Rich State, Poor People

‘Guo jin min tui,’ or ‘the state advances, the private sector retreats’ has now become a catch-phrase among China watchers. It refers to the rising dominance of China’s state-owned sector at the expense of the vibrant private enterprises. Debates surrounding this phenomenon have been focused on the economics side. For example, in a New York Times report back in August, Michael Wines observes:

Those who see little evidence of an expanding state sector generally believe that China has a decade or more of robust growth awaiting it before its economy matures. Theirs is a Goldilocks view of state intervention — not too much or too little, but just enough to push a developing economy toward prosperity.

The skeptics have a darker view: they believe distortions and waste, in no small part due to government meddling, have resulted in gross misallocation of capital and will end up pushing growth rates down well before 2020. What drives their pessimism, the skeptics say, is that China, like Japan a generation ago, has too much confidence in a top-down economic strategy that defies conventional Western theory.

In a recent piece, Mo Zhixu, a prominent Chinese blogger, approaches the debate from a political point of view. ‘Guo jin min tui’ is not really an economic phenomenon per se, but an expression of political will to maintain the authoritarian structure. He claims that since the economic reform, key industries have remained in firm government controls. This includes strategic sectors such as defense, electricity, petrochemicals, telecoms and transportation. There is also no fundamental change in the financial sector, the crucial sector for resource allocation. This is also true in social sectors including education and culture.

Because maintenance of the authoritarian regime is the primary objective, efficiencies and marketization are not really top priorities of the regime. As Mo observes:

The so-called ‘small government, big market’ is just an elusive goal created by academics, and has never been a policy option for the government. State planning proved to be a failure during the first 30 years [of the PRC]. Without marketization, it was a dead end for the Chinese government. However, to introduce marketization, the Chinese government has to abandon its control over the economy. More seriously, following a ‘small government, big market’ policy entails transforming the authoritarian structure, in which politics dominates over the society, into a constitutional structure, in which politics is accountable and subordinated to the society. This is what Deng Xiaoping and Chen Yun cannot accept. As their ‘two focal points’ illustrated, introducing marketization and constraining it to specified areas are the gist of reform.

Yang Jisheng’s book, Political Struggles in the Reform Era, once quoted a saying by Chen Yun to Zhao Ziyang: ‘CCP’s political authority is underpinned by its economic authority.’ According to my understanding, political authority is not only manifested in central-local relationships, but also in the relationship between the administration and society as a whole. In order to maintain absolute social control in this authoritarian structure, the government not only needs to resist political reforms and supervisions, but also needs to control economic and social resources. But the challenge lies in the inefficiencies, wastes and corruptions in the governmental structure and state-owned enterprises (SOE). The private sector, given its higher efficiency, will soon overtake the state sector. And inefficiencies, wastes and corruptions will soon kill the state sector.

Therefore, to protect the authoritarian structure, the government needs to use its power to interfere in the market at a time when marketization proceeds. To compensate for the deficiencies of the state sector and to maintain the leading role of the state-owned economy requires executive control and monopolization. Hence, the marketization process is twisted. To achieve the same [authoritarian] objective, the dual tools of inflation and low interest rates are also employed. They have the effect of transferring economic resources from the private to the state sector. We therefore observe the phenomenon that the growth in monetary supply is faster than GDP growth for over three decades, and executive control in the financial sector has never been loosened.

This observation highlights the political dimension of China’s state intervention in the economy. If maintaining the authoritarian system is what it is all about, the regime will achieve it at the expense of inefficiencies, wastes and corruptions. Economists’ concerns about the disadvantages of state intervention then miss the point: what they are arguing about are just the symptoms, rather than the root cause of the problem. Putting economics at the service of politics is the real issue, and in the words of Mo Zhixu, it is ‘an open conspiracy with a political intention which is all too clear.’

0 thoughts on “Rich State, Poor People”

  1. As Japan has so aptly demonstrated, top down economies never work in the long run. It’s nationalistic and cultural inability to change ensured that Japan has started sinking into second rate status following a self imposed 20 year long economic stagnation.

    So, is China going to be the next Japan? Certainly sounds like it from that article.


  2. “The skeptics have a darker view: they believe distortions and waste, in no small part due to government meddling, have resulted in gross misallocation of capital and will end up pushing growth rates down well before 2020. What drives their pessimism, the skeptics say, is that China, like Japan a generation ago, has too much confidence in a top-down economic strategy that defies conventional Western theory.”

    Correction: Conventional Anglo-American Neoliberal theory, not western theory. (Heck, Marxism is a western theory) Continental European “Social Market Theory” is, in many ways, as “top down” as Japan, and Germany has itself on a much better footing, based on real production, than Britain or the US, who have followed Neoliberal economics straight into the fiscal abyss. Neoliberal theory ultimately has a tendency to turn into economic wireheading- the numbers look good, but they’re fundamentally meaningless. Real income for the average American or Brit have barely budged in decades.

    But, more importantly, is the Chinese state sector really advancing? Reality check:

    -from 1996 to 2009, the number of employees in State-Owned enterprises has dropped every year except 2008, where the number increased by only 230,000. This is a massive drop- in 1996, SOEs employed 112.44 million workers, versus only 64.2 million today.
    -The number of private enterprises in China increased 80% between 2004 and 2008.
    -At present, there are 123 centrally-administered SOEs; under the 12th Five-Year Plan, the government plans to cut this to 30-50 by 2015. Some companies will be merged, others simply devolved and decentralized.

    All these are from my book, China By Numbers 2011. In addition, I’d refer to this article from the World Bank:

    All this data points to the same conclusion: while SOEs remain massive players in the Chinese economy, their dominance has been in steady decline for the past decade, and I see little evidence of a significant change of direction any time soon.


  3. Excellent post. The only thing left for the rest of us to do is speculate on how much longer the gap between communist politics and young Chinese who want to live in normal country will last until something gives.


  4. Nicholas M argues that the number of SOE employees has nearly halved. This is a misrepresentation, it ignores the huge rise in the number of workers in Limited Liability Companies and shareholding companies. These are nearly all owned by the state. Private sector companies are generally small companies (most with less than 15 employees), but there are exceptions. Most significant however, is the fact that almost all of “the commanding heights” and banks are state owned. There is a direct connection between political power and state companies, as they are adminstered by appointees of the Communist Party’s organisation department.


  5. There is no doubt that the Chinese government wants to leverage its control over key industries in order to control the population.

    However, in some of the key industries (infrastructure and transportation) the cost barrier is too high for private companies. For other industries there is also not enough private capital to plan for anything strategic (longer than 5 years) and long term. In both of these cases you can argue that there would be more innovation with SOEs in charge. Also, I don’t think private corporations controlling the economy itself is necessarily a great thing for the people, or the economy for that matter. American companies are known for their efficiencies. As the economy wanes and people are being laid off the efficiency only raises, because those who are not laid off are asked to produce more. American corporations are still not hiring even when they acquire record profits preciously because they strive for “efficiency”. The SOEs are big and wasteful. However in being wasteful they end up trickling down more money to the average folks then private companies. That provides a far better mechanism than private companies running the economy in economic downturns.


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