Indigenous Entrepreneurship in Rural China

19 December 2008 at 3:27 pm Peter G. Klein Leave a comment

| Peter Klein |

A very interesting article in the McKinsey Quarterly by MIT’s Yasheng Huang: “Private Ownership: The Real Source of China’s Economic Miracle.” The key to China’s recent economic is not state-led capitalism (call it “Bush-Bernanke-Paulson capitalism”) but private property and financial-market liberalization, leading to a burst of indigenous rural entrepreneurship. Writes Huang:

Big cities like Beijing, Shanghai, and Shenzhen are routinely extolled in the Western press as vibrant growth centers. China’s rural areas, if mentioned at all, typically figure as impoverished backwaters. But a close analysis of the economic data reveals that these breathless descriptions of China’s modern city skylines have it exactly backward: in fact, the economy was most dynamic in rural China, while heavy-handed government intervention has stifled entrepreneurialism and ownership in the urban centers.

Particularly interesting is Huang’s account of why so many Western economists fail to understand this.

The real mystery of China’s miracle isn’t how the economy grew, but how Western experts got the growth story so wrong. One answer is that outsiders misunderstood the nature of one of China’s most basic economic institutions: township and village enterprises, which some of the West’s best-known economists have celebrated as the epitome of capitalism with Chinese characteristics — innovative hybrid entities that achieved high growth despite government control. Nobel laureate Joseph Stiglitz, for example, extolled them for offering an ingenious solution to a problem common to economies in transition from socialism to capitalism: asset-stripping by private investors.1 These enterprises, he argues, are a form of public ownership that prevents plundering while achieving the efficiency of private-sector companies.

In short, Western economists have often assumed township and village governments own these enterprises. As recently as 2005, Douglass North, another Nobel winner, stated in the Wall Street Journal that they “hardly resembled the standard firm of economics.” But the evidence suggests otherwise. A policy document issued by the State Council on March 1, 1984, includes the first official Chinese reference to township and village enterprises. It defined them as “enterprises sponsored by townships and villages, the alliance enterprises formed by peasants, other alliance enterprises, and individual enterprises.” The term “enterprises sponsored by townships and villages” referred to the collective undertakings townships and villages own and run. All the other entities mentioned in the policy document were private businesses: single proprietorships or larger private companies with a number of shareholders — precisely “the standard firm of economics.” Official usage of the term “township and village enterprise” has been remarkably consistent: it always includes private businesses as well as those sponsored by governments.

Western economists erred because they assumed the term referred to ownership. But Chinese officials understood it in the geographic sense — businesses located in townships and villages. The records of China’s Ministry of Agriculture attest that privately owned and run entities dominated the total pool of these enterprises. During the years from 1985 to 2002, the number of collectively owned ones peaked in 1986 at 1.73 million entities, while the number of private ones soared to more than 20 million, from about 10.5 million. In other words, the increase in the number of these enterprises during the reform era was due entirely to the private sector. By 1990, within the first decade of reform, such private businesses accounted for 50 percent of total employment in town and village enterprises and claimed 58 percent of their after-tax profits.

One important implication is that the “standard firm of economics” is not institutionally or culturally specific, as some institutional theorists have claimed, but a fairly general, almost universal organizational form. I’m sure the boys at orgtheory will have something to say about this.