live affect their physical health. One need only look at the well-known and unenviable record of life in slum neighborhoods worldwide, where housing is constructed without attention to sustainability,causing serious problems with light, air, sewage, and repairs and retrofitting. In an earthquake-prone area, failure to take sustainability into account can result in rubble instead of structures that can absorb the shock of a temblor. In a location like Australia, which is parched for water in the best of times, sustainable construction means buildings with good rooftop water collection systems and underground cisterns that would be superfluous in the rainy Falkland Islands but are crucial there. In an age of pandemics, sustainability also means developers taking air exchange rates into account, so that those inside a building have less likelihood of inhaling a pathogen.

 

Real estate developers cannot build housing, office buildings, commercial spaces, and new communities the way they did fifty or a hundred years ago, or even twenty years ago. Sustainability is an issue that should be at the forefront of every new construction or renovation. There are developers and locations in the world that are showing the way to a new, more sustainable development future. One of the best ways to make that happen is through impact investing. Impact investing is a specifically targeted type of investing where the investor is seeking to create wealth in a special way. “Impact investing is a distinct strategy with a dual mandate to generate measurable positive social change and market-rate financial returns” (“U.S. Real Estate Impact Investing,” 2019). 

The author of this paper has personal experience with impact investing at least on a small scale, having studied with the professor herein and participating in the work of a project at Columbia University. The author has also helped to identify impact investing opportunities in China for a compendium on the subject, and has a particular interest in impact investing for real estate. While most of the case studies produced for the Case Collection of the School of International and Public Affairs [SIPA] (2019) tend to be in the areas of economic development, food security, and the energy sector, there is every reason for impact investing to extend to construction, development, and rehabilitation.

For impact investing in real estate, the investor identifies both financial goals and social change objectives, seeks investments in real estate that can meet these goals, and then makes the investment, always measuring the impact investment against both goals, instead of one or the other (“U.S. Real Estate Impact Investing,” 2019). While having a dual set of objectives can be challenging and may narrow the range of possible investment targets, investors with a social conscience will never find a better theory or paradigm in which to make both a fair rate of return and a social impact. 

 

                    The Application of Impact Investing to Real Estate Sustainability 

Impact investing is a “third way” to do investing (SIPA, 2019). The SIPA case study goes on to say that it may be superior because philanthropic efforts on behalf of particular causes tend to have a time limit associated with them, or the philanthropy may close or move on to other charitable interests (p. 3). This is part of what they call the “professionalization of charity” (p. 3). The profit motive, on the other hand, is a constant: people to do not lose interest in earning a profit. At the same time, people do not lose their need for places in which to manufacture, live, and work. This makes sustainable real estate investment a logical target for impact investing, as viable as the food supply or energy supply chains. How that investment takes place may take different forms. The SIPA case study points to the Acumen Global Venture Capital Fund and the Rockefeller Capital Management company as venues for the impact investor, and notes certain investments made by each company (2019). The United Nations Capital Development Fund is also a good example of this kind of firm (SIPA, 2019). Whether private, public, or as an arm of a non-governmental organization, real estate is a good industry in which to seek impact investing. The following sections explain why, with a focus on the emerging sustainable real estate development market in China. 

                Green Technology Benefits Conservation and Environmental Protection

​China has come very far from the environmentally unconscious spree of building that was accomplished during its rush to industrialize, as it has come to understand its role in the world as a leader in the movement toward sustainability. While a big driver has undoubted been the widely known 2007 national policy for “Green Credit,” which blocks banks for advancing capital to enterprises that have scoffed at environmental protection law, there are other reasons for this new interest in green technology in the real estate sector, an interest that makes impact investments highly attractive.     ​

​Another of the great inducements in China for real estate to be sustainable is energy cost (Xiao, 2015). Xiao explains that there are many possibilities for developers to take advantage of regional and national programs to create energy efficiency in new structures. For example, she cites solar power purchase agreements known as PPAs, which can fix prices for the users so long as solar panels are installed for a buyer who is guaranteed, namely the new owner of the structure. She quotes the co-founder of the investment organization Seeder to the effect that an investor can expect a return in excess of ten percent for investing in a building like that. Nor are solar panels the only possibilities and inducements. Xiao (2015) also declares that smart metering of building is a way to cut down on energy consumption. For the pure purpose of building, she writes about the construction of a Chinese villa where the entire structure was 3-D printed and pre-fabricated, thus reducing overall construction costs. Assembly time for the villa was under three hours, and the parts for the building were a combination of new and recycled materials, including construction waste (Xiao, 2015). If this technology grows, and construction waste can be put to use instead of being hauled to a landfill, the savings on supply chain issues will be considerable. 

​Noting that many countries around the world, including China, are committed to environmentalism and pushing forward green development, the leading real estate firm of Cushman and Wakefield has announced that it is bullish on the future of green development, and expects for it to be a part of the industry for many years to come  (“Greenlighting Green Investment,” 2018). Cushman and Wakefield go on to say that one area where green real estate development will become prevalent has to do with water use and recycling. For example, the company is looking for internal recycling systems to be made parts of buildings in the future, where there will be water cooling towers on the building’s roof, holding areas and cisterns for treated water sewage underground that recycles up to the cooling and purification towers, and then use of that recycled water for cooking, bathing, washing, and other typical water uses. While it is true that drinking recycled water is now largely limited because of the human disgust reflex, there is no reason that the technology could not advance to where all water can be purified again and again until it is potable, then dirtied, and then potable again. If large water recycling centers can filter out even human waste for the purpose of using the water for irrigation, smaller building-borne systems could do the same for homeowners, tenants, and business users. 

                          Affordable Housing Can Be a Focal Point for Impact Investment

​Housing is an important part of the sustainable development process and of impact investment planning. The American company Calvert Impact Capital in fact had its entrée point to impact investing through affordable housing (Godschalk, 2018). In fact, Godschalk relates that their company’s initial loan was to a developer in Oregon who was building affordable housing, and who is still involved with Calvert. Within a few years, Godschalk explains that the company had put upwards of $50 million US into more than two dozen developers and lenders who were seeking to develop affordable housing in the continental United States. What is particularly admirable about the effort is that the target for this housing is diverse communities, who are traditionally underserved in the general housing market. One of the problems that the author points out concerning affordable housing in the United States is that there is a fair amount of government support and guarantees for loans, but that does not mean that the market is fullyserved and everyone looking for an affordable place to buy or rent can find one. Especially in big cities like New York and Los Angeles, rent is well known to be the biggest percentage of many peoples’ incomes, rendering an improvement in their economic circumstances very difficult. In fact, Godschalk notes that about half of all renters are paying 30% of their income for their homes and apartments – dwelling they neither own nor derive tax benefits from, given their renter status. 

​Where Calvert operates, Godschalk (2018) explains, is to help developers in their earlier activities (the stage that comes before building), as well as to offer them financial assistance in ways that traditional lenders cannot. There are many costs associated with both traditional and affordable housing development – planning, design, site purchase, etc. – but which the developers may not have the funds to cover effectively and that is where Calvert comes in and makes a big difference (Godschalk, 2018). Projects that otherwise would remain dreams come to fruition. 

​One example of a development plan in China proper that would be ripe for impact investment is the one that was proposed for the city of Shanghai as part of its overall master plan, just four years ago (Yiyau, 2016). This plan was ambitious, noting that a massive territory would need to be developed and redeveloped, and that more than 3,000 square kilometers would be involved in the project, Yiyau goes on to write. The author also notes that one of the goals of the development will be to make maximum use of all the space, including the development of land underground, as well as to induce the construction of more parks and greenery that can combat global warming. Moreover, the plan is meant to be executed by 2040 (Yivau, 2016), meaning that the government agencies involved are taking a long view, knowing that everything cannot be built right away, and thus giving impact investors an opportunity to get in on the ground floor.  

                                                           A Report from the Field 

​During the time that I worked at both a firm in Hubei and at Worldview Global Impact, I had the opportunity to identify and research successful impact investment projects either contemplated, underway, or completed in China. In the third part of this report, the possibilities for impact investing in real estate are discussed. In this section, there is information about what is going on at this moment in the field. A number of these projects are in the arena of affordable housing. 

​One of the leading companies that I identified in China and Asia for sustainable real estate investment, and investigated thoroughly, is Asia Green Real Estate (“Our Properties,” 2020), with Chinese offices in Hong Kong, Chengdu, and Shanghai. The company has become a conduit for European investors to put money into Chinese development that is sustainable, with the degree of sustainability measured by a propriety “EcoTool” that quantifies and measures sustainability. There is a good video presentation and summary of the current projects of Asia Green that was presented at the 2020 Swiss Property Fair called IMMO 2020 (“News and Insights,” 2020). 

​Among the most important of the Asia Green Real Estate projects that I identified were two residential developments in Tongren, China known as Tongren IEC Phase A and Tongren IEC Phase B (“News and Insights,” 2020). What makes these residential properties unique, according to the company, is a mix of geography and development decisions taken. The projects are placed in a park-like setting with plenty of light and air, and are just a short distance away from the city’s airport. In addition, there is a high-speed train planned from very close to the projects in order to reduce the amount of carbon emissions that are generated by residents. Housing is clustered in energy-efficient high rises, allowing for there to be plenty of open space for residents to enjoy. Moreover, there is a wide mix of housing types, so that people do not feel as if there is just one option, but instead will find a combination of apartments, townhouses, and duplexes. Beyond housing, there is also a mixed-use component, plus proximity to a major hospital. It is important to note that Tongren is located in south-central China, away from the coastline, and thus property development like this can be an inducement for companies to locate closer to the regions from which migrant workers might come, which is sustainable in that it can promote family preservation. The project has a China Green Star certification.

​Another important Asia Green project that I identified, studied, and followed was the Yah Song Ju Phase III development in the city of Chengdu (“Our Properties,” 2020). Asia Green reports that the development has achieved both an EDGE rating of 62 percent energy savings compared to the average, and a China Green Star certification. The property development is sustainable in the way that it uses the latest in heating and cooling technology to manage its energy costs, and by creating a sustainable lifestyle for residents by locating near excellent public schools and health care facilities. Moreover, it is a short walk to a new subway station, so residents do not need to drive to work.

​In terms of affordable housing, while all sustainable development is more affordable in the long run because of diminished costs to the environment and in the cost needed for ordinary lifestyles, I identified the Swedish company White Creek as one that is devoted to bringing affordable housing in a sustainable way to the middle class and lower middle class (“White Peak,” 2020). Its focus is both on established Chinese cities and those that are emerging, and the company has invested in more than twenty different projects since it was established in 2007. A good example of one of these projects is the London Gardens development in the community of Linyi, a city of 10 million, but off the beaten path of urban areas well known in the west. The London Gardens project was priced, when I was researching it, at a level that could be affordable to the middle class, and was constructed in a way to take advantage of local supply chains and replicability of design motifs, without the soul-destroying monotony of so many similar developments. Another White Creek project of note is the Urban Blocks mixed-use development in the city of Linyi, where the company combined an assortment of incomes into housing bybuilding apartments of different sizes to meet the needs of tenants and owners of different incomes. However, the same principles of sustainability are built into all the units, no matter the wealth of the occupant. This mixed-income approach is surely one that developers can follow in the future, as a way to avoid the homogeneity of socioeconomic status that arises in too many neighborhoods. 

                                                                    Conclusion

​Impact investing is a fairly recent development in the world of investing, taking a middle ground between the impact-focused efforts of philanthropies and charities, and the profit-focused efforts of traditional private investors and corporations. Impact investors seek a fair rate of return by investing in projects that will both bring that rate of return and produce a public good in various areas, such as food, transportation, environmental projection, and – increasingly – real estate development. To be sure, there may be differences in the ways that companies and investors define “public good,” but all impact investors have those dual goals.

​Real estate development itself has been slower than some other areas to be the focus of impact investing, most likely because of the complexities of real estate development and the way that it is capital intensive. A person may create, for example, a sustainable and biodegradable drinking straw in their garage or workspace, and then merely need to find an investor(s) who will help to bring that single, inexpensive product to market. For real estate, investors most take on large projects, which are often going to employ nascent technologies—e.g. for windows, heating, air conditioning, power, and area transportation-- in an effort to attract tenants and purchasers. However, in recent years, investors in the United States, China, and around the world are looking for sustainable real estate investment that can create a sustainable lifestyle according to the United Nations guidelines, reduce energy use and have a lower carbon footprint, and even bring together disparate elements of the socioeconomic continuum to live in a sustainable way.

​China has seen a number of these developments, in the arenas of mixed use and affordable housing. Different investment firms have become active, and are creating housing at all levels of development, including affordable housing. The most exciting thing about these developments is that they are also taking place outside the big cities of Beijing, Shanghai, and Guangzhou, and are proving to be viable in the marketplace. There is no reason that the future could not see a plethora of equally successful developments, given the right infusion of capital and support from official agencies and regulators. Together, a more sustainable and affordable residential future is possible. 

​​ 

References

“Doing Well by Doing Good: An Introduction to Impact Investing. (2020). Columbia University.New York: Columbia University. 

Godschalk, C. (2018, Apr. 24). “Dear Impact Investors: Consider Affordable Housing”Calvertimpactcapital.org. Retrieved from https://www.calvertimpactcapital.org/blog/773-impact-investing-affordable-housing.

“Greenlighting Green Investment into Green Real Estate” [Greenlighting Green Investment]  (2018, Oct. 24). CushmanandWakefield.com. Retrieved fromhttps://www.cushmanwakefield.com/en/singapore/insights/blog/greenlighting-green-investment-into-green-real-estate

“Our Properties” (2020). Asia Green Real Estate. Retrieved from https://www.asiagreen.com/en/our-investments

School of International and Public Affairs. (2020). 

“News and Insights” (2020) Asia Green Real Estate. Retrieved from https://www.asiagreen.com/en/news-category/asia-green-real-estate-immo-2020-project-overview

Sustainable Development Goals. (2020). Goal 11: Make cities inclusive, safe, resilient, and sustainable. United Nations. Retrieved from https://www.un.org/sustainabledevelopment/cities/

United Nations. (2015). “Transforming Our World: the 2030 Agenda for Sustainable Development” United Nations. Retrieved from https://sustainabledevelopment.un.org/post2015/transformingourworld  

U.S. Real Estate Impact Investing, A Primer. (2019, Apr.). PGIM. Retrieved from https://www.pgim.com/wps/wcm/connect/43c40238-2582-46fb-add0-817c73450b7e/PGIM-Real-Estate+Investment-Research-2019-Impact-Investing.pdf?MOD=AJPERES

White peak. (2020). www.whitepeak.com.  Retrieved from http://wprei.com/index.

Xiao, E. (2015, Dec. 12). How green tech is revolutionizing China’s real estate agency. Technode.com. Retrieved from https://technode.com/2015/12/12/green-tech-revolutionizing-chinas-real-estate-industry/

Yiyau, W. (2016, Aug. 23). Housing to be more sustainable, affordable. China Daily. Retrieved from http://www.chinadaily.com.cn/china/2016-08/23/content_26565287.htm

Artificial Intelligence Helps Build Smart Cities

 

Han Bao

December, 2017

Artificial Intelligence (AI), a term most people have only heard in movie franchises like Terminator, is becoming increasingly pervasive in our daily lives. From generating personal recommendations of our favorite shopping items and entertainment every time we open Amazon and Netflix, to optimizing traffic routes to our destinations in real time based on traffic patterns to help us get there faster via our smart phones, AI is making an impact in practically every aspect of our lives, and people are beginning to realize its power and potential. During the U.S. Congress’ first AI hearing entitled “The Dawn of Artificial Intelligence,” Senator Ted Cruz, Chairman of the Senate Subcommittee on Space, Science, and Competitiveness, acknowledged that Artificial Intelligence is improving the efficiency and productivity across industries in the United States. Many political and business leaders are looking to tap into the power of AI, and one of the largest areas for potential growth is city planning and infrastructure.


Rapid and relentless urbanization is becoming an international trend for many regions in both developing and developed countries. As the population increases exponentially in these areas, many facets of public services are unable to keep up with the demand of this ever-increasing population. With the help of AI, now we can build smart cities where citywide data will be analyzed to identify more quickly problem areas and inefficiencies. It will provide big data-based insights for improved decision-making that only AI algorithms can identify.


The key to building a smart city is data. With the increasing connectivity from smart phones and other electronic devices, Internet of Things (IoT) is providing many ways to capture data. City data from sensors such as traffic cameras, metro meters, weather stations, air quality monitors, power grids, etc. provide a large amount of data feeds that can all be taken into consideration to build a responsive public data network. By taking advantage of almost instantaneous data availability, machine learning and deep learning methods help extract value out of that data and help rapidly improve the efficacy of Artificial Intelligence, making it consistently smarter and faster. 


With the steady improvement in technology, these benefits are no longer just theories, but are being realized in many major cities today. According to studies, the lack of available parking space was a common complaint in many cities. Redwood, CA is one of them: despite the complaints that city officials receive, a survey of parking garages showed that they are only about 50% full on average. To solve this apparent discrepancy, city officials teamed up with a technology company and garages were outfitted with vehicle sensors to count precisely the number of vehicles currently in the garages and the number of available spots. AI-powered devices are also capable of measuring traffic patterns and providing analytical insights to understand capacity variation based on the time of day. 


Kansas City has also served as a great example of smart city. It initiated several interesting projects, including internet-enabled kiosks where users have access to connect with businesses and events around them and an Uber-like on-demand public transit system: these projects are all enabled through data analytics and machine learning that provide unique insights into the needs of the city. The projects in Redwood and Kansas City are just the beginning, but they have already demonstrated the value that AI can provide to improve cities’ existing infrastructure. 


As AI gains more visibility, more and more cities join in and begin experimenting and collaborating with the private sector to demonstrate how they can better serve their citizens. One of the common initiatives is the open data policy. This policy allows the sharing of city infrastructure data with AI companies that are capable of fully leveraging them to better identify the citizens’ needs and steadily improve city life. Moreover, these open data also serve as important parameters for city planners, architects, and designers to help them make better decisions on city planning and design, as well as on sustainability initiatives.


One of the best examples of introducing new smart infrastructures in the city is San Diego. It installed a connected street lamp network, which initially was a method to reduce the annual energy spending from the city budget by using more power-efficient LEDs. However, by introducing additional IoT sensors into these fixtures, other economic savings were realized, including real-time air quality monitoring, optimization of parking and traffic patterns, and even improved emergency services. In this example, having the foresight to build and install smart city-centric infrastructures have yielded surprising economic benefits for the city. I believe as more and more success stories emerge like San Diego’s, there will be an exponentially growing number of international businesses and city officials that begin to buy into the idea of building smart cities.


At the forefront of enabling a smart city is AGT International, a company that combines data management, integration, and advanced analytics. Introducing the concept of Connected City, AGT International leverages available data to provide actionable insights for city leaders that will be able to “create a safe, efficient urban environment that attracts residents, commerce and tourism.” Its projects range from the Middle East to Singapore, managing city safety, port optimization, and traffic incidents. More recently, they collaborated with Cisco to launch smart city plans for Hamburg in Germany. Their solutions and platforms are helping millions of people and city officials to improve city operations and public safety.


With the continuous development of AI and IoT technology, many cities are participating in the building of smart cities: Denver, Pittsburgh, and Portland all have their own plans to use data-based approaches to enhance urban life for their citizens. 2016 was a year of amazing ideas for the future smart city as people began to theorize potential application of AI in the public service sector. We are now in the last quarter of 2017, and many of these ideas have become reality around the world. With tireless efforts from both governmental agencies and private sector actors, we are beginning to see the differences that AI is making in our urban lives. As I look forward to 2018, I sincerely hope to see even more efforts from all parties and even more partnerships among city planners, technology developers, and entrepreneurs to offer unprecedented connectivity of sensors and devices, undertake more critical projects, and continue to improve the smart city experiences for everyone. I truly believe that Artificial Intelligence will significantly enhance the life of everybody through transformation of our cities, and with every willing participant joining the effort; we move one step closer to that goal.

HAN BAO is a New York-based entrepreneur. She is Founder and Managing Partner of Elephant Technology Development, Inc, a company that uses advanced Artificial Intelligence concepts to help its clients change their business towards unprecedented efficiencies and revolutionize entire work processes at an industrial level. In her previous position as a founding team member and Business Development Manager at BZM Innovative Technologies, Han reviewed many investment portfolios with advanced technologies, with an emphasis on city planning and urban development. She was also a liaison with the United Nations and presented indigenous rights issues for minority groups at United Nations Forums.

Development Strategies in Rural China during the 1970s and 1980s

 

Anzhi Chen

August, 2018

1. Introduction

 

China has experienced a remarkable period of economic growth in the last 40 years. Its average growth rate of 6.7% per annum from 1978 to 2016 has successfully lifted over 700 million people out of extreme poverty. Several strategies helped China achieve rapid growth in its rural areas after shifting from a command-based economic system to a market-based economy: among the most important are the Household Responsibility System (HRS), the Dual‐track Price System (DPS), and the Township and Village enterprises (TVEs).

 

The Household Responsibility System was launched in the early 1980s to provide fundamental management of the collective economy as well as to satisfy the basic needs of goods and means of production in rural China. The system merged the effectiveness of unified management combined with peasants’ enthusiasm by allowing households to freely deposit or dispose of extra production after meeting the national quotas.

As a means to stimulate productivity, the Dual-Track System also allowed enterprises to sell extra output to the market after accomplishing the planned target. Chinese reformers regarded it as one pf the most efficient ways to gradually build a market-oriented economy on the base of a planned economy.

Another reform aimed at increasing productivity was the Township and Village Enterprises. Provided with modern equipment, these enterprises were run by farmers in the countryside and served as the main source for the raising of farmers’ income and stimulating rural economic development. It is worth mentioning that some transitional policies, such as the HRS and TVEs, are still used by the current Chinese government with some adjustments to keep up with economic growth, while others, such as TVEs, are fading at this stage of history.

 

In this article, we will first review China’s post-reform period and the advantages of those development strategies mentioned above. Then we will compare these strategies with others used by foreign countries. In the last section, we will address some challenges faced by the present Chinese government and discuss why modern Chinese development strategies are in some ways less successful.

 

2. Pre-Reform and Post-Reform Periods

 

When the People’s Republic of China (PRC) achieved independence in 1949, it faced many issues ranging from politics to economics. A shortage of capital impeded its further economic development. Moreover, its involvement in the Korea conflict - because of its foreign policy - also influenced its economic relationship with foreign countries and then intensified its isolation. Supported by the Soviet Union in the early years of the nation, its economic structure and development direction were highly influenced by Soviet ideology. Emphasizing economic independence and putting heavy industry as the priority, China wanted to achieve its dream of becoming a developed country as soon as possible in order to compete with western economies. However, these strategies proved to be ineffective in improving individual life quality and national wealth.

 

After the end of the Cultural Revolution in 1978, President Deng Xiaoping launched a series of reforms to adjust China’s policies to its comparative advantages in labor-intensive production, without changing its economic system from Communism to Capitalism. Deng emphasized that the means of production would still be owned by the people or the state, although the percentage of private retail trade would increase. As a result, these reforms marked a turning point in the economic development of the PRC, launching a new era of steady economic growth lasting for more than 35 years.

 

China’s success in its development can be attributed to the following three reasons: (1) the recognition of the importance of practice rather than doctrine among high-level officials; (2) the objective and clear understanding and grasp of China’s national conditions; (3) the strong determination on pressing ahead with reform in its economic, social and political structures. All of them contributed to China’s economic miracle at the end of the last century. But before illustrating these reasons, a review of the Pre-Reform Era is necessary for a further understanding of the motivation and determination for the upcoming reform.

 

A Brief Review of Pre-Reform Era

 

The People’s Commune System was the main economic system of agricultural production in pre-reform China. Several flaws served as the main resistance to achieving the full potential in rural regions, and eventually caused the demise of this system.

 

a. External Limits under the System of People’s Commune

Under the system of People’s Communes, the production team led by people’s communes and subordinate production brigades took the main responsibility for basic production. At the beginning of every year, the local government set plans and goals for people’s communes, and these plans were revised and confirmed by corresponding production teams. Then the commune kept supervising and urging forward the working process to track and measure the progress of production. Although the local governments had made thorough investigations on land structure and climate before setting the plan, production teams often insisted on their own preferred crops due to local preference or tradition, which sometimes contradicted the original plans from local government. This conflict not only affected farmers’ motivation and initiatives but also reduced the economic benefits.

 

b. Excessive Labor Input

During the Pre-Economic Reform Era, commune and brigade enterprises had already existed. However, due to its small-scale production, limited need for labor, and the prohibition on labor migration, a great proportion of the labor force was wasted in certain regions. As the population kept growing while production activity remained stable, an increasing labor force often led to problems in agricultural production. Meanwhile, the inflexible distribution system had to deal with the increasing number of participants in distribution, so the growth of agricultural output could experience negative growth in some places.

 

c. Inefficient Collective Production

Farmers who were forced to join People’s Communes had no rights to quit. Their dissatisfaction and disappointment with the current system and plans consequently had a negative impact on their enthusiasm to participate in collective production. Therefore, “dawdling along” and “laboring as a non-labor” were common situations in that period. The low efficiency ratio further pushed local government to strengthen supervision, which led to an increasing labor cost and limited effect on productivity. Slacking off had remained the main problem and was never solved until the later reforms.

 

d. Flawed Point System

In Pre-Reform China, the point system established after 1960 measured farmers’ workload by counting point according to their workdays. This system failed to reflect the actual input within a workday, and therefore slacking off was a widely existing phenomena in rural China back in the 1970s. Besides, each point was related to the amount of output distribute to each family. This unfair distribution system further weakened farmers’ willingness to participate in agricultural work.

 

3. Moving Away from the Soviet Model

 

The most known characteristic of the early PRC was its command economy system. Drawing on elements borrowed from the Soviet Union’s development pattern, the early PRC’s economic system inherited its flaws as well. The command economy system assumed that the nation’s economic structure could be managed as a single company rather than as a market. The market effect was greatly underestimated as well as individual initiative. Meanwhile, economic planners had long failed to have adequate information to make thorough plans for every region. As the scale and complexity of the domestic economy increased, this issue was becoming more and more serious.

 

On the other hand, the Soviet Union’s national situation was very different from that of China. After WWII, the Soviet Union lacked a large labor force but had a relatively better industrial base. The central aim was to quickly develop heavy industry, not only because the process of industrialization was the advancement of technology and of the complexity of the component of capital, but also to help build a complete industrial and agricultural system and a strong military to prevent potential invasion from the western world. However, the foundation was built upon heavy industry, which determined the dominant economic and development characteristics of the Soviet Model - inefficient and extensive growth, an imbalance between military and economic spending, and between light and heavy production, and excessively centralized control. The same issues affected China in the 1970s as well.

 

The Soviet capital-intensive technology and development pattern was not suitable for China’s huge population base and weak industry. After the Chinese Civil War, the population of the PRC was 562.6 million, while the Soviet population was 170.6 million after World War II. With a weak industrial base, it was hard to transform the Prodrazvyorstka (an agricultural system in which the state collected the surplus grains) directly to a socialist agricultural system without trade or exchange of production. In other words, the Soviet command economy failed to elevate China to socialism within given conditions.

 

From an ideological perspective, there was a huge difference between the Soviet and Chinese governments. The Soviet command economy was considered to be meritocratic, which was related to Stalin’s belief in general will. On the contrary, the doctrine that “people are the actual leaders of China” had been widely recognized by the Chinese people. The contradictions in ideology between the Soviet and Chinese governments catalyzed the replacement of the command economy system in China.

 

After Deng Xiaoping became the new president, the highest officials soon began to prepare for a great reform in China. The premise successful reform in China was the determination of a practical and realistic ideology – “seeking truth from facts,” according to Deng in his speech Mind Emancipation, Truth and Unity. The decisive significance of the ideological line in the reform period was is the foundation of growth strategies in the 1980s and the further transition to a new market-oriented economic system. With a clear understanding of the national situation, China abandoned the command economy and gradually embraced reform.

 

4. Moving Towards Socialism with Chinese Characteristics

 

The Chinese government had a clear understanding of the national situation in the 1980s. Being aware of the flaws within their economic system, they were also capable of identifying their own comparative advantages that were critical to achieving development.

 

There are two factors contributing to the population advantage in the market. First, China was located at the second stage of demographic development at the beginning of the reform era: the average age was perfect for production activities and the population was increasing at a constant rate. This ensured China would have a long period of time with an adequate labor force. Second, the population base was big enough to support large-scale labor-intensive production, so an export-oriented market seemed to be promising after the “open door policy” was established.

 

The transition to a more labor-intensive production pattern began in the early 1980s, as a result of the Chinese government focusing on China’s demographic advantage. After the command economy was gradually replaced by the market economy, however, with the guidance form central government, a large percentage of the population entered the labor market. Adequate labor supply to China’s industry ensured a relatively low labor price, especially in rural China. The redundant laborers originally under the command economic system now served as the foundation for future growth.

 

However, in certain parts of rural China, village and township enterprises played a key role in development due to the missing initial funding that is necessary for purchasing equipment. Compared to those factories in suburban area, small-scale factory locating at villages was in an inferior position for its distance to consumers and lack of capital. They were collectively owned by villages and towns and invested in by both local governments and rural farmers. And therefore, it was half personally-owned and half  commonly-owned. This flexible model effectively dealt with the financial issue so that streamlined production could become feasible in some rural factories.

 

Moreover, the national and state administrative organs, their staff and people’s government at all levels had a relatively strong executive capacity. A highly efficient administrative management system that allowed central government to learn from its errors. Orders from the Central Committee were effectively given to local government and put into practice. Directed by the ideology “seeking truth from facts,” the Chinese Government was able to test their reforms first in selected regions. Local officials would then report the outcome back to the central government, which then decided whether the test program would be put into practice.

 

For example, the Chinese Government first tested the Household Responsibility System in Fengyang, Xiaogang - a relatively isolated village in the middle of China -,and then generalized it to adapt to different situations in different regions. The strategy of a dual-track price system was first tested in Wenzhou, a town in Zhejiang Province, which now is one of the most dynamic regions in China. The massive number of tests applied to different regions was done before they were put into practice, which helped improve the success rate.

 

From another perspective, the Great Chinese Famine from 1959 to 1961 caused massive damage to China’s development due to the Great Leap Forward, and the following Cultural Revolution worsened the situation. Before 1978, more than two thirds of the population lived on less than one dollar per day. With such great pressure from widespread poverty and an extremely low-income level, the Chinese Government regarded this problem as an opportunity to start the reform. The central government was aware of the flaws of the command economic system and had a strong determination to gradually abolish it. Although the reform radically changed income distribution and further hurt the vested interest groups, the Chinese Government still was determined to reform in its first 15 years.

                                                                                       

5. Challenges Faced by Contemporary China

 

Decades of growth have passed and the Chinese Government has shifted its goal from lifting China’s GDP as much as possible to developing a more sustainable pattern. To maintain the growth rate at a relatively stable level, the central government has to keep reforming and innovating the existing institutions to meet the new requirements and goals. In rural China, the exposed problems have pushed the central government to deepen the reform.

 

The interregional and intraregional income gap has kept rising after the beginning of the reform. The slogan “the richer bringing along the less rich” has not really been implemented, especially in the agricultural sector. After 2000, regional development imbalances are still rising. In different agricultural regions, due to the different distance to resources and markets, the production cost is varied, especially between the east and the south. In addition, the production pattern can also be different: capital-intensive and labor-intensive production have different benefits per labor unit and different productivity.

Within regions, inequality is also rising. Research shows that farmers’ growth of income is decelerating, and the food price is decreasing, and therefore the total revenue per farmer does not increase even though the total output increases. Another widely acknowledged question is about the gap between urban and rural income. Local government concentrates on urban development more than rural development, which further exacerbates this income inequality.

 

Although the Chinese Government has made great efforts to tackle the economic issues in rural development, such as abolishing taxation and establishing price floors on certain agricultural products, it still faces several marginal problems. On the one hand, these strategies encourage farmers to produce as much as possible. However, in a perfect competitive and almost saturated market, farmers lack the incentives to produce more. On the other hand, environmental regulations are sometimes ignored, so that environmental pollution is becoming more and more serious, thus hampering genuine economic growth and triggering a public health crisis.

 

In addition, conflicts between the central government and local administrations emerged.  Local governments’ lack of implementation capability now seems to be one of the main barriers slowing down further reform. The basic administrative offices now have a relatively loose structure compared to before, especially in the selection and promotion system, and therefore the implementation capability has decreased on such a large scale that some experts even allege that “the communist party has lost the ‘grass roots.’” This directly resulted in less pilot tests and the resistance efforts from squirearchy and township entrepreneurs.

Some reform strategies now appear to be less successful than those in the past because the central government fails to learn from errors that once could be tracked by local government. Therefore, these strategies are less recognized by the majority when they cannot produce the expected results.

 

6. Conclusion

 

Looking back to the past reform and development, the Chinese Government has achieved their goal of lifting GDP to an unprecedented high level and providing  assurance of basic economic rights for every citizen. There is no doubt that such great achievement should be attributed to the successful reform.

 

China had been trapped in an excessively centralized political system after the Chinese Civil War, and the command economic system slowed the economic growth of post-war China. Its relationship with the Soviet Union on the one hand ensured China’s development of its own industrial base, with a large amount of direct or indirect foreign aid, but it also led China to inherit multiple flaws in the Soviet Model as well: (1) external limits from the central government; (2) excessive labor input brought by strong regulation on migration; and (3) an inefficient collective production system, with its dysfunctional point system. However, with a clear understanding of its flaws, the Chinese Government under the administration of Deng Xiaoping started the reform, following the doctrine of “seeking truth from facts.” It successfully identified the comparative advantages within the domestic situation and pushed the implementation of reform policies with a strong determination. Finally, they moved away from the Soviet Model and started the following 40-year reform.

However, reform in China is still faced with significant challenges: (1) income inequality is still increasing; (2) the domestic market is approaching saturation; (3) a sustainable development pattern has not yet been achieved; and (4) the conflict between central and local government still exists. With all these difficult issues, it is hard for the current Chinese government to continue its past miracles and achieve a unique sustainable development pattern.

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