How should China’s economic transition from a central and government-controlled economy to a more capitalistic double-digit-growing juggernaut be correctly understood? According to Dr. Yasheng Huang of MIT, in “Capitalism with Chinese Characteristics”, the evidence would suggest that the release of entrepreneurial energies in the countryside in the 1980s was a critical and fundamental engine for China’s amazing growth, much more so than the wooing of foreign direct investment of the 1990s.

Further, Huang suggests that policy changes in the 1990s have had a less salutary effect on the society—with greater disparities between living standards, more pervasive corruption and crony capitalism, and less access to economic opportunities without guanxi (strategic relationships). Without funding a more supportive social safety net for the aged and the infirm, improved healthcare, and quality education for all, the society that the Chinese government is building will become even more imbalanced, he suggests.

This researcher candidly describes the elusiveness of accurate economic data—even as he pored over decades of official bank documents, official speeches, and government data.

He quips: “Here is one major difference between researching (the) Chinese economy and researching (the) American economy. In studies of American economy, scholars may debate about the effects of, say, ‘Reagan tax cuts.’ In studies of the Chinese economy, the more relevant question would be, Did the government cut taxes in the first place?” Huang Yasheng is an economist’s economist—with a thick flow of statistics, detailed minutiae, and macro-level analyses.

These differences stem from a variety of challenges. One may be a problem of a developing field in a closed country with socialist values trying to compete and integrate with a global marketplace. There are difficulties defining terms like township and village enterprises (TVEs) and how they manifest and even what they are. The government reliance on inflated numbers at all levels means a lot of “play” in the data. There are convoluted ownership structures. The record-keeping is medieval. There’s plenty of purposeful obfuscation and a cultural penchant for secrecy and protectiveness against foreigners and non-insiders who want to know information.

A similar sponginess exists in the conventional view that unique “context-specific local insittutional innovations, such as ownership by the local state of township and village enterprises (TVEs), decentralization, and selective financial controls” may be credited for China’s advances, while “private ownership, property rights security, financial lbieralization and reforms of political institutions, are not central compoentns of China’s growth story.” Huang would argue that radical changes in Chinese policies in the 1980s did in fact use classic growth maneuvers by encouraging private entrepreneurship in rural China in non-farm sectors, promote financial reforms to funnel credit to the private sector, to strengthen some property rights, to project policy credibility, and to move in the direction of poltical liberalization.

This economist very much favors the rural model of entrepreneurship over the urban “Shanghai model”. China’s peasantry and rural families, while traditionally disenfranchised and disempowered, have found a high powered ally in Huang, who asserts categorically: “When and where rural China has the upper hand, Chinese capitalism is entrepreneurial, politically independent, and vibrantly competitive in its conduct and virtuous in its effects. When and where urban China has the upper hand, Chinese capitalism tends toward political dependency on the state and is corrupt.”

This author argues eloquently for the importance of encouraging entrepreneurship by codifying more open-market laws and practices. Under Mao Zedong, those who would engage in entrepreneurial activity risked arrest and worse in the country’s dark gulag system. He writes of changes in the 1980s, with no sense of irony, “Imagine the incentive effect changing from an equilibrium in which a would-be entrepreneur faced instantaneous arrest to one in which this was no longer an automatic risk.”

The residual effects of Maoist ideologies have disappeared in many parts of the Chinese economy. The country’s coastal cities have blossomed; there are numerous miles of highways and a budding middle class, with their own homes and even cars. There are some property rights. A budding legal system exists although there are still many credible assertions of the power of people overruling the power of law. Nepotism still holds wide sway in the country, and corruption and bribery are endemic, according to numerous press reports.

However, the “commitment problem” still exists. “The political system, then as now, imposes no institutional constraints on the rulers to renege on their promises. The commitment problem, as political economists know very well, is massive in an unconstrained political system.”

In this gutsy work, Yasheng Huang suggests that China is fast-moving towards a kind of Latin American capitalism with huge class inequities. While he finds hope in some of the liberalism expressed by the Seventh Party Congress in October 2007, he sees the political system as self-serving and less concerned about its citizens.

In the 1980s, economic reform benefitted those in the countryside and originated there. Chinese economic reform then was an “overwhelmingly rural affair” and very much “a poor man’s affair.” No more: current advancements go to those with more social ties, money, education, and technological savvy—and those in the countryside are getting left behind.

The challenges that China’s leaders face are mind-boggling—with policy effects that ripple through a fifth of the world’s population and have spillover effects on the rest of the world (particularly in terms of pollution, potential international strife, trade wars and volatile money valuations, and geopolitical competition). Any missteps have the potential for a true and deep luan or chaos that has been such a traditional fear.

At heart, Yasheng Huang analyzed what worked in terms of Capitalism with Chinese Characteristics—and he thinks the leaders of the 1980s got a lot of it right.

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