What is wrong with Shanghai?

This paper is based on and adapted from a chapter for a book project entitled Capitalism with Chinese Characteristics. The basic idea of the book is to get the facts right about China’s reforms. For example, one chapter of the book on rural entrepreneurship refutes the notion that township and village enterprises (TVEs) were innovative, successful local government enterprises. Many Western economists, based on this idea of TVEs, have proposed elaborate theories to explain why China could succeed without private ownership. In reality, the label of TVEs was entirely a product of an arbitrary statistical reporting procedure in the Chinese system that reported all the non-farm business activities in the rural areas under a generic label called TVEs. A more detailed inspection of the data on the control structures of TVEs shows that vast majority of TVEs as early as the mid-1980s were purely private firms. The idea of this paper/chapter is similar—to get the facts straight about Shanghai. The data come from household and indigenous private sector firm surveys and a comprehensive patent database. The largely descriptive analysis of these data shows that despite the impressive visual images of the city Shanghai has a surprisingly small entrepreneurial sector and troubled private-sector firms. While it is widely believed that Shanghai is the high-tech hub of China, Shanghai’s patenting activities in fact experienced a steep decline vis-à-vis the more entrepreneurial provinces such as Zhejiang and Guangdong in the 1990s. One intriguing finding in this paper is that the national income accounting data—GDP per capita—show Shanghai to be much richer than the income data from the household surveys. Shanghai residents have the highest wage income in the country, but household surveys show that a typical Shanghai household has among the lowest income from asset ownership—interest income, dividend income and rental income—in the country and it has fairly low business income from self-employment businesses. One way to describe the ‘Shanghai model” is that the city has created the richest proletariat in the country but it has some of the poorest capitalists in China.