Notes - Capitalism with Chinese Characteristics: Entrepreneurship and the State

Notes

Chapter 1: Just How Capitalist Is China?

1. Lu provides a detailed account (Lu 2000).

2. Many of the details on the early history of Lenovo are chronicled in Lu (2000).

3. I explore this phenomenon in great detail elsewhere. See Huang (2003).

4. See Eckstein (1977).

5. See Qian (2003) and Naughton (2007). I provide more details on their views later in this chapter.

6. The lawsuit was covered extensively in the Chinese press. See http://arch.pconline.com.cn/news/suiji/10308/210452.html, accessed on December 11, 2004.

7. Table 4.5 in Bai, Li, and Wang (2003).

8. This has been done by Lin, Cai, and Li (1996).

9. It is interesting that some scholars, although recognizing the problems from equating the non-state sector with the private sector, nevertheless use the development of the non-state sector as a measure of the reforms. An example is Bai, Li, and Wang (2003, p. 99), who explicitly acknowledge this problem when they state: “In reality, collective enterprises are under close control of a government. Major investment and employment decisions could not be made without government direction or approval.”

10. Their paper is a background paper for the OECD report on China. See Dougherty and Herd (2005).

11. Their methodology involves two steps. First, they divide the firms into state and non-state firms. State firms in turn comprise two types of firms: SOEs and collective firms in which the collective share capital exceeds 50 percent. The second step is to classify all those firms in the non-state category as those with more than 50 percent of share capital held by legal persons, individual investors, and foreign firms.

12. The NBS dataset does not contain industrial value-added for 2001, so in my calculations, I used a close substitute, industrial profits. The 28.9 percent in 1998 in my calculations is very close to the 27.9 percent of the industrial value-added reported in the OECD study.

13. Another problem is that the study treats domestic private-sector firms and FIEs as a single homogeneous category. This treatment does not recognize that China has favored foreign firms at the expense of domestic private-sector firms. Thus, the estimate implicitly incorporates a substitution effect between FIEs and domestic private-sector firms.

14. The history of this firm is easily accessible by checking its website. The website, in both English and Chinese, provides details about the organizational evolution of the firm. An analogy would be those firms owned and controlled by Temasek, the holding and investment arm of the Singaporean government. Whether Temasek behaves as if it is a private firm is a separate question, but from an accounting point of view, because Temasek itself is state-owned, the firms controlled by Temasek ought to be classified as state-owned as well.

15. I have dealt with this issue extensively elsewhere. See Huang (2003).

16. This is available online. See http://law.baidu.com, accessed on December 19, 2006.

17. Quoted in Yergin and Stanislaw (1998).

18. The calculations are based on data on the value of gross industrial output broken down by ownership. Private sector here refers only to individual businesses. The data are provided in NBS (1997b).

19. This theory was first proposed by Che and Qian (1998a). Roland (2000) then reiterates the theory. Stiglitz (2006) defends the China model by invoking the TVE reasoning.

20. Some scholars have also argued that given China's institutional environment, the organization of TVEs is, in fact, superior to that of purely private firms. The TVEs have the advantage of political protection provided by local governments and in the biased financial system they have access to capital because their borrowings are guaranteed by the state. See Chang and Wang (1994) and Li (1996).

21. Acemoglu and Johnson (2005) have shown that those institutional arrangements that protect property rights and constrain public officials from arbitrary behavior have the greatest effect on economic growth. Not just any institutions matter, but a particular set of institutions matters the most. See a comprehensive review and assessment of this literature (Acemoglu, Johnson, and Robinson 2005). Finance economists have demonstrated the critical role of financial institutions. Access to finance has been shown to be a very important determinant of long-run economic growth (King and Levine 1993; Levine 1997; Rajan and Zingales 1998). La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1997) connect the design of legal institutions with finance. The literature on this topic is vast and the summary here is cursory. Some of the papers cited previously are survey papers that contain more comprehensive coverage.

22. In Chapter 2, I explain why this is the case and provide some evidence for it. The main reason is that central planning and the Cultural Revolution decimated capitalism in the cities but not in the countryside. In addition, agriculture, even at the height of central planning, was less planned than industry and rural residents never had job or social security protection as compared with urban residents.

23. For a good discussion on private plots during the commune era, see Perkins and Yusuf (1984).

24. For an explanation of the political holdup problem, see Acemoglu, Johnson, and Robinson (2005).

25. The polity data are compiled by Jaggers Keith at University of Colorado and Ted Robert Gurr at University of Maryland (source: http://www.bsos.umd.edu/cidcm/polity/). The polity scores in the exhibit are based on two variables in their database – DEMOC and AUTOC. Both variables are based on an additive 11-point scale (0–10). For DEMOC, 0 means least democratic and 10 means most democratic. For AUTOC, 0 means least autocratic and 10 means most autocratic. DEMOC and AUTOC are derived from codings of the competitiveness of political participation, openness and competitiveness of executive recruitment, and constraints on the chief executive. The polity scores here are derived from the following formula: Polity score = DEMOC − AUTOC. Thus, −10 means the most autocratic and 10 means the most democratic.

26. For a very good account of the role of Deng in the politics of reforms, see Harding (1987).

27. Whether Deng was actually politically distant from Mao is less relevant. In the end, Deng turned out to be far more politically conservative than suggested by his speech in 1980. But what mattered is how he was perceived in the early 1980s.

28. See Chua (2007).

29. Although there are complications, it is safe to say that FIEs are private firms, although in the foreign sector. Because we are primarily concerned with the domestic private sector, we do not discuss FIEs in great detail, except to make two points. One is that in the early 1990s, FIEs absolutely dominated the “other” ownership category of firms, with 71.2 percent of all the fixed-asset investments of these firms in 1993. Second, this juxtaposition of the seemingly liberal policy toward foreign firms, although imposing severe restrictions on the explicitly domestic private firms, is a fascinating topic, to which we return later.

30. It should be noted that the NBS no longer uses the “individual economy” in its data series on industrial output, although it still uses the “individual economy” category for its fixed-asset investment reporting. The 11.7 percent quoted in the text refers only to siying qiye and presumably does not include industrial getihu. See NBS (2003b), p. 459.

31. There is a related concern, which is that the rural collective sector actually incorporates some private-sector activities. Beginning in about 1993, the fixed-asset investment sources report separately on the collective economy and shareholding cooperative firms. Thus, although it is possible that the collective economy still incorporates some shareholding cooperatives, it is incorrect to assume that the rising rural private/collective ratio was primarily driven by the ownership changes of the collective TVEs.

Chapter 2: The Entrepreneurial Decade

1. This account of Nian Guangjiu is based on several sources. See Wu (Wu Xiaobo 2006) and Zhang and Ming (1999).

2. Detailed provincial data are available from the National Bureau of Statistics (1996).

3. The data come from the 1985 industry census (State Council 1988).

4. See http://209.85.165.104/search?q=cache:b2JPcTTl9MJ:www1.worldbank.org/economicpolicy/globalization/dollarqa.htm+David+Dollar+China+World+Bank&hl=en&ct=clnk&cd=2&gl=us, accessed on February 15, 2007.

5. The official source is the NBS rural household survey. See NBS (2007b, p. 43).

6. The World Bank advocates globalization as the reason for China's poverty reduction despite the contrarian evidence marshaled by its own economists. Ravallion and Chen (2007) devised their own poverty line that shows a higher number of poor people than that given in the official statistics. According to them, in 1980, 602 million Chinese rural residents lived in poverty, as compared to only 99.5 million in 2001, an enormous reduction indeed. But what is lost by merely looking at these two points in history is that an overwhelming portion of the poverty reduction took place in the 1980s. According to the same measure by Ravallion and Chen, by 1988, the number of rural people living in poverty was already reduced to 190.7 million. (In fact, in 1985, the poverty level was down to 183.1 million.)

7. This approach by the World Bank was first noted by Qian (2003). For more details on the World Bank's approach, see World Bank (1996), especially pp. 14–17.

8. The data in this section are reported in the Bureau of Industry and Commerce Administration (1990).

9. See World Bank development indicators for details.

10. A Western academic, John Burns (1981), documents that peasants in Guangdong engaged in fairly substantial speculative activities.

11. These are documented by Zhang and Ming (1999).

12. Dachai commune, located in Shanxi province, was flaunted by the Gang of Four for having thoroughly eliminated private ownership and the market economy.

13. This account is provided by Wu (2006, pp. 17–18). Zhou (1996) has some similar but less detailed accounts of private-economy activities during the Cultural Revolution.

14. Oi (1999, p. 73), for example, states that until 1987, “the hiring of more than seven employees was banned.”

15. See Jiangsu Statistical Bureau (1987) and (1988) for details.

16. Information about these cases comes from Zhang and Ming (1999).

17. This is a study by the Rural Policy Research Office of the Central Committee and the Rural Development Research Office of the State Council (1987). The field research was conducted between the fall of 1984 and the spring of 1985 and provides a valuable and rare snapshot of the state of rural China five years after the rural reforms began to unfold. The data and cases came from 28 provinces and were based on surveys of and interviews with 37,422 rural households. Only Tibet was excluded from the study.

18. That many rural entrepreneurs operated in the services sector, which we cannot examine due to a lack of data, further implies that the usual measure – industry share of the private sector – would understate the significance of the private sector in the 1980s when service data were not collected by the government.

19. I am not aware of studies explicitly linking private rural entrepreneurship with developments in income distribution, but some have suggested that the rural industrialization was behind the rise in the income inequalities in the second half of the 1980s (Rozelle 1996). However, it is important to be specific about the channels with which rural industrialization might have contributed to the rising inequalities. There are two ways that this could have happened, but these two mechanisms would entail opposite policy implications. One is that the rural entrepreneurs came from a privileged socioeconomic group and their gains were achieved at the expense of the gains of those from a less privileged group. The other scenario is that the rural entrepreneurs possessed a greater aptitude for success and this capability allowed them to be well-positioned when the regulatory environment became flexible. It is more likely that rural entrepreneurship contributed to the rise in inequalities through the second channel.

20. During the 1980–1985 period, rural inequality rose even as inequality at the national level declined. For the rest of the 1980s, rural inequality rose faster than inequality at the national level. Thus, the most significant development in the 1980s was a mild reduction in the gap in income inequality between the rural and urban areas (Ravallion and Chen 2007).

21. Data in this section are from Editorial Committee of Ten Years of Reforms in Guizhou (1989) and Editorial Committee of Contemporary China Series (1989).

22. See Rural Policy Research Office and Rural Development Research Office (1987).

23. All the data on banks cited in this section about Zunyi are from Editorial Board of Financial History of Zunyi (1992).

24. The quote is from the Guizhou branch of the People's Bank; other details are provided by Editorial Committee of Ten Years of Reforms in Guizhou (1989).

25. As recently as 2006, Stiglitz remained a proponent of TVEs despite the fact that many of the collective TVEs had failed in the late 1990s (Stiglitz 2006). His thinking on TVEs is heavily influenced by the modeling effort that shows that TVEs served as an effective bulwark against predation by the central state (Che and Qian 1998b). It should be noted that this model relies on two potentially incompatible assumptions to reach its conclusion. One is that the national government is predatory and self-serving. The other is that the same predatory national government trusts the local governments precisely because the latter are viewed as effective in public goods provision.

26. Details about this firm are contained in Huang and Lane (2002).

27. Aside from the confusion about the debt for equity capital, there was a practical reason as well: In the 1980s, the single-most binding constraint on private-sector development was the ideological sensitivity about employment size. From its first day, Kelon was a relatively large firm, recruiting some 4,000 workers.

28. As an article in The Economist recounts (“Infatuation's End” 1999):

When Whirlpool set up factories to make refrigerators, air conditioners, washing machines, and microwave ovens in China in 1994, it assumed that it was racing against other foreigners. Instead, its chief competitors turned out to be Chinese appliance makers such as Haier and Guangdong Kelon. Their technology was nearly as good as Whirlpool's, their prices were lower, and their styling and distribution were better suited to China. By 1997, having lost more than $100 million, Whirlpool had shut its refrigerator and air conditioner plants. The microwave factory survived mainly by devoting itself to exports, and Whirlpool's washing machine factory now makes appliances under contract for Kelon, which sells them under its own brand, a reversal of the usual hierarchy between Western and Chinese firms.

29. This finding is reported in Groves, Hong, McMillan, and Naughton (1995).

30. The story of Huabao is worth detailed examination. In 1993, the state-owned holding firm of Huabao decided to sell a majority of shares to a Hong Kong company at 10 million yuan. This was a highly questionable deal. Huabao itself was worth 1.8 billion yuan and the Hong Kong firm in question only had assets valued at 700 million yuan. The decision plunged the firm into turmoil among management, the Hong Kong firm, and the state-owned holding firm. Huabao, which was ranked No. 1 in the country in air-conditioner sales in 1993, deteriorated rapidly. By 1998, it was a deeply troubled firm. See Wu (2007, p. 39).

31. Putterman (1995) presents data showing that the industrial output share increased from 9 percent in 1978 to 18 percent in 1988. The private sector, by contrast, accounted for only 4.3 percent in 1988. Roland (2000, p. 281) cites data to show that the TVEs accounted for more than twice China's industrial output value as compared with that of private firms.

32. For example, Rodrik (2007, p. 87) has this to say about TVEs, “China did not simply liberalize and open up; it did so by grafting a market track on top of a plan track, by relying on TVEs rather than private enterprise.…”

33. This theory was first proposed by Che and Qian (1998a). Roland (2000) then reiterated the theory.

34. TVEs have the advantage of political protection provided by the local governments, and in a biased financial system, they have access to capital because their borrowings are guaranteed by the state. See Chang and Wang (1994) and Li (1996).

35. For a historical account of the TVEs, see Whiting (2001).

36. A Chinese academic also notes this definitional change provided in document No. 4. See Zhang (1990, p. 31).

37. The excerpt of his speech appears in Editorial Committee of TVE Yearbook (1991, p. 128).

38. The 1990 regulations are found in Editorial Committee (1991, pp. 500–502). The 1997 law is found in Editorial Committee of TVE Yearbook (1997, pp. 85–87).

39. Naughton (2007, p. 271) also states that during the 1978–1996 period, “most TVEs were publicly owned,” but Naughton fully acknowledges the heterogeneous nature of the TVE phenomenon. Figure 12.2 on p. 286 of his book clearly shows that very early on, private TVEs accounted for a significant share of TVE employment. In 1985, collective TVEs were only slightly larger than private TVEs in terms of employment (40 million versus 30 million) and by 1988, their employment size was quite comparable. So the data in his book actually do not lend to the notion that “most” TVEs were collectively owned.

40. The data in this section are based on the Ministry of Agriculture (2003).

41. At that time, the ministry was formally known as the Ministry of Agriculture, Husbandry, and Fishing. I have shortened it to the Ministry of Agriculture for expositional ease.

42. The TVE data used in this section are from Editorial Committee of TVE Yearbook (1989b, pp. 578–582). The TVE output data are broken down by economic sectors as well as by TVE ownership.

43. The World Bank and Chinese researchers conducted field trips and surveys of four counties in 1986, the results of which form the basis for this book. It offers a rich, nuanced, and accurate depiction of the complex ownership structures of TVEs. For example, the World Bank researchers reported that some of the private TVEs each employed more than 100 workers (Lin 1990, pp. 178–179). They also reported that although the collective TVEs had the size, the private TVEs had the momentum – they grew much faster than the collective TVEs. Between 1980 and 1986, the private TVEs grew at an annual average real rate 2.64 times that of the collective TVEs and, by 1986, the private TVEs accounted for 21.3 percent of the entire TVE output value, up from only 5.4 percent during the 1980–1983 period (Byrd and Lin 1990).

44. Micro data on the rural economy of Shandong are summarized in Shandong Rural Social and Economic Survey Team (1989).

45. This quote is from a fascinating book on China's economic history by Wu (Wu Xiaobo 2006).

46. Deng's quote appears in a report by a State Council research team on the rural economy. See Rural Economy Research Team (1998).

47. This size is massive, considering that rural China had poor infrastructures. The selection of the management committee of the commune was top-down, by Party officials at the county level (Barnett and with Vogel 1967, pp. 344–370). The management committee itself, ranging from nine to fifteen members, did not run the daily operations but had the ultimate power to veto decisions at the lower levels (brigades or production teams). The commune controlled all other levers of power by “absorbing or amalgamating with the various basic level organizations operating in the countryside.…” These organizations included, for example, agencies for supply and marketing, credit unions, and the local branches of the People's Bank (Donnithorne 1981, p. 44). The state extracted exorbitant surpluses from the peasants through the commune system. A report by the Chinese government describes Chinese peasants under the commune system as “payers of tribute.” Per capita grain consumption and other welfare indicators show no improvement between 1957 and 1977.

48. Data are from Lin (1983) and “Individual purchase of tractors has exceeded one million.”

49. There are many references to this episode, in both Chinese and English. See Wang, Wei, and Chen (1981). For an English reference, see Zhou (1996).

50. For a concise reading of this period, see Meisner (1999).

51. This is how Daniel Kelliher, in Peasant Power in China (1992, p. 247), describes the reformist thinking during this period:

Deng's coalition feared that peasant dissatisfaction, expressed in traditional modes like passivity and noncooperation, could doom the whole enterprise. Consequently, Deng's government displayed unprecedented restraint toward peasant defiance, an urge to accommodate peasant desires, and, above all, an openness to peasant initiatives.

52. This meeting is disclosed in a study of individual entrepreneurs by a research team assembled by the State Council. See State Council (1986, p. 25). The study does not disclose the timing of the meeting, but judging by the publication year of the study and a biography of Hu Yaobang, published in 1997, we can put the date at August 1983. See Chai, Shi, and Gao (1997, p. 126).

53. This is disclosed by Zhang and Ming (1999, p. 24). In 1999, Zhao was a political persona non grata. So, the two authors do not mention Zhao by name and simply note that the “Party secretary” visited the business in early 1988.

54. See Deng (2005, pp. 185–186).

55. This episode is recounted in Wu (2006, pp. 85–86).

56. Zhang and Li (2001, p. 7).

57. The data are from Zhejiang Bureau of Statistics (1985, p. IV-123).

58. For example, the level of grain production in 1978 was 36.2 percent more than the 1965 level, but cotton production increased by only 2.8 percent. According to one Chinese economist's calculations, the net returns per area for grain production were only 39.6 percent of the net returns for cotton (Li Binqian 1982).

59. The document uses euphemisms such as “large rural employment households” to refer to private businesses.

60. These are outlined in the Ministry of Agriculture (1985, p. 2).

61. More information can be found in Zhang and Ming (1999), who discuss the survey method and summarize the findings of the 1993 survey. A detailed description of the 2002 survey is contained in the dataset available from the Universities Service Centre of the Chinese University of Hong Kong.

Chapter 3: A Great Reversal

1. In my earlier work, I argued that fiscal centralization, under the condition of political centralization, could lead to some unproductive economic decisions. When politics is centralized, fiscal decentralization serves as a way to check and balance the discretion of the central government. It is also a risk-sharing device in that if one province makes a wrong decision, the harmful effect is confined to that one province. See Huang (1996).

2. The NBS discloses nominal values and the real growth rates. The implicit deflators are derived on the basis of these data.

3. As far as I know, only one economist, Wing Thye Woo, has identified credit constraints as the reason why the TVEs failed (Woo 2005). His view on this subject is rarely cited in works on TVEs. I owe my own inspiration to Woo's writings on this issue.

4. Economists have produced some evidence that TVEs outperformed private firms in rural China (Chang and Wang 1994), but this finding hinges on an erroneous classification of assigning all TVEs to the collective sector. As I have noted, the majority of TVEs were actually completely private.

5. To be fair, this is the after-tax profit figure. One reason for this huge decline in the after-tax profit seems to be an increase in taxes. Taxes rose from 560 million yuan in 1980 to 1.5 billion yuan in 1984 (Zhang Yi 1990). But this huge increase suggests that the collective TVEs were vulnerable to government predation.

6. This document states in part, “In order that billions of assets accumulated by individual businesses and alliance enterprises be used for production rather than for consumption and in order to guide individual businesses and alliance enterprises toward a path of collective development, from now on the regulation of these enterprises should put an emphasis on guiding them to adopt a shareholding cooperative system. This is to emulate the system of shareholding cooperatives in the transformation of the handicraft industry” (Editorial Committee of TVE Yearbook 1990, p. 4).

7. The Sun Dawu affair is described in great detail by Lei and Hong (2004).

8. I should mention that some scholars, although acknowledging credit constraints in general, believe that the credit constraints varied considerably across different regions in China, either in the formal financial sector (Brandt and Li 2002) or in the informal financial sector (Tsai 2002). It is worth putting this view against the broad context. In 1999, the short-term bank debt outstanding to the de jure private sector from all financial institutions (including rural credit unions) was 57.9 billion yuan (People's Bank of China 2000). The top three provinces with the largest credit outstanding to the de jure private sector in 1999 were Zhejiang (11.4 billion yuan), Guangdong (8.4 billion yuan), and Fujian (3.4 billion yuan). These three provinces accounted for 40.3 percent of the entire short-term bank debt outstanding to the private sector; Zhejiang alone accounted for nearly half of that. The view that there is considerable regional heterogeneity is thus true only for a limited number of provinces.

9. The IFC study on the private sector also shows that loans from banks and credit unions for sampled firms declined between 1995 and 1998. In 1995, loans from banks and credit unions accounted for 22.6 percent of finance but, by 1998, they had declined to 18 percent. Corporate bonds declined from 1 to 0.3 percent. The drying up of outside financing forced owners to put up more capital. In 1995, the principal owners’ capital accounted for 21.9 percent; in 1998, it accounted for 35.8 percent.

10. I add some additional restrictions. For example, I exclude those firms that were subsequently privatized. We do not have information about when these firms were privatized and, therefore, we cannot know their ownership status when they received formal or informal finance. Moreover, in asking for information about the firm during its “start-up stage,” the question contains an important ambiguity: We do not know whether the respondents interpreted the question to mean the start-up of the original firm or the start-up as a privatized firm.

11. Until 1988, the loan data on TVEs did not explicitly separate out the collective and private TVEs. By policy, loans to established private TVEs were reported together with the loans to collective TVEs. A 1983 decree by the ABC accorded the same loan policies to the new alliance enterprises – a contemporaneous euphemism for large private enterprises – as collective enterprises (Agricultural Bank of China 1985 <1983>-a). After 1988, private TVEs became a separate reporting category in the bank data with the promulgation of the ABC “Provisional regulations on loans to TVEs by rural credit cooperatives.” Article 6 specifically includes private businesses as a part of the TVEs (Agricultural Bank of China 1988b).

12. The practices included that 57 percent of the Wenzhou RCC branches had moved to a system of flexible loan rates and that the reformed branches reported healthy profit growth (People's Bank of China 1987, p. 126).

13. During the years of a tight monetary policy, the credit squeeze was obtained essentially by freezing the loans extended to the non-state sector. Loans to the state sector continued, albeit at a lower rate of growth. In 1989, during the period of an austerity policy, loans to small-scale private firms contracted by 20 percent as compared with the previous year. Working capital loans and fixed-asset loans to the state sector rose by 21 and 14 percent, respectively. In 1994, loans to collective firms and TVEs contracted by 10 percent and in 1995 loans to private firms contracted by 36 percent. However, in both these years, loans to the state sector grew at double-digit rates. See Sehrt (1998, p. 83).

14. The 1995 Loan Guarantee Law is available in Rural Work Leadership Team (1997).

15. These numbers are reported in China Finance Association (1986).

16. In 1995, the central government compelled the genuinely private urban credit cooperatives (UCCs) to form shareholding ties with municipal governments. The official rationale was to impose better financial supervision. In a single sweep, the municipal governments became the largest shareholders of the UCCs (renamed Urban Cooperative Banks). But, the official rationale ran hollow as the financial performance of the UCCs was far superior to that of the state commercial banks, not to mention the fact that improving financial supervision is a regulatory matter, not an ownership issue. See Girardin (1997).

17. For comprehensive treatment of the Chinese leaders, see Li (2001).

18. One very interesting finding in their research is that village elections are more contested in those villages with more private entrepreneurs. This is clear evidence that private entrepreneurs are attempting to counter the power of the Party via the villager committees (Oi and Rozelle 2000).

19. For example, a township government has a Party committee, a court system, and a legislature similar to that at the county level. An interesting example illustrates how the Chinese government devised the different legal treatments of the township and village enterprises. A ruling by the State Land Administration in 1992 differentiates the assignment of land rental incomes between township firms and village firms. In the case of township firms, the rental income is accrued to the township governments. In the case of village firms, the rental income is accrued to the villages. Very tellingly, the State Land Administration applied the same assignment principle to village firms and private firms.

20. Field research indicates that these differences do matter in terms of perceptions. Kung (Kung 1999) reports that a village cadre deliberately crossed out the word zhengfu (government) on a questionnaire and remarked that the village was not a part of the government. Budget constraints differ as well. Again, according to Kung, the township managers, although often reassigned to other regions, could count on government bailouts, whereas there was “the unceasing pressure that the village Party secretary will inevitably face in the event a village enterprise goes under, in which case the burden falls disproportionately upon him.”

21. The article is reprinted in http://www.singtaonet.com/china/200707/t20070717_577084.html, accessed on July 24, 2007.

22. For more details about this episode, see Lieberthal and Oksenberg (1988).

23. According to one estimate, in 2006, the Chinese government spent 70 billion yuan on official vehicles. See Pei (2007).

24. The Chinese data on fixed-asset investments are disaggregated by 15 broad sectoral categories, such as agriculture, manufacturing, construction, health, and education. Within each of these 15 broad categories, there are several subcategories. Manufacturing, for example, is further broken down into food processing, beverage making, and so on. One of the 15 broad categories is labeled “government, Party, and social organizations.” The data allow us to separate out the investment activities of the social organizations, which are nongovernment organizations. It should be stressed here that the figures preclude investments in the provision of the public goods, such as public utilities and infrastructure. These investment activities are listed separately.

25. Apparently, a few non-state firms were incorporated into the target list but the precise number is unknown.

26. Naughton (1996) provides some detailed accounts of these early reform efforts.

27. See http://www.baidu.com/s?cl=3&wd=http://news.xinhuanet.com/stock/2004--09/07/content_1952118.htm, accessed June 5, 2006.

28. For an exposition, see Roland (2000).

Chapter 4: What Is Wrong with Shanghai?

1. The speech is printed on the website of the Indian embassy to the United States. See http://www.indianembassy.org/newsite/press_release/2006/Mar/35.asp, accessed on August 23, 2006.

2. In 2004, according to NBS (2005a, p. 369), the number of employed people in Shanghai was 8.37 million people and of this number, 2.48 million were classified as “rural.” This suggests 29.6 percent of the workforce to be rural. There is a sharp discrepancy between the residency data and employment data. According to the same source, in 2004, only 80,000 people resided in the rural areas. However, Shanghai's residency data are highly unstable. In 1992, there were 4.1 million rural residents, but in 1994, this number declined to only 1.8 million. In 1995, this number was reduced to 390,000. This pattern suggests the likelihood that the number on rural residents is highly sensitive to administrative reclassifications rather than to the long-run economic and social dynamics, which tend to bring about changes more gradually.

3. The comment that Shanghai is leveled with Silicon Valley appeared in Pink (2005). See his New York Times column for his view on freedom in Shanghai (Friedman 1999).

4. For one thing, because GDP data are the explicit benchmarks used by the Chinese political system to promote or demote officials, they can be easily manipulated. During the 1990s, Shanghai was a showcase of Chinese economic progress and it is not altogether implausible to assume that Shanghai's GDP data might have been assembled in such a way as to match its outwardly impressive skyline. Chinese data are often suspected of statistical falsification, but this is not a problem for which a ready solution exists. In the following analysis, I proceed on the basis that the Chinese data are accurate, but I analyze the components of Shanghai's GDP to illustrate some of the particular dynamics of its economy.

5. In 1997, for example, the net national product of the United States was 7,231 billion dollars. Of this amount, 4,687 billion dollars was employee compensation and 551 billion dollars was proprietors’ income. In the Chinese data, employee compensation and proprietors’ income are reported together. So, in order to compare the two countries, I added the two items in the US data, which comes to 72.4 percent.

6. The main problem is that we do not know whether foreign firms also fall into the category of government-controlled firms, so double counting may be involved.

7. Quoted in Balls (2004).

8. Mr. Wood is quoted in Pocha (2006).

9. The data are from Urban Social and Economic Survey Team (1991; Urban Social and Economic Survey Team 1997, 2003, 2005).

10. It should be noted that official publications report a very high savings rate. There are two possibilities. One is that the government and businesses, rather than households, in Shanghai account for much of the savings. This is merely the asset side of the income approach of GDP. Because much of the income accrues to firms and the government, they have also accumulated the largest claims on the financial assets in the city. The other possibility is that some institutions may register their savings under individual names, a common practice in China.

11. This is documented in a study by OECD (2003).

12. Various issues of the Chinese statistical yearbooks provide employment. Also see NBS (2005a) for employment data broken down by regions.

13. This narrow measure has some advantages and disadvantages compared with our broad measure. The disadvantage is that it is too narrow and it fails to reflect what is going on in the private sector. The advantage is that it is a closer measure of urban employment and, therefore, we can use this measure to compare the city of Shanghai with other regions. The other advantage is that this narrow measure does not include private-sector employment. Because we know that Shanghai has an under-developed private sector, we can then use this measure as an indicator of a potential effect of suppressing private-sector development rather than as an indicator of this suppression.

14. See the website on the Pre-Qualified Medicines project, http://mednet3.who.int/prequal/, accessed on August 24, 2006.

15. See an interview on Xinhuanet, http://news.xinhuanet.com/fortune/2006--08/07/content_4929294.htm, accessed on August 15, 2006.

16. The information on the NASDAQ-listed Chinese firms is culled from several websites. See http://tech.sina.com.cn/i/nasdaq_china.shtml and http://www.nasdaq.com/.

17. I have checked several sources on Chinese patents. Chinese patent data, unlike its economic data, are quite consistent across different sources and are clearly labeled and well defined. The annual patent application and grant data are published in the Chinese Statistical Yearbook from 1988 to 2006. In addition, I have drawn on two specialized publications on Chinese science and technology. These are the NBS and the Ministry of Science and Technology (1999 and 2002).

18. All the patent data that are presented in this section refer to patents granted to domestic residents. China's patent data also include patents filed by foreign residents – firms or individuals operating in China. I exclude these for the purpose of illustrating the “newness” of the products or technologies. The inclusion of patents filed by foreigners would complicate the patent counts because Chinese law does not recognize patents registered outside of China and, therefore, foreign firms have to register their patents in China in order to receive patent protection. Thus, the high levels of FDI would automatically push up the patent counts, but it does not necessarily suggest inventions of new products or new technologies.

19. For a succinct description of the main features of the Chinese patent system, see Hu and Jefferson (2006).

20. The 1981 data are from NBS (1982, p. 443 and p. 454). The number of engineers and scientists refers only to those working in SOEs. In 1981, however, this likely exactly matched the total number of engineers and scientists. The number of college students does not begin to describe the full difference in terms of the level and quality of human capital. Shanghai is home to some of China's best-known universities, such as Fudan and Jiaotong. Zhejiang University, a historically strong academic institution, is usually ranked below these two Shanghai universities. Sun Yat-sen University in Guangdong is considered a second-tier institution.

21. See Li (2001).

22. For a very good account of the role of Shanghai industrialists in Hong Kong, see Wong (1988).

23. There is very little evidence that the policy had any real effects and there are even questions about the direction of the assistance. In one aid project, the Shanghai municipal government built a hotel in one of the most scenic areas of Yunnan province to attract tourists, but most of the profits were repatriated to Shanghai (Saich 2001, p. 151).

24. Batra, Kaufmann, and Stone (2003) provide an extensive discussion of the problems facing firms in the middle. Their findings are based on survey data of 10,000 firms in 81 countries. In the survey, middle-sized firms are found to be most constrained by a poor business environment.

25. Data are from NBS (2004a).

26. For example, the Soviet Union was competing head-to-head with and even led Western countries in steelmaking, machinery, synthetic materials, and microelectronics. The dynamics illustrated by Iacopetta is a familiar tale in centrally planned economies. Kogut and Zander (2000), studying Zeiss companies in East Germany and West Germany, found their products to be comparable in terms of technological sophistication. The difference was that Zeiss in East Germany was not self-funded and it soon collapsed during the economic transition as the new government withdrew the funding.

27. Although Shanghai's population (17 million) is much smaller than the total population of Zhejiang (45.7 million) and Guangdong (77.6 million), if we assume that patenting is primarily an urban activity, the gap in the urban population is not nearly as large. In 2004, Shanghai's urban population was 14 million, compared with 37.7 million in Zhejiang and 64.9 million in Guangdong. Thus, even if one controls for the population size, there is no question that Shanghai is substantially less innovative than Zhejiang and Guangdong. Basically, the urban population differential ranges between 0.37 – Shanghai to Zhejiang – and 0.22 – Shanghai to Zhejiang, and the individual patent grantee ratio ranges from 0.16 to 0.09. This is not to mention the analytical argument that population size may very well be irrelevant in this type of exercise, especially under the condition of the geographic mobility of talent. Those regions with a supportive and fostering environment may attract more capable and innovative individuals, and those regions with an inappropriate policy model may lose these people. The total number of patents granted is a superior measure, and by this measure, the gap between Shanghai and the two entrepreneurial regions in China is huge.

28. NBS (2005a) has detailed regional data on fixed asset investments.

29. The State Council report contains details about a number of individual businesses. The scale of their operations was substantial. One private entrepreneur successfully developed a demolition line of business and subcontracted work with the Shanghai Steel Factory. The long-term employment of her firm was 28 persons, and sometimes more than 100 persons during busy periods. In two years, the equity of her business grew from 2,000 to 440,000 yuan, a remarkable rate of growth. Another private entrepreneur with a successful construction business hired 120 workers. Sales in 1985 amounted to 160,000 yuan.

30. Both were trained as engineers and had spent long careers in technology before coming to Shanghai. Jiang had been minister of the electronics industry before moving to Shanghai and Zhu had worked in the State Economic Commission, the agency in charge of upgrading China's technology base.

31. Quoted in Pocha (2006).

32. This developmental vision for Shanghai was outlined in his inaugural speech after Jiang Zemin was appointed mayor of Shanghai. See Jiang Zemin (1988).

33. However, the effect of this change in the tax rule on private-sector development is ambiguous when private enterprises were not perceived of as part of a township's tax base, and this would tilt the incentives in favor of developing collective enterprises.

34. The Shanghai government justified this program as an effort to clear the “slum areas.” But a commonsensical reasoning would refute this rationale. In 1997, Shanghai had about 4.8 million households. Displacing 541,400 households would suggest that 11 percent of Shanghai households lived in slums in the mid-1990s.

35. These interviews were conducted in 2007 with entrepreneurs, lawyers who specialize in registration regulations, and officials at the All-China Federation of Industry and Commerce, an organization representing private-sector businesses. In addition, I also visited several district offices of the Shanghai Bureau of Industry and Commerce, the agency in charge of registering and licensing firms.

36. The regional GDP are available from the NBS (2006c, pp. 63–64).

37. We do not report data for 1980 because the data for that year are not broken down by sectors. The NBS records the income data on a per capita basis and we use the income data valued on a cash basis. The NBS also collects data on total household income that includes the imputed market value of unsold products. Using the cash income minimizes potential variations in the valuation methodologies. I have deflated the Shanghai and China data to their 1978 price levels, using the Shanghai and China consumer price indexes. The national consumer price index is available from the NBS (2006c). The Shanghai data were downloaded from the website of the Shanghai government, at http://www.stats-sh.gov.cn/2003shtj/tjnj/nj05.htm?d1=2005tjnj/C0901.htm. Using the nominal values would yield similar results in terms of the data trends.

38. See news.sohu.com/20070301/n248423843.shtml 86k, accessed on April 1, 2007.

39. Of all the private-sector surveys, SEBS1991 and PSS95 are the only two surveys that include both Shanghai and Shenzhen.

40. In the 1990s, Shanghai was a special economic zone in that it was a special recipient of the largesse of the central government, not that it had pioneered in economic liberalization. Pudong depended on handouts from the central government, whereas the four SEZs in the 1980s operated on a self-funded basis. In 1990, Zhu Rongji, then the mayor of Shanghai, revealed that the central government would earmark a special funding facility totaling 6.5 billion yuan to support Pudong development (Zhu Rongji 1990). This is the only explicit earmarking by the central government to support Shanghai. Shanghai is the venue of many SOEs directly managed by the central government. Until 2007, these SOEs did not pay dividends to the central government; instead, they plowed back their huge monopoly profits into reinvestments. Many of the reinvestments in Shanghai were essentially transfers from the rest of the country to Shanghai.

41. The Zhang Rongkun affair was covered extensively in the Chinese media, less so in Shanghai than elsewhere in the country. For coverage in the English media, see McGregor (2006a).

42. Since the downfall of Chen Liangyu, the Chinese media began to report more details on corruption cases in Shanghai. The magazine, Caijing, in particular has published a series of articles on the topic.

43. For one thing, the “rotten-deal” view is heavily colored by comparing Shanghai with Guangdong. Shirk (1982, p. 141) reported the following remark by Shanghai's mayor, Wang Daohan, “Of course we're behind Guangdong on reform. If the center gave us the same financial deal they gave Guangdong, we would be moving faster on reform.” In the 1980s, Guangdong received a tax arrangement with the central government that allowed the province to keep much of what it collected, whereas Shanghai was required to remit most of its tax revenue to the central government (Oksenberg and Tong 1991).

44. The investment gap is even larger between Shanghai and Zhejiang. In 1986, Shanghai and Zhejiang had similar GDPs (41 billion yuan in Shanghai and 48.5 billion yuan in Zhejiang). But between 1986 and 1990, the central government invested in Shanghai 4.2 times more than what it invested in Zhejiang.

Chapter 5: Capitalism with Chinese Characteristics

1. This episode was reported extensively in the Chinese press. A number of prominent Chinese lawyers and legal scholars came out in defense of Mr. Cui. Mr. Cui received a lenient sentence, by Chinese standards. He was sentenced to a suspended death sentence. See the coverage in Nanfang Daily, at http%3A//www%2Enanfangdaily%2Ecom%2Ecn/zm/20070201/xw/fz/2007020100, accessed on June 16, 2007.

2. This account is from McMillan (2002). McMillan based his account on the work of Claire Robertson, a scholar on Africa.

3. There are numerous reports on this episode, including http://www.chinadaily.com.cn/english/doc/2004--06/23/, accessed on May 15, 2007.

4. These figures were reported by China Youth Daily on September 18, 2007, and transmitted by http://news.boxun.com/cgi-bin/news/gb_display/, accessed on September 19, 2007.

5. This view is widespread even though there is no systematic evidence in support of it. For a detailed discussion, see Rodrik (2007).

6. Sen (1999, p. 44) quotes from research by Anand and Ravallion (1993) that shows broadly defined human development is not solely a function of average income.

7. Nine-year compulsory education refers to schooling from primary to junior lower secondary levels. The 12-year system refers to schooling from primary to upper secondary levels.

8. See a recounting of a Xinhuanet story on the website on educational issues in Hebei province. See http://www.uedu.net/get/hebei/hebei_base/, accessed on November 20, 2005.

9. As far as I know, few have identified this issue. One exception is Naughton (2007, pp. 195–196), who discusses it in some detail.

10. The title of the article is unusually frank: “The ghost of illiteracy returns to haunt the country.” Although the article garnered very little attention in the West, the Chinese Ministry of Education reacted strongly. It published a disclaimer saying that the 30 million figure is an estimate by academics rather than an official figure.

11. The 113.9 million is based on a sampling of 1.325 percent of the Chinese population.

12. See the statement by an official of the Ministry of Education confirming that the current illiteracy standard is still 1,500 Chinese characters.

13. Because rural households are also business units, we need to take out the expenditures on production inputs in order to accurately reflect the burdens on rural households from rising costs in health care and education. All the denominators used in the calculation of ratios refer to consumption expenditures.

14. Some of the findings of the study are summarized in www.chinahexie.org?Article_Show.asp?Artic, accessed on September 25, 2007.^.

15. Urban China fared slightly better but also faced immense problems. The collapse of the SOEs in the late 1990s contributed massively to the size of the problem. In Zhenjiang city, for example, it is estimated that more than half of the SOEs were not able to reimburse their employees the full cost of their medical care as of the late 1990s. (Zhenjiang city, which is located in prosperous Jiangsu province, probably has fared better than other regions of the country, such as the northeast region of the country where the SOEs have collapsed on a greater scale). Nationwide, as the World Bank points out (World Bank 2005b), China's overall reimbursement rate fell throughout the 1990s.

16. This is a government-sponsored program financed by the central government, county governments, and households in equal shares (10 yuan per participant) (World Bank 2005b).

17. In fact, Zhao Ziyang began to argue for the creation of a social protection system as early as 1984. In 1988, I participated in a World Bank study on the need and steps required for creating a social protection system in China. The project was initiated by the Chinese government.

18. Pei (2006, pp. 172–173) summarizes some of the research in this area.

19. Many of the standard indicators of development of a country's health sector reflect what is happening on the supply side rather than on the demand side. For example, the World Bank reports that China had 1.7 doctors per 1,000 persons and 2.4 hospital beds per 1,000 persons during 1995–2000. These figures put China in a favorable comparison with Malaysia (0.7 and 2.0), Thailand (0.4 and 2.0), and South Korea (1.3 and 6.1).

20. The data on the 1980s come from NBS (1993b, p. 802). Data for other years come from the respective China Statistical Yearbooks.

21. In this book, I am not concerned with some of the generic issues about GDP data, such as that they do not measure the subjective well-being of human beings or they do not sufficiently take into account the external effects of economic production such as pollution and resource depletion. I also do not discuss the issue of self-reporting, which China economists have identified as a problem. Local officials can over- or under-report GDP depending on their incentives. Some scholars (Rawski 2001b) have documented the rather substantial problems in Chinese GDP data.

22. Chinese construction of the CPI has already been questioned. After making some adjustments to the Chinese price indexes, Young (2003) used an alternative set of deflators and recalculated the GDP growth rates. He lowered the average annual GDP growth rate from 9.1 to 7.4 percent between 1978 and 1998. The main problem with the Chinese deflators identified by Young is the procedure used to collect the data. Most countries collect price data through sampling. But in China, the firms themselves report both nominal and constant values of output. Government statisticians then convert the data into price deflators. Some enterprises often assume equality between the nominal and constant values of their output, which means that the value of the reported deflators systematically understates the true inflation and thus systematically overstates the real growth.

23. The growth of household income as reported by the NBS is higher than that reported by Khan and Riskin (2005), who base their results on the 1995 and 2002 waves of the CHIP. Khan and Riskin themselves have noted this difference and attribute it to the different ways the NBS and CHIP define income.

24. In interpreting this finding, it is important to stress some data issues. This ratio is approximately the same ratio of employee compensation to GDP calculated on the basis of the income approach of GDP. We cannot show it here explicitly, but one may wish to argue that the declining ratio in the 1990s might reflect the increasing privatization of the Chinese economy if the household claims on corporate assets rose. This interpretation is not correct. For one thing, it is not possible to reconcile this rationale with the rising ratio in the 1980s when the private sector developed rapidly.

In fact, private-sector development should boost this ratio, as it did in the 1980s. This is because the household survey data on income include proprietors’ income and capital gains (interest income and capital gains). So, theoretically at least, the declining income share of GDP has nothing to do with the possibility that Chinese households increasingly ran their own businesses or acquired claims on the corporate sector (through purchases of company shares). To the extent that these rising claims are important, they are already fully captured in the household income data.

25. Their finding that geographic factors account for 80 percent of the variance is generated without incorporating migrants into their data. When they do include migrants, the importance of geographic factors declined to only 21 percent in 2002. The problem is that the 1995 CHIP survey did not poll migrants, so we do not know what proportion of the explanation is due to migration in 1995. In any case, there is no econometric reason why geography should increase in explanatory importance even if the regressions do not explicitly incorporate migration.

26. For a good account on this topic, see Tanner (2004).

27. The details are from Pastor and Wise (1992) and Wise (1994).

28. The details of these measures are available from the NSB (2007a, p. 109 and pp. 378–381).

29. Data are from the National Bureau of Statistics (1990).

30. Some of these industrialists are household names in China. Rong Yiren, who ran the largest textile operation in China in the 1930s and 1940s, came from Suzhou. An Wang, who later founded Wang Computer in Massachusetts, came from Kunshan, a county in the vicinity of Suzhou. In politics, maybe as a sign of things to come, Zhou Enlai, Communist China's premier between 1949 and 1976, was born in Jiangsu. His nemesis, Generalissimo Chiang Kai-shek, the leader of the Nationalist government on the mainland and then on Taiwan, was born near Ningbo in Zhejiang.

31. Elsewhere I have provided statistical evidence linking these aspects of the two provinces. For now, let me concentrate on documenting this set of differences.

32. The adjustments are done to the Chinese GDP data rather than to the Indian GDP data because the official Chinese GDP data in the 1970s and 1980s were compiled according to different procedures from prevailing international practices.

33. The HDI data can be downloaded from the website of the UNDP at http://www.undp.org.

34. The data on social development in China and India can be accessed from the World Development Indicators, available at http://devdata.worldbank.org/dataonline.

35. The Chinese data are from various issues of the China Statistical Yearbook. A very useful data source on India is www.indiastat.com. The data on India's transportation facilities were accessed on May 1, 2006.

36. The data are available at http://devdata.worldbank.org/dataonline.

37. See World Bank (2001, pp. 60–61).

38. The output measures here refer to the ratios of output in labor-intensive (skill-intensive) industries to output in less labor-intensive (less skill-intensive) industries. High (low) labor-intensive industries are those industries above (below) the median value of labor intensity. The skill-intensity measure is similarly derived. For details, see Kochhar et al. (2006).

39. The World Bank designed and implemented – with the cooperation of partner institutions – the WBES in 1999–2000. The survey was carried out in 81 countries and on more than 10,032 firms operating in these countries. The survey was designed to capture the firms’ views on many aspects of the business environment pertaining to their operations. As far as this author is aware, there have been only two studies that have used this dataset. One study was conducted by a group of World Bank economists who focus on assessing the business environment around the world (Batra, Kaufmann, and Stone 2003). The other study focuses on differences in policy treatments between foreign and domestic firms (Huang 2004). An important feature of the WBES is its emphasis on entrepreneurial firms. The vast majority of the firms are owned privately. In the entire WBES sample, only 12 percent of the firms reported some government ownership.

40. It should be pointed out that in the same study, as compared to India, China fares much better when it comes to labor and licensing regulations.

41. India implemented meaningful financial reforms in part because of the way its reforms were triggered. The country experienced an external crisis in 1990 as its foreign exchange reserves were being drawn down and at one point were only sufficient to cover two months’ worth of imports. The rupee crisis, as it is known, led to the involvement of the International Monetary Fund (IMF), which imposed financial reforms as a condition for providing bridge loans.

42. The history of Infosys has been reported extensively in business school cases. See Kuemmerle (2004).

43. For details, see http://www.gcr.weforum.org/.

44. Deng made this comment to Yang Shangkun, president of China at the time, on the eve of the declaration of martial law. The comment is recorded in Zhang, Nathan, and Link (2001, p. 218).

45. The data are provided by one of the best investigative journals in China. See http://www.nfcmag.com/list-2.html, accessed on February 2, 2008.

46. Pei (2006, pp. 28–29) summarizes the views of many insiders.

47. For example, Sachs, Varshney, and Bajpai (1999) and Ahluwalia (2002), after contrasting India's slower pace of export growth and FDI inflows with those in China, find India's rigid labor laws, substantially higher tariffs, restrictions on large firms, and exit barriers to be the sources of its lagging performance. Business analysts readily concur with the view that India's performance has been less impressive than China's. Two articles in The Economist, in 2003 and 2005, although inconsistent in their animal allegory – the tiger in the 2003 piece refers to India, whereas the tiger in the 2005 piece refers to China – are nevertheless consistent in their conclusion that China has substantially outperformed India. See The Economist (“The Tiger in Front: India and China” 2005; “A Tiger Falling Behind a Dragon” 2003). That said, business analysts have recently recognized that India has also performed well in an absolute sense but still not as impressively as China. Martin Wolf, a respected economic columnist for the Financial Times, summarizes this new “consensus” most succinctly when he writes, “it will remain more China than India for some time.” See Wolf (2005).

48. From World Bank (1989, p. 91).

49. For a detailed account of FDI in India during this era, see Encarnation (1989).

50. For example, see World Bank (1993), Stiglitz and Yusuf (2001), and Yusuf and Evenett (2002).

51. Naughton (2007, pp. 144–145) points out that China's investment to GDP ratio today is quite similar to that in Japan in the 1970s and that in Korea in the 1990s.

52. The data on East Asia in this section are based on Wade (1990), Lee (1996), and Campos and Root (1996).

53. Some analysts argue that Chinese GDP data undercount the service sector and, therefore, may overstate the investment/GDP ratio. All the figures cited in this text are based on revised GDP data that incorporate the previously under-reported private service sector.

54. The export share data for Taiwan come from Ranis and Schive (1985).

55. See World Bank (1993) and Campos and Root (1996).

56. See Yergin and Stanislaw (1998, p. 179). There is, to be sure, government ownership in Taiwan, but even according to an account normally sympathetic to the strong role of the state in the economy, government ownership in Taiwan seems to have been primarily confined to upstream, R&D sectors and not to the manufacturing stages of production. The role of the state was to jump-start businesses rather than to actively manage them (Amsden and Chu 2003, pp. 86–88).

57. Different studies and sources provide different Gini numbers, but they all converge on trend developments. See Haggard (1990), World Bank (1993), and Asian Development Bank (1995).

58. A report in http://finance.sina.com.cn/g/20011105/125514.html, accessed on October 5, 2007, summarizes these rounds of salary adjustments.

59. The poverty line is published by the NBS (2007b, p. 43). This is what the Chinese call the absolute poverty standard.

60. See http://news.sina.com.cn/c/2007--11-01/110414212069.shtml, accessed on November 4, 2007.

61. Li's findings are published in http://www.p5w.net/newfortune/index.htm, accessed on October 20, 2007.

62. Summarized in www.npr.org/templates/story/story.php?storyId=5411325, accessed on July 23, 2007, and by Dean (2006).

63. China Digital Times at http//chinadigitaltimes.net/ has a special section on forced evictions in China.

64. Quoted by Yergin and Stanislaw (1998), p. 130.

65. See some of the earlier studies on the TFP of the Chinese economy (Chen, Wang, Zheng, Jefferson, and Rawski 1988; Borensztein and Ostry 1996).

66. One exception to the findings reported here is Wang and Meng (2001), who report that TFP growth averaged 7.3 percent in the 1992–1997 period, but only 2.5 percent in the 1978–1991 period. However, the authors themselves dismiss this finding because they cannot locate the sources of this dramatic acceleration of TFP growth. A new factor in the 1990s, foreign investment, turns out to be insignificantly correlated with TFP growth, leading the authors to conclude, “the extra 4.8 percentage points of industrial TFP growth during 1992–1997 appear to represent a statistical error.”

67. The 17th Party Congress and Hu's speech are covered extensively at http://xinhuanet.org.

68. Greenspan's comment on the Chinese stock market was first reported by Bloomberg and transmitted by China Daily. See http://bbs.chinadaily.com.cn/redirect.php?gid=2&tid=583320&goto=lastpost, accessed on November 2, 2007.