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In the 1990s, China did move forward in FDI liberalization and in the area of restructuring urban SOEs. In this book, I assign a greater weight to rural developments than to these other developments in my explanation of the pace and the character of China's transition toward capitalism. The argument is that FDI and SOE reforms are fundamentally urban and, to the extent that entrepreneurial capitalism is rural in origin, rural policies matter more for China's economic transition.
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
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In the 1990s, China did not revert back to central planning. Far from it. But China began to adopt policies and practices that favored the more state-controlled urban areas. During this period, China made notable progress in reducing the ideological stigma associated with the private sector (much of which was actually revived during the Tiananmen period). But, financial policies became adverse in the rural areas and fiscal and economic affairs in the rural areas were centralized.
In the 1980s, the labor share of GDP was rising and in the 1990s it was declining. In the 1990s, China was producing output at an impressive rate but this output production began to benefit its citizens less and less.
In other words, although GDP growth was fast in the 1980s and the 1990s, the welfare implications were quite different.
“What financed these expensive projects in a poor country like China?” The second obvious question is, “If China spent precious resources on such projects, what other projects had to be given up to finance these projects?” The first question gets to the actual costs of these projects; the second question gets to the opportunity costs.
Thus, even if it is true that mixed-ownership firms became more important in the 1990s, their rising importance was achieved at the expense of the registered private sector, not at the expense of the state sector. This is a finding worth emphasizing. Many of the reforms touted by economists as ownership reforms have nothing to do with privatization. They are designed as alternative funding devices to supplement a massive investment program organized by the state.
The results are shown in Row (5b). As recently as 1998, based on this broad definition of the private sector, the investment share of the private sector was only 17.2 percent, smaller than that in the 1980s (21.4 percent). Since then, the share went up to 27.6 percent in 2002 and 33.5 percent in 2005. Thus, based on this broad definition of the private sector, all we can claim is that the ownership policies since the late 1990s seem to have become more liberal than those in the 1980s. By the same token, the policy environment during much of the 1990s was more restrictive toward the private
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Although it was a largely rural phenomenon, entrepreneurship in the 1980s was not an agricultural phenomenon. This is an important insight. As the case of Mr. Nian shows, the entrepreneurs were rural residents but they engaged in industrial production and service provision activities. This has important implications for how China managed to rapidly reduce poverty and how the country achieved a virtuous cycle between economic growth and social performance in the 1980s.
With better and more data, we know vastly more about China in the 1990s than we do about China in the 1980s. Furthermore, our views of the 1980s are often based on inferences rather than on direct empirical observations. Here, the gradualist framework – that China moved to a market economy progressively and steadily over time – exerted a powerful influence on how scholars framed the issue.
Yes, the entrepreneurship of the 1980s was exclusively a rural phenomenon, but keep in mind that China in the 1980s was a predominantly rural society, with 80 percent of the population living in the rural areas. Thus, private entrepreneurship had a huge impact on the largest segment and the poorest of the population.
In part because globalization fits well with mainstream economics, many came to view globalization as a critical factor in China's broad economic success.
In 1978, the number of rural poor stood at 250 million (as defined by the Chinese poverty line) but, in the first 10 years of reforms, this number already declined to 96 million in 1988. The poverty headcount declined by 154 million. In the next 10 years of reforms from 1989 to 1999, the poverty headcount declined by only 62 million. This was a fraction of what China achieved in the 1980s.
One may argue that poverty reduction in the 1980s was faster because it was easier. It was a case of “picking the lowest-hanging fruits,” one may say.
There is some truth to this structural explanation but it cannot be the entire truth. One indication is that the Chinese poverty figures are highly sensitive to the definition of poverty line. At the poverty line of US$1 per day, in 2002, 7 percent of the Chinese population lived in absolute poverty, but when the poverty line was redrawn at US$2 a day, this fraction increased to 45 percent (World Bank 2003). The ethnic and geographic explanation is unable to explain this high level
Also, the structural explanation oddly assumes that it was easier to tackle poverty in the 1980s than in the 1990s. In the 1990s, the Chinese government commanded substantially more resources than in the 1980s.
The essence of the policy model of the 1990s was to tax the poorer rural China to benefit the richer urban China and to restrict rather than expand the opportunities for small-scale and humble entrepreneurs
There is another facet about the poverty reduction record of the 1990s – it was partially a result of statistical manipulations. In 1998, 1999, and again in 2002, the Chinese authorities lowered the official poverty line, making it easier for a statistical reduction of poverty. In 1997, the rural poverty line was drawn at 640 yuan per person; by 2002, it was 627 yuan per person (NBS 2007b).
In the 1980s, FDI and international trade were minuscule. In 1988, China received just 3 billion dollars in FDI, half of what India – widely viewed as an FDI laggard – receives today. And yet, China's record in poverty reduction in the 1980s is substantially more impressive than its record in the 1990s.
The true China miracle is a classic and conventional one – the country grew because of private-sector dynamism, a relatively supporting financial environment, and increasing property rights security.
Chinese capitalism is heavily rural in origin. The reasons are complex but one hypothesis is that central planning was always weaker in the countryside than it was in the cities.
Very few of China's successful corporate giants in the competitive manufacturing industries are based in the metropolitan, industrial centers such as Beijing, Shanghai, and Tianjin. (Firms in politically connected sectors such as real estate are another story altogether.)
Readers may wonder why capitalism in China was rooted in the rural areas. There is a demand-side dynamic – rapid income growth in rural China creating the derived demand for more consumer goods and services (Naughton 2007). The more interesting explanation is on the supply side – why rural entrepreneurs were able to respond to the market changes so quickly and on such a massive scale. One important reason is the radical and market-conforming nature of the reforms initiated by the Chinese leadership in the 1980s.
For whatever its faults, the Maoist leadership invested heavily in the health and educational sectors of rural China.
Micro data show that the first generation of Chinese rural entrepreneurs was very well educated.
The second reason is that even at the height of the Cultural Revolution, there was still some residual capitalism in rural China.
There was also a political factor. The Cultural Revolution, however sweeping and penetrating, was largely an urban affair and it may have undermined the urban political control of the countryside. In a planned economy, the urban centers are always more state-owned than the rural areas and thus a diminution of urban control would inadvertently allow for some breathing ground for capitalism.
A common measure in economics literature of the size of individual business units is employment. This is an appropriate measure here.
From an economic perspective, it is important to know how substantial the rural entrepreneurship was in terms of creating employment opportunities outside of agriculture. As agricultural productivity improved, there was a greater pool of rural labor available for nonagricultural activities. From a welfare point of view, it is important to know whether rural businesses generated employment opportunities in nonagricultural sectors for the rural surplus labor.
Apart from the insight and data that we get from them, the very fact that they were recorded in the government reports means that the Chinese government was fully aware of the scale of such entrepreneurial ventures.
These anecdotal stories show that the ceiling effect of the employment restrictions was not as stringent as the seven-employee rule suggests. There were numerous cases of private businesses employing far more than seven persons.16
More systematic data based on PSS1993 confirm that rural China had some very large private employers. PSS1993 provides data on the number of investors
Of all firms founded between 1980 and 1990 by rural entrepreneurs, only one year, 1980, had an average size of private-sector firms close to the seven-employee rule. In that year, the average number of employees was 8.89. The largest average employment was 37 persons in 1983, and it was 30 persons in 1985.
A carefully designed study based on surveys on 37,422 rural households (supplemented by interviews) shows that those rural households primarily engaged in nonagricultural activities comprised 11 percent of the total rural households as of the mid-1980s.
Rural entrepreneurship was a method of choice on the part of rural residents to transition out of agriculture in the 1980s.
All of these developments reveal an important dynamic of the era – there was a great deal of arbitrage activities intermediated by the rural entrepreneurs. One indication is that many of the rural entrepreneurs operated a business in the urban areas.
The SEBS1991 data suggest that barriers to rural/urban mobility may have come down in the 1980s, earlier than many Western academics have assumed.
However, the reason that Western academics assume that rural/urban mobility was greater in the 1990s than in the 1980s is that there were more labor migrants from the rural areas in the 1990s. But here is a critical difference between the two decades. In the 1980s, as SEBS1991 shows, it was the rural entrepreneurs who came to the cities and established operations there. In the 1990s, it was mainly the rural laborers who flooded the cities in search of jobs.
In the 1980s, the rural entrepreneurs were engaged in arbitraging the rural/urban differences in the returns to their investments, whereas the rural laborers of the 1990s were arbitraging the rural/urban differences in the returns to their labor.
A particularly virtuous aspect of the rural entrepreneurship in the 1980s is that it occurred among the low socioeconomic groups of the society. SEBS1991 shows that only 12.3 percent of the rural respondents had held a prior village or enterprise leadership position before becoming an entrepreneur. SEBS1991 asked about motivations for going into entrepreneurship. In response to this question, 62 percent of the rural entrepreneurs cited “to make a living” as their motivation for going into business, compared with 19.8 percent who answered “to make additional money.” Thus, their entrepreneurial
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In the 1980s, there were two cross-cutting dynamics in the income distribution trends. One was a rise of within-rural inequality; the other was a decrease in rural/urban inequality.20
This is a little-known fact but one with monumental significance: In the 1980s, private-sector development and entrepreneurship were growing fastest and most vibrantly in the poorest parts of the country. Entrepreneurship was a poor man's affair.
Given how poor Guizhou was, the scale of private businesses in Guizhou was considerable. We can demonstrate this point by calculating the ratio of the registered capital of these entrepreneurial ventures to the per capita GDP of the region.
Some rural entrepreneurs, even in this most impoverished province, had already begun to venture into capital-intensive businesses.
This gets to one of the least known stories about rural China in the 1980s – private-sector financing from the Chinese banks was sizeable. (I provide more details on this issue in the next chapter.) In Zunyi county, the rural credit cooperatives (RCCs) – a critical financing vehicle for private-sector development in the 1980s – increased their lending by 65 times in just three years between 1979 and 1982. In 1979, lending to rural households was 4.53 percent of that to collectives. In 1982, the lending to rural households was 3.5 times of that to collectives. Between 1982 and 1988, lending to
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There was also some nascent financial liberalization. The provincial branch of the People's Bank of China – an institution that in the 1990s would crack down harshly on informal rural finance – described an increasingly diverse financial scene in Guizhou in very positive terms: “A large number of shareholding and collectively owned financial institutions emerged, while informal finance and individual borrowing and lending developed rapidly.”24
Professor Stiglitz is enamored with the corporate organization known as township and village enterprises. TVEs, he argues, are a unique form of public enterprise that can solve what he views as an extremely serious problem afflicting transitional economies – the stealing of assets by private investors. Monitoring institutions are under-developed, he goes on, and therefore public ownership is needed to minimize stealing.
The start-up equity capital did not come directly from the government. As was common among the large entrepreneurial businesses in the 1980s, financing by the government took the form of a loan. The Rongqi township provided Mr. Wang with a 90,000-yuan technical assistance loan and arranged for a credit line of 4 million yuan for his firm. In return, the township took over nominal control of the firm and assigned an official, Pan Ning, to be the general manager. The loan was quickly repaid to the township, but the firm remained registered as a collective TVE.
The point of the story is that Kelon would have been registered as a straightforward private business in any market economy. But China at that time did not have a legal framework to accommodate a private enterprise the size of Kelon and a firm operating in what was viewed then as a modern industry.27 Township and village governments assumed controls of these firms as a matter of political prerogative rather than on the basis of their share of capital contributions. The logic of township control had nothing to do with economics; it was deeply political.
But, the entire arrangement that gave rise to the private control rights of Kelon was completely tacit and without any legal foundation. Kelon prospered as long as Rongqi township was benevolent, but this benevolence was not to last forever.
