Thomas Greenhalgh writes on the economic impact of freedom of enterprise in China.
The People’s Republic of China (PRC) prides itself upon its corporatist approach to economic growth, particularly geared towards export markets, yet State Owned Enterprises’ (SOEs) now noted poor performance, in regard to inefficiencies and faux profits (through government lending), have left us with the question as to where the greatest impetus for growth within the Chinese economy is, or at least will be. The conclusion is increasingly that economic development is happening despite strong state intervention.
China’s ailing agricultural sector of the 1970s stands as a particularly apt example of the failings of the centralised system of agriculture, whereby individual economic and social liberties were forcibly curtailed to pool resources and effort, supposedly maximising production. Productivity rates were appalling low, and upon the victory of the Deng Xiaoping clique over the ultra-Maoist ‘Gang of Four’, a burst of rural entrepreneurialism in 1979 resulted when the government offered farm families the opportunity to work independently as contractors for their communes.
By 1984 this ‘household responsibility’ system had been adopted by virtually all farmers and was followed by rapid increases in output and rising rural incomes. It’s hardly a surprise that farmers reacted so positively to the reform. After decades of having their initiative seen as a way by which others can exploit them further, with no material gain, this means to escape the cycle was too attractive an opportunity to ignore. What was the state’s role in this growth? It constituted the lack thereof. Public spending and foreign investment appeared on the scene only when growth rates tempered in the 1990s. This was a major blow to statist lines of thought which favoured more collective efforts for facilitating growth, such as the disastrous Great Leap Forward, resulting in the deaths of 20 to 30 million people due to starvation.
Agriculture isn’t the exception, industrial cities have similarly experienced a boom in economic output and incomes as they’ve progressively thrown off the shackles of government interference (even so-called ‘positive’ interference like subsidies).
Indeed, opening regions up to competition with each other, through fiscal decentralisation, has resulted in local states creating favourable political, economic and administrative environments for foreign investment and indigenous entrepreneurship. Those regions favouring limited state control over economic processes fared better, with Shanghai residents, on average, earning 44 percent less than their counterparts in the nearby smaller coastal city of Zhejiang from operating businesses and 34 percent less from owning assets. The implications of this are clear, state-led capitalism may lift urban skylines and GDP statistics, through discriminatory favouring of foreign investors and large industrial subsidies, but not actual living standards. Why would the government intervene when it’s not even making the lives of its populace easier?
The short answer is that the Central Government is increasingly recognising the key role played by private enterprises, especially when it has a much better chance of collecting taxes from private companies than from loss-making state enterprises. The granting of official recognition to property rights (in the August 30 law pertaining to enshrining them in the constitution), coupled with the reforms of the SOEs (in a bid to model them upon neoclassical conceptions of how firms should operate), effectively constitutes a continuing privatisation of growth in the benefit of all.
With the private sector's share of the GDP rising from less than 1% in 1978 to more than 50% (OECD estimate) – 70% (BusinessWeek estimate) today, employing more than 70% of the workforce in the next 5 years, perhaps we’re seeing the beginning of the end of lingering Maoist influence over economic processes. No matter how long it takes to arrive at the point where one sees it, the benefits of free markets are unmistakable to all.
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