The Best Book I Read In 2020

The best book I’ve read in 2020 is without a doubt Huang Yasheng’s 2008 “Capitalism with Chinese Characteristics”. I credit Adam Martin for turning me on to it as an assigned paper in a Free Market Institute class that I had the privilege to attend in 2018 but never got around to reading the full book until my co-author Bryan Cheang reminded me of it recently. This is a book on the history of China’s post-communism economic growth. China’s rise to prominence in the 21st century makes its economic development story all the more important to get right, with big implications for development studies.

Huang’s thesis is simple. China’s massive poverty reduction and growth was thanks to pro-market reforms in the 1980s that enabled tens of millions of entrepreneurial businesses in the most agricultural provinces of China to engage in business and trade. This was a time where privatised ownership became prevalent, policymakers introduced financial liberalisation and relaxed restrictions on entrepreneurship. As Huang puts it, Chinese capitalism is rural in origin where its first true miracle growth took place:

The two strongest advocates of the rural reforms, Zhao Ziyang and Wan Li,were appointed premier and vice premier, respectively, in 1980. (Sichuan and Anhui, led by Zhao and Wan, respectively, had led the country in the pioneering agricultural reforms in the late 1970s.) It took China just six years between 1979 and 1985 to create a policy environment sufficiently liberal that a rural private sector with 10.5 million businesses strong, with 40 percent nonagricultural employment, had emerged. China may not have embraced the Washington Consensus, but it moved away from the Moscow Consensus at a rapid and purposeful speed.

What’s the big deal of this story? Huang’s rural revolution cuts against the conventional wisdom of China’s economic story, which explains its post-1979 growth as attributed to a model of state-led capitalism that consisted of high foreign investment, export-oriented manufacturing, stringent controls on finance, and government ownership of its millions township and village enterprises (TVE). TVE’s, according to Huang, have been greatly misunderstood by China scholars (such as Joseph Stiglitz) as being government-controlled and owned. Archival research finds that the ownership structure of TVE’s resemble more that of a private sector business. This trivial methodological detail has great implications, as China’s 12 million TVE’s contribute to a significant amount of China’s economic activity, accounting for 58% of after-tax profits and as high as 49% employment in 1989. Of China’s 12 million TVEs in 1985, 10 million were substantially privatised businesses while the remaining 2 million were collectively-owned.

Note the explosive increase in number of private TVEs and its employment, relative to collective TVEs.

However, China reversed course in the early 1990s and embarked on a technocratic industrial policy with a strong urban bias. Many of its market-friendly rural reforms from the 80s were halted, constraining access to capital for rural entrepreneurs in favour of businesses in urban cities. The result was that millions in the rural states that previously enjoyed a boom in prosperity now experienced economic stagnation, a massive rise in adult illiteracy (30 million), rising unemployment, stagnating productivity, etc. The state-led capitalism model of the 90s greatly hurt the rural states by siphoning capital and labour to urban states such as Shanghai.

Where it gets interesting is that Shanghai remains a deeply inefficient economy with very little innovation. Whatever growth there was, the average Shanghainese did not share in these benefits. For instance, GDP growth of urban states like Shanghai are not correlated with household income growth, unlike in the 80s when rural entrepreneurship flourished. Profits were accrued to the grabbing hand of state-owned enterprises and politically-connected foreign-owned enterprises. Economic growth in the 90s was anti-poor.

The output value of poor, rural states such as Hebei and Guizhou came from private TVEs in contrast to urban states such as Beijing, Jiangsu and Shanghai.

To prove his point here, Huang exploits a fantastic natural experiment in the state of Zhejiang (one of the states that escaped the anti-market policies of the 90s). By looking at patent applications and locations of big Chinese companies headquarters, Huang finds that Zhejiang is immensely entrepreneurial relative to an urban city like Shanghai that adopted the state-centric model, despite the latter enjoying more advantages in R&D funding, engineers, and research scientists. This lacking in economic dynamism is consistent with poorer outcomes for the average Chinese in urban cities, such as lower personal household income wages. An excerpt from the book:

In 2003, the All-China Federation of Industry and Commerce (CFIC)
published a list of the 1,582 largest indigenous private-sector firms inChina.
Of the top 100 firms ranked by sales on the CFIC list, six were based in
Shanghai. This compares with 35 based in Zhejiang and 17 based in Jiangsu,
the two provinces bordering with Shanghai. To put Shanghai’s ranking in
perspective, on this list there were the same number of firms from Liaoning,
a province in China’s northeast that was saddled with inefficient SOEs and
with a struggling economy in the 1990s. The six Shanghai firms were not
ranked particularly high on the list. The top Shanghai firm is Shanghai
Fuxing (№6 on the list); the five other Shanghai firms were ranked Nos.
15, 39, 60, 81, and 91, respectively. Another statistic is also telling. Of the six
Shanghai firms, three were connected to real estate and construction, the
most political sector in the Chinese economy.

If Huang’s thesis is right, then the China puzzle is not a puzzle after all. It implies that:

1. China’s growth story is more aligned to “Washington Consensus” wisdom (this is not to say that the Washington Consensus was without its problems), which is that economic growth takes off when countries get the standard market institutions right: private property ownership, the rule of law, and macroeconomic stability.
2. China’s growth cannot be explained by the “gradual” narrative whereby the interventionist state carefully modulated the country’s development through careful steering.
3. Where the Chinese government has intervened, it has in fact greatly hurt growth and exacerbated poverty for the poor.
4. Urban states such as Shanghai, Beijing and Jiangsu are built on a steep foundation of cronyism, which is a great injustice to the rural Chinese.

The book is immensely rich empirically and well-substantiated. Methodologically, the book is very much in sync with the insights of New Institutional Economics a la Douglass North, which emphasises the study of the economics by engaging the institutional details, as opposed to standard and “clean” economic analysis that privileges statistical significance (See more on this by Boettke, Haefelle and Storr here). Huang’s heavy usage of archival research and survey interviews to clarify the ownership structures of China’s TVE’s demonstrates this aptly.

I cannot recommend this book enough. If you don’t have time for the book, there’s a great podcast episode on Spotify too.

P.S. The book’s first chapter has a fascinating story of how Chinese tech giant Lenovo is in reality a successful product of the Hong Kong economic system, rather than China. The company was registered as a foreign firm in China, but headquartered in Hong Kong to benefit from its legal and financial institutions.

Donovan Choy is a Visiting Research Fellow at the Adam Smith Center Singapore. He is co-author of the book Liberalism Unveiled: Forging a New Third Way in Singapore, a classical liberal analysis of Singapore’s policy discourse.