Recently, the Agricultural Bank of China announced that it completed the largest IPO in history, following in a line of several Chinese hybrid state-owned entities that have made such historic offerings. It is amazing that, after more than three decades of astonishing economic growth, many still dismiss feats like the AG Bank of China’s IPO as a cynical story of state-market manipulation. But the truth is much more sobering: China actually understands the nuances of how to build a successful and powerful economic juggernaut than we in the US do. The reality is that we have much to learn from China these days. The irony of our times is that the largest (nominally) communist society in the world is also the most dynamic (and intelligently run) capitalist economy in the world.
As I wrote in a recent article on this topic (Guthrie and Slocum, “Through the Looking Glass: Inefficient Deregulation in the United States and Efficient Regulation in China,” in Markets on Trial: The Economic Sociology of the US Financial Crisis, Michael Loundsbury and Paul Hirsch, eds): “Since the early 1980s, most of the capitalist world has converged around the consensus that state-owned enterprises are fundamentally inefficient. With the privatization of national energy conglomerates from Britain to Italy to the privatization of tobacco and salt corporations in Japan to Mexico, Turkey, Zaire, the general consensus is that state involvement is fundamentally antithetical to the type of efficiency that comes with private ownership. The assessment of the inefficiencies of state planned economies in the Soviet Bloc and China seemed to confirm this view. Dating from the scholarship of famous economists like Janos Kornai and Jeffrey Sachs, the basic position has been that state ownership simply could not provide the right incentives for efficient market behavior. This notion is a mainstay of US economic and political discussions—any state involvement must be less efficient than private ownership. The core concept of the efficiency of a deregulated market system is often contrasted to the notion of the fundamental inefficiency of state ownership.
“The success of China’s economy and many state-owned firms within it has caused us to revisit some of the key assumptions upon which those arguments are based. The reality that China has revealed is that the issue is not ownership per se (state versus private) but, instead, the ability to create the right incentive structures that lead to efficient market behavior. In reform-era China, there has been a tremendous amount of institutional innovation that has allowed for a reform of incentives—leading to greater efficiency—while at the same time allowing the state to continue to watch over and guide the economy.
“While we typically conceive of private ownership as leading to efficiency and innovation and state-ownership as leading to inefficiency and complacency, this caricature simply does not match reality. In some cases, private firms like General Motors and Citigroup can be woefully inefficient, while state-owned firms like PetroChina and the AG Bank can be extremely efficient. The issue is not public versus private ownership per se; rather it is how effectively incentives are aligned to create dynamism and innovation in the marketplace. Further, state ownership has the added role of forcing firms to think long term and align themselves with national interests.
“Our own policy makers should be less fearful of and think more innovatively about public-private partnerships. In China, the government is deeply engaged in the economy—not only as regulator but also as economic agent. And, contrary to the common portrayal of SOEs as inefficient and complacent organizations, China has been able to align the incentives of senior executives in the SOEs; the government has also done an effective job of aligning the incentives of local officials. The key policy lesson here is that government agencies can be quite effective in guiding economic organizations: they are in a position to consider national (or local) strategic policy issues and broader issues of systemic risk; and contrary to popular belief, they can also think about economic action in creative and institutionally innovative ways.”
In short, there are so many ways that the US economy is lagging behind today (innovation, education, systemic risk analysis), and if we are not careful, we are going to fall further behind. Today, we are locked into a simplistic debate about the efficiency of the private market and the inefficiency of state “meddling” in the economy. First, there is no clear argument that private ownership is better. General Motors and Chrysler have been every bit as lethargic and inward looking as the worst caricature of the classic State-Owned organization might be; yet PetroChina is by almost every statistic the most efficient oil company in the world. But innovation is better in the private economy you might say; perhaps in some cases. But China is killing us in the development of clean tech right now. Why? Because the state has deemed it important, and it invests in it. The best we can do is tax credits to stimulate private sector development. The bottom line is that we need to get out of our simplistic mindset of a laissez-fair market economy. And we need to wake up and learn from the careful way in which the Chinese economy is being planned.
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