The Red Pig and the Stupid Market*

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Chinese Economy

Some months ago the news reported on an economic research paper according to which “China could grow more quickly by 2036 if Chairman Mao’s policies were brought back”. This basically means that Deng Xiaoping’s free market policies did more bad than good and everything was just almost perfect when Mao was ruling China –if evil capitalists would just let him rule for a few more years, all those poor victims, killed by war, famine, and political purges under Mao would have properly served the Communist Utopia!

The paper, entitled “The Economy of People’s Republic of China from 1953,” is based on a wrong methodological approach: the authors divide China’s economic growth in two different periods –The Mao Era (1953-1978) and the post-Mao Era (1978-2011). The resulting conclusion reads like an extraordinary claim. And extraordinary claims require extraordinary evidence:

“the continuation of the 1953-1978 policies with the exception of the Great Leap Forward would have delivered about half of the post-1978 gains” although “the Great Leap Forward was a short-lived policy shock with negative welfare gain only in one year but an overall slightly positive aggregate impact” (p. 1).

However, as we have seen in a previous review of Yasheng Huang’s book, Capitalism with Chinese Characteristics, the free-market policies and the entrepreneurship-oriented economy introduced and favored by Deng Xiaoping did not survive the Tian’anmen Massacre but were reversed during the 1990s. By ignoring Yasheng Huang’s data, the authors are trying to prove that post-1990 China would have done better with Mao instead of Deng –but because of the reversal in these policies after Tian’anmen, post-1990 China actually returned to a light version of the pre-1978 Maoist policies. Their study, thus, actually demonstrates the opposite of what it sets out to prove.

A second methodological problem is their use of GDP numbers to calculate China’s growth. As Christopher P. Casey puts it in his article “How GDP Metrics Distort Our View of the Economy”:

“For example, even if a ship — built at great expense — cruised without passengers, fished without success, or ferried without cargo; it nevertheless contributed to GDP. Profitable for investors or stranded in the sand; it added to GDP. Plying the seas or rusting into an orange honeycomb shell; the nation’s GDP grew.”

This though has been expressed by many remarkable economists: Mises stated that GDP estimations were “as childish as the mystic efforts to solve the riddles of the universe by worrying about the dimensions of the pyramid of Cheops;” Frank Shostak called them “an empty abstraction devoid of any link to the real world;” and John P. Cochran has pointed out that it “encourages government meddling” and, hence, it is in fact politically designed to advance the Keynesian agenda. Joseph T. Salerno even goes as far as to defend that a reduction of GDP can actually increase economic growth.

Furthermore, the authors try to show an increase in the privatization of State Owned Enterprises (SOEs) in the 1990s, but they fail to define what privatization means in the context of the People’s Republic of China. Jie Gan et al.’s working paper, “Privatization and the Change of Control Rights: The Case of China,” is the main source for this claim but, when read carefully, it offers a different explanation of Chinese privatization during this period. For example, according to Gan et al., “Public offering [one of the different types of gaizhi, an euphemism for privatization] involves partial privatization since by the Chinese law the state retains the majority of the shares after public offering. Internal restructuring, including incorporation, spinning off, introducing new investors, and debt–equity swaps, as well as bankruptcy/reorganization, often involves partial privatization but may also involves no privatization in the case that a structuring is among state-owned firms” (p. 6). This is the rule, rather than the exception, and joint ventures involve privatization when joined with foreign firms, as it is the case with Galanz and Wahaha (private domestic joint ventures are rather small and do not account for the so-called “Chinese miracle”). In fact, privatized SOEs are highly scrutinized by the government, and the managers who own them have very short tenures even if the shareholder is a legal person, instead of a local government (Huang, pp. 12, 16).

Privatization data is in fact the only post-Tian’anmen issue discussed by the authors (p. 32), the rest being limited to the 1978-1989 period. Because of this, there is no comparison between the pre- and post-Tian’anmen period, and the authors assume that data from the 1990s –for which they just provide numbers without further analysis– is the result of Deng Xiaoping’s policies –when it is in fact a reversal of them.

These are just some of the methodological problems of the aforementioned paper. It is hard to believe that the thesis presented by the authors could be sustained with a properly classification of pre- and post-Tian’anmen policies and a complete study of 1990-2011 political and economic changes, including privatization and excluding the unreal GDP growth –which, as it is commonly agreed, is even more unreal in the case of the People’s Republic of China.

Claims such as these are not only misleading, but they should be deemed dangerous. The recent financial crisis in China clearly shows that the projected data presented by the authors of “China could grow more quickly by 2036 if Chairman Mao’s policies were brought back” makes little sense. Even if the Chinese government keeps inflating their big red piggybank, their stupid market policies will just end up breaking it.

* I owe this title to my former student Lee Q.

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