Among those who muster the most righteous indignation against governments that stifle private enterprise are free-market advocates claiming to speak on behalf of the poor. In their works, the poverty of peasants and of rural migrants who eke out a living in the global South’s growing cities is caused by government bureaucrats, who provide privileges for crony capitalists and other favoured elites while smothering the entrepreneurial energies of the less fortunate. Give the poor clearly defined rights to their meagre properties, provide them with opportunities to obtain credit and stop subjecting them to onerous taxes and regulations, and they will not only find entrepreneurial solutions to their own poverty, but they will become a powerful engine for economic development.
This is the message of Capitalism with Chinese Characteristics, the widely acclaimed book by Huang Yasheng.footnote1 In contrast to many mainstream economists, who praise China for steadily advancing toward Western capitalist practices over the last three decades, Huang argues that China started retreating from true economic liberalization in the 1990s. In the 1980s, he writes, China was developing a type of entrepreneurial capitalism in which small rural entrepreneurs played the leading role. But in the 1990s it moved toward a state-led capitalism, which favours big government-connected urban enterprises. Huang’s book, which has received considerable attention in academic and policy circles both inside and outside China and was named by the Economist as Book of the Year, has broken new ground in combining free-market doctrines with populist claims.
Most advocates of greater economic liberalization in China are not especially concerned about growing income inequality or about the welfare of those in the lower echelons of the economic hierarchy, but Huang belongs to a distinct subgroup of free-market enthusiasts who place the plight of workers and peasants at the centre of their analyses.footnote2 Members of this subgroup, which includes prominent academics and journalists such as He Qinglian, Hu Shuli, Qin Hui and Kate Zhou, have elaborated a variety of arguments that attribute growing inequality in China to such factors as official corruption, the persistence of state ownership, overweening government control, constraints on private enterprise, urban bias among state elites, lack of transparency and crony capitalism.
Huang’s account has received particular attention for several reasons. First, he is ensconced at the top of the academic establishments on both sides of the Pacific. A native of China who earned a PhD in government at Harvard, Huang now teaches at mit’s Sloan School of Management and has appointments at Tsinghua University’s Center for Chinese Economic Research and Center for China in the World Economy, which house many of the prc’s most prominent and influential economists. Second, he challenges standard accounts of steady progress of market reforms in China by arguing that the conspicuous decline of rural enterprise has been caused by growing state constraints on private entrepreneurship, crafting a narrative that is at once provocative and seemingly intuitive. Third, as a champion of indigenous Chinese enterprise, he criticizes policies that favour foreign-invested firms. Fourth, he backs up his narrative with an impressive body of original research. Drawing on intensive examination of thousands of pages of primary documents from Chinese banks and rural credit cooperatives, as well as data from official surveys of rural enterprise that have been little used by academics, Huang produces a wide array of statistics which he analyses in innovative ways. For this, future scholars will be greatly in his debt.
The book is organized around a comparison of the 1980s, which Huang characterizes as a ‘rural entrepreneurial decade’, and the 1990s, which he dubs a ‘state-led urban decade’. In the 1980s, Huang contends, economic policy was largely in the hands of Zhao Ziyang, Wan Li and others who were inclined to carry out liberal experiments and were sympathetic to rural entrepreneurs. After dismantling the rural communes, they allowed private enterprise to flourish in the countryside by removing government constraints and providing easy access to credit. While the cities were still dominated by sluggish government planning and state-owned enterprises, in the countryside—where the state had always been weaker and enterprising spirit stronger—small labour-intensive rural businesses became the prime engine of the rapidly expanding economy.
The liberalizing trends of the 1980s, however, ended abruptly with the suppression of the Tiananmen protests and the fall of Zhao Ziyang in 1989. Economic policy-making was taken over by a new team led by Jiang Zemin and Zhu Rongji, urban-oriented technocrats from Shanghai, who were partial to state-guided industrial planning. They disdained rural entrepreneurs and favoured big, high-tech, capital- and energy-intensive projects, funnelling money to state-owned enterprises and using tax breaks to encourage foreign investment. The result was an increasingly corrupt, crony capitalism and an urban boom in which gleaming skyscrapers were built on confiscated paddy fields. Starved of credit, rural enterprises stagnated and declined.
Huang dedicates one chapter to Shanghai, which he presents as the epitome of all that is wrong with the state-led urban model. While gdp growth has been rapid, he writes, the city’s economic development has been dominated by corporations in which government entities or foreign companies have major shares, rather than by indigenous private enterprises. To ensure the profitability of the state-connected enterprises, layoffs of state-sector workers were particularly aggressive and the development of private-sector competition was suppressed. As a result, Shanghai has relatively few small proprietors and a dearth of medium and large private firms. This lopsided development has in Huang’s view produced income polarization, with the city’s poorest residents experiencing falling real incomes.