The China files, Part 3: Crony capitalism

May 11, 2011

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.

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.

The final part of this series will focus on the role of China’s feisty females. The previous parts looked at how fast China can grow, and its brave new economic model.


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china will never be a competitor to USA.

The linear thinking economists do not understand the risks of wealth and income gap among people… when people get richer they ask for more freedom… well fed people go to the next step in maslow’s hierarchy… communism is successful making everybody poor for equality… China will have serious problems in next 50 years…

freedom of speech and education will make the biggest difference…

Posted by Ocala123456789 | Report as abusive

“‘if’ — China could make a peaceful transition to something more like a Western democracy”. Really? Sounds like China is already very much like our own Western kleptocratic plutocracy that is laden with “economic goodies being grabbed by insiders, sometimes via corruption and in other cases by excluding outsiders from opportunities”.

Posted by Pumpkin731 | Report as abusive

It’s hard not to see similarities between China’s elite class and Wall Street. Capitalism is more or less running its course around the world by driving social inequalities to unsustainable excesses. Beyond the economic problems, capitalism also murders the environment by forcing companies to endlessly expand to compete successfully.

Capitalism is dying in China and in the U.S., it needs serious socialist reform – the free market is the only capitalist thing worth keeping, but even that is a misnomer – hardly a fair market when government subsidies rig the game in favor of monopolies.

Posted by rtgunlimited | Report as abusive

Yea right, as if that doesn’t happen here in the U.S.

Posted by jkelley76 | Report as abusive

rtgunlimited… what do you think about socialist reform in Greece or Portugal or Spain? Socialism is not an answer to our problems… maybe you can fix the debt problem of Europe with your socialist reforms…

Posted by Ocala123456789 | Report as abusive

This occurs due to a low minimum wage. China has no minimum wage, which is how the communist country attracts business investment from the U.S. and elsewhere. Companies prefer paying Chinese workers 20 cents an hour to hiring a U.S. worker for $7.25 an hour plus benefits, and then simply transporting the goods back to the U.S. or elsewhere for sale.

What then happens is all the money saved goes to companies, who can spend it on their CEOs. We have thus seen CEO pay here in the U.S. increase from 35:1 (CEO:average worker) to 262:1 from 1978 to the present, a few decades. You get a huge income disparity, with the workers now getting barely enough to survive, while all the money goes to the companies and the rich. Monopolization occurs too, with megacorps who have plenty of wealth for acquisitions.

There are other effects too, anyone interested in learning more can contact me.

Posted by Jzyehoshua | Report as abusive

Would there be any tolerance to bringing socialism to western Europe or North America? Answer = Never. Would western political parties in power, like to be there forever? Answer = Yes, if they had their means. Would US or Europe allow eastern or Islamic principles dominate their daily lives? Again = No. And if there’s tolerance in democracy, why isn’t there tolerance to other forms of government that delivers and heals fruit for it people? what have democracy brought and free market brought to Africa? = Chaos, misery and poverty. where is Mexico’s position on world map? = A drug transit nation to feed the US taste.

I believe there is no universal form of government or values that applies to all regions or part of the world at a given in time. Every nation through their leaders – be it as called autocratic or what ever have the freedom in gauging the environment and chose a part to leads to success, and where policy doesn’t work, there is not bad in trying another. It must never mean pirating the ways of your wealthy neighbor. If China was to follow all stated suggestions put forward by the writer of this article, especially in a current competitive political and economic environment, then they would have been a single outcome, which is chaos and a beggar nation. So instead of putting suggestions to China, I believe you should have a hard look in to the impact of US and European policies to Africa in the name of democracy export.

Posted by Non-Bias | Report as abusive

Every country has its own set of problems. Fortunately for China, its government seems to have the will to take care of its own people, and more importantly, it has the power to do so, unlike its Western counterparties who have their hands bound and have to please their lobby groups who do not necessarily serve the country’s interests at large.

Posted by Pterosaur | Report as abusive

China has moved 500 million rural poor into the middle class and is scheduled to move another 300 million in the next decade. China only has 1,000,000 millionaires and does better on the gap between rich and poor than the USA does.

Our gap is now at historic highs and going higher the executives of our companies make 350 times what the normal workers for their company make. As as far as corruption goes the USA is probably the worst. GE makes $17 billion dollars and instead of paying $5 billion in taxes gets a $4 billion dollar tax refund. Warren Buffet makes billions a year and should pay 34 percent in income tax but only pays 2 percent.

Yes corruption in the USA with Geithner (the tax evader) in charge of the Treasury is the worst it’s been in years. Instead of taxing the rich for their fair share of taxes they let the super rich pay no tax and in a lot of cases give them huge tax refunds like GE.

Bernanke allows people like Bill Gates to borrow $100 billion thru Microsoft at zero percent interest to go and invest it in Chinese companies while foreclosing on Americans who have lost their jobs as we move our manufacturing over to China.

Yes the USA is still number one in one area and that is corruption.

Posted by JEYF | Report as abusive

“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.”
The CIA World Factbook lists China’s Gini coefficient as 41.5 for 2007 where a score of 0 would represent perfect equality and 100 would be perfect inequality (i.e. one person gets all the income). This places it around 82nd out of the 135 or so countries that are ranked, immediately above Russia and better than most sub-Saharan countries. The U.S. is ranked twelve places lower, with a Gini coefficient of 45, at 94th place. This puts the U.S. just below countries like Nigeria, Iran, Cameroon and Cote d’Ivoire.
@Ocala123456789, I guess I shouldn’t bother to ask why you would choose Greece, Portugal and Spain as representative of socialist governments. As the article points out, national finances are a bit more complicated than the simplistic view of “capitalism good, socialism bad”. You just happened, by pure chance I’m certain, to have chosen three of the most corrupt of all the developed nations (as reported by Tranparency International, Greece is tied with China at 78th, Portugal and Spain are just ahead of Botswana at 30th and 32nd respectively). Might this have more to do with their economic failure than their form of government? Had your not-so-random sample included say Sweden, Denmark and the Netherlands you would find three countries with quite socialist governments, all of which have done better than the U.S. through the latest recession. They all have significantly more equal distribution of income and, perhaps not so coincidentally, lower levels of corruption than the U.S. as well.
@Pterosaur, “Fortunately for China, its government seems to have the will to take care of its own people” Huh? Did you read the article? China treats it’s rural poor like dirt. They’re allowed to migrate to the cities (sometimes) to provide cheap labor in sweatshop conditions but their children are not allowed to attend school there. You call this taking care of it’s own people?

Posted by jtfane | Report as abusive

Cronyism and nepotism happens on a far greater scale in some democratic countries. It so exists because the electoral system holds the people to ransom by forcing the people to vote for the incumbent failing which they do not get benefits.

How’s that for democracy and why it fails to work in so many developing countries.

Posted by greenacres | Report as abusive

Well well………, another western minded who pretend to know everything about china. There are too much to say about your very narrow mindset about china, that the only piece of advice I can tell you is pack your duffel bag get two years visa and travel around. This will be the smartness move you will have done in your life. You old clichés will fly away.

Posted by armonid | Report as abusive