Originally published in The Boston Globe
Tuesday, June 19, 2001

The Revolution in Shanghai
By Martin and Kathleen Feldstein

We recently returned from a trip to Shanghai, nearly twenty years after our first visit. Although we have been back in between, we were overwhelmed by the enormity of the change during the past two decades.

Shanghai in 1982 was a poor and drab city. Every man and woman wore dark, Mao style shirts and pants, adding to the overall dreariness of Shanghai's appearance. The shops had nothing worth buying. Everyone was totally dependent on the state owned enterprise to which he or she had been assigned after leaving school. Employers provided housing, health care and the other necessities of life.

No one was allowed to employ another person. A few farmers from the rural areas around Shanghai were selling vegetables raised on their collective farms after they had met state production quotas. But most Shanghai residents had no experience outside the state sector. China was a very poor communist country that left a visitor depressed.

Today's Shanghai is a booming and vibrant market economy. Gone is the drabness of dress and lifestyle. The variety of clothing worn on the streets of Shanghai is not very different from what we see at home, although jackets and ties were scarce in the heat of summer. Lively shops advertise and offer an enormous array of western and Chinese goods to an increasingly well-off public. Although real income levels are substantially below that in the west, McDonald's and Starbucks are popular with local young people and the successful entrepreneurs can shop in stores like Cartier and Louis Vuitton. Cars dominate bicycles on the busy streets and taxis are ubiquitous.

Individuals choose not just their clothing style but also their type of employment and the companies where they work. Privately owned companies - both domestic and foreign - are an increasing share of the economy.

The infrastructure of the city has been transformed over the last two decades. A hectic pace of construction has created office buildings, hotels, and apartment complexes that are hardly distinguishable from those of the United States, although a shortage of good housing still keeps the standard of living in Shanghai far below that of the west. But that too is changing as individuals are able to purchase their own apartments, financed with western style mortgages.

Pudong, the new part of Shanghai constructed in the past decade across the river from the older part of the city, has one of the most spectacular modern skylines of any city. Pudong is the new financial district of Shanghai and the financial center of China. Although Hong Kong and Singapore now dominate financial transactions in east Asia, market participants expect that role will gradually shift to Shanghai over the next two or three decades. To make that possible, Shanghai will have to improve its electronic infrastructure and its legal and regulatory institutions, a process that is already under way. The Shanghai stock market is booming and the legal barriers to share ownership are being eliminated for both domestic and foreign residents.

Shanghai, as the financial center of the country, has long been the star of the Chinese economy with a higher standard of living than elsewhere in China. Growth has also been unevenly distributed geographically, with cities like Shanghai, Beijing and Guangdong growing faster than the rural areas and the industrial cities of the interior. But change is coming and everywhere in China the standard of living is rising and individuals are enjoying the benefits of a shift to a market economy.

The visible signs of China's transition are reflected in the economic statistics. Since our first visit, China's gross domestic product has grown at an average annual rate of more than 7 percent. Over a 20 year period, that means a four-fold increase in China's GDP. China's per capita income is more than three times as high now as it was in 1982.

China's accession to the World Trade Organization will bring an acceleration of industrial and financial change inside China. More competition from American products and other foreign goods as well as the increased presence of foreign financial service firms will accelerate the closing of inefficient Chinese enterprises and force others to increase efficiency in order to remain viable.

A population of 1.3 billion people - about five times that of the United States - and a basically meritocratic educational system will provide the manpower and intellectual leadership to continue China's transformation. China also has a barely tapped capacity to expand and grow internally, extending prosperity to the center of the country. Industrial production and the overall standard of living will rise as the three-fourths of the population now employed in agriculture shift to industry and commerce. Much of this is happening through the development of local industry in township and village enterprises that often start as the collective activities of local residents but are increasingly becoming privately-owned firms.

Enormous challenges remain for China as it modernizes and integrates into the world economy. Improving corporate governance, developing a modern tax system, closing down the state owned enterprises that are widely recognized as economically inefficient, and reforming a banking system that is burdened by a huge volume of bad debts are among the most important problems. But there is no doubt that China will become the leading economy of Asia and one of the few key economies of the world.