Which Direction in China?
By I wonder what Yasheng Huang would think of this argument…
During its decades of rapid growth, China thrived by allowing once-suppressed private entrepreneurs to prosper, often at the expense of the old, inefficient state sector of the economy.
Now, whether in the coal-rich regions of Shanxi Province, the steel mills of the northern industrial heartland, or the airlines flying overhead, it is often China’s state-run companies that are on the march.
As the Chinese government has grown richer — and more worried about sustaining its high-octane growth — it has pumped public money into companies that it expects to upgrade the industrial base and employ more people. The beneficiaries are state-owned interests that many analysts had assumed would gradually wither away in the face of private-sector competition.
New data from the World Bank show that the proportion of industrial production by companies controlled by the Chinese state edged up last year, checking a slow but seemingly inevitable eclipse. Moreover, investment by state-controlled companies skyrocketed, driven by hundreds of billions of dollars of government spending and state bank lending to combat the global financial crisis.
Huang argued that the Chinese economy moved heavily towards the private (mostly rural) sector in the 1980s, only to retrench in favor of the state owned public sector and foreign direct investment in the 1990s and the first half of the 2000s. This retrenchment produced high levels of inequality and reduced innovation and productivity growth. Under the leadership of Hu Jintao, Huang argues that the pendulum has swung back in the other direction, in favor of private enterprise. I’m curious whether the Great Recession has halted that process, and reaffirmed the move back towards state intervention. It’s certainly a plausible interpretation of events, although there isn’t as of yet a lot of data on precisely what’s happening. If Huang is correct about the productivity imbalance between the Chinese public and private sectors (he argues that the latter is much more productive), and if the Great Recession has shifted the direction of Chinese economic policy, then the long term consequences could be severe in terms of inequality (more) and productivity (less).