Thursday, January 06, 2011

Major flaws of an economic success story - Huang Yasheng

Shanghai Stock ExchangeShanghai, a failure?  via Wikipedia
Only few books can claim they have been able to offer a profoundly new perspective on China’s economic developmont. This one does.
In his groundbreaking book on China’s economy, Capitalism with Chinese Characteristics: Entrepreneurship and the State Huang Yasheng takes important Chinese holy cows to the slaugther house. In the process, he creates a few new ones, but Huang’s monumental work will force quite a few people to revise their perspective on China’s 30 years of reform.

After the economic success story at China’s country side in the 1980s, a reversal in policies triggered off major problems, Huang says. The welfare of its citizens went down, income inequality shot up, illiteracy went up, average rural household income went down, poverty went up. Shanghai’s skyscrapers or the 1990s are no symbols of its economic prosperity but the hallmarks of squeezing capital out of the country side. Its successful rural development gave way to an urban approach with few real winners. Even Shanghai he describes as a major faillure.

Huang describes, based on thorough analysis of an unprecedented number of original documents, that the 1980s were an amazing success of private entrepreneurs at China’s country side, of liberal policies, including availability of finance for private entrepreneurs and protection of property rights. That policy was reversed in the 1990s with a new focus on developing China’s larger cities. While that adjustment did not change the upward line of economic growth, the trends underneath caused a major disruption.

Huang blames predecessors who analyzed China’s economy and have sticked to a too superficial GDP-fetishism. While nobody denies that China achieved a major successes in its thirty years of economic reform, very little attention has been given to the causes. Most of China’s poverty was solved in the successful 1980s, while the 1990s reversed much of this and other early gains, Huang argues.

Huang takes on effectively other standing opinions about China’s economic development. By digging deep in the archives, he sheds more clarity on what actually happened in those first two decades of unprecedented growth. He does so with vigor and much attention for detail, but - as he keeps on repeating himself - asking the right questions is one of the tougher tasks when studying China. So it is a legitimate question to ask whether he asked the right questions himself.

While he created a monumental work, a few question marks rise:

1. Throughout the book Huang follows the US ideology - I would call it an assumption - that private busines is good and government is evil in economy. With recent scandals in mind - Enron, Madoff, Lehman Brothers to mention a few - that assumption does not hold. He adds a layer of complexity to an already complex story that is not really needed. He tells the story of many negative effects of government decisions: that could do, without the ideological phrame work.
2.While Huang stays away from speculating on why the successful policy from the 1980s was reversed after 1989, after Tiananmen, there is a good argument. The Jiang-Zhu team wanted to regain control and freewheeling rural capitalism did not fit in that agenda. Even if they would have realized the severe negative impact of their policies, they would still have done it.
3. Centralizing China's financial sector would have been needed anyway, also without reversed policies.
4. Many of the figures Huang uses sounds weird indeed. While it is commonly known GDP figures were manipulated for political reasons, why accepting other statistics without auestion marks?
Despite a few question marks, a very important book.

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