Guo Jin, Min Tui (国进民退)

Michael Wines has an excellent report in today’s New York Times, about the rising dominance of China’s state-owned enterprises, at the expense of the once-vibrant private sector.  Although partly an unanticipated consequence of China’s big stimulus push, he notes, the trend may — to some degree — reflect a more profound shift in philosophy:

Once eager to learn from the United States, China’s leaders during the financial crisis have reaffirmed their faith in their own more statist approach to economic management, in which private capitalism plays only a supporting role.

“The socialist system’s advantages,” Prime Minister Wen Jiabao said in a March address, “enable us to make decisions efficiently, organize effectively and concentrate resources to accomplish large undertakings.”

The trend has given rise to a catch-phrase among Chinese entrepreneurs: “guo jin, min tui,” or “the state advances, the private sector retreats.”  (The rough ambiguity of the characters could also suggest “the nation advances, but the people fall behind”).  Or as one official quoted in the article colorfully puts it, the new policy amounts to “leaving the private sector drinking the soup while the state enterprises are eating the meat.”

Wines cites China’s airline industry as a revealing, concrete example:

Six years ago, the central government invited private investors to enter the business.  By 2006, eight private carriers had sprung up to challenge the three state-controlled majors, Air China, China Southern and China Eastern.

The state airlines immediately began a price war. The state-owned monopoly that provided jet fuel refused to service private carriers on the same generous terms given the big three. China’s only computerized reservation system — currently one-third owned by the three state airlines — refused to book flights for private competitors. And when mismanagement and the 2008 economic crisis drove the three majors into financial straits, the central government bought stock to bail them out.

Today, only one private competitor remains.

The implications of this shift depend on who you talk to.  Columnists like Thomas Friedman have hailed China’s ability to make state-led investments in infrastructure and technology.  As Wines observes:

Those who see little evidence of an expanding state sector generally believe that China has a decade or more of robust growth awaiting it before its economy matures. Theirs is a Goldilocks view of state intervention — not too much or too little, but just enough to push a developing economy toward prosperity.

The skeptics have a darker view: they believe distortions and waste, in no small part due to government meddling, have resulted in gross misallocation of capital and will end up pushing growth rates down well before 2020. What drives their pessimism, the skeptics say, is that China, like Japan a generation ago, has too much confidence in a top-down economic strategy that defies conventional Western theory.

Anyone who reads this blog regularly knows I fall into the skeptic camp.  Which leads me to mention another excellent article, an op-ed by Chrystia Freeland in today’s Washington Post called “China’s economic model isn’t the answer for the U.S.”  She raises a number of important points, regarding the link between freedom and innovation, that I couldn’t agree with more.

As for China, my concern is that its leaders, its policy-makers, and to some extent its people have forgotten what made the economic miracle of the past 30 years possible.  It was not the product, as is commonly portrayed these days, of a series of five-year government plans, in which entrepreneurs played their cooperative but subordinate part.  It was the courageous and far-sighted decision, on the part of China’s leaders, to get out of the way and allow the Chinese people to create better lives for themselves — starting with the humble step of allowing farmers to grow and sell their own surplus crops.  When the state advances, and the people retreat, China wanders and backtracks on the very path that has led it to accomplish so much.  I’ve seen remarkable things these past 30 years, an incredible transformation, and I believe even more remarkable things are still to come in China — but not if it keeps heading in this direction.