Tuesday, August 31, 2010

Chinese Capitalism is State Control Dressed Up in Pin Stripes

Until 1978, private ownership of any kind was banned in China. But today, Chinese citizens can own property, businesses and shares. Thousands of state-owned companies were sold quite frenetically in the early years. Most were cornered by party officials or state governments via thinly concealed indirect structures. This created an illusion of entrepreneurship in China. Such a 'privatization' was quite unfair. Unlike genuine entrepreneurs these cadres took no risk, which devolved on taxpaying town residents. But now that these businesses were classified as 'private', they were free of all obligations towards the state. Bank credit was as easy as transferring cash from one pocket to another, since the same bunch of officials who now controlled the enterprise also ran the local bank. Minxin Pei has called this the 'decentralized predatory state', one where the exploitative actions of a market economy are layered over the excesses of state control. It's possibly the most accomplished model of 'state capitalism' in the modern world; even where the state is a minority shareholder, it often ends up controlling the board. The influence of politics is all-pervasive with half the entrepreneurs being members of the Communist Party, the so called 'red capitalists'. A survey found that 90 per cent of all the wealthy people (with personal assets of more than $14 million) were children of high-ranking party officials.

If Chinese entrepreneurship is fake or illusory - then what explains the fact that Chinese goods have taken quality conscious western markets by storm?  To understand this phenomenon, you must take a closer look at the stuff that sits on the shelves of Western malls: they may be made in China by they are produced by foreign companies. To put it a bit more starkly, China offered labour arbitrage to foreign capital. An obvious fallout of this 'outsourced' workshop model is that China has become a giant sub-contractor, but is yet to make its mark in the world of ideas and brands.

A Chinese phrase catching rapid currency is guojin mintui, - it means 'the state advances and private sector retreats'. There has always been plenty of evidence of China discriminating against private entrepreneurial talent in favour of large state - or foreign-owned enterprises. There were several instances of private firms trapped in title disputes whose assets were seized. Today, the Chinese media is full of stories about the 'second wave of nationalization', as stimulus-cash-fattened state enterprises gobble up fast-expanding private companies.

Marshall Meyer in Knowledge@Wharton believes that the 'government will always remain in control of the 100 largest firms in China', giving it direct ownership of nearly 50 per cent of GDP. Eight out of ten largest listed companies in China are state-owned. In India, nearly half of the ten largest listed companies are in private hands. India has not launched a single new public sector company in the last two decades. In fact, a few among the older public sector companies have been privatized, while the government is reducing its stake in all others. So China has created huge, state-owned monopolies, while India is unraveling knotty socialist behemoths.

1 comment:

  1. India not being able to launch any new public sector company in the last decade(or few) can be attributed to the lack of will and commitment on part of our Babus and due to the fear of inefficient bureaucracy as well.
    If the point to be believed is Entrepreneurship then its unfair not to mention that Indian Entrepreneurs did not receive any kind of help from the Govt when its need was dire i.e. when India was open to reforms and the subsequent booming of economy. Furthermore, there were many bottlenecks the threatened the very institution of entrepreneurship like the "Inspector Raj".
    Or if the point to be believed is wealth Distribution then India is no different from China except for the fact that much of the formers wealth is concentrated in the hands of private players while the latter has it in state owned firms.