Just how capitalist is China?

“Evolution of capitalism in China is a function of a political balance between two Chinas--the entrepreneurial, market-driven rural China vis-à-vis the state-led urban China. In the 1980s, rural China gained the upper hand but in the 1990s, urban China gained the upper hand. [p. 1]

What triggered these policy reversals? ....

A reasonable conjecture is that the political and policy turning point was the 1989 Tiananmen turmoil. It is well-known that the post-Tiananmen leadership sought to crack down on the private sector, mainly on ideological grounds. The ideological assault was quickly halted as is well known by China scholars, but a longer-lasting effect of Tiananmen was a substantial change in the composition of the Chinese leadership. Suffice it to mention that the pre-Tiananmen and the post-Tiananmen leaderships differed in one critical aspect—their rural vis-à-vis urban credentials. Before Tiananmen, many of the top Chinese leaders charged with day-to-day economic management—Zhao Ziyang, Wan Li, and Tian Jiyun--hailed from rural provinces that had pioneered in agricultural reforms. They built their economic credentials by having succeeded in the management of agriculture. After Tiananmen, the top Chinese leaders in charge of the economy--Jiang Zemin and Zhu Rongji--came from the most urban and the least reformed region of China--Shanghai. We cannot know for sure whether these observable characteristics of the Chinese leaders explain their policy orientations but they are not inconsistent with the view that there was a rural policy bias in the 1980s and that there was an urban policy bias in the 1990s.

The key to getting the China story right is to understand its rural entrepreneurship. This is why the decade of the 1980s is so important in our efforts to explain China. I ... will show that rural entrepreneurship was not only vibrant but also virtuous. Rural entrepreneurs built businesses of a substantial scale in some of China's poorest provinces and after only a few years into the first decade of the reforms, the private portions of the TVEs [township and village enterprises] were extraordinarily high. [p. 42]

A central mechanism of the growth model of the 1990s was to finance state-led, urban China by heavily taxing entrepreneurial rural China. The result was the urban boom--the skyscrapers and urban amenities in Beijing and Shanghai--that many take as a sign of China's economic success. Very few observers have asked the obvious question, "What financed these expensive projects in a poor country like China?" ....

The answer is that entrepreneurial rural China paid the price. [p. 44]

[E]ven as China is about to enter the fourth decade of reforms, the size of its indigenous private sector is conspicuously small. The best way to characterize the Chinese economy today is that it is broadly similar to many of the commanding-heights economies of the 1970s. It is capitalistic to be sure, but it is a version of the oligarchic capitalism which, as Baumol, Litan, and Shramm (in Good Capitalism, Bad Capitalism, and Economics of Growth and Prosperity, 2007) argue, characterized Latin America. Today China has other attributes that also put the country closer to the Latin American end of capitalism rather than to the East Asian end--the rising income disparities and the contraction in social opportunities available to the population to attain education and health. [pp. 44-45]”

Yasheng Huang, "Just How Capitalist is China?", MIT Sloan School Working Paper 4699-08 (4 April 2008).

http://ssrn.com/abstract=1118019

Professor Yasheng Huang teaches international management at Sloan School of Management, MIT. This essay is the first chapter of his book Capitalism with Chinese Characteristics (Cambridge University Press, New York, 2008).

I know little of the Chinese economic situation so I found this interesting for several reasons. Professor Huang points out that a very large country such as China has different ideas about what it should do and where it should go economically, and that these differences may be traced to rural-urban geographic differences is very interesting. Indeed, the rural-urban difference, with one entrepreneurial and the other state-led, is one I was not aware of but do not doubt. In fact, it makes sense, and it makes sense that policy would be affected by the background of leaders coming from markedly different parts of this large country. Finally, the point of a small indigenous private sector and its oligarchic nature was also unknown to me, and also not surprising.

I take it China is less capitalist than I thought.

An interesting paper well worth reading.

Thanks to Larry Willmore for the pointer.