An argumentative scholar discusses Chinas economy

Huang Yasheng

Editor's Note:

Huang Yasheng, a 49-year-old professor of political economy and international management at the Sloan School of Management, Massachusetts Institute of Technology, has become a star in Chinese economic studies. The author of Selling China (2003) and Capitalism with Chinese Characteristics (2008), Huang gives detailed and special narrative account of history of economic reforms in China, based on archival and quantitative evidence spanning three decades of reforms. The following is an interview by the Economic Observer (EO) with Huang, an economist who regards himself as "argumentative."

EO: Nowadays there are two perspectives on viewing China: One considers it a crisis-ridden "colossus with feet of clay," whereas the other regards it as "a global model." What's your perspective?

Huang: I tend to stress crisis, however, calling it "crisis-ridden" is kind of extreme.

We should first clearly realize China's advantages. China has every prerequisite of economic liftoff–education level, cultural traditions and other social conditions.

A relevant self-evolution system is also needed. And the mainland has witnessed the evolution of its system in the past three decades since the reform and opening-up began.

China has many successful and unsuccessful elements–successful ones are more than unsuccessful ones. However, those unsuccessful ones are pivotal.

Take North Korea and South Korea for instance. The two were once quite similar to each other. In the 1950s, the North was actually richer, enjoying abundant mineral resources and higher level of industrialization.

However, the two are very different today. The only disparity lies in the system, mainly the economic system, though the political system is of course also very important. Without a good system that enables self-improvement, a country's economy cannot take off despite good social conditions.

Next I want to elaborate why I'm pessimistic about China's economy. Many issues that China is now encountering have nothing to do with "Chinese characteristics." For instance, China's economic mode has been Latin Americanized, and thus the income distribution here is also Latin Americanized.

The savings ratios of both the Chinese government and companies have been raised, but the residents' savings ratio here is not enhanced. We saw such a problem in Brazil in the 1960s and the 1970s.

In China, domestic capital is supplanted by foreign investment, and lands are enclosed to build factories and residential buildings – this is exactly what happened in Brazil in the 1970s.

There are lots of potential problems in China's economic system and policies. These problems are not, as some have suggested, "unique to China" due to China's innovative path to development, but have taken place in other countries and led to failures. I can hardly imagine that cancer kills one person, but makes another vigorous.

If China only continues to enhance supply, but not to promote domestic consumption and stimulate domestic demand through adjustments in its system and policies, a productivity surplus and the popping of bubbles will inevitably take place.

No government can force its citizens to consume. Thus, I'm quite worried about China's economic tendencies in one or two years' time.

EO: Is it possible that the prediction of inflation will stimulate consumption?

Huang: Such a question actually presumes that ordinary Chinese people have lots of money, but choose not to consume.

However, according to my measurements and calculation, if the official data reveals that a typical citizen has 100 yuan ($14.60) savings, he actually has only 40 yuan ($5.90) according to my data. This means that the savings of typical residents are way lower than we imagine.

The rich save money, and the poor consume – this is true in any country, and China is not an exception. Thus, to scare the poor with predictions of inflation and push or encourage them to consume is actually meaningless. For the rich, this is a dangerous strategy – once the rich feel that their capital will be devaluated, they will transfer their money abroad, leading to capital flight.

Such a strategy is especially risky when the rich hold most of the social wealth. This is exactly where the fragility of China's economy lies.

EO: How do you view the current economic policies?

Huang: Many Chinese compare the Chinese government's 4 trillion yuan ($585.60 billion) stimulus plan to US President Barack Obama's stimulus package. Admittedly, Obama hopes to save the market and companies. However, he also wants to reform the systems of banks and financial institutions. He wants to change old systems, rather than reinforcing them.

Many Chinese scholars mention the repairing of roads when talking about Roosevelt's New Deal. This is quite interesting. Chinese scholars always explain the US through a Chinese lens. For instance, the Chinese government stresses repairing roads, those scholars thus explain that Roosevelt emphasized repairing roads. Actually, Roosevelt helped establish lots of systems that are still in use today, such as the social insurance system, healthcare system and bank risk control system. Reform was much more important than repairing roads in the New Deal.

I thought China would reflect why it was heavily hit once the financial crisis erupted in the US. And it would naturally come to the conclusion of weak domestic demand and slow income growth of ordinary Chinese.

Unfortunately, in the past six months, such discussions were scarcely heard. Many people even began to consider China as the "world savior," and regard the crisis as a symbol of the success of the "China mode."

EO: Purely from the economic perspective, what stage in the past decades was most open by your definition?

Huang: The 1980s. The rural economy was quite free at that time, and farmers were able to acquire good financial support. According to my research, 70 percent of rural households were able to get loans in the 1980s, and that ratio contracted into merely 30 percent in the 1990s.

In 1980s, whether a farmer was able to acquire loans had nothing to do with his political status, and the farmers seeking to start non-agricultural businesses found it easiest to get loans. However, since 1990s, it's been hard for average farming households to find ways to get loans, if they want to start non-agricultural businesses.