‘The Long and Winding Road’ Sorting Out The Puzzle of Growth – The Macro and the Micro of It

I was reminded once again recently - when giving a class on China in the context of global markets - that understanding the workings of the Chinese economy is not easy.  Part of the lecture was based on Yasheng Huang, MIT’s China scholar’s 2008 study of the Chinese economy, Capitalism with Chinese Characteristics: Entrepreneurship and the State.  What came to mind was his warning early in his book to take care when examining the Chinese economy:

…- the Chinese economy is so complicated that what appears to be straightforward and obvious on the surface is not at all so once we dig into the details.  To get into these details requires going far beyond the normal empirical basis of much of the economic analysis on China. 

Yasheng Huang’s analysis is filled with fascinating insights into the structure of the Chinese economy.  He suggests, against accepted wisdom that China’s economic growth is not the triumph of Chinese entrepreneurial capitalism – what he calls in this book – ‘directional liberalism’.  In a detailed examination Huang identifies, through a culling of the Ministry of Agriculture’s records, that the Township and Village Enterprises (TVEs) – which most western experts have incorrectly identified as state enterprises - were in the 1980s largely rural private enterprises.  This entrepreneurial surge in the 1980s, as described in the book, is largely choked off by the post Tiananmen leadership from Shanghai that leans heavily on state directed economic growth as the main instrument of economic growth.  With the Shanghai leadership in place in the 1990s, the Chinese economy turns to foreign direct investment, exports and large State Owned Enterprises (SOEs).  This analysis, if correct, undermines the view that China and its phenomenal economic growth is a product of a gradual and smooth transition to capitalism.

China is therefore far less capitalist than what has generally assumed and entrepreneurial capitalism has been choked off in favor of state directed intervention. Huang believes that the Chinese capitalist model is less the traditional Asian growth model and more a classic Latin American approach.

But the warning from Huang with respect to China’s complicated economy goes beyond the analysis of the capitalist character.  As anyone will attest, there is a formidable frustration in attempting to uncover the dynamics of growth in China.  There is no difficulty in securing macroeconomic data – whether GDP, or trade, current account or national budgetary expenditures or revenues.   But there is far less clarity when one attempts to analyze Chinese growth using microeconomic data.  Thus it is difficult to extract household income, or health coverage or pension coverage.

The result of this is that today you can get a multitude of figures on China’s output but when trying to assess the shift to domestic consumption and examining government expenditures on a social safety net, for instance, the prospects are slim indeed.  The result is many analysts will make all sorts of statements about China's shift to domestic demand but without any figures to back it up. 

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