These five extracts from Coase’s How China Became Capitalist explain it very well:
CHINA’S IGNORANCE OF ECONOMICS IN 1980 WAS SIMILAR TO INDIA’S IGNORANCE OF BASIC ECONOMICS TODAY.
During the Cultural Revolution, China pursued a policy of self-isolation in diplomacy and self-sufficiency in the economy. At the same time, ideological monopolization in the name of pursuing pure socialism led to the stifling of intellectual development. Even Marxism was held to be a finished theory rather than a developing school of thought. As a result, Chinese knowledge of market principles was almost nil, and what little did exist was often erroneous. In 1980 Milton Friedman visited China and gave a week-long intensive course in price theory to the brightest Chinese bureaucrats. One day, at lunch after the lecture, a minister from the Ministry of Materials Distribution and his chief associate, who were to form part of a Chinese delegation to the United States, wanted to know who they should talk to in the United States. The first question they asked was, “Tell us, who in the United States is responsible for the distribution of materials?”
HOW LEE KUAN YEW CHANGED CHINA. SADLY, ALL THE CLOWNS OF INDIA THINK THEY KNOW MORE THAN LKY – THE PAST-MASTER OF GOVERNANCE
There is no doubt that such intensive exposure to the outside world, particularly to the West, served as a powerful catalyst for changes in Chinese attitudes to the market, to capitalism, and to economic development. For example, when visiting Singapore in November 1978, Deng inquired in detail about the working of foreign direct investment and its contribution to the rise of Singapore’s economy. To the surprise of his host, Deng openly admitted mistakes the Communist government had made and earnestly sought advice from Lee Kuan Yew, Singapore’s founding and long-serving Prime Minister, on how to improve the Chinese economy. More than a decade later, Lee still remembered his meeting with Deng.
“I had told Deng over dinner in 1978 in Singapore that we, the Singapore Chinese, were the descendants of illiterate landless peasants from Guangdong and Fujian in South China, whereas the scholars, mandarins, and literati had stayed and left their progeny in China. There was nothing that Singapore had done that China could not do, and do better. He stayed silent then. When I read that he had told the Chinese people to do better than Singapore, I knew he had taken up the challenge I quietly tossed to him that night fourteen years earlier.”
HOW CHINA DEVELOPED A DESIRE TO LEARN FROM OTHERS (A DESIRE THAT INDIAN SOCIALISTS NEVER DEVELOPED, BEING ULTRA-ARROGANT AND FULL OF THEMSELVES) –
After visits to Hong Kong, Macau, Singapore, Japan, the United States, and Western Europe in 1978 and 1979, Chinese officials had been shocked by the astonishing technological advancement and economic efficiency achieved by the capitalist system and the pleasant living conditions enjoyed by the middle classes. They were forced to appreciate the extraordinary strength of capitalism in innovation, technological as well as institutional, a point actually made a long time ago by Marx himself.
CHINESE LIBERATION OF PRICES IN 1990s WAS CRITICAL TO ITS CONVERSION TO CAPITALISM
The most serious defect of China’s economic reform in the 1980s was the lack of price reform, which had resulted in chaotic pricing, massive resource misallocation, and economic disorder.
In 1992 the Chinese government took a series of decisions that would ultimately abolish price control. The list of prices for raw materials, capital goods, and transportation services to be set by the central government was reduced from 737 to 89 (it would be further reduced, to 13, in 2001).63 The market for grain was fully liberalized nationwide at the end of 1992. The National Planning Commission halved the mandatory production plan for 1993, leaving more room for market forces to operate. China also significantly reduced the import tariffs for more than 3000 items, beginning at the end of 1992. The process of price deregulation would continue throughout the coming years. In 1993, the dual-pricing practice used for steel and machinery products was ended; in 1994, dual pricing for coal and crude oil ended. By 1996, the dual-track pricing for industrial inputs became history. The share of producer goods transacted at market prices increased steadily from almost zero in 1978, to 13 percent in 1985, 46 percent in 1991, and 78 percent in 1995.
CHINA IS A KEEN FOLLOWER OF LKY’s SINGAPORE MODEL AND THE WORLD’S BEST ECONOMISTS. THE NEXT MAJOR REFORM IN THE 1990s IN CHINA WAS OF ITS STATE ENTERPRISES, WHICH MOVED TO THE SINGAPORE TAMASEK MODEL.
With the endorsement of a market economy as the ultimate goal for China’s economic reform in 1992, the proponents of enterprise reform gained a new mission: turning state-owned enterprises into independent, autonomous, and market-oriented economic entities.
It was reported that in 1988 about 10.9 percent of state enterprises were insolvent. The rate rose to 16 percent in 1989, 27.6 percent in 1990, over 30 percent in 1993, and 40 percent in 1995. A survey of state enterprises in 16 big cities, including Shanghai, Tianjin, Shenyang, and Wuhan, jointly conducted by nine central government ministers and bureaus in 1994 revealed that 52.2 percent of state enterprises were insolvent. At the same time, the share of state enterprises in industrial production plummeted from 77.6 percent in 1978 to 54.6 percent in 1990 and 34 percent in 1995
Chinese economists drew much theoretical inspiration from a growing school of thought in modern economics, the economics of property rights, as mainly developed by Armen Alchian, Steven Cheung, Harold Demsetz, Douglass North, as well as Ronald Coase.
Zhucheng, a small county-level city in Shandong, quietly privatized 272 out of its 288 state or collective enterprises. This happened between late 1992 and mid-1994. Chen Guang, who became mayor of the city in 1991 and Party Secretary in 1993, oversaw this radical episode of enterprise reform. As mayor, Chen quickly found out that the majority of state enterprises were actually insolvent and had to rely upon government subsidies to survive. The local government, however, could no longer afford to subsidize the loss-making state enterprises.
After most of the state enterprises being privatized or simply closed, Chen faced little resistance in abolishing five government bureaus formerly in charge of administering state enterprises.
In January 1996, a delegation of twenty-three members from nine different Ministries was sent by Zhu Rongji, Premier of the State Council, to visit Zhucheng for a week. Their report enthusiastically approved the Zhucheng experience of restructuring state enterprises. In March, Zhu himself led a delegation to Zhucheng, visiting many restructured enterprises. After his visit, Zhu pointed out some shortcomings in Zhucheng’s enterprise reform, but praised it as a model that deserved serious consideration for other cities.
To reform their state enterprises, most of which had been the pride of China during Mao’s time, officials from Shanghai visited several western European countries to study how they managed their state assets.
Many small and medium-sized state enterprises were simply liquidated. As a result, their number was cut dramatically. Even those remaining were separated from direct government control and put in the hands of a few state asset management companies. In principle, the state asset management company would behave like a private investor, subject to certain political constraints. Moreover, all state asset companies reported directly to the State Assets Management Committee, slashing the bureaucratic red tape that had plagued state enterprises in the past.
The practices of both Zhucheng and Shanghai were incorporated into the “Decision on Issues Regarding the Establishment of a Socialist Market Economic System,” which was passed at the Third Plenum of the Fourteenth Central Committee of the Party in November 1993. This meant that those practices were now part of the main approach to reforming state-owned enterprises. The strategy was then called “holding on to the big and letting go the small.”
THE THIRD MAIN MARKET REFORM IN CHINA WAS CREATION OF JOINT STOCK COMPANIES in 1997 AND PRIVATISATION AS A POLICY
At the Fifteenth National Congress of the Party in 1997, the role of the non- public sector was stressed as “an important component” of the socialist market economy. Joint-stock companies were officially recognized. Privatization was no longer seen as undermining socialism. Afterward, the state-owned enter- prises went through a drastic process of restructuring and downsizing, resulting in massive layoffs.
CHINA’S FAILURE TO PRIVATISE OR LET GO THE HIGHER EDUCATION SECTOR IS HOLDING IT BACK – ITS ACHILLES HEEL – AND EXPLAINS WHY IT WILL REMAIN A THIRD TIER COUNTRY IN COMPARISON TO THE USA.
Most Chinese universities and the educational system in general still remain under state control. It is here that the most serious deficiency of China’s market reform reveals itself. This deficiency stands at the root of the troubling symptoms we have identified above, as well as other shortcomings in the Chinese economy.
The most significant change in Chinese universities in the past few decades of rapid market reform has been the commercialization and expansion of higher education. At the end of the 1980s, Chinese universities started to enroll fee- paying students who otherwise would not have been able to attend college because of their poor performance at the national college entrance examination. As a result, the state ceased to be the only funder of higher education. The pace of commercialization and expansion of the higher education sector picked up greatly in the 1990s, giving rise to what is widely referred to as “China’s great leap in higher education.” In 1995, only 5 percent of age group 18–22 had access to higher education; by 2007, that had increased to 23 percent
The fatal organizational flaw of Chinese universities is their lack of autonomy. The majority of Chinese universities remain primarily funded by the state and under the strict control of the Ministry of Education.
In 1995 and 1998, the Chinese government launched Project 221 and Project 985, with the aim of building up a few world-class universities and critical academic disciplines.85 The Ministry of Education introduced the piece rate compensation system to Chinese universities, an incentive scheme that had served well in manufacturing firms. University professors are evaluated and rewarded according to their publications. The total compensation of a professor typically consists of a basic salary, which is tied to his or her academic rank, and a performance-based reward, which is mainly dependent on publications. In most cases, the basic salary is set so low that all professors have to publish to earn a decent living. Not surprisingly, this scheme, which is now widely applied, has turned Chinese professors into publication machines.
Given the pervasive administrative meddling of the state, it is not difficult to understand the mediocre performance of Chinese universities. As Milton Friedman remarked, the surest way to destroy an industry is to protect it with state monopoly. The state monopoly in China has severely curtailed the production of ideas. Administrative interference is so severe that even in areas such as physical and biological sciences and technology, where the impact of political ideology is limited, a free market for ideas hardly exists.
People of critical thinking and independent thought, the most valuable human assets in any society, often find themselves labeled political dissidents. In turn, political dissidents often find themselves deemed to be “anti-Party,” or “anti-socialism,” a charge that can end their career, if not their life.
The lack of a market for ideas is directly responsible for the lack of innovation in science and technology, the Achilles’ heel in China’s growing manufacturing sector.