Towards a Worldwide Index of Human Freedom

Liberty in Comparative Perspective: China, India, and the West • 209
SOEs controlled about two-thirds of fixed capital in Chinese industry in
1990, now it is down to about one-third. “The Chinese economy is primarily
privately owned or controlled today” (Bardhan, 2010: 68, 80, and
98). According to the Economist, enterprises that are not majority-owned
by the state contribute 70 percent to Chinese GDP, 67 percent to industrial
output, but 75 to 80 percent of the profits of Chinese industry (2011,
March 26: 72). Huang is more cautious. In his view, just above half of the
Chinese economy is privately controlled, with more of it controlled by
foreigners than by indigenous entrepreneurs (2008: 15). Whereas foreign
investors frequently established joint ventures with the Chinese in the
late 1980s and early 1990s, since the beginning of the twenty-first century,
wholly foreign-owned enterprises dominate (Walter and Howie, 2011:
7). Foreign investment is an essential background condition of Chinese
export successes. According to the Economist, the biggest exporters are
foreign invested enterprises (2010, July 31: 46).
Small and medium enterprises in China get little help from the government.
According to the Economist, there were a million of them by 1990,
eight million by 2001, and around 60 million in 2009 (2009, September
12: 68). Ninety-five percent of them are privately owned. They account
for more than half of China’s tax revenues, about 60 percent of China’s
GDP, 66 percent of its patent applications, 68 percent of the country’s
exports, and 80 percent of China’s new products. They find it hard to
get formal loans. Worse still, pooling private funds outside of official
channels may be treated as a crime and can even lead to the death penalty
(Economist, 2011b, April 16: 63). If environmental regulations are
enforced at all, then small and medium firms are much likelier targets
than state-owned enterprises. In general, political connections still count
in China. According to Du and Girma, such “connections enhance firms’
growth and survival prospects, even if politically neutral start-ups enjoy
faster efficiency improvements” (2010: 543). Since politically less well
connected businesses demonstrate better productivity growth than “red
hat” enterprises,23 the impact of political connections on resource allocation
and economic performance tends to be negative.
It is hard to understand how the Chinese economy could do so well
since the late 1970s without a full commitment to private property rights
rather than the ambivalence about the degree to which they might be
tolerated that actually exists. One answer to this conundrum has been
provided by the theory of “market-preserving federalism” (Montinola,
Qian, and Weingast, 1995; Weingast, 1995). By delegating much economic
decision-making authority to provincial and local governments,
23 If one factors in the low cost of borrowing for SOEs and their preferential access to land,
the real return to equity for SOEs might even be negative (Economist, 2011, June 25: 12).
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