Saturday, November 22, 2008

Capitalism with Chinese Characteristics

Here is an interesting piece about the Chinese economic model. Professor Yasheng Huang challenges the Beijing Consensus (that incremental privatization in rural areas was the key to increased prosperity) and says that rural privatization has actually been rolled back in the past 15 years. TVEs led to helped reduce poverty by 154 million between 1978 and 1988 but after this rural privatization was rolled back by restricting loans to entrepreneurs willing to invest beyond agriculture sector and taxes were raised in the rural areas to fund urbanization. Interesting!

He argued that the reforms in the 1980s were very far reaching and substantial for private sector development, especially in rural areas led by township and village enterprises (TVEs). In the 1990s, however, those reforms slowed, and privatization was rolled-back.

From 1978 to 1988, poverty in rural China declined by 154 million people, while it only declined by 62 million people from 1989 to 1999. Huang argued that the key to the greater success in the 1980s were TVEs, which were a focus of the early reforms of the 1980s. Out of 12 million TVEs existing in 1985, fully 10 million were totally private. Along with an abundance of government loans that were easily accessible to small businesses, this strategy created rapid poverty alleviation.

In the 1990s a fundamental reversal was made in rural policy. First, there was a substantial increase in the qualifications enterprises needed for loans. Second, the government’s loan policy emphasized agricultural production instead of expanding rural entrepreneurship beyond agriculture. Farmers found it difficult to obtain money to start a non-agricultural business. Third, although most Chinese live in rural regions, a new focus was put on developing the urban regions. To pay for these urban reforms, the government heavily taxed rural citizens and reduced services in rural health and education. The result of these policy changes was a reversal that slowed down rural poverty alleviation and sharply increased the gap in urban-rural household income. 

Though Huang made a strong case for widely varying economic policies in China between the 1990s and 1980s, his explanation for the reversal, he admitted, is not based on an exhaustive review of the facts. Nevertheless, he suspects that the reason is technocratic. In the 1980s, the Chinese Communist Party (CCP) was led by individuals who grew up in rural regions, while the leadership of the 1990s came from urban areas. Furthermore, this may explain why today’s CCP leaders, like rural-born Hu Jintao, are refocusing on rural reforms.

Here is his book Capitalism with Chinese Characteristics: Entrepreneurship and the State reviewed by The Economist.