Huang Yasheng, professor of political economy and international management at MIT’s Sloan School of Management, spoke at the FCC in Hong Kong last week. I intended to write a post about it soon after the event, but then got waylaid by various other duties. Huang’s take on the Chinese economy is interesting – and, in certain key ways, different from that of many others – so it’s still worth a few lines.
Chinese government policy is increasingly focused on creating the social infrastructure that will persuade people to save less and spend more. In this way, China can evolve into a self-sustaining consumer-driven economy. Huang, however, believes that a high saving rate is not the problem; low income growth is to blame.
He bases his argument on what might be best described as the “suppression of household income” model. In Shanghai, for example, GDP has grown dramatically compared with the national average, but household income is not growing relative to GDP. The suppression works as follows: The government intervenes to acquire land from rural households, and then auctions it off to real estate developers at competitive prices. Consequently, money that could have gone to the many goes to the few.
“Shanghai is the most extreme example of the economics of financial distortion,” Huang said.
Huang’s solution is liberalization, particularly in rural areas: Revive entrepreneurship (as represented in the now-sluggish non-farm business income figure) through a program of land reform and finance initiatives. No longer will rural residents flock to factories in Dongguan – some will choose to stay at home and set up their own businesses. He points to Zhejiang, a province that saw considerable liberalization in the 1980s and 1990s and, thanks to the rise of private sector activity, has seen household income growth that is proportionate to GDP growth.
Huang believes China could live with an economy that expands by 5-6% each year, provided household income growth stays in touch with this headline number. But his conclusions are bleak.
“My biggest concern going forward is that you repeat the Shanghai story for the rest of the country as you roll out these massive investment projects. [The government] has the right policy goals, but the means they use are really administrative in nature rather than market-based … They do not make the connection between the rural areas and places like Dongguan.”
He also warns against China’s development path mimicking those of Japan and South Korea. The East Asian economic miracle was built on strong GDP growth, good social performance and low income inequality – China doesn’t tick all the boxes.
“China satisfies one part of this, but it has utterly failed in the other definitions,” Huang said. “I feel intellectually more comfortable comparing China to Latin American countries in the 1960s to 1980s.”