The China files, Part 3: Crony capitalism
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Hugo Dixon
China’s economy is riddled with vested interests, while free speech is suppressed. This potentially explosive mixture sounds similar to Hosni Mubarak’s Egypt, though Beijing has been much more successful at promoting economic growth than Cairo in recent decades. No wonder the regime is cracking down on dissent — including arresting Ai Weiwei, the internationally renowned artist. But it won’t be easy to maintain the current political model — or to reform it. And failure to do either could knock the economy off its extraordinary trajectory.
The country is officially run by the Chinese Communist Party. But, apart from the suppression of individual rights, it is hard to see much about it that is communist. Inequality is high and rising. The Gini Coefficient, a standard measure of income inequality in a society, is over 0.4 and, by some measures, is close to 0.5 — high figures normally associated with sub-Saharan African countries.
If this inequality were merely a reflection of the market — the fact that some Chinese are more talented and hard-working than others — it could be motivational. But a lot is also a result of economic goodies being grabbed by insiders, sometimes via corruption and in other cases by excluding outsiders from opportunities. One lesson from the Arab Spring is that populations can grow restless when they think rulers and their cronies are enriching themselves unfairly.
In China, the “class” system operates on several levels. At the top of the socio-economic scale are the “princelings,” children of important party officials, who have become multimillionaires by trading on their contacts. Then there are bureaucrats, who enjoy attractive lifestyles funded by the people’s taxes and sometimes bribes. Transparency International puts China joint 78th out of 178 countries in its 2010 ranking of perceived corruption. State-owned enterprises, meanwhile, benefit from monopolies or oligopolies and pay minimal dividends. The fruits of their economic activity are therefore largely enjoyed by those who run them.
There is also the “hukou” system which prevents rural migrants from participating fully in China’s economic miracle. The country has at least 150 million people who come from the villages but work in the cities. The snag is that they don’t have the right to be resident, so often live in dormitories, and their children don’t get the same access to schooling as local residents, so usually stay in the villages with their grandparents. The cities want these workers but don’t want to be swamped by the need to house them and pay for the education and health care of their families. The result is a potentially unstable two-class society.
Finally, even among the urban population, soaring house prices cause a chasm. The bubble is great for the rich who have bought multiple houses — so long as it doesn’t pop. But it’s tough on those who can’t afford to get onto the property ladder.
CARROTS AND STICKS
The regime is alive to the problem. Up to now, its approach has been a classic mixture of carrot and stick. The carrot has been growth. Even if the benefits of growth haven’t been equally distributed, hundreds of millions of people have still been taken out of poverty. Meanwhile, the stick has been to crack down on anybody who is perceived to be stepping out of line — whether the series of arrests in the past two months or employing an army of censors to police the internet or the killing of protesters in Beijing’s Tiananmen Square in 1989.
The problem is that both the carrot and the stick are becoming harder to wield. Economic growth is going to slow down in the coming decade. It then won’t be as easy to buy off potential dissent. Meanwhile, mobile communications and the Internet are mutating in ways that Beijing will find increasingly difficult to control. True, the authorities have banned Facebook and Twitter, while Google decamped to Hong Kong when it finally had enough of the censorship. But the Chinese people are still finding ways round what has been dubbed the Great Firewall.
What’s more, there’s a connection between political rights and economic advancement. This was not apparent in the past three decades, when the Chinese model was based on low-value manufacturing. Millions of people could be stuck in factories and told to get on with the job. But it will become apparent as Beijing tries to switch to a new model based on services and high-value manufacturing. If this transition is to be successful, people will have to think for themselves more. They will also have to harness the full power of modern communications. It will then be virtually impossible to keep a lid on free speech. On the other hand, if Beijing decides to batten down the hatches, there will be fewer economic goodies to share out — and protests could bubble up in other ways.
There is an alternative: dismantle both the crony capitalism and the Communist Party’s monopoly on power. If this could be accomplished in an evolutionary way — admittedly, a big “if” — China could make a peaceful transition to something more like a Western democracy.
The country has seen big shifts of direction in the past — the Maoist takeover in 1949, the disastrous famine-inducing Great Leap Forward in the late 1950s, the equally crippling Cultural Revolution from 1966 until Mao Zedong’s death in 1976, and the extraordinary successful capitalist revolution initiated by Deng Xiaoping after that.
But, as the economic boom has gathered pace, insiders have an increasingly strong interest in maintaining the status quo. It is doubtful that China’s current generation of leaders has the power to take on vested interests. The present duo — Hu Jintao, the president, and Wen Jiabao, the prime minister — are seen as consensus politicians. The front-runners to succeed them next year — Xi Jinping and Li Keqiang respectively — haven’t shown their hands, but as existing members of the political elite, are likely to be consensus politicians too.
This may have been suitable when the task was to keep the old export and investment model on the road. But it doesn’t look so appropriate given the need to yank the economy in a different direction, while also addressing mounting socio-political problems.