【33】In the fall of 1988，I took the Friedmans to tour the YangtzeRiver basin.Milton was happy to see street vendors doing busi-ness on muddy roads，and told the General Secretary（whomwelater met in Beijing）that street vendors would have to bribe toobtain a license.Suzhou officials obligingly showed us their famous town-and-village enterprises，which were embarrassing.During dinner，a vice mayor of Suzhou argued with Milton onthe superiority of state enterprises.In the fall of 1993，I again took the Friedmans to China.One main street in Shanghai wasfully lit at night，and we all applauded when our bus passed ashop owned by traveling companion Jimmy Lai.The Friedmansstopped briefly in Shanghai in 1998，and Milton could hardlybelieve what he saw.
reason is that the xian systemworked better in theYangtze River basin，because down south private enter-prises were already established under earlier contractualarrangements.Factories were scattered hither-thither,untidy and dirty，but business interests were significantlyvested.In other words，in the south there was a lack ofthe flexibility in land use necessary for xians to competeeffectively.Not that the southern xians do not compete,but they did not possess the flexibility to juggle land usewhich their northern counterparts enjoyed.This experi-ence also taught us that the belief that dispensing withgovernment planning and relying on the market isalways more efficient is wrong.World-class industrial
Two episodes of the Friedmans’ China visits should go onrecord.First，I taught Milton a lesson in Chinese economics.InShanghai，1988，walking in the street and hungry，I sawadumplings vendor and pulled out my wallet，but found outmoney was not good enough: food coupons were also required.A passer-by sawthat I was arguing with the dumpling man，and gave me a small stack of food coupons.I was delighted，andMilton asked why I was so happy.I said，“The gentleman gaveme these coupons free of charge.Can you imagine foodcoupons worth nothing？This city is going to explode!” It did.A second episode is that Milton lost a debate! In Chengdu,1993，the governor of Sichuan province received us.Miltontried to teach the governor about the proper way to reform，say-ing that to cut the tail off a mouse，don’t do it inch by inch: Toreduce pain the whole tail should be cut off all at once.The gov-ernor responded: “My dear professor，our mouse has so many tails we do not know which one to cut first.” Milton could not respond.Sadly，that governor is no longer with us.A coura-geous man noted for his bold criticisms，it is said that he lost support from Beijing at the end.
villages cropped up in the Yangtze River basin，with beautiful landscaping and all the modern facilities，and they were routinely planned by xian officials.They plan,however，for the market! The officials know that goodthings sell better.They also know that they are likely to be sacked if what they plan does not sell.
There is a formula for distributing income betweenxians and the higher authorities that is important in pro-moting competition.Very briefly，at the early stagefixed amounts were paid to the higher authorities.Thisoften led to conflict，as some localities felt that they werebeing exploited just because they did well.Sharingarrangements were then introduced，with quarrels occur-ring again because the rates were not the same amonglocalities.
This brings us to an important development in 1994.From then until now，investors in a locality or xian aresubject to a 17% value-added tax which is uniformthroughout the country.The xian is entitled to one-quar-ter of this，or 4.25% of the value added in production.Alternatively，a small private enterprise may pay 4% to6% business tax（depending on the nature of business）.Profit tax is on top，but this does not concern us here.For the purposes of our discussion we may also ignorethe business tax，which one has to pay even when losing money.The value-added tax yields by far the highestrevenue，and it is this tax that xian officials are most con-cerned about.Let us therefore concentrate on the 17%tax on that part of output value over and above the cost of rawmaterials and other deductibles.
The question is whether this take of 17% is a tax，or arent？My viewis that it is rent and not tax，for two rea-sons.First，whenever an investor uses land or real prop-erty to generate income then he is required to pay thetax.Second，this tax would have to be paid as long asincome is generated，regardless of profit or loss by theaccounting measure.
In 1986，I observed:In ancient China，as in medieval Europe，no distinc-tion existed between the meanings of “rent” and“tax.” A feudal lord who collected rent became acollector of tax when he assumed the role of a“government” in providing services such as justiceand protection.34
It may seemtrivial to quibble over what is tax and what is rent，except in the paradigmof economics taxmaximization is routinely criticized，while rent maxi-mization is often endorsed.The truth of the matter is that for the efficient use of land rent would have to becharged，no matter by the landlord or by the government.Howthe proceeds are spent is a separate matter.It is my contention that since the xians are competing，the maxi-mization of rent is consistent with efficiency provided allland is used.This does not mean there is nothing leftover for the investors.Their expected income net of therental tax must be sufficient to cover interest cost，and ifthe economy grows because of their investment，their
【34】Cheung，“China in Transition”op.cit.
