Studying China’s Economy
Carsten Holz, an economist at Hong Kong University of Science and Technology, has a fascinating essay in the current Far Eastern Economic Review arguing that most scholarship about and data about China is skewed by tight governmental controls.
Academics who study China, which includes the author, habitually please the Chinese Communist Party, sometimes consciously, and often unconsciously. Our incentives are to conform, and we do so in numerous ways: through the research questions we ask or don’t ask, through the facts we report or ignore, through our use of language, and through what and how we teach.
Foreign academics must cooperate with academics in China to collect data and co-author research. Surveys are conducted in a manner that is acceptable to the Party, and their content is limited to politically acceptable questions. For academics in China, such choices come naturally. The Western side plays along.
China researchers are equally constrained in their solo research. Some Western China scholars have relatives in China. Others own apartments there. Those China scholars whose mother tongue is not Chinese have studied the language for years and have built their careers on this large and nontransferable investment. We benefit from our connections in China to obtain information and insights, and we protect these connections. Everybody is happy, Western readers for the up-to-date view from academia, we ourselves for prospering in our jobs, and the Party for getting us to do its advertising. China is fairly unique in that the incentives for academics all go one way: One does not upset the Party.
Because of these pressures and the Chinese government’s penchant for secrecy, getting reliable data is near impossible and the government has a powerful incentive to lie. The result is that Western scholars become unwitting propagandists for the Chinese Communist Party.
We talk about economic institutions and their development over time as if they were institutions in the West. “Price administration” regulations, central and local, abound, giving officials far-reaching powers to interfere in the price-setting process. Yet we accept official statistics that show 90% of all prices, by trading value, to be market-determined. We do not question the meaning of the Chinese word shichang, translated as “market,” but presume it to be the same as in the West.
Similarly, we take at face value China’s Company Law, which makes no mention of the Party, even though the Party is likely to still call the shots in the companies organized under the Company Law. Only if one digs deeper will one find unambiguous evidence: The Shaanxi Provincial Party Committee and the Shaanxi government in a joint circular of 2006 explicitly require the Party cell in state-owned enterprises (including “companies”) to participate in all major enterprise decisions; the circular also requests that in all provincial state-owned enterprises the chairman of the board of directors and the Party secretary, in principle, are one and the same person. At the national level, the leadership of the 50 largest central state-owned enterprises—enterprises that invest around the world—is directly appointed by the Politburo. Economists do not ask what it means if the Party center increasingly runs enterprises in the U.S. and Europe.
And then there’s this statistic, which Tyler Cowen highlights:
Article after article pores over the potential economic reasons for the increase in income inequality in China. We ignore the fact that of the 3,220 Chinese citizens with a personal wealth of 100 million yuan ($13 million) or more, 2, 932 are children of high-level cadres. Of the key positions in the five industrial sectors—finance, foreign trade, land development, large-scale engineering and securities—85% to 90% are held by children of high-level cadres.
To avoid excerpting the whole piece, I’ll note merely that in the remainder of the article, Holz argues that the word “mafia” could well be applied to the economic practices of the regime, although it seldom is. And that calling using Western terms like “government” (and I’d add “president” and “parliament”) to describe the party-run regime not only confers legitimacy but deflects questions that would otherwise naturally occur.
“Samizdata Illuminatus” contends that regime control of economic data “helps to prompt foreign investors to keep funding the great confidence trick that is the modern Chinese economy.” He believes that
“the unholy alliance of a dictatorial regime and the application of corrupted ‘free’ market ideals” will
“probably fail spectacularly” in the end.
Perhaps. In the post-Mao period, though, the PRC has experienced spectacular levels of economic growth while keeping a lid on other freedoms. Historically, economic liberalization has led to demands for political liberalization as a rising middle class demands a greater say in the government it is helping to fund. That’s been true in the West, Japan, and, to a lesser extent, in post-perestroika Soviet Union/Russia. Maybe its massive size and incredibly old culture will make China an exception.
Update: (Steve Verdon) I can’t help but note that when James writes,
In the post-Mao period, though, the PRC has experienced spectacular levels of economic growth while keeping a lid on other freedoms.
the source of this “data” are the self-admitted propagandist/academics who can only provide Party approved data.
Historically, economic liberalization has led to demands for political liberalization as a rising middle class demands a greater say in the government it is helping to fund. That’s been true in the West, Japan, and, to a lesser extent, in post-perestroika Soviet Union/Russia. Maybe its massive size and incredibly old culture will make China an exception.
Or maybe it is all a carefully crafted lie (China’s growing middle class, economic liberalization, etc.). After all, if we are to believe the statistic noted by Tyler Cowen, some of the most well off are actually children of high ranking cadre in the party. They already have a voice in how things are run and since they are rich and likely to get richer, where is the incentive to change?
The idea that suddenly all of the statistics and studies on China maybe carefully crafted propaganda and one can’t tell what is true and what is false, uncertainty increases. Making predictions when uncertainty increases becomes problematic. You are going to either be amazingly wealthy, unbearably poor or somewhere in between. Not really all that helpful is it?
It’s a point I’ve been making for a long time. Additionally, not only are Western institutions propagandists for the regime, Western companies work actively to prevent political liberalization.
We are repeating, nearly word-for-word, the experience with Soviet Russia in our dealings with post-1979 China. As with Soviet Russia, much of China’s growth is the result of moving non-productive labor from agriculture to manufacturing (unlike with Soviet Russia, opening agriculture to a little private entrepeneurship has improved agricultural productivity). How much of the remaining growth is vaporware is anybody’s guess.
But here is the critical point remember. China does not represent a market of a billion people for Western companies. It represents a market of a few thousand very prosperous people. That’s a high-risk market which Western companies are perfectly free to pursue. They just shouldn’t expect to be indemnified against their inevitable losses when they lose their shirts.
Certainly, the statistic that nearly all of China’s multi-millionaires are beneficiaries of official nepotism is alarming, but the economic situation for the vast majority of Chinese has indeed improved. It is not accurate that only a few thousand Chinese are in the market for Western consumer products.
The only reason China has thus far avoided a mass “people power” revolution is because a sufficient percentage of the population is prospering, albeit some more quickly than others.
I don’t think there are cultural reasons why the Chinese middle class won’t demand political reform. After all, Taiwan is culturally identical to China and it couldn’t remain authoritarian forever.