Customer Reviews

Capitalism with Chinese Characteristics: Entrepreneurship and the State

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Professor Huang has written a brilliant critique of China's economic development (and of necessity, debunks much of what others have written about China's economy). He shows that China's development started in the 1980's with government programs focused on the rural economy, with programs designed to encourage rural entrepreneurs. Unfortunately with the Tiananmen Square crackdown, the new government leaders (technocrats from Shanghai) focused on major programs for urban areas, including massive construction projects and encouragement of foreign investment. Rural enterprises (and their required informal and official funding networks) were shut down. Although there was a proliferation of highrise buildings and massive construction projects (Three Gorges Dam, Shanghai's maglev, the Olympics,...) the result was slower income growth (especially in the rural areas), increasing illiteracy (parents could not afford to pay rapidly increasing tuitions), declining health care (hospitals, like schools, also became profit centers for local bureaucrats), expropriation of farmers' land, and much much more corruption, all of which has led to increasing social disorder among peasants who are finding themselves worse off. Party cadres' pay has rapidly increased and there are now far more of them. And productivity growth has declined or has even straight-lined. A return to the policies of the 1980's is clearly in order, but the current leaders, while trying to fix things, are still relying on top down commands and controls, and they have a much larger bureaucracy to keep happy.
Anyone trying to understand China's economic development over the last thirty years must read this. The causes of China's growth are badly misunderstand; too many economists and analysts have been overwhelmed by the vision of Shanghai's massive development without understanding the tremendous cost and waste involved, and the penalties paid by the common people (income for the poorest Shanghaiese has actually been going down).
The book should also be a lesson for Western politicians who think that China's methods of centralized planning and control of industrial policy can be applied in the West. Or maybe our politicians also understand how government control can lead to huge payoffs for politicians (as with Countrywide Credit's payoffs of at least two senators and lots of others politically connected, not to mention the huge salaries paid to Democrat politicians 'working' at Fannie Mae).
Read this book if you have any interest in China or economic development!

This is one of those books that very significantly change how we see a very important part of the world. The above reader review and the professional book reviews capture the book's strengths very well. I don't have the necessary expertise to question the author's interpretations, but they have immense credibility in their basis in detailed exploration of Chinese archives. For an historian a compelling use of documents to create a fundamentally new paradigm of recent Chinese economic history.
My only real complaint is with the editing: too often the same phrases are used to repeat the same message or qualification of the message. It becomes a little like a hypnotic poem: it makes sure we get the message, and given its novelty perhaps this is acceptable. I think that if the analysis of this book is accurate, then we can expect very significant disorder in China with the unfolding of the global credit crisis. And in a funny sort of way it will all be the result of the American and Chinese varieties of crony Capitalism. In both cases one has some sympathy for entrepreneurs and ordinary working people caught in the webs constructed by economic and political elites more keen on building their own enormous wealth than on the wider economy. The triumph of unenlightened self interest.

This is the most insightful book I've read so far on the Chinese economy. Most commentators only look at the most readily available data, but Huang dug through many obscure detailed records that were less likely to be manipulated.

The most important point of the book is to show that the widely held view of China as having gradual, steady improvement since 1978 is wrong. There was a dramatic political change in 1978 that allowed the rural parts of China (which still account for a large part of the economy, and where entrepreneurial culture had not been stamped out by communism) to prosper. Then starting in 1989 urban-focused leaders stifled rural businesses, causing stagnation there until 2002, when leaders more friendly to rural business gained power and allowed fairly healthy growth to resume.

Meanwhile urban areas have been dominated by crony capitalism which produced a good deal of gdp growth through massive state-directed investment in large companies, especially in the 1990s. This growth has produced fewer benefits to the average person than gdp numbers would lead us to expect.

Most of China's success has been due to private enterprise. Beliefs that state-run businesses have produced growth are partly due to confusing reports about which companies are private.

I'm fairly impressed by the documentation of the changes in the rural political climate, but since the author seems to be the only one reading his sources of data and since it would be very time consuming to check them, it would be easy for errors to go unnoticed. For urban issues, he appears to be overstating the importance of problems that are not unique to China.

He partly clears up the puzzle of China doing better than should be expected for a country whose legal system doesn't provide much rule of law. He provides evidence that some of the most important successes depend on British law imported via Hong Kong. But he doesn't provide enough evidence to tell us how important this effect has been.

He leaves unanswered many questions I'd like answered. Why did government policies undergo these changes? Is the surprisingly reported steady gdp growth mostly the result of manipulated statistics? How much of the growth has been an investment bubble, and how much is sustainable? How did entrepreneurial culture survive communism in rural China so much better than in other countries?

Professor Yasheng Huang teaches political economy and international management at the Sloan School of Management, Massachusetts Institute of Technology. His thesis is that in the 1980s, China's government liberalised financial policy, allowing peasants credits to start up private rural businesses, so rural poverty fell sharply. Then after the shock of 1989, the state abruptly changed course, switching loan capital into large state-owned enterprises and urban infrastructures, and granting huge advantages to foreign capital drawn to the big cities, so poverty grew again.

In the 1960s, China had longer life expectancy, lower infant mortality rates and better educational attainments than India. In the 1970s, community medical schemes covered 90 per cent of the rural population, but by 2003, only 20 per cent. In 1998, 37 per cent of sick rural residents were not treated, because they couldn't afford the costs of health care. In 2000 WHO ranked China 188th on a measure of `fairness in financial contributions'. China had become one of the world's most inequitable societies in terms of distribution of and access to health care. It is now one of the world's most unequal societies.

In the huge privatisations of the 1990s, 50 per cent of private entrepreneurs in China's poor regions "got their startup capital from seizing control of collective fixed assets." Village governments "sold some or all of their enterprises to individuals at extremely low prices." So "the private share of TVEs [township and village enterprises] grew in terms of output and employment." Maybe this caused the 1990s' slowdown.

Since the 1990s, labour's share of GDP has fallen, and there are growing divides between rich and poor, and between city and countryside. The rural tax burden has risen. The state has raised charges for education and health: some local governments even charged for immunisations. There are fewer rural primary schools and medical facilities.

Productivity growth, rural income growth, education and health have all fallen. Between 2000 and 2005, the number of illiterate adults grew by 30 million, to 113.9 million. Peasants lost land. Land grabs and corruption increased. Poverty is growing: in 2002, 45 per cent of the population got less than $2 a day.

Capitalism is failing China's people. Huang's remedy? `Free the market'. Really? Have 30 years of free markets brought the British people social equity, rising wages or better lives?

"Capitalism with Chinese Characteristics" was named one of the top economics books by "The Economist" in 2008. Author Huang's focus is on examining why China has grown so fast. Professor Huang teaches political economy and international management at MIT. Huang researched a 22 volume compilation of internal bank documents, archives of the Ministry of Agriculture, and other sources to reach his conclusions. Still, he (and others) was handicapped by the fact that only 46 people worked at the National Bureau of Statistics in 1976, and as late as 1986, 90% of economic data was handled manually. Thus, he says that often instead of examining the question of whether a tax cut had stimulated investment, one is instead left with the question of whether a tax cut actually took place. His findings are as follows:

1)Rural sector private entrepreneurship developed rapidly in the 1980s, supported by the Chinese banking system. However, while security of the proprietor increased considerably ("One should never underestimate the incentive effect of not getting arrested"), property security rights still remains problematic. Of the 12 million TVEs (township/village enterprises - refers to location, not ownership) in 1985, 10 million were private; some were former collectives that had been privatized. (Other sources report most were privatized via buying state-owned enterprise (SOE) assets and hiring retired workers.) Reduced regulation helped - especially ignoring the limit of seven employees. Almost every entrant to that sector in the next ten years was privately owned; 25% foreign ownership was the cutoff. The bulk of poverty reduction occurred in these areas, within 1980-1988. The biggest lesson involving TVE privatization, pointed out by Joseph Stiglitz, is that China managed to transition state-assets to private ownership without the massive theft that occurred elsewhere - most notably Russia.

2)The 1990s brought former Shanghai mayors and party secretaries to national leadership and an emphasis on investment and credit allocations to urban areas. Rural areas were taxed heavily for support, and government corruption increased. Credit constraints on rural TVEs expanded, and growth of rural household income slowed. (Rural taxes were eliminated after Jiang Zemin's replacement.)

3)Shanghai is a vivid and concrete illustration of China's transformation, with its forest of towering skyscrapers, magnetic levitation airport/downtown train, and 2010 World Expo. Huang, however, calls Shanghai a capitalist illusion and the world's most successful Potemkin metropolis. It's growth was fueled by enormous state (seize land, pay less than market, auction off land-use at market prices) and foreign (about $6.5 billion/year, equal to all India) investment. Also focused on eliminating free "unorganized and unsightly street markets," rebuilding and auctioning off space. Strict zoning. Private sector banned from bidding on infrastructure projects - corruption? At the end of the 1980s, indigenous private-sector enterprises in Shanghai were among the smallest in China, with much lower income for entrepreneurs. Shanghai was the least reformed urban area. Its former mayor (2002-2006) states that SOEs contribute nearly 80% of Shanghai's GDP, vs. 60% in the rest of China. When Hu Jintao replaced Jiang Zemin (former Shanghai mayor) in 2002, the bias towards Shanghai stopped, and rural areas received improved treatment. Meanwhile, real income of the city's poorest 10% has declined each year since 2001.

4)Most (all) major large private companies follow the path of Lenovo. Lenovo, though featured as a Chinese success story, is not a Chinese company. While its Chinese face is in Beijing and was founded in 1984 under the Chinese Academy of Sciences (CAS), its real ownership control is in Hong Kong. Nonetheless, seven of Lenovo's Hong Kong subsidiaries were included on a Chinese list as among China's largest FIEs in 2003. Except for initial CAS loan financing, the Hong Kong capital market supplied Lenovo with almost all its subsequent capital. After its founding, Lenovo was denied a production license for computer manufacturing in China - instead, the government granted a license to the Great Wall Group (floundered), a traditional SOE. Lenovo began producing computers in China as an Foreign Investment Entity (FIE) originating in Hong Kong, and still does. Other examples exist - eg. Haier (refrigeration), Huawei (telecommunications gear). Huawei is viewed by Cisco as its main technological rival. It was established in 1988, and until recently, the telecommunications sector was off-limits to private-sector Chinese firms. It too went the Hong-Kong route.

5)In the 1990s, China conferred substantial tax incentives on FDI while restricting growth of the indigenous private sector. Until 2005, many high-tech and strategic industries were off-limits to domestic private entry - only businesses with foreign registration were allowed.

6)Concluding that China's successes do not depend on Western-style financial and legal institutions is not true. China lacks both, but has access to them in Hong Kong. "Foreign" capital is first exported from China and then imported back, via Hong Kong. However, this is not so easily accomplished in China's interior.

7)The vast majority of SOEs with shares on China's stock exchanges are classified as non-state firms but are tightly controlled by the state. SAIC Motor is an example.

Summarizing: China is much less capitalistic today than most observers assume it to be, and less so than 20 years ago. Further, its rule of law and openness of financial institutions may have regressed in recent years, and compare poorly with India. Less than one-quarter of corporate profits in 2005 China came from domestic firms.

Bottom-Line: "Capitalism with Chinese Characteristics" provides a total revision of the story of China's economic miracle, one that has not proceeded in a straight line. Determining this took considerable effort by Huang to overcome the severe data limitations. Huang believes that the Chinese Communist Party (CCP) will continue to support high growth; however, problems under Jiang Zemin obviously could be repeated. However, learning that China's success is more a matter of an increasingly strong and intrusive state rather than capitalism should be no surprise to anyone who has paid reasonably close attention to the actions taken by China's government. Locating ownership in Hong Kong and relying on it for final financing and legal foundation is a distinction of minimal significance, as evidenced by China's success. Finally, Huang's research was limited to 2006 - since then, China has undertaken major steps to place its banks into a competitive mode.

With a wealth of data and careful case studies, Huang overturns much of the conventional wisdom regarding China's economic miracle. The true miracle, he argues, was the local and rural entrepreneurship of the 1980s, not the urban state-guided and FDI driven urban coastal growth of the 1990s.
As Huang himself notes, much of what he says is positing opinion rather than stating clearly defined fact. Nevertheless, this is an impressively researched work and Huang is confident enough in his findings that he does not shy from overt criticism of high-profile and respected development economists (among them, Joe Stiglitz, Jeffery Sachs and the World Bank).
'Capitalism with Chinese Characteristics' should ignite debate on China's growth model and it would be wonderful to see a response from some of those whom he criticises. It should also be essential reading for every economic decision maker in China.

Professor Huang's elaborate analysis of China's economic developments over the past 30 years is commendable. In recent years, many China "experts" have been unanimously singing high praises of China's achievements, probably having been impressed by skyscrapers and massive constructions in big cities, an infinite appetite for luxury goods which has dwarfed any other country, and of course, an enormous mountain of foreign reserves. Interestingly enough, the less real life experience an "expert" has in China, the higher tones he or she tends to sing. Those who lived through the `Great Leap Forward' period, the Cultural Revolution, and the early stage of the economic reform, tend to have a more realistic and critical assessment of China's recent economic developments and Professor Huang is one of them.

The majority of the Chinese population lives in rural areas, and China cannot become a truly modern, well developed country without closing the gap between the living standards of rural people and urban people. Historically, there had been a huge gap between rural and urban areas before the economic reform starting 1978. As shown in this book, the early reform greatly benefited rural areas, allowing rural household to create wealth and close the gap somewhat, but unfortunately the gap increased again in 1990s, when the policies favoring rural capitalism were reversed. Even in urban areas, household income growth has been slower than the GDP growth in recent years. This created a huge gap between the rich and the poor in the entire society. This is best demonstrated by the difference in the income growth rates of the rich and poor in Shanghai 2001-2003 (Chapter 4, Fig. 4.2), as the rich tend to benefit much more from the rapid growth in GDP. This is going to be a serious issue as China is trying to create more domestic demands to offset the fall of exports: without participation of the majority, you cannot boost domestic demands for consumption. I view the growth in 1980s as more organic (like an athlete increasing performance via intensive training and healthy foods) whereas the growth in late 1990s to 2000s is more like rapid performance improvement by an athlete with the help of steroid.

This book uses data mainly from official Chinese sources, such as the Chinese National Bureau of Statistics, and the Shanghai city government. I believe these sources are also available to other China scholars, but it appears that Prof. Huang is the first to analyze these data and provide a different picture of the economic development than the skyscrapers and foreign reserves may suggest. This book can certainly help anyone who wants to have a more in-depth understanding of what is really going in China.

This book is un-fun to read - even for someone who is passionate about understanding Capitalism in China. Prof. Huang does not understand how to write prose effectively. He has collected a large amount of data, but has failed to distill it for the reader into an organized prose that is digestible.

The thoughts are choppy, fragmented and unorganized.

This book is an exceptional piece of scholarship, with very interesting conclusions. The writing is not always very good with lots of repetition, a poor (and long) introductory summary, and insufficient highlighting of some of the really important data sets (p.116, p.122, p.254): the casual reader might want to focus on those data sets and the accompanying gloss.

At the risk of some oversimplification, Huang finds that the 80's in China were characterized by vigorous growth through private enterprise. In the 90's China became a state run, top down economy, relying on foreign direct investment for the continued growth which was accomplished. Economists have come to emphasize the importance of the security of private property in promoting growth, and while nominally this did not exist in the 80's in law, it mostly did exist in fact. The 90's were a different story, with land grabs and other kinds of expropriations, as well as limits on competition with state controlled enterprises, and a stranglehold on the availability of credit.

One might think that the source of growth was not too important so long as growth was obtained, but this is not true. The "Gini" coefficient which was developed by international economists shows that Chinese society suffered from more inequality in the 90's. Education and health deteriorated, with the number of functionally illiterate actually increasing. Corruption became rampant even as civil service salaries greatly increased and there was less freedom at the village level. Moreover, because urban areas grew at the expense of rural areas, more Chinese workers had to migrate, and living in a squalid worker dormitory, separated from family, leads to a reduction in quality of life not picked up in GDP measurements (Huang does not explicitly make that point, but it is obvious).

Huang sees signs that in the 21st century, China's new leaders have been trying to move the country back in the direction of the eighties. As a stock market investor, I can point out the following: a number of Chinese companies have listed on the NASDAQ while not being allowed to list on the Shanghai stock exchange where share valuations are higher, so they are not able to raise as much capital. At the same time, however, some of these companies have received state assistance of various kinds without state control.

I believe Huang was objective in his research, although he does gloss over the evils that can result from unrestrained private enterprise - think of the industrial revolution in Europe.

After reading this book, you can almost feel that there is some kind of idealistic political-eoconomic model in the author's mind, and that such model exists in reality and works great. Unfortunately, a model of that nature broke 80 years ago and broke again in 2008. Many social scientists tend to be too optimistic on how human nature can turn positive under some political procedural logic, and tend to ignore that crony Capitalism is indeed everywhere and that every economy is, unavoidably, moving along with some type of sickness. This could seriously lead to an insensitivity to some fundamental institutional changes happening in China beginning from 2002. In the end, hypercritical is as quixotic as hyperlaudatory.

The tone of this book is very argumentative, but it exaggerates the policy switch between 1980s and 1990s, exaggerates the usefulness of his documentary evidences, exaggerates the differences between what he sees and what everybody else sees, all of which come from the fact that it lacks a persuasive and solid "growth theory". It takes too much for granted, and focuses too narrowly on ownership and finance. The author attempts to show a real China, yet his narrow scope, shallow theoretical construct, and dis-oriented detail all fail him.

It's a simple question: if there is a policy reversal that is so bad in the 1990s, why China keeps on growing and rising? The author wants us to believe that the reality is wrong while in fact something is seriously wrong with the "growth theory" and political-economic ideal assumed by the book.