DB: As for the question whether or not China was in need of foreign capital to accelerate its economic growth, Huang Yasheng, Associate Professor at the MIT Sloan School of Management, argues that the main driver of China’s economic miracle up to the end of the 1980s were domestic private village and township enterprises.
Somewhat correct but completely irrelevant…..
What he doesn’t mention is that in order to drive this economic growth, these TVE’s had to borrow extremely heavily to the point where you had rural credit instititutions that were (and still are) insolvent. The TVE’s growth phase ended around 1990 when the countryside basically ran out of cash.
DB: Then at the beginning of the 1990s, the central government decided to shift the economic development scheme towards urbanization driven and controlled by the public and governmental sector
Because they had no choice in the matter. The boom in the countryside was not because private enterprise was particularly good but because Maoist communal agriculture was a total disaster. By 1990, the rural countryside had recovered from the Maoist disaster. At that point, there were no productivity gains to be made anymore, and the rural credit institutions that were designed to take advantage of these gains started going bust.
Also “privatization” is not a good way of describing rural land ownership. The “contract responsibility” system is something that is not quite private and not quite socialist. You can see it when people like Huang are saying good things about it that it becomes private, but when they say bad things about it, it becomes non-private.
DB: Now the point is: Huang argues in his studies that economic activity driven by the private sector in townships and villages in the 1980s have led to greater benefits for the Chinese people then the subsequent government- and public sector-led urbanization. What do you think of his view?
Maybe it is true, but it is completely irrelevant. The basic problem is that what worked in the 1980’s wouldn’t necessarily work in the 1990’s and the 2000’s and the 2010’s. The reforms of the 1980’s were designed to fix the problem of the 1970’s, and once those problems are fixed, you have to do something different. Times change, and policies that create a miracle in one place and time can be totally disastrous in another. Much of the “China miracle” wasn’t that privatization was very good, but because Maoist communal agricultural was particularly bad, and switch to another system (any other system) would have improved things.
This is the problem that I have with ideological people whether they are socialist or capitalist. They fail to adapt when the situation changes. People loved the Soviet model in the 1960’s not because they were total idiots but because the Soviet Union generated extremely large amounts of economic growth in the 1950’s. When talking about the failures of state planning in the 1990’s, we also have to consider the successes in the 1950’s. We can certainly learn things from the 1980’s, but we can’t repeat them because the world is different.
This applies to current issues. I personally think that Chinese industrial and banking reform in the 2000’s was a huge success. Does that mean that I think that we can relax and just follow exactly the same policies? Hardly. *Because* it has been a success, a lot of the problems that the policies had to fix have been fixed, which means that there is nothing more to do. China’s economic model in the 2000’s is highly capital intensive and highly export intensive. It worked well in the 2000’s because China is where the Soviet Union was in the 1950’s or where East Asia was in the 1980’s.
It’s going to stop working in the 2010’s Much of the export intensive part will never come back. Building one expressway is going to be very useful, but building two isn’t. Right now building stuff works because there are a lot of things that need to be built. As time passes there are going to be fewer and fewer things that can be usefully built.
So right now the big thing in China is trying to move the economy from an capital driven, export driven economy to an technology based, innovation based economy. This means basically tearing lots of things up and starting over again, and looking at how other countries (particularly the United States) promote innovation. It’s going to be wrenching and painful, change always is, and people will do a lot of stupid things and make lots of mistakes, just like they did in the 1990’s and in the 2000’s. Expect to make mistakes and set things up so they aren’t fatal ones.
I’m optimistic because managing an economy requires constant change and constant renewal, and my feeling is that the people in the Chinese government aren’t trapped replaying the glories of the past like the Soviet leaders of the 1970’s or frankly like Ya-Sheng Huang is.