David R. Henderson  

China's Economic Growth

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The spontaneous reforms in agriculture meant that new supplies of food products needed markets and that markets needed infrastructure. Rural dwellers created a private trade network, and, within one year, most state food stores were out of business. Rural entrepreneurs then created new businesses, such as hotels, services, private restaurants, and small-scale manufacturing, through the three Fs (friends, family and fools). They bribed local officials to register their companies as "township and village enterprises." They created fake "red hat" enterprises, that is, private companies masquerading as state companies, and sham collective enterprises, or they used state enterprises to issue receipts and open bank accounts. Large private manufacturing firms developed first in predominantly agricultural provinces. China's largest agribusiness was founded by brothers who left the city to found their company in rural Sichuan. Rural entrepreneurs built the largest refrigeration and air-conditioning companies in China.
This is from Paul Gregory, "China's Growth: Planning or Private Enterprise?", the August Feature Article on Econlib.

Another excerpt:

The CPC [Chinese Communist Party] is, therefore, at a crossroads. To date, it has played the "leading role" in politics, economics, and civic life. If people are allowed to make their own decisions in relatively free markets, the CPC will lose much of its leading role. The control of economic resources is what gives party leaders power and personal wealth. An authority on Chinese finance characterizes credit markets as a "bountiful source of political resources.... [T]he enormous pool of savings in the banking sector made it an indispensible policy and political instrument."

Gregory concludes:
The remarkable feature of China is that despite the private sector's disadvantages in credit markets, it has advanced and outgrown the privileged state sector. Perhaps, one day, we will see what it can accomplish on a level playing field.



COMMENTS (2 to date)
david writes:

The imperative of Chinese state subordinates is not stellar technocratic management but public acquiescence to the social order, and this peace is a prerequisite for capital accumulation anywhere in the world.

It doesn't come easily. The major question is whether the CCP is really delivering a peace worth the rights it shreds, but there is no question that it is fragile and can disappear in short order. The chaos of 90s Russia is not good for the private entrepreneur, either.

Gregory writes his article from the privilege of a liberal democracy forged over centuries; considering a 'choice' of state vs. private enterprise is a luxury that only confidently stable states can afford - states with a civil service already so steadfastly legitimate that it can actually enforce the rule of law on private enterprise. As Dr. Kling likes to say, lose the 'we' - there's no state, there are only people; in developing countries it is a serious question over whether a newly wealth manager will turn his mind and wealth to establishing himself as a new strongman. See, again, Russia... the return on investment of cronyism can be very great, after all.

collin writes:

A fair question here is can there be necessary freedoms without freedom of speech? (In the US for the most part...most PC complaints are not government imposing speech.)

Or this long term just a much more corresive version of Japan Inc? I vote this time China has a soft landing (the government has the tools, room and power to limit the damage) but has a really big financial crisis in 20-30 years. It also seems like China is starting to be over-run by small time local versions of Huey Longs with absurd Keynesian investments.

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