Abstract
Nicholas Lardy is an economist who has followed the brickwork of the Chinese economy from its early stages, even before the reforms were introduced. His publications, including the one being reviewed, and another one on pre-reform resource allocation and income distribution in a fully state-controlled economy in 1978, follow a similar line of investigation—fiscal policies, reforms and the role of the state. While Lardy’s pre-reform focus was on the fiscal policies in a state-centric non-competitive economy, his post-reform focus has shifted to analysing the momentum of economic reforms. The Chinese state’s initial approach to reforms and eventual rise of non-state forces raises theoretical complexities and empirical debates, which the book attempts to decipher.
The title of the book, Markets over Mao, symbolises the economic transformation which has generated private growth and de-valued the role of the state. Lardy’s arguments are built on the premise that non-state actors, including private businesses, have influenced resource allocation and become a catalyst for economic reforms. Accordingly, he discredits the sole role of the Chinese state behind stimulating reforms (p. 2). He presents his thesis around a central theme that refutes the notion of state-led capitalism, advanced by several scholars (Li Xing and Timothy M. Shaw, Ronald Coase and Ning Wang, Hiroshi Ohnishi, David Lane, Christopher McNally). The author argues that it was the private firms—a creation of market reforms that set the course for progressive deregulation.
The book is structured into four chapters and each one of them offers a short but penetrating analysis of the historical, institutional and theoretical factors that have contributed to China’s economic success. The first chapter presents the background and elaborates the contrast in pre- and post-reform economic policies. Lardy reports how ‘markets for products’ and ‘factors of production’—’the parameters’—underwent a momentous shift (p. 12). The author highlights the important makeover in the institutional roles of the State Planning Commission, the Price Commission and the Ministry of Finance. He then takes the two parameters mentioned earlier to provide critical background to the discussion on policy shifts. He presents a review of ‘product markets’ by examining the effects of the demand and supply logic. The chapter also discusses the significant changes in ‘factors of production’, for example, reforms related to labour and capital (resource) (pp. 20–21). Lardy conjectures that the market for capital and some other factors of production still remain distorted (p. 23). He also brings out an important angle in this chapter about how state-led planning has been slowly replaced by market-led ‘program outlines’ which reflects the changing principles behind the Chinese economic policies (p. 39).
Chapter 2 examines the dilemmas of state-SOE reforms. He says: ‘grasping the large and releasing the small’, was an important decision to corporatise the management and create fiscal federalism (p. 45). Marshaling evidence, the author critiques state intervention in supporting SOEs and influencing the economy (p. 53). Lardy sketches developments during the Hu Jintao–Wen Jiabao era to revitalise SOEs. Propaganda over creating ‘national champions’ and the establishment of the State-owned Assets Supervision and Administration Commission (SASAC) was entirely a state-led effort to revitalise the SOEs. Lardy claims that the re-emphasis on the state’s stake through SASAC and National Development and Reform Commission (NDRC) confirms this (p. 55). He also collates data to prove that the SASAC firms were neither efficient at using capital nor were they a vehicle producing ‘national champions’. Moreover, the NDRC as the most influential party-state organ and custodian of the economy during the Hu-Wen decade, failed to guarantee a rational scale of investments and raise its efficiency (p. 58).
As the economy opened up, the state enterprises were exposed to competition but lost market share to emerging private players. By providing a pixelated picture of changing ownership structure, the author illustrates how this fundamental transformation gave private firms an environment to prosper. Apart from narrating changes in the ownership structure, the chapter also shows how the erroneous empirical foundations of registering private firms led to misinterpretation of data on registration, production, employability and market share (p. 66). He also notes that there is a significant erosion of state-controlled firms even in some of the ‘pillar’ industries (p. 76). More precisely, the state ceded considerable space to private firms in oil (downstream activities) (p. 76), water supply (p. 78) and the construction industry (p. 79) facilitating the rise of the private sector in what was predominantly the domain of the SOEs.
Lardy demonstrates that the private firms have played a decisive role in generating employment and exports. He concludes that almost all of the growth of urban employment in China since 1978 was the contribution of private firms, including privately owned foreign firms (p. 84). The author also attempts to explain the growth of the private sector from a systemic perspective. He alleges that the Chinese state delayed private firms’ growth prospects, but at the same time he doesn’t deny that the evolution of state policy towards the private sector, starting from the middle of 1990s, did provide traction for private sector reforms (p. 89). At the political level, the government even took steps to promote the legitimacy of the private sector. In March 1999, the 9th People’s Congress approved a constitutional amendment identifying the non-state economy as ‘an essential component’ of a mixed economy, a clear improvement from its previous designation as ‘an important component’ of a state-dominated economy (p. 91). Moreover, the author also underlines how the party set-up facilitated the political participation of the private sector (p. 91). The third chapter also discusses the financial system, where he explains the discrepancies in resource allocation. The author elaborates that irrespective of contributing 3/4th share in the GDP, the private enterprises were given only 1/5th of the bank credit (p. 94). By comparing bank credit, access to debt, equity markets, banker’s acceptance and trust loans, he concludes by saying that it is the retained earnings that have financed the private enterprises more than any other sources (p. 121).
In the final chapter on ‘the unfinished revolution’, the author argues that China’s transition to a market economy is incomplete. The state still restricts open and fair competition in important segments of the service sector and a few key prices are still state-administered which, he believes, would distort the allocation of resources and slow economic growth (p. 123). Referring to the 3rd Plenum of the 18th Party Congress in November 2013, Lardy indicates that the key prices will be decontrolled including those for various forms of energy, foreign exchange and the cost of capital and, in case they are implemented, these reforms will substantially rebalance Chinese economic growth. As noted in Chapter 3, the author sees the service sector offering more opportunities for the private sector and predicts that reforms in the financial sector will be critical to accelerate the reforms and growth (p. 135). Lardy notes the contemporary debate regarding the degree to which the market should guide China’s economic development; again referring to the party conclaves, he assesses that the debate within the Party and among Chinese entrepreneurs will influence the pace of reforms, but not the direction.
The book is a critical discussion of the Chinese reformist agenda, accomplishments and about the prevailing confusion over the scope and depth of economic reforms. What could have been really an asset to this work would have been an examination how the enterprises evolved—an explanation which might have connected the dots between mushrooming of new entrepreneurs and how, or whether, they were politically incentivised; he could have also examined how enterprises emerged at a time when the concept of ‘private’ was susceptible to ideological assault. The private enterprises that did emerge cannot be generalised as purely entrepreneurial from the liberal point of view; rather, the initial form of private enterprises was an offshoot of politically–induced privatisation. Some of today’s leading private firms are classic examples of this, including Lenovo, Huawei and ZTE. Overall, the author has covered a number of transitional aspects of the Chinese economy; his special focus on public–private sectors gives a preview of its coming makeover.