The Aborted Revolution of China

The Aborted Revolution

By Mark L. Clifford Wednesday, Jan. 14, 2009

China is facing the most threatening economic crisis in decades, and its leaders have every reason to be afraid. As factories close, profits plunge and worker protests become more frequent, the country's huge foreign-exchange reserves and three-decade-long record of growth suddenly seem less like a guarantee against turbulence and more like barely adequate insurance.

Written before the full force of the crisis became apparent, Yasheng Huang's Capitalism with Chinese Characteristics: Entrepreneurship and the State presciently anticipates the need for a guide to the least understood weaknesses in China's economy. An MIT professor, Huang argues that China's real reforms were in the 1980s, while from 1989 to 2002 leaders actually moved the economy in the wrong direction and might be about to pay for it.

Huang has mined never-before-researched financial records on rural China to bolster his thesis that the major gains in overall income growth and entrepreneurial activity were made in the 1980s. Interestingly, this happened without massive infrastructure: at the time, China lagged behind India in terms of paved roads and railways.

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.

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.

Huang asserts that only more developed property rights, transparency and democracy will allow China to move to the next stage of economic development — but he does so almost in passing and one longs for more substance on these points. Thankfully, his rearview vision is far more fleshed out. As a look at China's entrepreneurial economy in the 1980s and 1990s — and as a counterpoint to the common misconception that China is steadily evolving into a more market-oriented economy — this book is unparalleled.

Mark L. Clifford is an author and the executive director of the Asia Business Council