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Tuesday, April 11, 2006

The Dark Side of China's Economic Boom

SimonWorld says:

Despite the flak I took in promoting an article written by mainland born, U.S. based political science professor Minxin Pei (the last time about Taiwan), I shall do it again. This time, Dr. Pei writes a very readable editorial for the sometimes geographically challenged readership of the San Francisco Chronicle. He had some brave observations about why we should be pessimistic about political liberalization following on from economic liberalization... I don't agree with all of his arguments, but they are a quick read and definitely worth absorbing.

Here's the commentary on China's patronage system:

The dark side of China's dazzling economic boom, by Minxin Pei, Commentary, SF Chronicle: The only thing rising faster than China is the hype about China. ... And why shouldn't they believe the hype? The record of China's growth during the past two decades has proved pessimists wrong and optimists not optimistic enough. But before we all start learning Chinese and marveling at the accomplishments of the Chinese Communist Party, we might want to pause. Upon close examination, China's record loses some of its luster. ...

Behind the glowing headlines are fundamental frailties rooted in the Chinese neo-Leninist state. Unlike Maoism, neo-Leninism blends one-party rule and state control of key sectors of the economy with partial market reforms and an end to self-imposed isolation from the world economy.

The Maoist state preached egalitarianism and relied on the loyalty of workers and peasants. The neo-Leninist state practices elitism, draws its support from technocrats, the military, and the police, and co-opts new social elites (professionals and private entrepreneurs) and foreign capital -- all vilified under Maoism. ...

To most Western observers, China's economic success obscures the predatory characteristics of its neo-Leninist state. But Beijing's brand of authoritarian politics is spawning a dangerous mix of crony capitalism, rampant corruption and widening inequality. Dreams that the country's economic liberalization will someday lead to political reform remain distant.

After a quarter century of gradual economic reform, has China succeeded in transforming its old command economy into a genuine market economy? Not nearly as well as most people would guess. ... The Chinese state remains deeply entrenched in the economy. According to official data for 2003, state-owned companies directly accounted for 38 percent of the country's GDP and employed 85 million people (about one third of the urban workforce).

But China's tentacles are even more securely wrapped around the economy than these figures suggest. For example, Beijing continues to own the bulk of capital. In 2003, the state controlled $1.2 trillion worth of capital stock, or 56 percent of the country's fixed industrial assets. There are only 40 private firms among the 1,520 Chinese companies listed on domestic and foreign exchanges.

To many observers, Beijing's tight grip on the Chinese economy means only that its reform process is incomplete. As China continues to open itself, they predict, state control will ease and market forces will clear away inefficient industries and clean up state institutions. The strong belief in gradual but inexorable economic liberalization often has a political corollary: that market forces will eventually produce civil liberties and political pluralism.

It's a comforting thought. Yet these optimistic visions tend to ignore the neo-Leninist regime's desperate need for unfettered access to economic spoils. Few authoritarian regimes can maintain power through coercion alone. Most mix coercion with patronage to secure support from key constituencies, such as the bureaucracy, the military and business interests. In other words, an authoritarian regime imperils its capacity for political control if it embraces full economic liberalization. Most authoritarian regimes know that much, and none better than Beijing.

Today, Beijing oversees a vast patronage system that secures the loyalty of supporters and allocates privileges to favored groups. The party appoints 81 percent of the chief executives of state-owned enterprises and 56 percent of all senior corporate executives.

State enterprises are miserably unprofitable. In 2003, a boom year, their median rate of return on assets was a measly 1.5 percent. More than 35 percent of state enterprises lose money and 1 in 6 has more debts than assets. China is the only country in history to have simultaneously achieved record economic growth and a record number of nonperforming bank loans.

Political savvy and business acumen do not often go together. Because of the party's fixation with high growth, government officials are rewarded for delivering, or appearing to deliver, precisely that. This incentive structure fuels a widespread misallocation of capital to "image projects" (such as new factories, luxury shopping malls, recreational facilities, and unnecessary infrastructure) that burnish local officials' records and strengthen their chances of promotion. The results of these mistakes -- gleaming office complexes, industrial parks, landscaped highways and public squares -- tend to impress Western visitors, who view them as further proof of China's economic prowess.

The Chinese economy is not merely inefficient; it has also fallen victim to crony capitalism with Chinese characteristics -- the marriage between unchecked power and ill-gotten wealth. And corruption is worst where the hand of the state is strongest. The most corrupt sectors in China, such as power generation, tobacco, banking, financial services, and infrastructure, are all state-controlled monopolies. ...

Various indicators, pieced together from official sources, suggest endemic graft within the state. ... Dishonest officials today face little risk of serious punishment. On average, 140,000 party officials and members were caught in corruption scandals each year in the 1990s, and 5.6 percent of these were criminally prosecuted. In 2004, 170,850 party officials and members were implicated, but only ... 2.9 percent ... were subject to criminal prosecution. So, party membership has its privileges.

Rapid economic growth has not yet produced China's much-anticipated political pluralism. In part, democracy itself has been a victim of the country's economic expansion. However flawed and mismanaged, the country's rapid growth has bolstered Beijing's legitimacy and reduced pressure on its ruling elites to liberalize. Democratic transitions in developing countries are often caused by economic crises blamed on the incompetence and mismanagement of the ancien regime. China hasn't experienced that crisis yet. Meanwhile, the riches available to the ruling class tend to drown any movement for democratic reform from within the elite. Political power has become more valuable because it can be converted into wealth and privilege unimaginable in the past. At the moment, China's economic growth is having a perverse effect on democratization: It makes the ruling elite even more reluctant to part with power. ...

The emerging social elite ... is co-opted and coddled. The party showers the urban intelligentsia, professionals and private entrepreneurs with economic perks, professional honors, and political access. For example, nationwide, 145,000 designated experts, or about 8 percent of senior professionals, received "special government stipends" (monthly salary supplements) in 2004; tens of thousands of former college professors have been recruited into the party and promoted to senior government positions. At least for now, the party's charm campaign is working: The social groups that are usually the forces of democratization have been politically neutralized.

China has already paid a heavy price for the flaws of its political system and the corruption it has spawned. Its new leaders, though aware of the depth of the decay, are taking only modest steps to correct it. For the moment, China's strong economic fundamentals and the boundless energy of its people have concealed and offset its poor governance, but they will carry China only so far. Someday soon, we will know whether such a flawed system can pass a stress test: a severe economic shock, political upheaval, a public health crisis or an ecological catastrophe. China may be rising, but no one really knows whether it can fly.

    Posted by on Tuesday, April 11, 2006 at 11:14 AM in China, Economics | Permalink  TrackBack (1)  Comments (35)

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