Capitalism with Chinese Characteristics: Entrepreneurship and the State

by Yasheng Huang

Presents a story of two Chinas – an entrepreneurial rural China and a state-controlled urban China. In the 1980s, rural China gained the upper hand. In the 1990s, urban China triumphed. In the 1990s, the Chinese state reversed many of its rural experiments, with long-lasting damage to the economy and society. A weak financial sector, income disparity, rising illiteracy, productivity slowdowns, and reduced personal income growth are the product of the capitalism with Chinese characteristics of the 1990s and beyond. While GDP grew quickly in both decades, the welfare implications of growth differed substantially. The book uses the emerging Indian miracle to debunk the widespread notion that democracy is automatically anti-growth. As the country marked its 30th anniversary of reforms in 2008, China faces some of its toughest economic challenges and substantial vulnerabilities that require fundamental institutional reforms.

Genres: China, Economics, Nonfiction, History, Politics, Business, Asia

366 pages, Kindle Edition

First published January 1, 2008

Reviews

[xhxhx · Rating 5 out of 5]

Very good.

Chinese growth in the 1980s depended on rural entrepreneurship, market-directed purchases, and local innovation. After 1989, when the reformist Zhao Ziyang was purged from the leadership, policy changes at the center made China more dependent on urban growth, financed at below-market rates by state banks. (See Walter and Howie's Red Capitalism (2011).)

A generation of Shanghai-bred leaders, including former General Secretary Jiang Zemin, encouraged foreign direct investment, but blocked genuine reform in the state and urban sectors, and reversed the previous decade's progress in the countryside by concentrating authority in the government-directed townships, rather than the open and flexible villages, whose town and village enterprises had been at the vanguard of the reform and opening period. State-owned enterprises remained under government control long after revenue shares were sold to private owners (they might have called it "loans for shares"), while the largest and highest-performing SOEs were kept in state hands.

The result has been relatively strong growth in aggregate output (a dubious measure), but relatively poor growth in household consumption. Chinese growth has depended on massive capital inputs, astronomical savings rates, and high investment. The result has been much less welfare-improving than the aggregates suggest.

Highly recommended.

[Yudhister · Rating 4 out of 5]

Notable:
- TVEs (township and village enterprises), while often nominally state-owned, were *de facto* private enterprises, and as such outcompeted SOEs (state-owned enterprises). Rural TVEs were often non-agricultural, typically in the industries of commerce and manufacturing, and survived in large part because of policies allowing for the resurgence of RCCs (rural credit cooperatives) as private lending institutions.
- In 1985, RCCs accounted for 76.8 percent of all agricultural loans and 47.8 percent of all loans extended to TVEs. Post Tiananmen Square, RCCs were restricted to solely providing credit for agricultural purposes, curtailing entrepreneurship for the manifest reason that *most entrepreneurs started their business to get out of agriculture.
- TVEs (in English) refer to *xiangzhen qiye* (rural and township enterprise) rather than *xiangcun qiye* (township and village enterprise). TVEs refer to the entire *xiangzhen qiye* phenomenon, which includes collective TVEs and straightforward rural private enterprises, while *xiangcun qiye* just refers to collective TVEs.
- Wenzhou Province served as a pioneer and bellwether for the reformist orientation to the "private sector" broadly, and specifically with regards to informal finance. In Guizhou Province (the poorest), fully 68.9% of households had taken informal credit, and 81% of private credit loans were used for production.
- Unlike other East Asian economies, the Chinese investment to GDP ratio *increased* as Chinese GDP increased, such that investment accounted for fully 50% of Chinese GDP in 2005. It can be argued that such obscene investment levels serve as a *substitute* for entrepreneurship, and would have been unnecessary only if China continued its pseudo-liberal policies of the 1980s.
- In fact, such large investments in infrastructure came at the cost of investment in rural education and public health, directly leading to increased illiteracy rates and a marked decrease in improving infant mortality rates. Additionally, productivity growth stagnated.
- Considering Shanghai an innovation hub is misleading. Zhejiang and Guangdong surpassed Shanghai in patent grants in the early 1990s, from 0.3x in the mid 1980s, due to their more entrepreneur-favoring policies. (This is especially striking when you note that Shanghai had between 3-6x more research scientists and R&D spending).
- Urban entrepreneurs in Yunnan and Shanghai earned similar amounts, when the GDP per capita in Yunnan is one tenth that of Shanghai.
- Personal income per capita and GDP per capita were negatively correlated in Shanghai in the 1990s.
- India creates (where the present tense refers to ~2008) more value per laborer than China and is better at retaining wealth.

Summary of main points given by author:

- Explicitly private entrepreneurship in the non-farm sectors developed vigorously and rapidly in rural China during the 1980s.
- Financial reforms, again in the rural areas, were substantial in the 1980s, and the Chinese banking system channeled a surprisingly high level of credits to the private sector in the 1980s.
- Conventional property rights security was — and still is — problematic, but the security of the proprietor — the person holding the property — increased substantially at the very onset of the economic reforms. The Chinese policy makers in the early 1980s strongly, directly, and self-consciously projected policy credibility and predictability.
- The political system, although absent of the normal institutional constraints associated with good governance, became directionally liberal early during the reform era.

On reforms:

- The Chinese definition of TVEs refers to their locations of establishments and registration (i.e., businesses located in the rural areas), not their ownership; Western researchers, on the other hand, have come to understand TVEs in terms of their ownership status.
- The cognitive gap is huge: As early as 1985, of the 12 million businesses classified as TVEs, 10 million were completely and manifestly private. Almost every single net entrant in the TVE sector between the mid- 1980s and the mid-1990s was a private TVE; thus both the static and dynamic TVE phenomena were substantially private.
- Private TVEs were most vibrant in the poorest and the most agricultural provinces of China (and this feature of private TVEs also explains the understatement of their size in the conventional reporting as well as the connections between rural private entrepreneurship and poverty alleviation).
- There are reports of privatization of collective TVEs in the early 1980s and large-scale privatizations in the poor provinces.
- Rural financial reforms — credit provisions to the private sector and allowing a degree of private entry into financial services — in the 1980s were endorsed by the governor of the central bank and the presidents of the major commercial banks.
- Chinese reforms were heavily experimental in nature rather than relying on a blueprint approach, but the outcome of the experimentation was private ownership and financial liberalization.
- By the measure of private-sector fixed-asset investments, the most liberal policy epoch, by far, was in the 1980s; in the 1990s, the policy was reversed, and many of the productive rural financial experiments were discontinued.
- Rural administrative management was substantially centralized in the 1990s.
- Credit constraints on rural entrepreneurship, including private TVEs, rose substantially in the 1990s.
- Growth of rural household income in the 1990s was less than half of its growth in the 1980s, and the declining growth in the rural business income was especially pronounced.
- The size of government — measured in terms of headcounts of officials and the value of fixed assets it controls — expanded enormously in the 1990s.
- The directionally liberal political reforms of the 1980s were discontinued and reversed.

On Shanghai:

- Although they are located in the richest market in China, indigenous private-sector businesses in Shanghai are among the smallest in the country, and self-employment business income per capita is about the same in Shanghai as it is in provinces such as Yunnan, where GDP per capita is about 10 to 15 percent of that in Shanghai. (As an illustration of how unusual the above pattern is, imagine finding that self-employment business income per capita in the United States was about the same as that in Turkey.)
- The political, regulatory, and financial restrictions on indigenous private entrepreneurship in Shanghai were extreme, as evidenced by the fact that the fixed asset investments by the indigenous private-sector firms peaked in 1985.
- The share of labor income — inclusive of proprietor income — to GDP is very low in Shanghai.
- Shanghai’s GDP increased massively relative to the national mean, but the household income level relative to the national mean experienced almost no growth.
- Although wage income is high in Shanghai, asset income is among the lowest in the country.
- Since 2000, the poorest segment of Shanghai’s population has lost income absolutely during a period of double-digit economic growth. Although aspiring to be a high-tech hub of China, the number of annual patent grants in Shanghai decreased substantially relative to that in the more entrepreneurial provinces, such as Zhejiang and Guangdong, in the 1990s.
- Shanghai was also corrupt.

On consequences:

- Although GDP growth was rapid during both the 1980s and 1990s, household income growth was much faster in the 1980s.
- The share of labor income to GDP was rising in the 1980s but declining in the 1990s.
- Several studies on total factor productivity (TFP) converged on the finding that TFP growth since the late 1990s has either slowed down from the earlier period or has completely collapsed.
- The majority of the much-touted poverty reduction occurred during the short 8 years of the entrepreneurial era (1980-1988) rather than during the long 13 years of the state-led era (1989-2002).
- Income disparities worsened substantially in the 1990s, while they initially improved in the 1980s.
- Governance problems, such as land grabs and corruption, intensified greatly in the 1990s.
- The heavy taxation on the rural areas led to the withdrawal and rising costs of basic government services.
- Between 2000 and 2005 the number of illiterate Chinese adults increased by 30 million, reversing decades of trend developments; this development has garnered almost no attention in the West.
- The way the Chinese measure adult illiteracy implies that all of this increase was a product of the rural basic education in the 1990s, and this adverse development coincided closely in timing with the intensification of urban bias in the policy model.

misc:
- urbanization -> centralization of power? Jane Jacobs might have something to say here?
- much FDI just allowed for capital to be more efficiently used in China by routing through Hong Kong. See Lenovo
- Stiglitz's perspective on TVEs was just plain wrong?

[Paul · Rating 4 out of 5]

A strong alternative narrative of Chinese economic growth and policy of the last 30 years. To date, the dominant story has been that of Dani Rodrik, et. al. of gradual policy reform that avoided the ills of neoliberal privatization through smart heterodox reform. This narrative adds some wrinkles to the story. While the 80s are still celebrated as creating important spaces for rural entrepreneurialism that supported pro-poor growth, the 90s are portrayed as a a period of illiberal regression. Shanghai epitomizes the the state-subsidized, centrally-planned urban economy that have been promoted at the expense of rural areas, which the government has starved of the oxygen that had been provided in the 80s. This change in policy has led to GDP growth decoupling from poverty alleviation, and is further evidence of the capture of industry by elites (in line with the 'extractive institutions' line of argument of North, et. al). When combined with the significant capital investments that appear to have a large amount of waste, the tremendous growth story of China begins to lose some of its luster.

[Yu Li · Rating 5 out of 5]

A very general view of how the economy of China evolved

The policy changes like the moon in every 15 days is the nature of Chinese economy,

The key message of this book is that economic development is the result of liberalisation and privitisation rather than infrastructure and FDI.

And follow this gradualism perspective, also like Rodrik mentioned once, without the full capacity to change everything overnight.

The Township and village enterprise is a way to guarantee the property rights of these enterprise.
However this enterprise could collapes if the government decided to take back contol.

Also, for the financial sector, without an effient financial system, how to deal the MINJIAN financial system, which based on network become a very complicated issue.

The rural part, at the beginning, the reduction was the lowest hanging fruit,(probabaly that's why the government is fighting so hard for the poverty reduction now). And how the health and education level changed is still a question.

Also, the FDI policy is not like anything, it is just causing some unfair condition for competition. Like the Lenovo case in HK.

And the state planned and whatever is an very unfair issue. The perfect methphor for that is the government is charging the peddlor is not because they what to distroy it, but they want to seek rent. I think the urban control and difference between urban and rural land is the key factor contributes to the problem of China today.

According to Huangyasheng, this is an very mismanaged, had planned and poor governanced became a very serious problem.

Even today, I think the labor market and stock market is still suffering from the state guided and inefficient things.

[Sanford Chee · Rating 3 out of 5]

Excellent review by Susan Rose-Ackerman.
On the same theme of the contestation of ideas, but applied to science & technology instead of entrepreneurship, the author gives this thought provoking lecture:
‘Rise & Fall of Technology in Chinese History’
https://youtu.be/TR8sH0VQbFs

Huang argues that scale & scope can be used as a 2-factor model to correlate w/ technological & scientific inventions throughout the history of Chinese dynasties.
While state sponsored scale has been relatively constant, scope for diversity & the contestation of ideas peaked in the 6th century w/ worrying implications for the current authoritarian regime today.
Is this theory correct?
Doesn’t China already lead the West in: AI, rocketry, e-commerce, Fintech & other technologies?
Ray Dalio’s book on ‘The Changing World Order’ challenges Huang’s hypothesis.

[Hanna Sun · Rating 4 out of 5]

interesting book that exposes the facade of how China economically transformed in the 1970s. China is only capitalist because it is based on foreign capital and foreign-invested companies, not indigenous private capital. China has crony capitalism built on systematic corruption and raw political power—and has self-sabotaged its economic gains by enacting illiberal reforms and government intervention. After 40 years China's transition to capitalism remains incomplete, and their indigenous private sector remains small.

[Faye · Rating 4 out of 5]

some very valuable primary source analysis, particularly of data from the National Bureau of Statistics. Comparative chapters at the end aren't as comprehensively argued, and some hypotheses aren't in line with recent policy changes, but there's not really anything Huang could have done about that.

[Pavel · Rating 4 out of 5]

One of the most difficult books I ever read. What made this challenging is a lot of data and lack of smoothness in the text on the micro level.

The book does cover a lot of ground in terms of time (~30 years) and the whole of China, presenting a very different view of the Chinese economy compared to what we are presented with usually: although GDP is growing quickly, the life of most people either did not improve or got worse. The book shows a lot of data, and although I did not agree with some inferences, overall the book makes a very strong case for its view.

You also get a good look as how the capitalist economy controller by a strong state would work. Although the book does not draw any parallels to what is happening in USA, there are similarities, not necessarily in terms of causes, but effects are similar. The most striking to me was that in Shanghai, while the GDP grew very quickly, the bottom 20% of the population had a net negative effect on their income (adjusted for inflation) and the top 20% of the population had a very significant increase in their income.

Overall a good difficult read.

[Richard · Rating 5 out of 5]

Well-researched story of the real, market-oriented reasons China succeed in its reform era. Says the government's main role was to get out of the way, and growth was better before the post-Tiananmen state changes.

[David Dayton · Rating 5 out of 5]

Once again, this is one of the best books that I've read to explain about the China of the last 35 years.

[David Freeman · Rating 4 out of 5]

one of my favorite topics. not light reading, but dead on.

[!Tæmbuŝu]

KOBOBOOKS

[John Z · Rating 5 out of 5]

Brilliant except some of the data points and reasoning are a bit light. Worth a second read. The Shanghai analysis and China-India comparison are fascinating.

[Pierre · Rating 3 out of 5]

A controversial argument with some great points but ultimately not convincing

[Madeleine O'Dea · Rating 4 out of 5]

Fascinating examination of the true nature of Chinese "capitalism"