After the 1989 Tiananmen leadership purge, when Jiang Zemin and Li Peng took over from more liberal leaders, the reforms championed in the 1980s by a wave of largely rural entrepreneurs were stalled, and officials sought to reassert authority. In this "great reversal," Beijing's Xiushui Market, a thriving shopping area popular with tourists, was effectively expropriated by the city. The entrepreneurial founder of Kelon, China's most successful refrigerator maker, had his company seized in a backdoor takeover by local officials who then ran it into the ground. Land grabs by officials intent on real estate development soared. Rural credit cooperatives backed away from entrepreneurial finance and morphed into "policy pawns and cashiers of local government." The government abandoned attempts to develop village-level democracy and instead strengthened the Communist Party in the villages. And finally, fiscal and administrative controls were centralized. The result: depressed income growth and slower growth in domestic consumption.Milestones like China overtaking Germany to become the world's third largest economy need to be taken with a grain of salt.
Unsurprisingly, several big-name Chinese companies on the international stage — Lenovo, Alibaba, Sina and Haier — registered many of their operations as foreign firms, accessed Hong Kong's capital market and legal system and thus succeeded not because of the regime's economic conduct but in spite of it. For reinforcement of the mainland's shortcomings, Huang points to Shanghai, where the mushrooming Pudong skyline masked a poor record on innovation and a lack of private-sector companies of note (its greatest success story, e-commerce star Alibaba, fled to Hangzhou in the neighboring and more entrepreneurial Zhejiang province).
Ominously, Huang contends that productivity growth in China has collapsed. So, too, has personal-income growth. Meanwhile, the paucity of attention given to rural incomes, and the stripping away of educational and health-care services for the rural sector, suggest that the future China might not resemble South Korea, where the private sector has steadily grown in importance, but Latin America [!...bring on the Chinese Hugo Chavez.]
A few months ago, I mentioned Yasheng Huang's book Capitalism With Chinese Characteristics. (You can download an excerpt from the SSRN.) In light of China's ongoing difficulties, it's worth revisiting. It tackles some of the more vexing questions I've tried to answer in recent posts. Inter alia: (1) Why is China unable to establish names with worldwide brand recognition unlike regional competitors such as Japan and South Korea?; (2) Can innovation be nurtured in an authoritarian regime?; and (3) Why have rather limited efforts to spur Chinese consumption been so lackluster? The Asia Business Council's Mark Clifford has timely commentary drawing from Huang's book. Add in China's very inefficient use of energy and I am firmly convinced that the whole of China's development is decidedly less than the sum of its parts in terms of various inputs. The cracks are already showing: