Few could have foreseen the paradox presented by capitalism with Chinese characteristics
Pranab Bardhan 05 October 2009
After the 60th anniversary of the People’s Republic of China, one is prone to reflect on its dramatic recent history, including the historic irony of the development of today’s arguably most vigorous capitalism in an avowedly communist country. The contradictions involved here are much more than were dreamed of in Mao Zedong’s philosophy when he famously speculated on the nature of contradictions, first in a 1937 essay, where he stated: “The law of contradiction in things, that is, the law of the unity of opposites, is the fundamental law of nature and of society.”
While the Communist Party retains the monopoly of power, the market mechanism is the major allocator of resources in the economy. While most people agree that the private sector is now the more dynamic part of the economy and creates most of the jobs, to find out how much of the (non-farm) economy is actually under private ownership is not straightforward: it is not easy to classify Chinese firms by their ownership or to distinguish between private and public, or semi-public, control rights.
This is, of course, part of the legacy of the development of the private sector under the shadow of the party-controlled state. As late as 1988, private firms with more than eight employees were not permitted. Many private firms operated below the radar and used various subterfuges and covert deals with local officials as they adapted to the changing permissible mores. Many of the smaller and regional state-owned enterprises (SOEs) were privatised and often their managers became the new owners. Today, probably more than half of the non-farm output (though not of fixed capital investment) is primarily privately owned or controlled. About one-third of the private entrepreneurs are members of the party; membership helps them get state finance, more protection and legitimacy.
Of course, it is well known that some of the entrepreneurs are in fact friends or relatives of party officials. Many SOEs are also controlled by powerful political families. Thus, there is a new political-managerial class, which over the last two decades has converted their positions of authority into wealth and power.
The vibrancy of entrepreneurial ambitions combined with the arbitrariness of power in an authoritarian state has sometimes given rise to particularly corrupt or predatory forms of capitalism, unencumbered by the restraints of civil society institutions. Perhaps nowhere has the predation been as starkly evident as in land seizures in cities as well as the countryside.
This corrupt or predatory form of capitalism also has some obvious global implications. When foreign companies try to invest in China, or Chinese companies try to acquire holdings abroad, the decision-making process can be vitiated by arbitrary political interference, underhand dealings, kickbacks and influence-peddling.
While the state has relaxed its earlier control over prices and allows markets and profit-making to be the major organising principle of domestic economic life, it is still predominant in the capital goods sectors and in transport and finance. Some of the SOEs are now important players in the global market competition. In general, in recruiting professional managers, broadening their investor base, and shedding their traditional social and political obligations, many SOEs do not conform to the usual stereotypes.
The state still controls the larger and often more profitable companies in the industrial and service sectors. The state’s role in regulating the private sector also goes far beyond the usual functions in other countries. Apart from exerting indirect control rights in private firms, during the current global recession, some SOEs - flush with abundant loans from state banks - have even taken over some of the financially strapped small and medium-size private enterprises.
An important question arises in cases where an enterprise is managed on essentially commercial principles, but the state still has control rights over a large share of the assets: is this a capitalist enterprise? Some may describe it as capitalist if the principle of shareholder value maximisation is followed. Others may point out that, as long as substantial control rights remain with the state, the internal dynamic logic of capitalism is missing. Late last year, when China’s richest man, Huang Guangyu, was arrested, many thought his biggest crime was that he was getting too powerful for the leaders’ comfort (shades of Vladimir Putin’s Russia).
Nevertheless, it is probably reasonable to guess that, while the party can undo individual capitalists at short notice, it will be much more difficult for the leadership to unravel a whole network of capitalist relations.
Individual entrepreneurs have a clientelistic relationship with the state, but the state is now sufficiently enmeshed in a profit-oriented system that has been identified with legitimacy enhancing international economic prowess and nationalist glory - a tiger that the political leadership may find difficult to dismount.
At the local level, the central leadership often finds it difficult to rein in officials, as they collude with local business to commit some of the worst capitalist excesses (in land acquisitions, product safety or pollution). By one official account, the party composition itself has drastically changed, most members now are no longer workers or peasants, but professionals, students and businessmen.
Such are the ambiguities and contradictions of Chinese capitalism that Mao never foresaw, nor did the capitalist corporations in the West now dealing with this strange hybrid.
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Contradiction in terms
Few could have foreseen the paradox presented by capitalism with Chinese characteristics
Pranab Bardhan
05 October 2009
After the 60th anniversary of the People’s Republic of China, one is prone to reflect on its dramatic recent history, including the historic irony of the development of today’s arguably most vigorous capitalism in an avowedly communist country. The contradictions involved here are much more than were dreamed of in Mao Zedong’s philosophy when he famously speculated on the nature of contradictions, first in a 1937 essay, where he stated: “The law of contradiction in things, that is, the law of the unity of opposites, is the fundamental law of nature and of society.”
While the Communist Party retains the monopoly of power, the market mechanism is the major allocator of resources in the economy. While most people agree that the private sector is now the more dynamic part of the economy and creates most of the jobs, to find out how much of the (non-farm) economy is actually under private ownership is not straightforward: it is not easy to classify Chinese firms by their ownership or to distinguish between private and public, or semi-public, control rights.
This is, of course, part of the legacy of the development of the private sector under the shadow of the party-controlled state. As late as 1988, private firms with more than eight employees were not permitted. Many private firms operated below the radar and used various subterfuges and covert deals with local officials as they adapted to the changing permissible mores. Many of the smaller and regional state-owned enterprises (SOEs) were privatised and often their managers became the new owners. Today, probably more than half of the non-farm output (though not of fixed capital investment) is primarily privately owned or controlled. About one-third of the private entrepreneurs are members of the party; membership helps them get state finance, more protection and legitimacy.
Of course, it is well known that some of the entrepreneurs are in fact friends or relatives of party officials. Many SOEs are also controlled by powerful political families. Thus, there is a new political-managerial class, which over the last two decades has converted their positions of authority into wealth and power.
The vibrancy of entrepreneurial ambitions combined with the arbitrariness of power in an authoritarian state has sometimes given rise to particularly corrupt or predatory forms of capitalism, unencumbered by the restraints of civil society institutions. Perhaps nowhere has the predation been as starkly evident as in land seizures in cities as well as the countryside.
This corrupt or predatory form of capitalism also has some obvious global implications. When foreign companies try to invest in China, or Chinese companies try to acquire holdings abroad, the decision-making process can be vitiated by arbitrary political interference, underhand dealings, kickbacks and influence-peddling.
While the state has relaxed its earlier control over prices and allows markets and profit-making to be the major organising principle of domestic economic life, it is still predominant in the capital goods sectors and in transport and finance. Some of the SOEs are now important players in the global market competition. In general, in recruiting professional managers, broadening their investor base, and shedding their traditional social and political obligations, many SOEs do not conform to the usual stereotypes.
The state still controls the larger and often more profitable companies in the industrial and service sectors. The state’s role in regulating the private sector also goes far beyond the usual functions in other countries. Apart from exerting indirect control rights in private firms, during the current global recession, some SOEs - flush with abundant loans from state banks - have even taken over some of the financially strapped small and medium-size private enterprises.
An important question arises in cases where an enterprise is managed on essentially commercial principles, but the state still has control rights over a large share of the assets: is this a capitalist enterprise? Some may describe it as capitalist if the principle of shareholder value maximisation is followed. Others may point out that, as long as substantial control rights remain with the state, the internal dynamic logic of capitalism is missing. Late last year, when China’s richest man, Huang Guangyu, was arrested, many thought his biggest crime was that he was getting too powerful for the leaders’ comfort (shades of Vladimir Putin’s Russia).
Nevertheless, it is probably reasonable to guess that, while the party can undo individual capitalists at short notice, it will be much more difficult for the leadership to unravel a whole network of capitalist relations.
Individual entrepreneurs have a clientelistic relationship with the state, but the state is now sufficiently enmeshed in a profit-oriented system that has been identified with legitimacy enhancing international economic prowess and nationalist glory - a tiger that the political leadership may find difficult to dismount.
At the local level, the central leadership often finds it difficult to rein in officials, as they collude with local business to commit some of the worst capitalist excesses (in land acquisitions, product safety or pollution). By one official account, the party composition itself has drastically changed, most members now are no longer workers or peasants, but professionals, students and businessmen.
Such are the ambiguities and contradictions of Chinese capitalism that Mao never foresaw, nor did the capitalist corporations in the West now dealing with this strange hybrid.
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