by Joe Zhang, http://www.scmp.com/business/economy/article/1511144/state-sector-chinas-secret-sauce It is too early to say if China has achieved economic success, evenafter 36 years of consistently high growth. Observers around the world say state-driven economies tend to becorrupt and inefficient and that China’s is no exception. So what should investors make of Beijing’s drive to make the statesector even more robust and dominant in the decades ahead? In an ideal world, it should scrap the existing state capitalismand build from scratch a set of inclusive institutions, similar tothose in the United States or Britain. But we live in an imperfect world, where historical accidents havemore profound impact on our destiny than elaborate designs do. The history of the past 36 years is a blip for China, but it offerssome clues as to why the state sector has helped China – and why itwill be helpful in the decades ahead. China has one of the most celebrated economicachievements among developingcountries under itsbelt, as seen in itsalleviation of poverty, its construction of functioninginfrastructure and its globally relevant manufacturingindustry. In contrast with India andother third-worldcountries, wherehundredsof millions of impoverished citizens roam the streets, China’sstate sector provides a safer, surer, and more productive answer toeconomic needs. ... the state sector has provided essential organisation, capitaland the ability to survive turbulence collectively. That’s theChinese edge, like it or not Economies of scale aside, the state sector has provided essentialorganisation, capital and the ability to survive turbulencecollectively. That’s the Chinese edge, like it or not. When hundreds of millions of helpless citizens are left to fend forthemselves, without essential public goods such as water, shelter,toilets, education and health care, what is the justification forthe governments to indulge themselvesin the free-marketreligion and – dare I say it – democracy? I must confess I can never echo the praise Gurcharan Das haslavished on India’s “weak state, but strong society”. To me, hislatest book, India Grows atNight, is just a desperate call for a big and effectivestate sector. For sure, relative to the shortage of capital, the shortage ofgovernance and organisational skills is a big challengefor developing countries. China’sstate sector has at least partially filled this void. Many studies havefound that governments in the US and Europewere very interventionist in the early stagesof their countries’economic development – and remain so even today despite theirfree-market appearance. Since 1949, China’s state sector has created not only jobs but alsomany completely new sectors – including green energy,aerospace, car-making andshipbuilding – in whichprivate enterprises cando business. It is true that all these expensive ventures are funded by taxesand hidden taxes (the inflation generated bythe central bank's printing presses).Butisn’t this infrastructure building partofwhat the state sector (and thegovernment) is supposed to do? No one in China has any doubt that the state sector is corrupt andinefficient. They know equally well, however, that the alternativeis much worse The problem is that China’s state-controlled enterprises competedirectly with the private sector on an uneven playing field. They crowd out private enterprises,worsen corruption and depressprivate firms’expected returns oninvestment. As a result, they have attracted publiccondemnation. But I contend that China has persisted with state capitalism withits eyes wide open. No one in China has any doubt that the state sector is corrupt andinefficient. They know equally well, however, that the alternativeis much worse. Chinese citizens may well envy what the West has achieved with itsvarious brands of capitalism, but there are reasons to doubt thefeasibility of it working for China. Why? Because the public has also chosen to stay the course andresist change. To be sure, the lack of an alternative was mainly a result of theCommunist Party’s authoritarian rule. But the reality is that ifthere were a public referendum on free-market capitalism versusstate capitalism, I believe the public would overwhelmingly endorsestate capitalism. Critics will say that’s because the party has brainwashed thepublic for over 65 years. But that’s an insult to the intelligenceof the public, in my opinion. It remains to be seen whether China’s state sector will be theanswer to the country’s many challenges: inequality, inefficiency,asset inflation, pollution and resource depletion. But judging from university graduates’ overwhelming preference forstate enterprises andthe civil service asemployers,the public seems willing to givethe state sector an extended lease on life. Joe Zhang is the author of the newbook Party Man, Company Man: Is China'sState Capitalism Doomed? |
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