Why private companies grow fast in socialist China

By John Ross
0 Comment(s)Print E-mail China.org.cn, November 16, 2014
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A striking feature of China's economic development is the breadth of social layers benefitting from it. At the bottom of the economic ladder, China has lifted over 600 million people from internationally defined poverty - accounting for the entire global fall in the number of those living in poverty. Taking middle incomes, while median U.S. wages have fallen in the last seven years, China's real urban incomes rose annually by not far short of double digit figures. At the top income level Alibaba's IPO, raising US$25 billion, the largest for any company in history, turned Ma Yun into China's richest person.

The soaring Alibaba [By Zhai Haijun/China.org.cn]

But Alibaba is the tip of an iceberg. By 2012, China had 10.9 million private companies, employing 113 million people, plus 40.6 million individual enterprises, employing 86.3 million people. No equivalently rapid expansion of private enterprises has taken place in any other country. How, therefore, has socialist China produced not only the world's biggest improvement in living standards for ordinary, and the poorest, people but also the world's fastest development of private companies?

The reason is that China's economic structure successfully aligns all major economic forces. This is strikingly unlike the current situation in the G7 - which was characterised by IMF Managing Director Christine Lagarde economically as "the new mediocre" and Pew International Research polling found the prevailing mood as "pessimism is pervasive." As the contrast, the continued rapid development by China's private companies demonstrates the advantages of China's economic structure, which has major lessons globally.

Taking first the West, the G7 proclaim themselves "market economies," in which large numbers of private companies compete equally to produce fair and efficient economic outcomes. Small and medium private enterprises are held up as their economic exemplar.

But this image of economies dominated by relatively small scale production, with perfectly competitive markets, is a myth. A dominant feature of modern economies is increasingly large scale production. In a number of sectors the investments required are so large they produce pure monopolies - railways, the electricity grid, metro systems in modern cities etc.

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