All developed countries have mixed economies, partly market-based with private property, and partly government owned, managed, and regulated. The economic mixture varies from country to country, and often within countries. (In India the province of Kerala has long been run by communists, while Gujarat, for example, has pro-market policies.)

In China, XinhauNet reports: “SOEs have potential in mass entrepreneurship, innovation: premier” (April 28, 2017):

China’s centrally-administered state-owned enterprises (SOEs) have a promising future in boosting mass entrepreneurship and innovation, Premier Li Keqiang has said.

Premier Li said he believes centrally-administered SOEs have more potential and opportunity in implementing mass entrepreneurship and innovation as they are rich in technology, talent, capital and resources.

Government owned and managed enterprises have a mixed record across the world, with a great many expensive failures. Next door to China is South Korean, fifty years ago an impoverished country recovering from war and partition, and suffering from misguided economic policies.

In “How to Go From the Third World to the First,” (Wall Street Journal, April 27, 2017), John Tamny reports:

In the years immediately after the war, South Korea’s disastrous economic policies produced alarming inflation and food shortages.

Economic advisors from the U.S. made things worse with poor economic advice. An economics professor from Dartmouth described his early work advising the South Korean government on collecting taxes. Theater owners were fudging attendance figures to reduce tax payments. So U.S. advisors recommended the government set taxes on the number of seats in each theater rather than claimed number of moviegoers. Before long tax revenues from theaters again fell, and South Koreans were sitting on the floor to watch movies.

The John Tamny review of The New Koreans  reference early misadventures with state owned enterprises:

Mr. Breen also suggests that the South’s growth began with dictator Park Chung-hee’s “guided capitalism” in the 1960s, but, as he later acknowledges, the companies supported by Park “almost all failed.”

Still, advocated of government “guidance” and direction of economic development see success story in Japan, Taiwan, Singapore, and South Korea, all of which had heavy government involvement in their early stages of economic development. Market advocates argue most of these interventions were and are misguided, diverting resources and subsidizing failures, and slowing authentic economic development.

With mixed economies like South Korea and China (as well as Japan, Taiwan and Singapore), successes and failures can be credited and blamed on either private enterprise or government’s guiding hand, often depending upon the preferences and preconceptions of researchers. The South Korean government aided major family-owned corporations (called chaebols). The Foreign Policy article, “Success Story in South Korea” was published in 1969.

Screen Shot 2017-05-03 at 8.33.52 AMNicholas Lardy’s Markets Over Mao: The Rise of Private Business in China  (Columbia University Press, 2014) argues in a 2014 Wall Street Journal interview that State Owned Enterprises (SOEs) praised by China Premier Li Keqiang in the article above, are problems more than solutions:

[WSJ]You argue that China’s state-owned enterprises don’t have the power that their opponents say they do. What’s your proof?

[Lardy] SOEs appear to be a relatively small portion of the Chinese economy. They account for between one-third and one-quarter of GDP. But in manufacturing, SOEs only account for 20% of output. In some parts of the Chinese economy, the private sector has largely displaced state companies.

[WSJ] You also say the notion that China flourishes because of “state capitalism” is outmoded. Why?

[Lardy] State capitalism means a high degree of state ownership of production, a great deal of control over investment, a great deal of control of the banking sector and a very substantial use of industrial policy. I don’t think the term ‘state capitalism’ fits China very well because its industrial policy has been an almost complete failure.

The return on assets of state firms is plummeting. It was around 3.7% in 2013, which is less than half the cost of capital

Debt Crisis Shakes Chinese Town, Pointing to Wider Problems,” (New York Times, April 25, 2017) suggest that continued government bank financing of favored state enterprises resulted in private enterprises resorting to complex and risky cross-company debt:

One of the paradoxes of China’s debt troubles is that the country is awash in debt, yet publicly listed or privately held companies can find it hard to borrow. The state-controlled banking system lends mainly to state-owned enterprises, which can seem like a good credit risk because they have implicit government guarantees.

In response, private companies often band together, guaranteeing one another’s borrowings, to give bank credit officers more confidence that loans will be repaid. The downside is that if one company runs into trouble, it can drag down the other companies that guaranteed its debts. Those other companies, in turn, can set off their own credit guarantees from yet more companies with no direct connection to the first one.

Across China, local government fund local development through debt, and this is a huge potential problem. “China Spawns Debt Market to Ease Burden on Local Governments,” (Bloomberg Markets, January 17, 2017) reporting:

China’s economic slowdown is hampering municipalities’ ability to support the 5.6 trillion yuan ($818 billion) of outstanding onshore notes sold by local government financing vehicles, which ballooned after the financial crisis when they used them to meet funding shortfalls. The notes offer an improvement over LGFV bonds because of cash-flow visibility, analysts said.

The vast overinvestment in steel and aluminum production as well as shipbuilding and other heavy industrial enterprises across China were built on enthusiastic local government support and debt.

China’s shipbuilders go from boom to rust,” (The Australian, February 10, 2017) reports:

Until last year the Yangzhou Guoyu Shipbuilding Company was a bustling village of 6000 workers striving to fulfil worldwide orders for new ships.

Today, in a scene repeated across China’s industrial heartlands, the yard stands silent but for the howling of stray dogs around its deserted docks. Outside the closed gates is a ghost town of abandoned workers’ dormitories, closed restaurants and crumbling internet cafes.

Much of Yizheng’s 27km stretch along the Yangtze’s northern bank 320km upriver from Shanghai is now a wasteland, where idle cranes loom half-seen through choking grey haze.

Unfinished hulks of ships are left to rust.

China’s central and regional government’s enthusiasm about shipbuilding since 2000, partly as a way to absorb massive new steel production, fueled the current collapse:

Shipbuilding became a symbol of China’s industrial might in the early 2000s, when Beijing vowed to transform its modest shipbuilding sector into the world’s largest producer by 2015 — then did it five years ahead of plan. …

The result is that China’s private sector shipyards have been virtually wiped from the map, while Beijing is keeping only the most viable state-run yards alive with subsidies. …

Chinese shipyards capable of building large ocean-going vessels have roughly halved in number since 2013 to about 70, he said, while hundreds of smaller shipyards have gone bust.

So, against the optimistic claim: “China’s centrally-administered state-owned enterprises (SOEs) have a promising future in boosting mass entrepreneurship and innovation…” is the reality of failed enterprises championed and funded in the past by local and central government bonds and banks.

The steel, aluminum, and ships exported and sold below cost in world markets have likely left a hole vast and deep of unpayable debt across China.

China warns on hidden local government debt risks,” (Financial Times, March 4, 2017) reports:

Local governments’ fiscal woes come as they face the prospect of either continuing to support highly indebted state-owned enterprises, especially in steel and coal, or allowing them to close and taking on the burden of additional pensions, unemployment benefits and unpaid debt.

 

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