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One of
the enduring mysteries of our times is how China has
created capitalism out of thin air.
Throughout history, countries have needed to secure
private property rights and impose limits on state power
in order for entrepreneurs to take risks, for bankers to
lend money to people other than the king’s cousin and
for economies to grow.
Not
communist
China.
The
spectacular success of the Chinese economy in the past
two decades seems to suggest to many analysts that good
institutions may not really be as fundamentally
important to a country as they are cracked up to be.
This
isn’t an idle, academic debate.
Our
perception of what makes China successful has serious
implications for how we analyze the prospects for the
rest of the developing world.
Most of
us may believe that Robert Mugabe’s undermining of
democracy is bad news for Zimbabwe’s economy.
But if
we conclude that
China
created material prosperity and spawned wildly
successful entrepreneurial ventures such as computer
maker Lenovo Group Ltd. without constitutional democracy
and its appurtenances, then we can’t—at least on purely
economic grounds—argue that Zimbabwe needs them.
Equally
useless, then, would be the heaps of empirical evidence
that economists have uncovered suggesting a causal
relationship between property rights and growth.
If the
most fascinating economic miracle of our times can soar
in an institutional vacuum, then surely others can, too.
Stuck
needle
Now,
that may only sound right to Mugabe and his cronies. So
what’s missing here?
The
answer, according to Massachusetts Institute of
Technology economist Yasheng Huang, is simple: The
conventional view of China is deeply flawed.
Institutions, as Huang argues in his forthcoming book,
titled Capitalism With Chinese Characteristics,
have mattered as much in China as elsewhere, only their
effect doesn’t show up as neatly.
Part of
the problem lies in measuring changes in the policy
environment facing entrepreneurs on the ground. The
“authority trends” for China, according to the widely
used Polity IV database, moved toward totalitarianism at
the start of Mao Zedong’s Cultural Revolution in 1966,
followed by a two-step return toward a slightly more
free society in the 1970s. And there the needle stops.
“If the
Chinese peasants had relied on the Polity IV to judge
their property-rights security, none of them would have
gone into entrepreneurship,” Huang says.
Millions
of entrepreneurs
But they
did—millions of them.
Huang
has dug into
China’s
Ministry of Agriculture data to show that in 1985, out
of the 12 million businesses classified as “town and
village enterprises” or TVEs, more than 10 million were
privately owned. The conventional view that Chinese TVEs
were controlled by local governments is a myth.
So what
exactly changed in the relationship between the
government and the people to cause this extraordinary
surge in rural capitalism? And that, too, just a few
years after Mao’s Cultural Revolution, when private
possession of a book—let alone a business—could get a
person arrested.
“China
then and now does not have well-specified
property-rights security,” Huang says. “But China in the
early 1980s moved very far and fast toward establishing
security of the proprietor. One should never
underestimate the incentive effect of not getting
arrested.”
Deng
Xiaoping
Something about Deng Xiaoping, who led China after Mao’s
death in 1976, convinced the peasants that changes
introduced by him were for real and that life wouldn’t
revert to being the drag that it was under Mao. “He was
purged three times by Mao and one of his sons was
crippled by Mao’s Red Guards,” Huang writes. “No other
Chinese leader commanded the kind of automatic
credibility that he did.”
Some of
this is pure speculation. But the theory isn’t
implausible. Huang’s hypothesis may help us better
understand contemporary China than reams of analysis of
official gross domestic product data churned out by
economists.
One of
the more shocking conclusions from Huang’s analysis is
that less than a quarter of the corporate profits in the
world’s fourth-biggest economy came from domestic
private enterprise in 2005. So what happened to Deng’s
legacy?
Following the 1989 Tiananmen protests, political support
for genuine entrepreneurship disappeared in the China of
the 1990s. Jiang Zemin and Zhu Rongji preferred growth
that was led by foreign capital and occurred in urban
centers. For businessmen away from large cities, access
to finance dried up just as it was promising to become
more liberal.
New
challenges
The
current leadership of President Hu Jintao and Premier
Wen Jiabao is aware of the challenge that faces them:
The gap between rural and urban wages has widened
alarmingly; the share of labor in national income has
fallen; inequalities between rich coastal provinces and
poor landlocked regions have risen.
In the
early 1980s, freedom from the fear of incarceration was
enough to prompt millions of people to start their own
businesses. The institutional changes that are needed
now will have to be much more substantive.
As a
Chinese company, Lenovo couldn’t secure the license to
make computers in China, Huang says. It had to come in
as a Hong Kong-domiciled “foreign-invested enterprise.”
Lenovo’s
success was Chinese entrepreneurship supplemented by the
institutional credibility of Hong Kong, where the
company, then known as Legend Holdings, raised $29
million in 1994.
Even
now, when
China
has a $3.3- trillion domestic stock market,
entrepreneurial Chinese companies are forced to seek
finance in Hong Kong and Singapore.
The true
capitalist miracle in China is one that’s yet to happen. |
