China's brand of capitalism faces "monumental odds"

By Alan Wheatley - Analysis

BEIJING (Reuters) - 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.

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.