The New Left Review has an important review of Huang Yasheng’s Capitalism with Chinese Characteristics. (The review and the response by Huang are available to individual and institutional subscribers only, unfortunately, but well worth the effort to obtain.)
Joel Andreas begins his review:
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. [1] 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.
Andreas agrees that the 1980s were better than the 1990s, but not for the reasons that Huang upholds. According to Huang, the 1980s was a period in which free market enterprises took off in the countryside without real restraint from the meddling state. Clearly unique to Huang’s argument is the idea that the rural TVEs (Township-village enterprises) were really private enterprises and not controlled by the local governments. In the 1990s, however, Huang see the state as stepping in and smothering these indigenous private enterprises, leading to the growth of coastal export-oriented enterprises and foreign-invested firms. Thus the “state-led urban decade” of the 1990s took over from the “rural entrepreneurial decade” of the 1980s. The political shift from Zhao Ziyang to the Shanghai fraction of Jiang Zemin and Zhu Rongji brought about this transformation: credit was shifted to large urban and often state-owned industry and tax breaks were given to foreign investment. In the long run, Huang is skeptical of the sustainability of this “Shanghai model.” Furthermore, the 1980s were more equitable than the 1990s period.
Andreas, however, sees a very different context to the difference between these two periods. He states:
The actual causes of the rise and fall of rural enterprises are in some ways just the opposite of what Huang proposes. Small rural firms flourished in the 1980s not because the state got out of the way, but rather because it intervened in the economy in a heavy-handed fashion in order to prevent the development of larger private enterprises. In the early years of the post-Mao era, the Chinese Communist Party was determined to prevent the development of a capitalist sector, which it viewed as a potential political threat. It allowed rural households to engage in small-scale entrepreneurial activities, and it continued to promote the development of collective enterprises run by village and township officials. Both sectors flourished with the opening of commodity markets, but their success was due in large measure to government protection. The state, in effect, created and maintained an environment in which these enterprises could operate without facing competition from large capitalist firms.
Andreas lists six specific restrictions that created the context within which the TVEs could grow: 1. “Land reform and rural collectivization, carried out at the beginning of the communist era, had eliminated the old landed and business classes;” 2. the state “suppressed” capitalist firms, setting dramatic limits on their size; 3. land sales were strictly limited; 4. direct foreign investment was limited; 5. the domestic market was protected from imports; and, 6. “rural households and collective enterprises enjoyed a monopoly on employing inexpensive rural labour.”
In the 1990s, “the CCP began to promote large-scale capitalist enterprise.” Restrictions on the growth of capitalist enterprises were removed, and both many state-owned enterprises and TVEs were privatized–many going bankrupt. Perhaps his most important argument, Andreas maintains that the shift from rural to urban entrepreneurship is best understood as an expression of capitalism’s intrinsic urban bias. As he states:
With the development of capitalism, peasants, peddlers and artisans are displaced by capitalist firms, the size of enterprises increases, the centre of economic activity shifts from the countryside to cities, peasants move to urban areas and cities expand at the expense of the countryside. Large capitalist enterprises are headquartered in cities, and successful rural enterprises move to cities as they grow. Jiang Zemin and Zhu Rongji did, indeed, have an urban bias, but it was inherent in their preference for capitalism. They were inspired by the corporate capitalism of the West, and they favoured supermarkets over farmers’ markets, department stores over street vendors, large factories over small ones, and corporate chains over mom-and-pop businesses.
Andreas also points out that Huang’s periodization is off. While Huang’s “rural entrepreneurial decade” ends in 1989, Andreas points out that “the number of small household enterprises continued to grow steadily until the mid-1990s.” Huang leaves much out of his 1990s narrative: “he wholesale privatization of township and village factories, which consequently lost much of the local government support they had enjoyed, including free use of village land and official help in securing labour, credit, contracts and markets.” In addition, a sharp drop in grain prices severely hurt the rural economy. Perhaps here we could argue–and I am not sure to what degree Andreas would agree–that from the mid-1990s a state urban bias exacerbated capitalism’s intrinsic urban bias.
Andreas sums:
Huang’s diagnosis of the maladies afflicting rural China is clearly informed by one of the foundational myths of neo-classical economics—the ideal of competitive capitalism. Free competition, it is assumed, creates a level playing field on which small entrepreneurs naturally flourish. If small entrepreneurs are squeezed out, it must be the fault of the state, which tips the playing field to the advantage of favoured players. The reality is quite different. Market competition intrinsically centralizes property without the need for state intervention. Winners squeeze out losers, amass capital, capture market share and block new entrants. The state often facilitates this process by favouring the winners, but it can also inhibit it by protecting the weaker players. Over the last two centuries, peasants and small rural entrepreneurs have been the main losers as capitalism has swept across the globe.
As Andreas argues, Huang’s “basic thesis—that the spectacular rise of income inequality in China in the 1990s was caused by state suppression of private enterprise—is difficult to square with the facts. During the 1980s, almost the entire urban population worked in the state and collective sectors and most off-farm rural employment was provided by collective enterprises. By the end of the next decade, although a significant public sector remained, the private sector had come to dominate both urban and rural China. The rise of income inequality in the 1990s was, in fact, accompanied by the rapid expansion of the private sector at the expense of the public.” What Huang ignores is the growing class polarization in rural China.
Overall, Andreas argues that Huang’s position entails protecting domestic capital, not only from foreign capital but also from the working class.
[W]hile Huang would like to protect all Chinese entrepreneurs from foreign capital, he has no use for market restrictions that protect small entrepreneurs from domestic capital. He sheds no tears over the elimination of the prohibition on private enterprises hiring more than seven employees, a regulation that in the 1980s enabled small household businesses to operate in many fields that would otherwise have been dominated by larger companies. He also believes that the government has no business protecting workers’ jobs or interfering in conditions of employment, and he specifically criticizes the 2007 Labour Contract Law. If enforced (unfortunately, most Chinese labour laws are not), the law would improve the bargaining power of wage workers, including the burgeoning number of rural migrants, and it would also improve the competitive position of small enterprises (which are exempted from the law’s requirements) as they struggle to hold their own against larger companies. Huang, however, is concerned that the law ‘will be very damaging to the economy’. It will, he writes, create labour-market rigidity that will ‘reduce the incentives of entrepreneurs to create businesses and will drive away existing businesses to countries such as Vietnam and India’.
Huang gives a short response in the same issue of the New Left Review (again this is available to subscribers and institutional subscribers only), mostly arguing about the nature of the TVEs, a key point of disagreement. Huang states:
While [Andreas'] explanation might fit with the conventional view that tves were mostly run by the local governments, this picture is factually incorrect. It is particularly incongruous for an argument along these lines to be used as an indictment of Capitalism with Chinese Characteristics: as far as I am aware, the book was among the first to produce carefully examined documentary evidence to establish the true ownership origins of the tves and to demonstrate that they were largely a private-sector phenomenon in the first place. This is a matter in which I take some pride. As a proportion of the total number of tves, the state-run tves were minuscule; it defies common sense to attribute the demise of the entire tve sector to the privatization of a small number of state-run firms.
Unfortunately little is clarified. In particular, Huang uses a different typology than Andreas and others to discuss the TVEs. Huang talks about “state-owned TVEs” versus “private TVEs”; whereas Andreas focuses on “collective enterprises run by village and township officials.” Huang then argues:
Another factual detail is even more damning: the state-run tves that were privatized in the late 1990s were incurring massive losses at the time of their sale; the government privatized them precisely because they were already doing very badly. In this light, it is rather strange to argue that privatization itself contributed to their bad performance. Privatization can no more explain the demise of the state-run tves—let alone those tves that were private in the first place—than chemotherapy can explain the demise of a patient with terminal cancer.
This, however, is a rather specious response to Andreas, who does not argue that privatization caused bad performance for TVEs. We should ask here as well what does “bad performance” mean? Many of the TVEs would never have made good profits within a free market capitalist economy–that is one of Andreas’ key points. But they could benefit the local economy by the very fact that they were often oriented more toward local needs (especially providing local employment) and conditions, and they could exist because of the limits placed on the economy by the state. As those conditions changed, many of those TVEs that provided a large amount of rural employment went bankrupt.
Perhaps the biggest disagreement concerns the issue of the urban bias: is it intrinsic to the development of capitalism (as Andreas maintains) or is it the result of specific, anti-entrepreneurial policies of the CCP in the 1990s? In his response, Huang makes a slippage, however. He suggests a comparison to US capitalism, stating:
Are these economies afflicted with urban biases in their policies? I imagine that Midwestern farmers would be surprised to learn that they are powerless victims in the American capitalist system. It is well known—and this should not be news to Andreas—that the us Congress showers billions of dollars on the country’s farmers every year. In fact, the subsidy to corn-growers is so outrageous that it is now blamed as a contributing factor to the rising levels of obesity in the United States, since cheap, subsidized corn is the basis of so many junk foods.
Of course Andreas did not argue that US governmental policies have an urban bias (and Huang himself–in his restatement of Andreas’ position–seems to realize this), but that capitalism itself, through competition, has an urban bias. For Andreas it is not primarily an issue of policy, but of political economy. Furthermore, as noted above, Andreas’ argument leaves room for government policy exacerbating the primary urban bias of capitalism itself. Huang’s response does not measure up. Huang then argues that:
The same point can be made in terms of the logical postulate that, if big capitalism leads to an urban bias, then we would expect ‘big socialism’ to be the natural ally of the rural sector. Here the history is pretty nasty: Joseph Stalin and the famines in Ukraine, or the Great Leap Forward in China, in which an estimated 30 million rural Chinese perished.
There is nothing “logical” about this postulate. “Big socialism,” I would argue, did not have a rural bias in contrast to capitalism’s urban bias. Stalin’s socialism was a form of rapid industrial development that depended upon centralization. The comparison does nothing to respond to Andreas.
This debate points to the need for further investigation of the rural-urban relationship and the nature of China’s shift to capitalism. What is undeniable is that as China has joined with global capitalism inequality has risen (both in terms of the rural-urban relationship and in terms of internal class polarization). In the end, Huang’s book does not provide the alternative explanation that he–and many of his boosters–thinks it does.
