Nightwork in Chengdu

Kenneth Pomeranz

  • BuyChina’s Growth: The Making of an Economic Superpower by Linda Yueh
    Oxford, 349 pp, £29.99, April 2013, ISBN 978 0 19 920578 3
  • BuyThe Rise of the People’s Bank of China: The Politics of Institutional Change by Stephen Bell and Hui Feng
    Harvard, 374 pp, £40.95, June 2013, ISBN 978 0 674 07249 7
  • BuyThe Great Urban Transformation: Politics of Land and Property in China by You-tien Hsing
    Oxford, 272 pp, £27.50, March 2012, ISBN 978 0 19 964459 9
  • BuyConstructing China’s Capitalism: Shanghai and the Nexus of Urban-Rural Industries by Daniel Buck
    Macmillan, 267 pp, £55.00, July 2012, ISBN 978 0 230 34095 4
  • BuyAnxious Wealth: Money and Morality among China’s New Rich by John Osburg
    Stanford, 248 pp, £15.99, April 2013, ISBN 978 0 8047 8354 5

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.

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[1] In this respect, those Chinese governments are more like some oil states, pre-reform ‘socialist’ states and others past and present that have relied on the income from state-owned assets rather than taxes on private transactions. Such states often have far less need to bargain with their citizens over rights and obligations. But Chinese governments are unlike oil states, and more like tax-based states, in that the state-owned resource in question is mostly leased to domestic developers, and can’t yield large amounts of revenue unless the domestic economy is growing.

[2] While some Chinese governments were very short of revenue in the late 1980s and early 1990s, others were flush with cash, while the central government had one of the lowest shares of total government revenue in the world (about equal to Yugoslavia’s on the eve of its demise). As a result, Beijing undertook a major centralisation of revenue in 1994, without also centralising government obligations; the result was to make it impossible for almost any local government to get by on taxes alone. It was generally assumed that land-based revenue was an unexpected saviour for these local governments. However, Meg Rithmire, in Land Bargains and Chinese Capitalism: The Politics of Property Rights under Reform (Cambridge, 226 pp., £22.99, October 2015, 978 1 107 11730 3), makes a strong case that Beijing anticipated this role for land revenues back in the late 1980s, when they created the new property rules; Rithmire has found evidence that this idea was suggested to Chinese leaders by Hong Kong real-estate magnates. Which of the twists and turns in Chinese political economy during the reform period will ultimately turn out to be planned, as opposed to ad hoc, is of course currently unknowable.

[3] The key word here is ‘relatively’. Even with that qualification, this statement is much less clearly true than it once was, in part because so many areas now have vast numbers of residents who are not full legal members of the community – making the extent of ‘intra-communal inequality’ very much dependent on whether one includes all, some or none of these people.