Why aggressive privatisation in the reform of state-owned enterprises is not for China
Dan Steinbock says there are sound reasons for the Chinese preference for pragmatic, gradual change in the reform of its state-owned sector, where intervention is still needed
In early summer, President Xi Jinping called on officials to deepen reform of state-owned enterprises. China would strengthen the "party's leading role in supervising" these enterprises through anti-graft inspections and public scrutiny.
However, the devil is in the details.
In the 1990s, Western "shock therapy" advisers promoted the rapid privatisation of state-owned companies to maximise productivity benefits. In Boris Yeltsin's Russia, the advice was taken seriously. The net effect was an economic disaster that still suppresses Russia's growth potential.
In China, the shock therapists' advice was ignored. Instead, reformers have favoured incremental change. In the process, the share of state-owned enterprises in industrial output declined from 75 per cent in the late 1970s to 25 per cent today. The net effect has been an economic success that is widely studied in most emerging economies.
According to market prophets, China's industrial revolution reflects the triumph of "markets over Mao", as the veteran analyst Nicholas Lardy titled his recent book. In this view, it is privatisation that has fuelled productivity at successful state-owned firms, while the closure of the loss-making ones has unleashed resources that were then more profitably employed by private firms.
According to the statist advocates, however, China's industrial revolution succeeded not because of privatisation but because state-owned firms remained under state overview.
In reality, neither markets nor Mao has triumphed, but Deng Xiaoping has. Much of Chinese success in the reform of state-owned enterprises can be attributed to pragmatic gradualism.
