This paper is the fourth chapter of a forthcoming book, Capitalism with Chinese Characteristics (New York: Cambridge University Press, July 2008). The book is a narrative account of the evolution of capitalism in China in the last three decades. (The year 2008 marks the 30th anniversary of economic reforms in China.) The research is based on detailed archival examinations of policy, bureaucratic and bank documents as well as several waves of household and private-sector firm surveys. As an example, I have examined a 22-volume collection of memoranda, directives, operating manuals, rules of personnel evaluations issued by the presidents of China's central bank, all the major commercial banks, rural credit cooperatives, etc. A detailed synopsis of the book appears after this page. This book devotes an entire chapter to Shanghai, for two reasons. One is that Shanghai represents the classic urban-bias model - the city restricted the development of small-scale, entrepreneurial businesses while conferring tax benefits on FDI and on businesses closely allied with the government. The other is that at the end of the 1980s, Shanghai was among the least reformed of the urban economies in China and yet its leaders during the second half of the 1980s went on to dominate Chinese politics during the entire decade of the 1990s. This book asks, "What is wrong with Shanghai?" and proceeds to present the following illustrations: - Although they are located in the richest market in China, indigenous private-sector businesses in Shanghai are among the smallest in the country and self-employment business income per capita is about the same in Shanghai as it is in provinces such as Yunnan, where GDP per capita is about 10 to 15 percent of that in Shanghai; - (As an illustration of how unusual the above pattern is, imagine finding that selfemployment business income per capita in the United States were about the same as that in Turkey); - The political, regulatory, and financial restrictions on indigenous private entrepreneurship in Shanghai were extreme as evidenced by the fact that the fixed asset investments by the indigenous private-sector firms peaked in 1985; - The share of labor income - inclusive of proprietor income - to GDP is very low in Shanghai; - Shanghai's GDP increased massively relative to the national mean but the household income level relative to the national mean experienced almost no growth; - Although wage income is high in Shanghai, asset income is among the lowest in the country; - Since 2000, the poorest segment of Shanghai's population has lost income absolutely during a period of double-digit economic growth; - Although aspiring to be a high-tech hub of China, the number of annual patent grants in Shanghai decreased substantially relative to that in the more entrepreneurial provinces such as Zhejiang and Guangdong in the 1990s; - Shanghai is also very corrupt
