Chen: China should decrease state holdings

Many governments justify public ownership of corporations as a way to increase economic equality. But Yale economics professor Zhiwu Chen GRD ’90 disagrees.

Chen, who studies the Chinese economy, argued in a lecture Tuesday that the Chinese government ought to decrease the stake it holds in its economy in order to even income distribution among citizens. During the talk, which was the first hosted by the undergraduate founders of the China Economic Forum, Chen talked to roughly 30 students about China’s experience with state ownership and its effect on the inequality of wealth across different regions of the country.

School of Management professor Zhiwu Chen was voted one of the top 10 most influential Chinese economists by “Wall Street Wire.”
Ge Yang
School of Management professor Zhiwu Chen was voted one of the top 10 most influential Chinese economists by “Wall Street Wire.”

“The topic that I have chosen questions the idea we were taught to believe since kindergarten in China,” he said.

Presenting data that he said reflected an inverse relationship between the number of state-owned enterprises and the level of economic development, Chen argued that instead of promoting economic equality, state ownership centralizes wealth and produces a wider gap between the rich and the poor.

Government-run economies face numerous problems, such as the so-called “moral hazard” — in which agents act less responsibly than they should because they don’t feel the full consequences of their actions — and the lack of checks and balances, he said.

“It’s just like self-dealing,” he said.

Most young economies are essentially free because nascent governments do not have the power to regulate them, Chen said. Before the advent of modern communications technology and transportation infrastructure, China’s government was not able to control the economy, he said. Riffing on an old Chinese saying — “The sky is high, just as the king is far away” — Chen argued that the central government used to have meager control the over distant provinces and counties.

But that is no longer the case, he said.

“Today, when technology is advanced and transportation is improved, all the other countries have been able to take advantage of this change and allow the labor to move around, except China,” he said.

China makes it difficult for laborers to move around the country freely, he said, creating inequalities in local labor markets.

From 1963 to 1979, as China developed a centrally organized economy, the income inequality between China’s provinces increased, Chen said. When Chinese leader Deng Xiaoping began to liberalize the economy in the early 1980s, the distribution became more equal. But inequality increased again after the mid-’90s, when the government became more involved in the economy, Chen said, with the poorer provinces faring worst.

“Places like Beijing and Shanghai are more influential, therefore got more benefit,” he said.

Chen’s data also suggested that provinces with the most lucrative investment opportunities — those not as fully developed — received the least investment. Investors are scared away by corruption and a lack of government transparency, he said.

Students interviewed said the talk provided an interesting perspective into one of the largest and fastest-growing economies in the world.

“In China, a lot of people don’t realize the degree of government ownership of assets,” said Harry Greene ’08, an Economics and Mathematics major. “Professor Chen’s talk sparked a dialogue about the economic policies in China.”

Lin He ’09 said he would have liked Chen to discuss the economies of more countries.

“I wish in his example he had used countries such as Norway, where income inequality is not a big problem, instead of the U.S. and Italy, where there is a big wealth gap between the rich and the poor,” he said.

Chen has taught finance at the Yale School of Management since 1999.

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