Review | Capitalism with Chinese Characteristics: Entrepreneurship and the State

January 15, 2025

Notable:

Summary of main points given by author:

- Explicitly private entrepreneurship in the non-farm sectors developed vigorously and rapidly in rural China during the 1980s. - Financial reforms, again in the rural areas, were substantial in the 1980s, and the Chinese banking system channeled a surprisingly high level of credits to the private sector in the 1980s. - Conventional property rights security was — and still is — problematic, but the security of the proprietor — the person holding the property — increased substantially at the very onset of the economic reforms. The Chinese policy makers in the early 1980s strongly, directly, and self-consciously projected policy credibility and predictability. - The political system, although absent of the normal institutional constraints associated with good governance, became directionally liberal early during the reform era.

On reforms:

- The Chinese definition of TVEs refers to their locations of establishments and registration (i.e., businesses located in the rural areas), not their ownership; Western researchers, on the other hand, have come to understand TVEs in terms of their ownership status. - The cognitive gap is huge: As early as 1985, of the 12 million businesses classified as TVEs, 10 million were completely and manifestly private. Almost every single net entrant in the TVE sector between the mid- 1980s and the mid-1990s was a private TVE; thus both the static and dynamic TVE phenomena were substantially private. - Private TVEs were most vibrant in the poorest and the most agricultural provinces of China (and this feature of private TVEs also explains the understatement of their size in the conventional reporting as well as the connections between rural private entrepreneurship and poverty alleviation). - There are reports of privatization of collective TVEs in the early 1980s and large-scale privatizations in the poor provinces. - Rural financial reforms — credit provisions to the private sector and allowing a degree of private entry into financial services — in the 1980s were endorsed by the governor of the central bank and the presidents of the major commercial banks. - Chinese reforms were heavily experimental in nature rather than relying on a blueprint approach, but the outcome of the experimentation was private ownership and financial liberalization. - By the measure of private-sector fixed-asset investments, the most liberal policy epoch, by far, was in the 1980s; in the 1990s, the policy was reversed, and many of the productive rural financial experiments were discontinued. - Rural administrative management was substantially centralized in the 1990s. - Credit constraints on rural entrepreneurship, including private TVEs, rose substantially in the 1990s. - Growth of rural household income in the 1990s was less than half of its growth in the 1980s, and the declining growth in the rural business income was especially pronounced. - The size of government — measured in terms of headcounts of officials and the value of fixed assets it controls — expanded enormously in the 1990s. - The directionally liberal political reforms of the 1980s were discontinued and reversed.

On Shanghai:

- Although they are located in the richest market in China, indigenous private-sector businesses in Shanghai are among the smallest in the country, and self-employment business income per capita is about the same in Shanghai as it is in provinces such as Yunnan, where GDP per capita is about 10 to 15 percent of that in Shanghai. (As an illustration of how unusual the above pattern is, imagine finding that self-employment business income per capita in the United States was about the same as that in Turkey.) - The political, regulatory, and financial restrictions on indigenous private entrepreneurship in Shanghai were extreme, as evidenced by the fact that the fixed asset investments by the indigenous private-sector firms peaked in 1985. - The share of labor income — inclusive of proprietor income — to GDP is very low in Shanghai. - Shanghai’s GDP increased massively relative to the national mean, but the household income level relative to the national mean experienced almost no growth. - Although wage income is high in Shanghai, asset income is among the lowest in the country. - Since 2000, the poorest segment of Shanghai’s population has lost income absolutely during a period of double-digit economic growth. Although aspiring to be a high-tech hub of China, the number of annual patent grants in Shanghai decreased substantially relative to that in the more entrepreneurial provinces, such as Zhejiang and Guangdong, in the 1990s. - Shanghai was also corrupt.

On consequences:

- Although GDP growth was rapid during both the 1980s and 1990s, household income growth was much faster in the 1980s. - The share of labor income to GDP was rising in the 1980s but declining in the 1990s. - Several studies on total factor productivity (TFP) converged on the finding that TFP growth since the late 1990s has either slowed down from the earlier period or has completely collapsed. - The majority of the much-touted poverty reduction occurred during the short 8 years of the entrepreneurial era (1980-1988) rather than during the long 13 years of the state-led era (1989-2002). - Income disparities worsened substantially in the 1990s, while they initially improved in the 1980s. - Governance problems, such as land grabs and corruption, intensified greatly in the 1990s. - The heavy taxation on the rural areas led to the withdrawal and rising costs of basic government services. - Between 2000 and 2005 the number of illiterate Chinese adults increased by 30 million, reversing decades of trend developments; this development has garnered almost no attention in the West. - The way the Chinese measure adult illiteracy implies that all of this increase was a product of the rural basic education in the 1990s, and this adverse development coincided closely in timing with the intensification of urban bias in the policy model.

misc: