This study is nothing short of a stinging indictment of China's gradual path of reform, both in its actual implementation in the 1990s and in its idealization by Western academics. Instead of the usual portrayal by the Chinese government and some U.S.-based economists that China's economy continues to undergo a process of reform, Yasheng Huang argues that the 1990s saw a “great reversal” of the promising, rural-based reform trajectory of the 1980s. This is a work of great importance, which has changed how many of us see the Chinese economy and will motivate further scholarship to uncover gross inefficiency embedded in the current Chinese growth model.

Huang begins by systematically casting doubt on the conventional view held by many economists that reform in the 1990s was simply a “deepening” of the reform of the 1980s. Marshaling an impressive array of survey and documentary evidence, Huang shows that China's private economy peaked in the 1980s, when the political elite encouraged private growth and privately owned township and village enterprises (TVEs) thrived. Survey evidence compiled by Huang further shows that in the 1980s, credit was generally available to rural private entrepreneurs and fueled the spectacular growth of TVEs. In the 1990s, however, banks began to channel funds away from the rural area to urban state-owned enterprises and construction projects. Beyond the usual story of rapidly rising nonperforming loans in the 1990s, the channeling of loans to urban areas led to a staggering opportunity cost. Zhejiang Province remains the only survivor of the 1980s model, from which we get a glimpse of China's alternative present, sadly forgone.

Huang then launches a systematic attack on Shanghai, often touted as the model city for the developing world. Instead of energetically incubating private firms, indigenous private entrepreneurship in Shanghai ranks among the lowest in all of China. Instead of earning income from entrepreneurship or from private assets, the average household in Shanghai earns mainly wage income and saves little, in stark contrast to places such as Zhejiang and Guangdong. More information on the vast commercial empire controlled by the Shanghai municipal government would have been welcomed in this section. Nonetheless, Huang makes a convincing case that Shanghai is a model of state capitalism that systematically discriminates against genuine private entrepreneurship.

One can certainly quibble with several of Huang's arguments. In chapter 1, Huang presents evidence that the indigenous private sector continues to make up a relatively small share of output and employment and that many state-controlled shareholding companies are misclassified as “private” firms. However, many foreign invested enterprises excluded from Huang's analysis were in reality domestic firms that took advantage of the preferential policies toward foreign invested enterprises. Thus, his estimate of the indigenous private sector is likely too low. Also, the decentralization policies pursued in the 1980s led to a precipitous decline in central government revenue and bouts of high inflation, which caused major urban demonstrations. In some ways, the policies of the 1990s were a reaction to the perceived chaos in the 1980s. On the collapse of the TVEs in the 1990s, although the dearth of credit was one reason, the fall of the TVEs also had to do with the 1994 tax centralization, which took away local government revenue and thus subsidies to TVEs. TVE competitiveness probably benefited somewhat from a hardening budget constraint. More generally, it would have been instructive to get a clearer political story on the reasons for the shift from a rural-based growth path to a growth path dominated by state-owned enterprises in the early 1990s.

Despite these reservations, Huang's core argument about the enormous explicit and opportunity costs of the urban, state-centric growth model in the 1990s remains convincing. China suffered great costs in terms of stagnant household income, increased illiteracy, and collapsing health care. But did China get nothing in return? Another interpretation of the 1990s is that third-generation leaders led by Jiang Zemin gained power at a time when the revolutionary generation was rapidly receding from the political scene. Left increasingly alone to govern this enormous country, they sought to concentrate state resources where possible in order to deal with shocks that often derailed the growth trajectories of developing countries. They used Deng's power one last time to centralize tax collection in 1994 and to unify the banking system in 1998. On the one hand, Huang shows us that the centralization of fiscal and financial resources led to an urban bias that channeled funds to large cities and deprived rural entrepreneurs of much-needed capital. On the other hand, the central government was able to deploy enormous resources to put out fires in the past two decades, ranging from the Asian financial crisis to SARS. We will never know whether the trade-off was a worthwhile one, but Huang is perhaps overly harsh in implying that China got little in return for its centralization policies of the 1990s.

The implication of this work for China's future makes this book a must-read for China specialists. Huang ominously predicts that “[t]he Shanghai model will come back to haunt Shanghai if there is an external shock” (p. 209). This may well apply to much of China in addition to Shanghai. That external shock is arguably happening right now as the global recession leads to a decline in export and foreign investment, previously the two genuine bright spots in the economy. If Huang's account is correct, capitalism with Chinese characteristics may well encounter some serious obstacles in the coming months.