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Customer Review

on 14 December 2013
I greatly appreciated this book, and believe it's a very valuable contribution to the research on China's development. Huang cuts through a lot of the Western confusion regarding China's reform process, to reveal a very different process from the one depicted in most newspaper accounts. When I first read it in 2011, it completely blew apart my impression of the economic reforms in China (along with Howie & Walter (2011) and Shih (2008)).

Huang summarizes his findings thus:

(i) Explicitly private entreneurship in the non-farm sector developed vigorously during the 1980s;
(ii) Financial reforms(in rural areas) "substantial" in the 1980s;
(iii) Conventional property rights have always been "problematic" but strengthened in early 1980s;
(iv) Policy makers of the 1980s succeeded by making their commitment to free markets credible;
(v) Political system was directionally liberal.

As an illustration of the last two points, Huang alludes to several episodes where there was a backlash by the local authorities against the new entrepreneurs, leading to the the Party requiring the authorities to back down and make restitution. Additionally, much of the property expropriated in the Cultural Revolution was returned to its owners with an apology by the state--shocking behavior, to say the least, from a totalitarian regime.

In regard to point (iii), Huang spends a lot of time analyzing the township and village enterprises (TVEs) that formed the vanguard of market reforms. The most important point, for Huang, is that "township and village" refers to the location of the enterprises, not ownership (as it happens, another book I just read refers in passing to the TVEs as if they were owned by the townships and villages where they were located). In fact, Huang acknowledges, the TVEs had ambiguous rules for ownership. As a result, the local government would allow private management until, in some cases, the enterprise became a cash cow and was expropriated (Huang cites the example of Kelon Refrigerator in Shunde county, Guangdong).

Huang is disgusted by efforts by Western economists, such as Joseph Stiglitz, to explain the mysterious success of rural capitalism in China (1). Economists were inclined to believe TVEs were collectively owned, and this was the best available arrangement to avoid state expropriation. Huang argues that TVEs were mostly privately owned (especially the small ones), and when they were not, they behaved as if they were. After 1993, however, the securitization and consolidation of state owned enterprises (SOEs) and the recapitalization of the banking system began to monopolize credit. Thereafter, TVEs were squeezed back into a small corner of the Chinese economy.

In addition to the cessation of genuine market reforms after 1993, successes in poverty reduction stalled. Despite inflation, the State Council has been very resistant to revising the threshhold of poverty upward. As a result, poverty reduction since 2002 has consisted mainly of strategically revising the threshhold to achieve a headline reduction (the threshhold is extremely low, and given the extreme variation in provincial price levels for food, etc., completely silly). Huang notes that illiteracy has returned and China's Gini coefficient has soared to keep pace with that of the USA (2).

There is a lot of careful research by Huang that examines sources usually ignored by researchers. However, Huang is stuck fuming at the perfidiousness of the Chinese government, thwarting the development of a "true" market economy. Perhaps he sees this as a nasty put-up job by a clique of Shanghai party elites (who dominated the Politiburo between 1993 and 2006) and Western journalists. But I think it's something else.

Capitalism is usally understood as (mostly) private ownership of the economy, accompanied by (mostly) free exchanges of inputs and outputs. Additional features may include vigorous protections of all types of property rights, clean government, and transparent financial markets. In practice, capitalism functions around the world with very flawed versions of all of these things, partly because equitable rights enforcement is so expensive and requires deep traditions of civil order. But different interest groups in each society see capitalism quite differently. For the Chinese leadership, capitalism was seen in two ways: macroeconomically, it was a supercharger for production, while microeconomically it was an engine for distributing incentives.

For this reason, achieving the sort of virtuous market institutions that Huang idealizes, involved an absolute commitment to the sort of market-based society that anarcho-capitalists in the West are still agitating for. It's an ideal that would have required a total commitment, one so extreme that most of the Chinese would have been willing to accept any cost. In practice, freedom is always instrumental.
(1) Joseph E. Stiglitz, "The Transition from Communism to Market: a Reappraisal after 15 years,'" in _European Bank for Reconstruction and Development Annual Meeting, London (2006). Mentioned in Huang (2008) on pp. 300 & 303. Stiglitz's theory was that, in the incomplete markets of China c.1978-1998, local government ownership was a second-best way to avoid theft of company resources by management.

(2) According to the CIA World Factbook, China's Gini coefficient was 0.48 in 2009; for the USA, it was 0.45 (2007). These are values confined to developing countries, such as Mexico or Brazil. By contrast, Canada's Gini coefficient is 0.32. Since 2000, the Chinese National Statistics Bureau has refused to issue an estimate of the Gini coefficient.
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