Why private companies grow fast in socialist China
- By John Ross
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E-mail China.org.cn, November 16, 2014
Even when a pure monopoly does not exist, globalization illustrates the way that many branches of modern industry require production on an extremely large scale to be competitive - therefore it cannot be carried out purely nationally. The world only has two major civil aircraft manufacturers, less than 10 companies dominate world automobile production etc.
In its most developed form this creates companies recognized as "too big to fail" - firms operating on such large scales that no alternative can take over their functions without dangerously destabilizing the entire economy. This is explicit in sectors such as banking but, as the state bailout of the U.S. auto companies after 2008 illustrated, it extends to far wider ranges of industries.
Some economic sectors, naturally, remain characterized by competition between large numbers of companies - in tourism, one of the world's largest industries, no company holds even a 1 percent market share. But overall, large companies dominate. The turnover of the world's 2,000 largest publicly listed companies is equivalent to more than 50 percent of world GDP.
The ideology put forward in the West that a modern economy consists of huge numbers of small scale competing enterprises is therefore myth. Equally, the West treating a totally differentiated economic structure as though it were a single "market" has dangerously negative consequences - which actually inhibits development by private companies.
A key example is the financial system, which has been the core of economic crisis in G7 economies. The largest private banks being "too big to fail" necessarily incentivizes extreme risk taking, even criminal, activity. In a pure competitive economy, company risk taking is constrained by the threat of bankruptcy, but once a private financial institution receives a state guarantee as "too big to fail," pursuit of the highest potential return, and consequently the riskiest financial projects, becomes rational - the private institution receives the profit if such projects are successful but the state absorbs the losses if they fail. The continuous series of private banking scandals such as LIBOR, JP Morgan's "Whale" trading, and foreign exchange manipulation, are therefore inevitable, as was the huge asset misallocation seen in developments such as the U.S. sub-prime mortgage crisis prior to 2008.
Far from being a single "market," a modern economy has at least three major types of market - pure monopoly, competition between small numbers of very large companies (oligopoly), and competition between very large numbers of small producers (perfect competition). An undifferentiated economic policy therefore cannot be successfully applied across economic sectors which have totally different economic structures.
China's economic structure - "socialism with Chinese characteristics," sharply differs. The very word "socialism" derives from "socialized," i.e. large scale production. In China the purest form of large scale production, monopolies, are state owned. But, simultaneously, since 1978 China has rejected a distorted idea, originating in the USSR, that small scale, i.e. non-socialized, production should be in state hands. China's agriculture is not collectivized, and purely competitive industries are left to private companies. In competitive sectors dominated by large scale production both state and private producers have advantages, so the best way to test their relative strengths is to let them compete - as China does.
