A Review: Capitalism With Chinese Characteristics

Yasheng Huang's Capitalism With Chinese Characteristics is an impressive book. Most impressive because it is the most in depth economic study of town and village enterprises (TVEs) complete with new data showing that even in 1985, "of the 12 million businesses classified as TVEs, 10 million were completely and manifestly private."

My education of business forms in China has focused on those the state allows foreigners to have an ownership interest in. Mr. Huang implies that Joseph Stiglitz has done the most in illuminating TVEs to the Western world as a fine example of how China's development strategy of public ownership has minimized "an extremely serious problem affecting transitional economies:" the stealing of assets by private investors. Conclusions from Mr. Huang's case study of the Pear River Refrigerator Factory TVE, or the Kelon Group, in Chapter 2, Part 2 stand in direct contrast to Mr. Stiglitz's conclusions based on the exact same TVE.

When Kelon was formed by Wang Guoduan in the 1980s, there was no legal framework to allow an entrepreneur to register a private business in the anticipated size of Kelon. Mr. Wang arranged for a loan and credit line from the township, registered the firm as a TVE with nominal control by the township, and quickly repaid the loan. The company performed very well while Mr. Wang was in control, and, in contrast to Mr. Stiglitz's conclusions, the only evidence of "massive plundering of Kelon's assets by the state-owned holding company" occurred after the township that had been exercising nominal control replaced the founding members of Kelon with their own people.

The first half of all of the chapters begin this way. A widely held perception of an aspect of China's economy is presented, and Mr. Huang tears it down by examining the details of the actual form and nature of business. In the case of TVEs, "China lacks efficient legal and financial institutions," but entrepreneurs have been very savvy in finding ways to circumvent the strict formal requirements of operating a business. Mr. StgliStiglitz is not the only one that Mr. Huang takes aim at.

In a later chapter he attempts to deflate the enthusiasm that Thomas Friedman and the World Bank seem to share about Shanghai's apparent embrace of free market globalization. Mr. Huang shares a quote from Chen Liangyu, Shanghai's former Party Secretary and currently serving an 18 year sentence for corruption in Qincheng Prison, that should tip off any economist regarding the superficially apparent capitalist nature of Shanghai:

If I am not mistaken, in our country, private businesses contribute 40 of GDP. In our Shanghai, SOEs create nearly 80 percent of Shanghai's GDP. Who upholds socialism most rigorously? Who else if it is not Shanghai?

But, numbers are tough, and the World Bank tends to focus on a single number: FDI.

I really like the first half of all of the chapters. Mr. Huang narrates case studies and explains the general economic issues quite well. Where I get lost is in the second half of the chapters. The economics becomes very serious, and I lack the formal training to claim that I actually understand what is going on. I can make some sense, but I'm not sure exactly what sort of holes to look for.

Basically what I'm trying to say is, I'm not embarrassed that I read these portions of the book with a less critical eye, and I don't think you should be either. Us econ lay people should enjoy the stories and conclusions presented in the first half of the chapters and let the economists and peer reviewers battle out the numbers presented in the second half. If there is some sort of consensus, then we take the stories and conclusions at face value. If there is not, then we await the conclusions and stories in the next book examining China's economy, and wait for that battle to be resolved.

By the way, peer reviews and popular reviews of the book have been excellent. The most widely circulated popular reviews are courtesy of Bloomberg.com and The Economist (which also named it one of the top economics books of 2008).