Friday, 24 April 2009

Can the Chinese regime survive?

The Chinese Communist party

The Chinese Communist party sold itself for years as a permanent revolution against capitalist oppressors, class warfare, and the aim of devolving into a stateless utopia. The premise looked sillier and sillier as the years dragged on. Deng came along and opened the door an inch: a smidge of capitalism heavily clogged up with state-run enterprises, mild criticism of Mao, preaching socialism instead of Communism, bare-bones institutions, welcoming businessmen, and no democracy. They are trying to shift their sheet music away from communism to nationalism. But the underlying dogma of party control is the same, and it is totally useless for China in the 21st century.

But even 30 years after Mao’s death, Hu, the new leader, needs the party hardliners, who think reform has gone too far and don’t want to go further – for them it is no longer about standing up for communism, it is about retaining control.

Their only political pitch is – “in 25 years we built a $2 trillion economy, so why is anyone complaining?” To respond to this, let me refer to a long-dead theatre critic, who once wrote a scathing review that went something like this: “I have seen your play, and there are parts that are good, and there are parts that are original. But the good parts are not original, and the original parts are not good.” The modern geopolitical version would go like this: “You have an economy that is mostly state-run and very vibrant. But the vibrant part isn’t state-run, and the state-run part isn’t vibrant.” The growth is happening in spite of the party, which has no clue. They are textbook communists looking on, bewildered, as capitalist progress happens in front of them, like the family dog watching a ten-year-old doing arithmetic. They are not leading China: they are the biggest threat to China’s future, a malignant parasite.

They will preach reform and use corrupt officials and leaders of state-run enterprises as scapegoats, but that will only get them so far. If they insist on vise-tight control of the country, they must take responsibility for the things that do not work.

Corruption in China

The official Chinese media actually talks about political reform, but it won’t happen without a struggle. There is virtually no oversight of local governors or businesses, particularly in rural areas, although government tried to tighten the reins in 1993. The spread of corruption interferes with both public and private firms. Corruption costs perhaps 14 percent of the GDP by one estimate.

For this reason, a lot of things which are essential to fuller integration into the international economy are lacking.

The legal system is expanding the number of cases it hears, but it the system also broken and completely politicized; the chairman of their parliament said flat-out that they would never have an independent judiciary. They made some progress in cleaning things up in the 1990s but backslid at the turn of the century. The head of the judiciary, a reformer, was replaced with a party hack. In one year almost 800 judges went on trial for corruption, so you can imagine how many got away with it, and half of the decisions of provincial courts are not even enforced. The unprotected are mistreated, with arbitrary detentions, and arrests and beatings of lawyers who defend politically unpopular clients.

They made progress on commercial and administrative law, but not much.
Some say as much as an eighth of the GDP comes from counterfeit goods; there is also trouble with quality control, and efforts to deceive inspectors. Food contamination is a growing problem. There are big problems in the pharma sector, where western firms get precursors and ingredients; it may reach the point where U.S. and European drugmakers, fearing lawsuits, regulators and bad press, will begin to reject ingredients from China. Without the rule of law, problems such as product safety and intellectual property rights cannot be solved.

Next, modern (let’s not call them western) business practices: sensible corporate management, anti-trust rules, real competition, financial oversight with independent auditing. This notion would also help government itself, with sensible investment and development, avoiding overcapacity etc.

The banking sector may be an important bellwether in this regard. During the Asian financial crisis it emerged that Chinese banks had huge amounts of non-performing loans on the street, perhaps $600 billion worth, as banking and accounting rules were set aside. China began tightening controls, putting regulators through more testing. But now with a recession on, pressure is mounting to loosen the reins again and use the banks to finance the stimulus effort; China could eliminate the CBRC regulations or even the whole CBRC. That of course is exactly how the U.S. found itself in its own dilemma.

Next, consumers and investors: they need property rights so they can borrow on the collateral and stop worrying about illegal land seizures, and they need to be able to buy enough stock to have a real voice in how firms are run. It can’t all go to the party poobahs.

Next, there are issues which the government absolutely will resist: free speech, free media, free debate, freedom of association, free election, and trade unions. You could also put improvements in education in this category.

Next, there are other aspects which we have addressed elsewhere: the need for a pension system, and sound trade and environmental policies.

Ground zero for China’s corruption problems is in their state-owned enterprises (SOE’s), which make up half the national GDP. In the 1990s they tried SOE reform but millions lost their jobs so the effort was curtailed. In 1997 China loosened controls on the SOE’s and funnelled a lot of their saved money into them; a lot of Chinese lending goes to the SOE’s. This happens even though the firms have proved themselves to be inefficient, unprofitable and corrupt; the government conceals the number of SOE insolvencies. The corruption only gets worse when party members get involved the SOE’s, and when the businessmen join the party: until 1998 the army and other government organs also ran businesses with little oversight. Instead of shutting down all the SOE’s, the government has chosen to build a real economy around them rather than shut them down or reform them, possibly with the aim of aging out the SOE’s by attrition, but that could take an awfully long time.

There is a cultural component to all this: the Chinese rely on personal relationships and connections, more than laws, rules and contracts.

Unrest in China

Tiananmen wasn’t just Tiananmen. There were demonstrations in almost two hundred cities. The party got lucky: the protesters were divided, and China wasn’t as hooked into the international economy so there was less vulnerability. Also the military played ball: Deng, a war hero, had the credibility to order the troops to fire.

The Chinese people remember Tiananmen; they know the party that perpetrated it is still in power and could do it again. And the troubles are still coming. Already they have had so many labor strikes and protests that the state-run media realized it was futile to try to conceal it. The number of protests jumped from 10,000 in 1004 to 74,000 in 2004; in the mid-2000s three million a year took part in protests and almost a million a year took part in strikes. People have been predicting serious trouble for years, but economic growth helped keep trouble at bay; now, with factories closing, protests are growing. Workers are protesting in the beating heart of the Chinese economy, the Pearl River delta, the source of one third of all Chinese exports. Government offices have been trashed, policemen attacked.

The party cannot relieve the political pressure with elections, because it would kill the party; they can’t allow controlled expressions of popular sentiment, because every time they try it, there is an explosion of protest. They’re not sure what to do.

And more trouble is coming: they have 250 million internet users which government can control effectively now, but for how long? The government has banned VOA, the BBC, and anyone who gets too chesty on the Tibet issue; they just banned the New York Times also. They loosened restrictions on the internet during the Olympics, then put up the gates again. The Chinese people also have 600 million cellphones, potentially a great revolutionary tool.

[ **UPDATE** -- More signs that the government is having trouble controlling everyone's access to the internet. ]

The Chinese leaders are probably a better bunch than the generation that preceded them. The cultural revolution essentially decapitated their entire professional class, and the old-timers were generally true believers, or too terrified of Mao, or his memory, or just not very good leaders. The new bunch still has no skill at western-style politics and less familiarity than they really need regarding the people they rule, particularly in the rural parts, but they are thoughtful and pragmatic. The Chinese invented the concept of qi, the interaction of multiple forces, rather than linear cause/effect; that sort of complex problem-solving is going to be awfully handy.

They know the political dangers; they are obsessed with maintaining control. The Chinese president indicated that the party and its leaders could lose credibility and the capacity to control the situation, leading to social unrest. They cannot contemplate loosening controls on the media or banking (foreigners can buy bank stock but they can’t run the boardroom), or allowing unionization or democratization.

The problem is that they cannot see a path out of the woods – a way to let the steam out of the political kettle slowly and safely -- and are unsure how to deal with the unrest. They are, however, trying. They are studying the prospect of political reform, and sending people to Sweden and Japan to study how capitalist democracy can work in what is essentially a one-party state. They even put on a television series praising the western system of representative government, examining efforts by both Roosevelts to control capitalism, and stressing the need to seek progress through economic development and innovation rather than aggressive militaristic policy.

Time is also a factor. Economic change is slow; the leaders would need to figure out what they want to do both economically and politically, launch it pretty soon, hope they guessed right, mostly – and make it all happen before the situation on the streets takes on a life of its own. Ironically, economic prosperity may accelerate political trouble: some analysts point out that when a developing nation develops a middle class, the first thing the newly prosperous reach out for is democracy. Fareed Zakaria pointed out that essentially all countries which reach that level go that way, except Singapore and some of the oil states of the Middle East. The Chinese people will demand that their society care for basic needs – caring for the young and old, and managing people’s money and property; so far the government isn’t getting it done.

We must not be tempted by the example of the fall of the Soviet Union, which went better than anyone had a right to expect: it all could have gone much, much worse. In 1991 all Russia really had to do was swap one group of corrupt oligarchs for another. China now must build an entirely new economy, and they have no playbook to work from. They playbook they used to get here – liberalizing with more private enterprise, stock markets, foreign investment, trade, industry, seeking a balance between capitalism and socialism, encouraging people to explore capitalism but not democracy, and banking cash reserves – will not help them much, in trying to solve their current problems.

If they do survive a leap to democracy, or something like democracy, it might take the form of a mixed system with popular participation under the hierarchy of a party which would let go of some of its power. Ideally some of the hardwired patronage networks would need to be unwired, but a certain level of corruption may be what greases the skids in the right direction. In addition to the more obvious hazards of life in a democracy, the government will also have difficulty with unexpected things; for example, Chinese dictatorship made it possible for the government to invest a ton of money on education even though the payoff is a long way down the road – in a democracy the people want to see a quicker return on their investment.

Zakaria suggested that China’s rise as a world power will continue even if the political situation blows up. He pointed out that after the Bastille fell, France continued to grow economically through a comical series of republics and empires.

Rural China

Further down the road, more trouble is brewing out west, in rural China. The gap between the rich urban east and the poor rural west will become politically unsustainable. The east pulls gas and electric power out of the west, and although they talk about reaching out and spending government money out west, it never goes very far; that includes support from banks. Trade among provinces is difficult. The local rulers in the west, left to their own devices, are very corrupt, and the locals are getting very little in the way of government service. Beijing has little control out in the boonies, and may not be able to reel them in if they need to.

Rural communes have already taken the initiative and de-collectivized themselves: productivity shot up, as did innovation. Then they did the same with local factories; they had to use legal evasions because private firms were not allowed to have more than eight people, or borrow from banks. This happened most in the south; Mao didn’t build much industry down there because he expected it to be invaded. The rural areas also send people to the industrial areas to work, which relieves some rural poverty but causes problems in the cities – and now those migrant workers are out of a job, 20 million of them just in the last several months.

Coming soon: China's economic situation, and its role on the world stage


Jack Reylan said...

China has just started using biologically cloned humanoid drones in its factories and military to counter the greying of the population caused by their former one child policy. This biological experimentation had begun in the early 1990s to produce star athletes but was aggressivley advanced. Such drones ahve also been know to appear on American soil as illegal workers. Given they blatant disregard for American safey in products they sell, because they don't care if we stay alive after we enrich them, it is worrisome that these clones have not been adequately tested for potential disease transmission.

HelloDollyLlama said...

Hmm. Do we have a source for this cloning thing?