In today's international debate over China's development model, a commonly heard term is "state capitalism,' and one oft-cited example of this is the country's development of high-speed railways.
Yet, in this issue of Caixin we report on exorbitant prices paid for bathroom fixtures on new bullet trains, further evidence if any were needed of the ills of state-led market development. In light of such abuses, a closer look at state capitalism is timely.
There are two schools of thought in China on state capitalism.
One group of scholars denies state capitalism is the reason for China's economic success. Instead, they argue, the driving forces were market dynamics unleashed by over 30 years of rural reform, private-sector growth, the national policy to open up and globalization. They say that to attribute success to state-led capitalism would be to misunderstand the past and mislead decision-making in the future.
The other school supports letting state capital shape the market, particularly in strategic industries. It sees state-owned enterprises as the cornerstone of China's spectacular growth. Analysts in this group do not use the term "state capitalism,' but they agree with the philosophy.
The concept is familiar to Chinese economists. Simply put, it means state resources, backed by political power, enter the market and edge out private capital to dominate. In classical political economy, state capitalism is typically seen as emerging in the later stages of capitalism.
By contrast, in the early years of centrally planned economies, state capital generally was first targeted at taking command of key sectors. In the political platform set out by the Chinese Communist Party in 1949, in effect the country's interim constitution, state capitalism meant an economic system of co-operation between state and private capital.
It provided that, "where necessary and possible, private capital should be encouraged to develop in the direction of state capitalism.' Of course, all forms of capitalism, including state capitalism, were in effect rejected under the Soviet-style economic model that China adopted afterwards.
Since the launch of economic reforms, especially in the last 10 years, China has seen a revival of state capitalism. However, it has only been part of wider market development. It must not become the country's prevailing direction and definitely not its goal. Yet, today, state-owned enterprises dominate China's economy and control all its strategic sectors.
The state's heavy hand creates and sustains monopolies, stifles competition and undermines a fair market. There is ample evidence to prove that state capital is less efficient than private capital. Moreover, it creates room for government departments and officials to seek personal gain. The series of corruption and abuse of power scandals in China's development of a high-speed railway network is clear evidence of a sick system.
The degree of state intervention in a capitalist system differs, of course. In its extreme, a government can succeed in oppressing all private enterprises except those it colludes with. Without effective curbs, China's state capitalism may well become crony capitalism.
State enterprises can play a useful role in the market, especially in industries that favor natural monopolies. But a well-developed market needs to protect fair play. As the economist Mancur Olson put it, a market economy requires fair rights and the absence of unfettered power. The unchecked growth of state capital is in fact incompatible with China's chosen model of a socialist market economy.
As early as 1999, in fact, policymakers decided to make strategic adjustments. The fourth plenary session of the party's 15th Central Committee called on state-owned capital to be pulled out of all industries except a minority of sectors where a government presence was essential. But the implementation of this decision has been desultory.
The reason for this is the sticky nature of certain enterprises. Because of their ties to government power, enterprises that deploy state-owned capital have easy access to financial support and government contracts; they can also lobby decision-makers and manipulate laws to their own advantage.
They are in effect special interest groups posing as market players, and their presence distorts the market. The drawbacks of this model of development today are too numerous to count. We must end it, insist on reform and nurture the development of the private sector. State-owned capital must be forced to retreat from competitive industries.
China's economy has reached its limits under this outdated model of development. Whether or not the country can engineer a new path of growth and avoid the middle-income trap will depend on its determination to transform itself.
The deployment of state-owned capital has never been China's stated national policy. Yet, so tenacious is state capitalism that it continues to extend its influence.
The international attention today on the "rise of state capitalism' needs to be taken with a grain of salt. Instead of being seen as legitimizing state capitalism, these comments should be taken as a warning of the perils that threaten Chinese prosperity. And they should pull people together to push for reform.
If our pace of reform continues to lag behind the expansion of state-owned capital, we will soon hear talk of not the rise, but a crisis, of state capitalism.
Source: english.caixin.com
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