Business World

A self-serving state deliberately impoverishes the countryside, stifling business and sending illiteracy soaring, in favor of building skyscraper-raked metropolises admired by the foreign capitalists it woos.

Welcome to the China of U.S. academic Yasheng Huang, whose trenchant analysis of the country’s 30 years of market reforms will discomfit those betting the current economic downturn is but a blip in the Middle Kingdom’s inexorable ascent.

Without root-and-branch political reform, Huang argues in ‘Capitalism with Chinese Characteristics’, China faces “monumental odds” in rebalancing an urban, state-driven economy where consumption has been sacrificed on the altar of investment.

“The next five years will be a litmus test for whether the country will emerge as another East Asian miracle or as a Latin American version of a vicious cycle of dashed expectations and perpetual turbulence,” Huang, an international management professor at the Massachusetts Institute of Technology, writes.

Huang’s thesis is that China’s true economic miracle occurred in the 1980s due to an explosion of rural entrepreneurship as farmers who had lived through the Cultural Revolution gained confidence that starting a business would no longer mean arrest.

All that changed in the political turmoil that followed the 1989 Tiananmen Square crackdown. Former President Jiang Zemin and Premier Zhu Rongji — who did not share the background of their predecessors running agricultural provinces — set about reversing many of the productive rural policy experiments of the previous decade, including easier access to credit.

The result, Huang documents, is that household income growth has lagged gross domestic product growth since the early 1990s faxless cash advances.

With the fruits of growth going increasingly to capital, mainly to big state-owned firms, the labor share of national income fell to 48 percent of GDP in 2005, one of the lowest proportions in the world, from 53 percent in 1990.

Output, in short, has benefited Chinese citizens less and less, stunting private consumption and forcing Beijing to take up the slack by massively stimulating infrastructure investment.

“A central mechanism of the growth model of the 1990s was to finance state-led, urban China by heavily taxing entrepreneurial rural China,” Huang writes.

TURNAROUND UNDER HU

Stephen Green, head of China research at Standard Chartered Bank in Shanghai, says Huang neglects some of the policy achievements of the 1990s, notably the overhaul of hulking state-owned firms and the launch of banking sector reforms.

But he calls Huang’s dissection of China’s reform period important, coherent and depressing.

“Perhaps its greatest contribution is to provide a comprehensive critique of a set of policies, many of which are still doing their damage, while at the same time pointing to the real source of China’s growth,” Green said in a note to clients.

Huang marshals a vast array of statistics to buttress his conjecture that, in contrast to the entrepreneurial capitalism of the 1980s, the welfare of ordinary Chinese did not keep pace with GDP growth under the state-led capitalism of the 1990s. 

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