Politeía Digest

Quis custodiet ipsos custodes?

Bamboo capitalism

leave a comment »

China’s economy

China’s success owes more to its entrepreneurs than its bureaucrats. Time to bring them out of the shadows

FEW would deny that China has been the economic superstar of recent years. Thanks to its relentless double-digit annual growth, it has become the world’s second-largest economy and in many ways the most dynamic. Less obvious is quite what the secret of this success has been. It is often vaguely attributed to “capitalism with Chinese characteristics”–typically taken to mean that bureaucrats with heavy, visible hands have worked much of the magic. That, naturally, is a view that China’s government is happy to encourage.

But is it true? Of course, the state’s activity has been vast and important. It has been effective in eradicating physical and technological obstacles: physical, through the construction of roads, power plants and bridges; technical, by facilitating (through means fair and foul) the transfer of foreign intellectual property. Yet China’s vigour owes much to what has been happening from the bottom up as well as from the top down. Just as Germany has its mighty Mittelstand, the backbone of its economy, so China has a multitude of vigorous, (very) private entrepreneurs: a fast-growing thicket of bamboo capitalism.

These entrepreneurs often operate outside not only the powerful state-controlled companies, but outside the country’s laws. As a result, their significance cannot be well tracked by the state-generated statistics that serve as a flawed window into China’s economy. But as our briefing shows, they are an astonishing force.

The Mittel Kingdom

First, there is the scale of their activities. Three decades ago, pretty much all business in China was controlled by one level of the state or another. Now one estimate—and it can only be a stab—puts the share of GDP produced by enterprises that are not majority-owned by the state at 70%. Zheng Yumin, the Communist Party secretary for the commerce department of Zhejiang province, told a conference last year that more than 90% of China’s 43m companies were private. The heartland for entrepreneurial clusters is in regions, like Zhejiang, that have been relatively ignored by Beijing’s bureaucrats, but such businesses have now spread far and wide across the country.

Second, there is their dynamism. Qiao Liu and Alan Siu of the University of Hong Kong calculate that the average return on equity of unlisted private firms is fully ten percentage points higher than the modest 4% achieved by wholly or partly state-owned enterprises. The number of registered private businesses grew at an average of 30% a year in 2000-09. Factories that spring up alongside new roads and railways operate round-the-clock to make whatever nuts and bolts are needed anywhere in the world. The people behind these businesses endlessly adjust what and how they produce in response to extraordinary (often local) competition and fluctuations in demand. Provincial politicians, whose career prospects are tied to growth, often let these outfits operate free not only of direct state management but also from many of the laws tied to land ownership, labour relations, taxation and licensing. Bamboo capitalism lives in a laissez-faire bubble.

But this points to a third, more worrying, characteristic of such businesses: their vulnerability. Chinese regulation of its private sector is often referred to as “one eye open, one eye shut”. It is a wonderfully flexible system, but without a consistent rule of law, companies are prey to the predilections of bureaucrats. A crackdown could come at any time. It is also hard for them to mature into more permanent structures. Read More in The Economist.

Advertisements

Written by Theophyle

March 11, 2011 at 8:20 am

Posted in China, Economics, The Economist

Tagged with ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: