Thursday, April 2, 2015

Capitalism with Chinese characteristics

Some of the most insightful books on China that I have read were written by Chinese academics who work in Western countries. Able to draw both on their insider understanding of the Chinese system and on the outside perspective which comes from living abroad, and liberated from censorship, they are sometimes able to provide real insight into the workings of this perplexing country.

I have recently finished one such book: an original and interesting study of China's economy called "Capitalism with Chinese characteristics". It was written a few years ago by Huang Yasheng, a Beijinger who teaches at Harvard. Analyzing China's economy is an arduous task due to the opaqueness and ambiguity inherent in the system. As Huang points out in the introduction, while in the US a study might focus on the effect of a tax raise, a similar study on China might focus on the question of whether China's government really has raised taxes or not.

All the same, Huang's book makes a pretty convincing case in favour of a thesis which, as far as I know, is new: according to him, the economic policies which China followed during the eighties were substantially different from the ones it followed in the nineties and later on, and much more conducive to the Chinese people's general well-being.

Huang claims that during the eighties, the Chinese government was following a clear path towards greater liberalism. Economic reform was focused on the countryside, where enterprising peasants were enabled and encouraged to start their own private businesses. Growth was fueled by the so-called "Township and Village Enterprises" (TVEs), which according to Huang are usually misunderstood by Western observers to have been state-owned enterprises, when in fact they were usually private companies begun by individual peasants. Rural residents were allowed to poll money informally to set up their businesses, or they were enabled to borrow money from the banking system.

Although the protection of property rights in China was sketchy (as it remains today), it was still far better than it had been under Chairman Mao before 1978, and this was sufficient for the Chinese to feel encouraged to take risks and make money. People felt that things were changing for the better, and they had faith in Deng Xiaoping's determination to keep it that way.

After the events of 1989, however, the conservative faction within the government gained the upper hand (especially the so-called "Shanghai clique"), and the country significantly changed course. Most Western scholarship assumes that after 1989 there was just a brief setback in the liberalization of China's economy, knows as the "Tiananmen interlude" (1989-1992), and that after Deng Xiaoping's famous "Southern Tour" China's reform once again picked where it had stopped in 1989.

Huang claims that this is a misunderstanding. In reality, China's policies never again veered in the same virtuous direction as they had done in the eighties. Instead, during the nineties what was created was a model of development based on a clear bias in favour of the cities, state-owned enterprises and foreign investment.

The policy environment became much less favourable to small indigenous entrepreneurs, due to restrictive regulations and policies which made it much harder to get credit from the banks. Instead of following in the path of other East Asian economies like South Korea, China became a "commanding heights" economy in the South American style, with economic growth fueled by imposing infrastructure projects mandated by the government, including all the first-class amenities and skyscrapers in the big cities which are superficially so impressive.

This mode of development has also been able to produce spectacular GDP growth, and it has continued to make the country more prosperous. On the other hand, it has been much less beneficial for the well-being of the Chinese people. Income disparity has become huge, and private incomes have become a smaller proportion of national GDP. Rural residents have become nothing more than a pool of cheap labour for the cities. Huang attempts to demonstrate that the provision of educational and health services in the rural areas suffered as a result of the strong urban bias of the policy makers, and that literacy rates actually declined in the countryside in the early 2000s as a result.

Huang also claims that the few big Chinese companies which are starting to make a name for themselves in the world are either not really private or not really based in Mainland China. For instance Lenovo, China's biggest computer company, has long been controlled and run mainly from Hong Kong, out of the reach of the Chinese system, where it has access to world-class financial and judicial institutions. 

Huang repeatedly calls China's current economic system "crony capitalism", and uses a compelling example to prove his point: the case of Beijing's famous (or infamous) "Silk Street". The Silk Street is a large shopping center near Beijing's embassy district, always extremely popular with tour groups. It is notorious for its wide selection of counterfeit designer goods.

Tourists haggling in Beijing's Silk Street

Although I have been there a few times, what I didn't know was the history behind the place: the market was apparently started spontaneously in 1985 by a group of small Beijing traders. By 2004 it was a thriving outdoor market which attracted dozens of thousands of visitors a day. Then the city government suddenly decided to close down the outdoor market and build the nearby indoor market which exists currently. They claimed this was to clamp down on the selling of fake products, but the problem with this explanation is that ten years later there are still just as many fakes on sale as before.

The government arbitrarily awarded the right to operate the new market to a private entrepreneur who did not have a stall in the old market. There was no bidding, and no rationale for the decision was ever made known. It is reasonable to suspect that this person did not win the deal just for making the best offer. The original traders were not allowed to keep their stalls, and the valuable right to own a stall in the new market was auctioned off. The bids fetched millions of Yuan. 

In essence, the hundreds of traders who had created the valuable "Silk Street" brand were expropriated out of it, in favour of an entrepreneur with political connections. As Huang points out, this is obviously not any kind of socialism, as the authorities did not retain control of the market themselves, but gave it away to a private businessman. Rather, it is "crony capitalism built on systemic corruption and raw political power", in which property rights are not properly guaranteed by the legal system. 

Huang also dedicates an entire chapter to Shanghai, or rather to attacking Shanghai and all it stands for. He claims that the infatuation of many foreign observers with the city is based on a superficial view. In reality, Shanghai represents all the worst of China's economic system. Contrary to popular perception, it follows policies which are deeply inimical to home-grown innovation and entrepreneurship, but friendly to foreign FDI and state companies. The share of the city's wealth which goes to private households is low even by China's standards. Shanghai's impressive skyscrapers and luxury amenities have actually been heavily subsidized by the rest of the country, especially its more productive parts like Zhejiang and Guangdong.
Huang's indictment of China's system is certainly heartfelt, and based on an enormous amount of research of Chinese statistics which would have been impossible without a deep knowledge of the language and culture. His description of China's ills will chime with anyone who has lived in the country for long.

At the same time I think he has a misplaced faith in what he calls a "virtuous" form of capitalism, one driven by private entrepreneurs which protects property rights, to deliver social equity and fairness on its own. After all this form of capitalism is well established in his country of residence, the United States, but there is relatively little fairness and equality there when compared to other industrialized countries.

I think that a government which redistributes wealth through taxation is a necessity in order to achieve a just and fair society. I also think that, as the 2008 financial crisis has shown, a totally liberalized and unchecked financial system can also distort the economy and cause a lot of harm. All the same, government intervention should take place within a framework of clearly defined rules and rights, which is what is lacking in China.

Shanghai's famous skyline: does this represent all that is wrong with China?

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