Capitalism with Chinese Characteristics: Entrepreneurship and the State, by Yasheng Huang (Cambridge University Press, 366 pp., $30)

Foreign commentators on the Chinese economic “miracle” tend to focus narrowly on China as a unified entity. But China is a huge, diversified empire, with various languages and cultures. The country’s unity has been imposed from the top, by the Communist Party, which has held power since 1949—that is, the unity is ideological and despotic; it doesn’t arise from any spontaneous feeling of the Chinese. Any traveler to China can easily see the disparities with his own eyes, without needing a background in economics. The huge gap in standards of living from one province to the next, or from large cities to rural areas, is astonishing. Urban and rural Chinese seem like two different peoples. In Capitalism with Chinese Characteristics, Yasheng Huang, who teaches economics at MIT’s Sloan School of Management, explores the reasons for this evident split within Chinese society. He believes it is the consequence of a deliberate policy that the Communist Party implemented in the 1990s.

China’s economy took off in the early 1980s, Huang reminds us. In 1979, Deng Xiaoping returned land to the famished peasants and broke the collective ownership system (though without complete privatization). The results have been stunning, consistent with classic free-market theory. Given the possibility to improve their lot, the Chinese became entrepreneurs. Yet they’ve done so without an important component of free-market theory: property rights—at least as we in the West understand them. Everything in China technically is owned by the state, though, in practice, the Chinese came to understand that the state respected de facto property rights, allowing some freedom of operation. This autonomy has given entrepreneurs an increasing sense of security. Farmers have felt secure enough, for example, to till their plots on land granted to them with very long leases. As a consequence, the growth rate in agriculture reached double-digit numbers in the 1980s. The Chinese, who had been starving, in less than ten years became largely able to feed themselves.

Huang relates the epic adventure of rural Chinese entrepreneurship between 1980 and 1990, in which striving businessmen built firms of substantial scale in the poorest provinces. This capitalist surge occurred, again, without any official property rights or rule of law. The new entrepreneurs, however, were closely connected with the local Communist Party bureaucrats or apparatchiks. Becoming rich wasn’t just tolerated; in fact, it was openly encouraged: economic growth, after all, was in China’s interest, and it benefited Party members through direct involvement and corruption. Despite their poor equipment and uncertain legal status, these rural companies were able to begin by serving the domestic market, since the Chinese in the 1980s lacked everything. Through family connections, via Hong Kong and the Chinese diaspora, the rural entrepreneurs then swiftly grasped that the global market would soon become an ever-larger source of profit. It wasn’t uncommon in those days to visit a remote factory in a rural township manufacturing clothing or toys for an American store.

The Communist Party also took a more liberal path politically during the eighties; emerging capitalism seemed to favor democratization of the regime. This development seemed to confirm the famous theory, propounded by Samuel Huntington in his 1991 book The Third Wave, that free markets lead necessarily to political freedom; China would follow the path of Korea and Taiwan. Alas, nothing of the sort happened. Huang explains why. In the early 1990s, in the aftermath of the Tiananmen Square student revolt, a new clique took control of the Party and imposed a different economic and political strategy. Originating from Shanghai, the group’s members despised the peasantry and held a strong urban bias. They did not believe in democracy but instead considered enlightened despotism the proper means to govern China.

From the 1990s on, China’s policy has focused on making the nation strong and urban. As Huang demonstrates through surveys and statistics, this policy has worked in accordance with the Party’s ambition. But statistics reporting the global growth of China give no sense of what actually happens on the ground. Huang does not point out that Chinese leaders chose to achieve this strength—which is not the same as development—by exploiting the rural Chinese at the cheapest cost, sending them to work in urban factories producing goods for the global marketplace.

This conflict between the new urban capitalism, flourishing with Party support, and the former rural capitalism, now languishing, has dug a social divide with no equivalent in other nations, rich or poor. Documenting it, Huang reveals, among other shocking details, the growth of illiteracy rates in rural China—a direct legacy of the Party’s economic strategy. When one visits rural China, visual evidence upholds his findings: schools and health care, which could still be found, even if in limited forms, in the 1980s, have now all but disappeared. Huang could have reinforced his portrait by discussing another important factor that does not show up in statistics: the Hukou identification system, which links any Chinese to his mother’s village of origin. In practice, this amounts to legal apartheid, allowing the urban employer to send back to his mother’s home the unproductive or restless worker.

“The fact that 45 percent of the Chinese live under the poverty line in spite of a double digit growth,” writes Huang, “shows that China has chosen the wrong path.” Huang may be right from an ethical perspective or from the rural Chinese perspective. But the strategy that Huang condemns fits perfectly with the ambition of the Party: a strong, educated, modern, and city-based China, served by an army of 1 billion workers who keep wages low and competitive.

Huang’s survey ends in 2007, but he does cover the latest power shift within the Party. The Shanghai clique has been forced into retirement and replaced by a seemingly more compassionate Communism: President Hu Jintao talks of social justice and a harmonious society. But beyond this rhetoric, which had nourished Huang’s hopes (at least initially), little of substance has changed. The Hukou system remains in place, cities continue to grow, and land still belongs to the state. Public investments in schools and health care in rural areas remain barely visible. Not only is democratization out, but repression has hardened. As the Olympic year of 2008 approached, human-rights activists, religious leaders, lawyers, bloggers, and Buddhist monks all lost what little freedom they enjoyed as the Party clamped down on dissent. It’s worth remembering that before his elevation to the presidency, Hu was governor of Tibet, hardly a grooming post for the faint-hearted in the Communist hierarchy. Tibetans have no reason to expect a brighter future under his leadership.

Beyond making all the right noises about social justice, the Party has little reason to shift course and pursue real change. If China became a democracy, the Party would probably be voted out of power. If it somehow managed to win a genuine election, it would have to serve the needs of the rural majority instead of the urban minority. Party members don’t want that, of course, since they are themselves urban dwellers with privileges. If Huang looked closely at the Communist Party’s social composition, he would lose hope for a self-reforming regime: among 60 million Party members, “peasants” and “workers” constitute less than 10 percent. Capitalism with Chinese characteristics may not be all that good for the Chinese as a whole, but as Huang clearly demonstrates, it’s more than good enough for Party members.

Could the current global crisis derail the Party’s strategy? So far, the rural workers who lose their jobs and are sent back to their villages have been the victims. The Party leadership discusses various reforms, such as land privatization as an incentive to achieve a better life in farming, or stimulating the economy by investing in rural areas and refocusing on the domestic market. But these internal debates haven’t translated into actual change. Party members have too much to lose to alter their ways of doing business and their rule over the poor. The political status quo—and the exploitation of rural China by urban China that Yasheng Huang documents—could remain in place for a long time to come.


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