A Lethargic Dragon
From the May 14, 2012, issue of NR.

Communist Party leader Bo Xilai


Reihan Salam

And these maladies aren’t just a blemish on an otherwise sterling economic record. They flow from the very nature of the Chinese economic model.

Late last year, Andy Stern, former president of the Service Employees International Union and one of the leading lights of the American labor movement, published a short essay in the Wall Street Journal extolling China’s virtues. He contrasted China’s extraordinary economic success since the late 1970s with the failure of “the conservative-preferred, free-market fundamentalist, shareholder-only model,” which, in his view, “is being thrown onto the trash heap of history in the 21st century.” As Exhibit A, Stern cited a visit to a mushrooming metropolis in China’s southwest: “Our delegation witnessed China’s people-oriented development in Chongqing, a city of 32 million in Western China, which is led by an aggressive and popular Communist Party leader — Bo Xilai. A skyline of cranes are building roughly 1.5 million square feet of usable floor space daily — including, our delegation was told, 700,000 units of public housing annually.”

This aggressive and popular leader has, alas, run into some trouble. Bo, the son of Long March veteran and Chinese vice premier Bo Yibo, has been removed from office on grounds of corruption, and there are extensive reports that he used torture and intimidation tactics to eliminate or discredit his political rivals. His wife is currently under investigation for her alleged role in the murder of British businessman Neil Heywood. To be sure, this doesn’t in itself undermine the notion that Chongqing’s people-oriented development has been an economic success. But a closer examination suggests that the glittering Chongqing that so impressed Andy Stern is a kind of overgrown Potemkin village.

As an inland city, Chongqing has far lower labor costs than do cities in coastal regions such as Guangdong, the affluent southern province that borders Hong Kong. So while Guangdong has been working to improve its economic prospects by upgrading the skills of its work force, giving non-governmental organizations greater freedom to do their work, and embracing private entrepreneurship, Chongqing has been generating growth by shifting workers from agriculture to industry. In other words, Chongqing is a throwback to an older economic era.

Bo Xilai made his mark by using substantial state subsidies to build large public-housing projects and to encourage elite firms such as Apple to locate production facilities in the city. But these subsidies weren’t drawn from Chongqing’s local economy. Rather, they came at the expense of other regions. China’s political authorities essentially decided to turn Chongqing into a showpiece to demonstrate that China’s government is committed to developing the country’s poor interior. And the reason China’s government has to press this message is that, for decades, Beijing has been extracting resources from the poor rural interior to subsidize rich coastal regions.

In Capitalism with Chinese Characteristics, MIT professor Yasheng Huang offers a new take on China’s experience since 1979. Whereas most scholars have seen it as a period of uninterrupted growth and prosperity, Huang divides it into two distinct eras. During the first, which lasted roughly from 1979 until 1988, Chinese economic policy was remarkably friendly to homegrown private entrepreneurship. China’s GDP per capita grew at an annual rate of 8.5 percent during these years, and both rural and urban regions made substantial gains in personal income and consumption. During the second period, from 1989 to 2002, the government embraced a more statist economic approach. GDP per capita grew at an impressive 8.1 percent, yet household-income growth fell from 11.1 percent in the previous period to 5.4 percent. Moreover, the rural areas that had thrived in the 1980s experienced a sharp slowdown in the 1990s. The years since have been a muddle; the central government has been unwilling to surrender control over the economy, but there have been fitful efforts, such as the Chongqing experiment, to spread growth to the interior.

One of Huang’s central insights is that the so-called township and village enterprises that fueled Chinese growth during the 1980s were largely private. Scholars have often mistaken them for state-owned enterprises, thus masking the extent to which China’s 1980s-era growth was a bottom-up rather than a top-down phenomenon. This boom in private entrepreneurship had a particularly big impact in the poorest provinces, partly because local Communist elites were less risk-averse. Rural financial institutions were granted wide autonomy, and they proved a crucial source of start-up capital for new firms. At the same time, the CCP allowed a number of political reforms to increase the accountability of local officials and to guard against corruption.