Over the next few weeks we're going to be hearing a lot about Shanghai. Expo 2010 -- this year's version of the venerable World's Fair -- has just opened in China's biggest city. Two years ago Beijing used the Olympics to showcase China's achievements to the world; now it's Shanghai's turn. So get ready to absorb an economy-sized dose of superlatives: The world's second-busiest port. The largest stock market on the mainland. Double-digit growth since 1992. The Paris of the East.
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Let's wish the Shanghainese all the best as they gear up for their party. The Expo looks like it will be a lot of fun, and we certainly hope that's the case. But beware. Tradition teaches us that fairs also make great occasions for hucksters and con artists. So a word of friendly advice: Should you happen to hear people assuring you how Shanghai ought to serve as a "model" for China, or even the rest of the world -- put a hand on your wallet. Somebody might be trying to pull a fast one.
Foreign business people, in particular, love to gush about Shanghai. Look at Pudong, the city's financial district, where a forest of skyscrapers has sprouted in the course of a few years. Look at the state-of-the-art hotels, the fizzy night life. Look at the awe-inspiring infrastructure, from the city's immense container port to the maglev train that whips visitors into town from the airport at 268 miles (431 kilometers) per hour. So it's easy to understand why in 2004 the World Bank, which often praises Shanghai for its strong business spirit, chose the city for a conference designed to celebrate China's success at combating poverty. Earlier this year, the New York Times' Thomas Friedman invoked Shanghai, along with Hong Kong, as the embodiment of China's vibrant new business culture, "a highly entrepreneurial sector that has developed sophisticated techniques to generate and participate in diverse, high-value flows of business knowledge."
But what if Friedman and the World Bank are wrong? That's one of the conclusions that emerges from Capitalism with Chinese Characteristics, a new book by Yasheng Huang, a China-born economist at the Massachusetts Institute of Technology. "I never bought into the idea that Shanghai was a laissez-faire capitalist city, like Hong Kong," said Huang in an interview. "That simply wasn't true. And a lot of Shanghainese know that. They know that it's not a free market environment."
In his book, Huang argues that China's economic reforms can be divided into separate eras. In the first, which extends from Deng Xiaoping's 1978 "opening and reform" to the early 1990s, the Communist Party emphasized rural development with relatively little interference from above -- and the result was an explosion of small- and medium-sized businesses that created an enormous surge in employment and grassroots wealth. Deng created his first "special economic zones" in places along the coast -- such as Shenzhen and Xiamen -- where there was relatively little established industry. So the new companies that sprang up there were almost entirely private. Foreign investors piled in, but mostly under conditions that didn't disadvantage local entrepreneurs. Everyone got rich together.
The second phase, which started in the early 1990s and has continued more or less until the present, reversed or slowed many of these earlier reforms. Now policy concentrated on big cities. Here, Huang argues, the government played a much more active role, pouring money into showcase infrastructure projects and favoring state-owned companies over private ones. What's more, regulatory regimes and tax structures tended to privilege foreign investors over domestic businesses -- a trend that reached its apogee in Shanghai. As Huang writes: "Shanghai represents the political triumph of the Latin American path, anchored on the prominence of statist interventions, huge urban biases, and distorted liberalization in favor of FDI [foreign direct investment] at the expense of indigenous entrepreneurship."
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