Preface - Capitalism with Chinese Characteristics: Entrepreneurship and the State

Preface

In 1998, during my field research in Shanghai for my last book, Selling China, I asked a government official whether he could introduce me to some private entrepreneurs. He gave me a quizzical look and asked, “Are you a Harvard professor?” (I was teaching at Harvard then.) “As a Harvard professor,” he continued, “why are you interested in those people selling watermelons, tea, and rotten apples on the street?”

Somewhat taken aback by his response, I gently reminded him that companies such as Microsoft and Hewlett-Packard were all founded and run by private entrepreneurs. I then ventured to him that maybe the reason private entrepreneurs in Shanghai were just selling watermelons and tea is because these were the only activities the government allowed them to do.

The comment by that Shanghai official has always stayed with me, and it provided the initial inspiration to write this book. (One chapter in this book is entitled, “What is wrong with Shanghai?”) It is striking how his comment contrasts with much of the theorizing about Chinese reforms in the West. A prevailing view among Western academics, especially economists, is that the goal of the Chinese state was to create a market economy based on private ownership, but the reforms were blocked by political obstacles. For political expediency, policy makers then settled for the second-best options to achieve the same goals – such as partially privatizing state-owned enterprises (SOEs), introducing foreign competition, and encouraging new entrepreneurship while retaining SOEs.

The truth is closer to the spirit of the comment by that Shanghai official. As late as 1998 much of the Chinese officialdom held private entrepreneurship in utter contempt. If it is indeed the case that the Chinese state chose to repress the private sector, there are some major puzzles. For one, how to explain the undisputed fact that the private sector actually managed to grow over time? I provided an explanation in my last book, Selling China, which shows that foreign direct investment (FDI), instead of bringing technology and knowhow, acted as venture capital or private equity by providing some financing to the repressed entrepreneurs. This is the reason why FDI is so prevalent in China, from high-tech to low-tech industries and from rich to poor regions of the country. Several empirical papers have systematically confirmed this hypothesis since the publication of my book.

FDI is not the end of the story. FDI flowed into China in the 1990s, and if FDI explained the growth of the private sector and economic growth in the 1990s, how does one explain the decade of the 1980s? The question of the 1980s exposed my own ignorance of recent Chinese history. I had always assumed, as do many other academics, that the Chinese reforms followed a gradualist trajectory – first beginning with modest, small steps and then accelerating the pace and the intensity of economic transformation over time. For many years, I held the view that the reforms in the 1990s were far more radical and far-reaching than the reforms in the 1980s.

A reader of this book would recognize that the thesis of this book is exactly the opposite. It shows that the true China miracle occurred in the 1980s and that it was a miracle created by the bottom-up entrepreneurship and considerable liberalization on many fronts. In the 1990s, there was in fact a substantial reversal of reforms.

I began to question my own assumption after I had an opportunity to discuss and debate with Dr. Zhang Wei. Zhang, now a lecturer of Chinese economy at Cambridge University, is extremely knowledgeable about the history of reforms. He was a rising star in the Chinese government in the 1980s, heading an important economic development zone in Tianjin at a young age. Zhang Wei, gently but firmly, told me that my gradualist perspective significantly understated the pace of reforms in the 1980s. Since that conversation, I began to notice that quite a few insiders – those who worked in the Chinese system – held a similar view. Li Changping, a rural official whom I quoted in Chapter 3, was most direct about the reversal of reforms in the 1990s.

But an academic treatment of this topic requires more than producing the opinions of insiders. The view has to be substantiated by data. This is the challenge. Few social scientists appreciate just how difficult it is to get accurate Chinese data, especially about the 1980s. The Cultural Revolution completely destroyed the Chinese system of data collection. According to one account, only 46 people worked at the National Bureau of Statistics (NBS) in 1976 and, as late as 1986, 90 percent of the Chinese economic data were handled manually. (In 1985, the NBS conducted an economic census. An American economist inquired about obtaining the raw data of the census, to which the reported response was that the magnetic tape containing the data fell into water and was completely damaged.)

At MIT, I often marvel at and envy some of my colleagues for their ability to generate data for their research – by designing elaborate experiments, sometimes using their students as objects. One of my colleagues designed an experiment in which he would take pictures of students in the dinning hall. (Maybe I would only marvel at them up to a point.) I do not have the similar luxury of generating data experimentally, and it is not easy to retrospectively survey people about their past, especially when the relevant people are former premiers or ministers (including quite a few who are still persona non grata, politically).

I settled on an alternative – researching government documents. China is not short on documents. One particular source of documents proved to be extremely useful to my project – collections of bank documents. For this book project, I examined thousands of pages of bank documents, many going back to the early 1980s. It is on the basis of the cumulative weight of the documentary evidence that I came to reject the gradualist interpretation of Chinese reforms.

A skeptical reader may argue that a conclusion based on documentary evidence is not rigorous enough. (Apart from the documentary evidence, I have also collected a substantial body of survey data.) In leveling this criticism, one should be reminded that the gradualist perspective was never systematically proven in the first place. The most convincing piece of evidence in support of the gradualist perspective is the rising output share by the private sector. In Chapter 1, I went into some detail explaining why this is a problematic indicator of policy evolution.

The question of methodological rigor is most relevant when we try to draw causal inferences, not when we attempt to establish facts. Here is one major difference between researching Chinese economy and researching American economy. In studies of American economy, scholars may debate about the effects of, say, “Reagan tax cuts.” In studies of the Chinese economy, the more relevant question would be, Did the government cut taxes in the first place? Much of this book is about documenting facts, including establishing an accurate definition of township and village enterprises (TVEs) and coming up with an analytically appropriate measure of policy evolution toward the private sector.

Two individuals should be singled out for being most helpful in my effort to source documentary evidence on Chinese reforms. One is Jean Hung, who was the librarian at the University Service Centre at the Chinese University of Hong Kong. Jean created an amazing collection of documents on China. One book that I used at her library shows the reach and the depth of her collection: Only 24 copies of that book were ever printed. Her collection goes way back – to the late 1970s and the early 1980s – and was meticulously catalogued. I owe her a huge debt of gratitude.

Nancy Hearst, at Harvard’s Fairbank Center Library, was equally instrumental to my project. Her library, unquestionably, is the best place to do research on contemporary China outside of Asia. Nancy has also helped this book project in other ways. She edited and proofread the earlier versions and corrected many of the mistakes I made. I am very grateful to her.

Over the years, I have had a number of capable research assistants. These include Lu Gao, Yu Lu, Heiwai Tang, Yanbo Wang, and Wendi Zhang. Others tracked down and provided crucial data. Professor Yifan Zhang at Lingnan University in Hong Kong generously shared data with me, and Yang Zhi at Hong Kong University assisted me in data analysis. Scott Parris, my editor at Cambridge University Press, and Ken Karpinski, my project manager at Aptara, provided the most efficient assistance in the production process of this book. I am deeply grateful to them.

Let me also thank those individuals and colleagues with whom I have discussed the ideas in the book and those who have provided valuable comments on earlier drafts or presentations of ideas. These include William Baomul, Pranab Bardhan, Suzanne Berger, Kristin Forbes, Jun Fu, Simon Johnson, Devesh Kapur, Tarun Khanna, Nicholas Lardy, Don Lessard, David Li, Rick Locke, Minxin Pei, Guy Pfeffermann, Ed Steinfeld, Lester Thurow, Laura Tyson, Ashutosh Varshney, Eleanor Westney, and Alan White. Four anonymous reviewers at Cambridge University Press provided very helpful comments.

This book would not have been written without the unfailing support and encouragement from my wife, Jean Yang. She endured many of my absences from home while she was taking care of our two young daughters, Kunkun and Nanan, and working as a high-level executive at a health insurance company. She was my first testing ground of the sanity of many of my ideas. My daughters may have improved my work as well, if indirectly, when they took away my laptop and wrote or painted their own expressions over my writings.

Finally, I devote this book to three individuals who, I believe, represent the true China miracle. I referred to them in different parts of the book–Nian Guangjiu in Chapter 2 and Zheng Lefang and Sun Dawu in Chapter 3. All three were rural entrepreneurs, and they met the common unhappy fate of being brought down by the illiberal policies of the 1990s. In my modest way, I am noting their contributions here.

–Yasheng Huang

on June 6, 2008,

in Delhi, India.