January 5, 2009 / 6:21 AM / 12 years ago

China's brand of capitalism faces "monumental odds"

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.

A man talks on the mobile phone outside the Shenzhen Stocks Exchange opposite to the 384-metre (1,260 ft) tall skyscraper at Shun Hing Square in the southern Chinese city of Shenzhen in Guangdong province November 25, 2008. REUTERS/Bobby Yip

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.

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.


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.

The utilization rate of hospital beds, for instance, peaked at 84.5 percent in 1988. The rate fell in the 1990s as the cost of medical care became prohibitive and reached a nadir of 57.4 percent in 2002. Coincidentally or not, this was Jiang’s last year in power. By 2005, the rate had risen back to 62.9 percent.

“Again, as in so many other areas, the improvement coincided with the commencement of the leadership of Hu Jintao and Wen Jiabao,” Huang writes.

Hu, China’s president and Communist Party chief, and Wen, his premier, deserve credit in Huang’s eyes for beginning to repair the social safety net and reverse the neglect of the countryside.

Since Hu took over in 2002, inflation-adjusted rural income growth has recovered to 5.5 percent a year from 3.8 percent while Jiang was in office from 1989 to 2001. From 1978-1988, peasants’ incomes rose a whopping 12.2 percent a year in real terms.

More broadly, the policy platform unveiled at the five-yearly Congress of the Communist Party in October 2007 was the most liberal and progressive in 20 years, in Huang’s view.

But the bad news, as he sees it, is that Hu and Wen have achieved results by revising policy goals rather than the administrative policy methods of the 1990s.

China today still has what Huang calls a “commanding heights” economy in which the government wields enormous power and the indigenous private sector, though now entering the fourth decade of market reforms, remains conspicuously small.

“Many of the endemic problems in the Chinese economy today — massive pollution, corruption, inefficient capital deployment, land grabs, and so forth — cannot be tackled without meaningful institutional reforms, in particular, reforms of Chinese political governance,” Huang writes.

“So far, the policy rhetoric is encouraging. The issue is whether the current leaders will truly follow their policy rhetoric to its logical conclusion — empowering people through political reform,” Huang concludes.

Editing by Neil Fullick

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