The reasons for China’s economic boom remain disputed. Chinese economic policy has changed repeatedly while high growth rates have continued. Commentators are clearer on what hasn’t happened than on what has: there has been only limited privatisation (as there was in 1990s Russia), no full embrace of factor markets (land can’t be privately owned; labour mobility is restricted by an internal passport system; capital markets are anything but transparent), and much less political liberalisation than some predicted. Despite the current slowdown – which has slashed stock market and real estate values that had long been suspiciously high, and is causing a cascade of debt problems in over-leveraged firms and local government development agencies – there is still a reasonable chance of China experiencing several more years of growth that would be high by almost any other country’s standards. So the basic questions remain: how long can the boom go on, and should we expect the durable institutions that emerge from it, if there are any, to resemble Western ones?
Linda Yueh’s China’s Growth: The Making of an Economic Superpower begins with a lengthy exercise in growth accounting. She looks at how five factors have contributed to Chinese growth: institutional change, particularly the clarification of property rights and contract enforcement; the increasing dominance of private profit-seeking firms; labour market changes that make it easier to match workers with jobs and reward investment in training; ‘catch-up growth’ from importing superior technologies and business practices; and the development of social norms and networks that encourage entrepreneurship. She uses statistical regression to estimate how much of China’s post-Mao growth each of these factors might explain.
Yueh estimates that about 45 per cent of China’s growth since 1979 can be attributed to capital accumulation, another 10-20 per cent to the growth of the labour force, and a further 11-15 per cent to improvement in ‘human capital’ (i.e. healthier and, more important, better educated workers). This leaves around 30 per cent of growth to be explained by what economists call Total Factor Productivity (TFP): gains resulting from making institutions more efficient, discovering better ways of doing things and various intangibles. Yueh estimates that a bit less than a third of China’s TFP gains – 8 per cent of growth overall – is explained by the reallocation of both labour and capital from state-owned enterprises to the private sector. This leaves about 20 per cent of growth to be explained by other institutional changes – easing migration restrictions, liberalising financial rules, providing more patent protection and so on. This is a relatively modest share, but Yueh estimates that it has been increasing recently, and must increase at a faster pace if China is to continue rapid growth while allowing its people to enjoy more of growth’s benefits, since more consumption would moderate its very high rates of investment and capital accumulation. She then turns to what she sees as the two greatest challenges ahead: legal reform to make businesses more secure and better able to expand, and rebalancing the economy so that it depends more on domestic consumer demand.
Her discussion of institutions begins from what she and many others call ‘the China paradox’: that China’s legal system seems too unreliable to have supported such robust growth. She argues that the paradox essentially disappears if we compare China not to other ‘post-socialist’ economies, which have tended to copy their institutions from developed countries, or to former European colonies, which have also used imported models, but to another large developing economy that gradually evolved its own institutions: the United States in the 19th and early 20th centuries. China adopted sophisticated patent law and corporate law before it reached the level of GDP per capita at which the US had done so: US growth wasn’t much inhibited by the pace at which its legal system evolved, and perhaps China hasn’t been held back either. Such a comparison can only be suggestive, as Yueh admits, and most historians would question whether similar levels of GDP a century apart really show that two societies were at a common ‘stage’ with similar institutional ‘needs’. Yueh is certain that China’s growth will suffer if it doesn’t adopt a more Western-style legal system. She cites the increasing importance of new technologies in driving growth – and thus the need to protect intellectual property in particular – but one may have doubts about whether that’s sufficient reason to claim that after the present moment adequate institutions (economically speaking) can no longer be expected to develop internally. She goes on to argue that China’s approach may appeal to other developing countries precisely because it’s been characterised by gradual evolution in response to economic development, rather than by the sudden adoption of supposedly better institutions in the hope that they’ll jumpstart growth. This is an important challenge to much of today’s conventional wisdom.
Yueh also points out that moving huge numbers of workers from state-owned or collective firms to the private sector in the 1990s led to millions of lay-offs, but didn’t produce large gains in labour productivity. Much bigger gains came from ‘corporatisation’ – converting state-owned enterprises (SOEs) into shareholder-owned corporations – even when the state retained a controlling interest. But the gains from corporatisation were small compared to those created by new technology, healthier and better educated workers, and labour market reforms that increased incentives for further training. Workers who have an urban hukou (a residence permit giving them access to a city’s public services) rarely change employers. This is true even of those who started working after the ‘smashing of the iron rice bowl’ – the abolition of lifetime job security, widespread benefit cuts and tens of millions of lay-offs – at state firms in the mid and late 1990s. Migrants, who tend to lack hukou and so are more likely to leave their children behind, move and change jobs frequently, and firms are reluctant to train them. They are also often excluded from jobs at SOEs. Those who do have an urban hukou get most of the SOE jobs, and rarely consider working in the private sector. Yueh finds some signs of change – one survey suggests that those with urban hukou increasingly perceive migrants as both potential co-workers and competitors for their own jobs – but the labour market remains highly segmented.
Addressing this problem will require reform of the hukou system, but other measures will also be necessary. China’s financial system puts private firms at a disadvantage: a number of the laws enacted in the 2000s exempt SOEs from restrictions on borrowing, making an already un-level playing field even more unfair. Making it easier for migrants to get SOE jobs would help, but Yueh would prefer to see SOEs continue to shrink. In her analysis financial reform is crucial. Currently, most households have few places to invest their money, so they put it in state banks, even though interest is capped at low levels. Under state pressure the banks lend far too much to inefficient SOEs; knowing they’ll have a hard time getting loans, private firms save to finance their future expansion. Breaking this cycle, Yueh argues, would stop people saving so much and help rebalance China’s economy in favour of domestic consumption. It would also help to make growth sustainable: the country can’t continue to rely so heavily on exports and the growth of domestic investment can’t outpace consumer demand for ever.
Yueh wants the government to pull out of manufacturing and finance, but she doesn’t expect it to do so rapidly, nor does she think it essential. She believes there are areas where the government should play a more prominent role: more social welfare provisions would be good in themselves, good for the labour market and would give households the confidence to save less and spend more. This adjustment, she suggests, could give China another thirty years of growth, though not at 10 per cent per year. But she doesn’t ask whether China’s rulers are likely to make these changes or what their consequences might be beyond sustaining growth. She argues – correctly, I think – that most institutional change has been internally driven, but doesn’t include the politics behind it in her story.
The Rise of the People’s Bank of China, by the political scientists Stephen Bell and Hui Feng, looks at how institutional change happens in a society with no place for overt political competition. It also conveys far greater anxiety than Yueh’s book about the urgent need for rapid change. At the end of their book, Bell and Feng quote an official of the People’s Bank of China (PBC) describing the challenges of institutional change: ‘China is very much like a giant leaking ship. We cannot stop and repair the ship, otherwise it is bound to sink. We have to mend it while it sails until reaching the shore.’ He doesn’t say what the shore represents. Is it a certain per capita income? A particular set of economic institutions, such as a truly independent central bank? The authors have their own interpretation:
So far, the political regime has defied a number of doomsday predictions of a sinking ship and has managed to keep the leaking ship afloat with significant institutional changes. But ultimately, the political deficiencies of authoritarian rule may have to be addressed to further secure the institutional achievements of the reforms. As part of this broader process, the extent and pace of institutionalisation of the central bank’s authority, and ultimately perhaps its institutional independence, hinge on further economic liberalisation, but perhaps also more importantly on political democratisation.
This is a curious end to a book which argues that over the last 35 years the PBC has been remarkably good at solving policy problems, and has made itself indispensable to China’s political leaders and gained power within the party state instead of achieving independence from it. Like Yueh, Bell and Feng believe that ‘final institutional reforms’ to make the state ‘more similar to that found in Western economies’ will be necessary. But they invoke a much broader set of reforms than she does, and believe they’ll be needed sooner than in the ‘next three decades’.
Bell and Feng point out that gradual change has worked much better until now than the abrupt adoption of supposed ‘best practice’ from abroad would have. In the planned economy of the early post-Mao years, the PBC was little more than a clearing house for payments between units. The economy was powered by physical commodities (raw materials, labour, products) and policy was dictated by those who needed or made them. The idea that central banks should be insulated from politics – an article of faith in the West after the macro-economic fluctuations of the 1970s – had little if any support in China. The regulatory tools used by most central banks to raise or lower the cost of credit were unlikely to work in a country where most firms’ funds came directly from their supervising ministries.
Bit by bit, the PBC consolidated its authority by being better at solving problems than its bureaucratic and ideological rivals. First came periods of high inflation, mostly in the 1980s. Then came asset bubbles; recessions; big banks with bad loans; and a huge inflow of foreign exchange that put China under pressure to revalue its currency. The PBC’s strategies for dealing with these problems included measures not available to Western central banks: it slowed the economy in 2003, for example, by tightening the money supply and introducing a flurry of new regulations that restricted the conversion of farmland to more profitable uses. (The memory of these successes is part of the backdrop to the government’s recent heavy-handed interventions in the stock market in an attempt to prop up prices. These moves have almost certainly been counter-productive.) Bell and Feng reject the idea that superior institutions can simply be identified and adopted wholesale, but they do believe that the optimal institutional arrangement for any modern society is, roughly speaking, a neoliberal one. The challenge facing China, as they see it, is to figure out a route to that destination. But the PBC’s story isn’t one of the inevitable victory of market-based thinking. Bell and Feng report that direct interventions in the economy were often part of its strategy, and the PBC still hasn’t and can’t become politically independent. The performance of ‘true’ central banks before and since the 2008 financial crisis also suggests they may not be optimal institutions in any case. Is the failed austerity of the European Central Bank over the past few years a consequence of too much independence from political pressures or too little? Doesn’t the fact that the Federal Reserve, the Bank of Japan and the ECB have taken such different approaches show either that economics doesn’t yield a clear answer in the absence of political pressures, or that there are plenty of ‘advanced’ economies in which such pressures remain crucial?
You-tien Hsing ’s The Great Urban Transformation focuses on an area in which change has been very rapid, but which hasn’t seen a move towards Western-style institutions. Urban land in China still belongs to the state, and rural land to ‘collectives’ that are effectively parts of village or township government. It can, however, be leased for very long periods. Money that governments get from developing land themselves or leasing it to developers has become a fiscal lifeline, exceeding tax revenues in many places. It has also meant that people are frequently displaced by building booms that ‘upgrade’ their neighbourhoods but do nothing for them.
The Chinese government is far from monolithic, and it’s central to Hsing’s story that particular land development rights are vested in specific government units. These include national ministries, provincial, municipal and county governments, and a variety of sub-county entities. Competition for land development opportunities is intense: for local governments it can be desperate. Many matters of day-to-day governance are decentralised in China, but the setting of tax rates and revenue-sharing formulae aren’t: the rules make it hard for local governments to survive off taxes on agriculture or industry despite a huge manufacturing sector, and personal taxes are widely evaded. Most provinces and municipalities still control some profit-making industrial units, but increasing competition has reduced their returns. Money sent from the centre helps some local governments, especially in poorer regions far inland, but it’s rarely enough. However, most Chinese cities have jurisdiction over their surrounding agricultural areas – the largest municipality, Chongqing, is roughly the size of Austria – and a law formally authorising and setting rules for long-term leases on urban land was passed in 1988. Within a few years profits from such deals became central to local strategies for capital accumulation – a shift that once seemed to have been largely improvisational, but now seems less so.
In the period before Hsing’s story takes place, there was a huge but geographically uneven boom in rural industry. Rural counties, townships and villages, most of which had entered the post-Mao era with overwhelmingly agricultural economies, faced serious challenges, and their initial responses to these challenges still affect those who live there. With tiny tax bases and no longer possessing the ability to commandeer labour, rural administrators in the 1980s often struggled to maintain basic infrastructure, let alone stimulate rapid growth. A number of rural governments, most of them near the coast, found a solution in the creation of township and village enterprises (TVEs) – collectively owned small-scale industries that absorbed vast amounts of rural labour, creating more than a hundred million jobs before the TVE boom stalled in the mid-1990s. The TVEs solved fiscal problems, made many communities wealthy and helped create some of the distinctive features of China’s post-Mao development: an unusually large amount of rural industry and a low rate of urbanisation; the continuation of collective property rights in an increasingly market-driven economy; and the enormous importance of one’s place of residence in determining household wealth. But many of these firms depended on subcontracting work from urban-based SOEs, which retained control of brand names, government funding and contracts with foreign firms. The SOEs were restructured in the late 1990s, which put severe pressure on the prices their subcontractors could charge, and many TVEs were privatised or closed.
Hsing shows, however, that their legacy is crucial. TVEs kept together land and assets which in other villages were leased to individual households and used for farming. Legal residents received a share of the profits: every household benefited, not just those in which someone worked for a TVE. Some villagers became wealthy enough not to have to farm or work in factories and these jobs went instead to migrant workers from poorer parts of the country who didn’t become legal residents. The village leadership controlled a consolidated block of land, which they were able to offer to development offices when nearby cities expanded, and they could present a united front in negotiations. Because the land was already being used for non-agricultural purposes, municipal authorities didn’t need special permission to turn it into a residential or commercial zone. By contrast, the central government sets a limit on the amount of farmland that can be converted to other uses each year, and localities have to compete for a share of that quota: the further down the hierarchy a unit is, the poorer its prospects.
For people in villages that once had TVEs the effects of being swallowed up by cities have often been positive. In return for ceding control of most of its land, the village often gets to keep a small portion for housing and another to develop. The village corporation replaces small houses with multi-storey buildings, parts of which are rented out as shops, offices and as housing for new migrants. (Hsing estimates that 80 per cent of the migrants to Shanghai and Guangzhou live in these ‘villages in the city’.) These developments often violate zoning rules and are badly overcrowded: Shenzhen’s villages in the city had 589,000 residents per square mile in 2004, while the densest of New York’s 59 community districts has 109,000. Migrants might get a better deal on housing if villagers had been completely excluded from developing their land; but villagers clearly benefit, continuing to live together, and enjoying ample incomes.
Villages that leased their farmland to individual households in the 1980s and failed to build any collectively held enterprises haven’t done so well. They’ve tended to receive little for the rights to their scattered, agriculturally zoned plots, and have been rehoused wherever the municipality chooses to put them. They have little chance of mounting effective collective action if the job or housing they’re allotted proves unsatisfactory. Communities that backed collective and not individual entrepreneurship have been among the biggest beneficiaries of the boom, even though many of those collective businesses have now disappeared. It’s no accident that unlike Yueh, Bell and Feng, whose books focus on macro-economics and national policy-making, and insist on the need for more economic liberalism, Hsing bemoans policies that have weakened ‘peasants’ collective organisation and identity’, and asks whether pockets of collective ownership can survive.
Some commentators have recommended privatising rural land and letting individual farmers bargain for themselves. But even if this were politically feasible – rural cadres as well as peasants would surely object – it’s unclear whether property rights alone could protect farmers’ interests. Without the power to accumulate parcels of land and have them rezoned, rural land is worth only a fraction of what it would be with rezoning, and getting that power requires social and political capital. Recent reforms ordered by Beijing that were supposed to empower individual farmers to bargain more effectively seem to have done more to undermine collective action than to improve outcomes for affected households. The limited survey data available indicates that the rural poor support keeping land inalienable and giving village collectives the right to reallocate it in response to demographic change. The World Bank has recommended privatisation but gradually, through a system that strengthens regulations and makes it easier for collectively held rural construction land to be leased for urban uses.
The process of creative destruction, which shuttered so many TVEs, is described in Daniel Buck’s Constructing China’s Capitalism. Buck focuses on Shanghai and the surrounding ‘rural’ areas, which are now highly developed. This region, along with the Pearl River Delta studied by Hsing, is one of the most successful development stories in post-Mao China: a Human Development Index for the region would be about even with Portugal’s. For some time, it appeared to offer China’s best example of development that combined a low level of rapid growth with public ownership, relatively limited inequality and a workable system of property rights.The ‘southern Jiangsu (Sunan) model’ was also distinctive for having a much smaller role for foreign investment than other boom areas, and more success at high value-added production, such as machine-building, telecommunications equipment and sophisticated electronics.
But the model depended on the TVEs, and when they began to fail in the late 1990s it lost much of its lustre. Some observers felt this confirmed that there was no viable alternative to neoliberalism; some argued that even if the TVEs were only a transitional phenomenon, they had had lasting consequences; others contended that the newly privatised rural firms retained features of their earlier, publicly owned incarnations. In Shanghai itself, SOEs became more, not less, central to the economy, though they behaved more like privately owned firms than they used to. All this led people to ask whether Chinese development really remained distinctive, and if so, why and how.
Buck arrives at an original interpretation of these phenomena by considering the urban and rural stories together. This is something few have done, though it’s long been known that a great deal of what the TVEs in the Lower Yangzi did was subcontracted by urban SOEs. One reason for this neglect is that urban and rural enterprises were placed in different administrative categories by the Chinese government; another is that it’s difficult to follow the web of connections between contractors and subcontractors, to compare costs across firms with different legal structures, tax and reporting systems, and to figure out where profits are being accumulated. Buck puts the pieces together, which allows him to make some interesting claims.
He argues that from roughly 1980 until the late 1990s, a combination of the exploding demand for goods within China and the fact that only a limited number of firms – many of them near Shanghai – were able to produce those goods meant that SOEs earned large profits and didn’t have to worry too much about costs. Much of the subcontracting they did was geared towards increasing their output capacity quickly to meet demand rather than aimed at finding the cheapest way to produce goods – the same was true of the subcontractors who outsourced some of their own work. It wasn’t until well into the boom that many firms got in contact with more than one subcontractor when they needed a given part, and even then, it was usually a political or social gesture aimed at spreading the wealth rather than an attempt at gaining leverage in price negotiations.
By the mid-1990s new firms elsewhere in China entered these profitable markets, leading to increased competition. At the same time, the so-called Asian financial crisis of 1997-98 caused a sharp, albeit temporary, contraction of demand. The SOEs began cutting back significantly, Buck argues, driving harder bargains with their TVE subcontractors and thereby forcing down wages. Desperate to hold onto their contracts (not least because the local governments that owned them couldn’t shed responsibility for their workers the way a private firm could), TVEs accepted much lower margins – in some cases no margins at all – as well as late payment and other unfavourable terms. Many TVEs folded and were sold off (to their managers or to outsiders) at low prices. As Buck sees it, the wave of foreign investment that hit the Shanghai area in the early 2000s wasn’t a response to the area’s robust long-term growth, but to the fire sale of industrial assets.
This story has important implications. It undermines some of the popular explanations for the decline of TVEs – inefficiency caused by unclear property rights, for instance – as well as the theory that they were responsible for the crisis that befell the SOEs. Rather, TVEs and SOEs prospered symbiotically when demand for their products outstripped supply, and suffered together when markets became glutted. Buck thinks this is important enough to be built into models of post-socialist economies generally. He believes that analysts of post-socialist transitions have focused too narrowly on the move from government to market allocation of resources and ignored the fact that because socialist economies usually had shortages of consumer goods which weren’t resolved instantly, the transition could be cushioned (and made politically palatable) by a phase of artificially inflated incomes for well-placed producers. In the Chinese case, the striking redistribution of income from labour to capital during the years of privatisation can’t be understood through careful studies of a single firm or by looking at a firm’s links to government, or at state labour and regulatory policies. Buck argues that the changes have been determined by the way networks of firms are embedded within the larger economy. He emphasises the importance of guanxi, or personal connections, but also shows that guanxi tends to function differently during periods of rapid growth and periods of retrenchment.
Anxious Wealth, John Osburg’s ethnography of ‘business entertaining’ in Chengdu, complements Buck’s book by showing how the social connections Buck says are so important come about and are maintained, and how they aid or hinder market transactions. His informants are acutely aware of the extent to which success in Chengdu depends on the relationships that men develop through entertaining. That’s why the most successful put so much time into it, even if they don’t enjoy it because it takes a toll on other parts of their lives. The men claim they have no choice but to engage in this ‘nightwork’.
Many of them believe that the importance of connections will wane, and that the business world will eventually become a pure meritocracy in which competition is solely a matter of the quality and price of one’s products; that’s the way it is, they believe, in countries already on ‘the global track’. It’s not clear whether they’re aware of the counter-evidence they could easily find in any Western newspaper, and how they might explain this away, or what they would say about the long-standing importance of connections in Chinese business and society.
Many entrepreneurs who sent their own children abroad said they did so because it would give their children an opportunity they never had to make it on talent and ability, rather than connections. Few of those Osburg spoke to saw even the most successful businessmen as examples of the ‘high quality’ (suzhi) people China needs if it’s to become truly modern. This contradicts the frequent claims made by journalists, scholars and others that financial success has become the only measure of worth. The mistresses, models, club hostesses and other women accused of becoming rich by prostituting themselves to whom Osburg spoke did tell him that money was the prime signifier of worth. They defended their choice to sell their bodies: everything is a commodity, they maintained, seeing themselves as the vanguard of a more ‘modern’ China. Their critics, however – especially female entrepreneurs and professionals – also claim to represent true market-based modernity: the meritocracy of the future, as opposed to the ‘grey economy’ of immoral women, who embody a guanxi-dependent stage of development.
These ‘native’ voices agree that the only future for China is one in which its institutions resemble those of the West and hold this view despite China’s recent successes, and despite the loose correspondence between idealised ‘Western’ institutions and Western reality, or the direction in which many Westerners, especially since 2008, want their own societies to move. But there are also many Chinese people who are uneasy about liberalisation as a solution to the country’s current problems, and not only party members or other privileged figures who hope to protect themselves from fairer competition. Osburg tells a striking anecdote about a winter storm that hit southern and central China in 2008, leaving millions without water and power for days. Afterwards,
the residents of Kaili in central Guizhou noticed a peculiar phenomenon. Of the more than ten thousand electrical poles downed by the storm, 90 per cent of them were poles put up during the late 1990s; the majority of the poles from the 1950s and 1960s remained standing. This discovery contradicted the national narrative of technological progress. As one commentator put it, ‘Under normal circumstances, one would expect the old poles to break first, particularly since newer poles are built using more advanced technology.’ Investigators discovered that the new poles were reinforced with inexpensive iron wire instead of standard rebar.
The story was quickly deleted by censors, but similar ones appear regularly, encouraging the widespread nostalgia for Maoism.
Some of the entrepreneurs in Osburg’s book fantasise about a future of perfect market-based competition, but this dream is more common among those whose careers have been hampered by the strong personal networks between the state and ‘private’ firms. A number of successful Chengdu businessmen, Osburg reports, are converting to Tibetan Buddhism, and a smaller but non-trivial number to Christianity; others are becoming more interested in philanthropy. The newly rich are searching for models of ‘high quality’ behaviour and often become taken with foreign ones, since they lack an indigenous ‘old rich’ to emulate. For them, business-related socialising is also a way of showing their good taste, loyalty and other attributes that distinguish them from ‘vulgar’ competitors who can only offer bribes.
Many in Osburg’s Chengdu feel that the status quo isn’t a meritocracy, and that it’s unstable as well as undesirable, but far fewer believe that more marketisation is the answer. Even among those who clearly profit from the current system, there’s no consensus on what merit or fair competition means, or on what the inevitable end of 9 per cent annual growth might look like. But Osburg’s book also suggests ways in which post-boom institutions might build on reform-era trends, though his informants are not very specific: they mention philanthropy, religion, Confucian ethics, an education system less oriented towards tests and rote learning, and the need for ‘a new public morality’. This is hardly ‘socialism with Chinese characteristics’, but neither is it a desire simply to replace Chinese economic practices with Western ones. And interestingly, though a number of Osburg’s wealthy informants mention the possibility of moving abroad (as many affluent Chinese also do in opinion polls), the only person in this circle who actually did emigrate (to Canada) soon returned.
Many features of the current system are undeniably unjust and have already incited protests, but whether or not this discontent threatens the system is less clear. Parts of the system are inefficient, but it remains stunningly dynamic. If China grows at 7 per cent annually for the next decade, its per capita GDP will surpass the current levels in Hungary and Kazakhstan; and, like it or not, this is demonstrably attainable without complete economic transparency, much less a fully democratic polity. We need to stop thinking that in China the only possibilities are spectacular success or catastrophic failure: China, too, can muddle through for long periods. And with so many Chinese still poor – and the advanced economies failing to produce either dynamism or increasing justice – now is an odd moment to insist that Chinese convergence towards Western liberalism is necessary, sufficient or particularly likely.