A darker view of the Chinese economic 'miracle'

By Alan Wheatley Reuters

Monday, January 5, 2009

BEIJING: A self-serving government deliberately impoverishes the countryside, stifling business and driving illiteracy up while building skyscraper-adorned metropolises admired by the foreign capitalists it woos.

Welcome to the China of Yasheng Huang, a U.S. academic whose trenchant analysis of 30 years of Chinese market reforms will discomfit those betting that the current economic downturn is but a blip in the Middle Kingdom's inexorable ascent.

Without root-and-branch political reform, Huang argues in "Capitalism with Chinese Characteristics," China faces "monumental odds" in re-balancing an urban, state-driven economy where consumption has been sacrificed on the altar of investment.

"The next five years will be a litmus test for whether the country will emerge as another East Asian miracle or as a Latin American version of a vicious cycle of dashed expectations and perpetual turbulence," writes Huang, an international management professor at the Massachusetts Institute of Technology.

His thesis is that the true Chinese economic miracle occurred in the 1980s because of an explosion in rural entrepreneurship, as farmers who had lived through the Cultural Revolution gained confidence that starting a business would no longer mean arrest.

All that changed in the political turmoil that followed the Tiananmen Square crackdown in 1989. The president in subsequent years, Jiang Zemin, and Prime Minister Zhu Rongji - who did not share the background of their predecessors, who had run agricultural provinces - set about reversing many of the productive rural policy experiments of the previous decade, which included relatively easy access to credit.

The result, Huang documents, is that household income growth has lagged behind the growth of gross domestic product since the early 1990s. Output, in short, has benefited Chinese citizens less and less, stunting private consumption and requiring Beijing to take up the slack by stimulating infrastructure investment.

"A central mechanism of the growth model of the 1990s was to finance state-led, urban China by heavily taxing entrepreneurial rural China," Huang writes.

Stephen Green, head of China research at Standard Chartered Bank in Shanghai, said he believed that Huang had neglected some of the achievements of the 1990s, notably the overhaul of hulking state-owned companies.

But he called Huang's dissection of China's reform period important, coherent and depressing. "Perhaps its greatest contribution is to provide a comprehensive critique of a set of policies, many of which are still doing their damage, while at the same time pointing to the real source of China's growth," Green wrote in a note to clients.

Huang marshals a vast array of statistics to buttress his claim that the welfare of ordinary Chinese did not keep pace with economic growth under the state-directed capitalism of the 1990s.

The utilization rate of hospital beds, for instance, peaked at 84.5 percent in 1988. The rate declined in the 1990s as the cost of medical care became prohibitive and reached a nadir of 57.4 percent in 2002. Coincidentally or not, this was Jiang's last year in power. By 2005, the rate had climbed to 62.9 percent.

"Again, as in so many other areas, the improvement coincided with the commencement of the leadership of Hu Jintao and Wen Jiabao," Huang writes.

Hu, the Chinese president and Communist Party chief, and Wen, his prime minister, deserve credit in Huang's eyes for beginning to repair the social safety net and reverse the neglect of the countryside.

Since Hu took over in 2002, inflation-adjusted rural income growth has recovered to a rate of 5.5 percent a year from 3.8 percent while Jiang was in office, from 1989 to 2001. From 1978 to 1988, rural incomes rose a whopping 12.2 percent a year.

But the bad news, as Huang sees it, is that China still has what he calls a "commanding heights" economy in which the government wields enormous power.

"Many of the endemic problems in the Chinese economy today - massive pollution, corruption, inefficient capital deployment, land grabs, and so forth - cannot be tackled without meaningful institutional reforms, in particular, reforms of Chinese political governance," Huang writes.