The reforms carried out over the last 30 years have mostly been in response to crises. ‘Popular resistance and economic imbalances are now moving China toward another major crisis. Strong and privileged interest groups and commercialized local governments are blocking the equal distribution of the benefits of economic growth throughout society, thereby rendering futile the CCP’s strategy of trading economic growth for people’s consent to its absolute rule.
‘An open and inclusive political process has generally checked the power of interest groups in advanced democracies such as the United States. Indeed, this is precisely the mandate of a disinterested government — to balance the demands of different social groups. A more open Chinese government could still remain disinterested if the right democratic institutions were put in place to keep the most powerful groups at bay. But ultimately, there is no alternative to greater democratization if the CCP wishes to encourage economic growth and maintain social stability.’
This is an argument that has been gathering strength in influential circles over the last few years, and Yao Yang’s piece in Foreign Affairs brings it right out of the closet.
Peter Drysdale and Shiro Armstrong are the editors of the East Asia Forum.
Many of Prof Yang’s observations, as usual, are correct. He has been involved with a number of studies on reform in the distribution economics of China.
But his appeal to a significantly more open system is more an indicator of the frustration that he and other domestic reformers feel at the natural turn of events:
1) The current generation of leaders is near enough to its end to worry more about its resting place than the reforms it championed upon ascension to rule.
2) The break-down in the external pivot point of its high-growth strategy (the USA’s capacity to import inelastically both manufactured goods and the companion funds therefor) occurred at a politically very inconvenient time. That is to say:
a) much of the previous debt the financed the last domestic financial restructuring was due to roll over and need buoyant equity markets for refinancing, and
b) the cost of labor and materials had already begun to rise inexorably, putting the economy into a hard corner, whereby some previous economies of scale have become diseconomies of scale (and also disruptive to Australia’s equilibrium growth path).
This external shock, in a stroke, nullified one of Beijing’s best tools for constraining local-government misbehavior: controlling the purse strings. Now, they too are stuck in the vicious circle of encouraging moral hazard in those very institutions in order to avoid mass migrations and riots. Further, they have been forced to reverse a decade of hard work in building up the integrity of the banking system.
Practically speaking, there is no chance of the sort of reforms Prof Yang proposes for China until economic equilibrium is reestablished at a lower, sustainable growth rate. The social dislocations involved in that shift will require at least five years, maybe a decade, given the relatively high dependence China acquired to foreign demand over the 2001-08 period.
The alternative path to reform is one requiring the domestic situation to worsen significantly and end the kind of revolts the CCP most fear. This is an unlikely path, but fear of it will lead the CCP to make serious policy mistakes (of the sort it has made in much of 2009, while trying to keep that tent pole in place), some of which could lead to piece-meal reforms such as a wider and more uniform enforcement of the “bankruptcy law” as it exists in its still-born form today.
The ability to terminate failed experiments has been one of the hallmarks of the PRC’s spectacular success in navigating high-growth policies over the last 20 years. Its inability to terminate those of many of the elite (typical of any complex economy) augur for the reversion to mean trend. That is, to a sustainable growth path, a reversion that requires a (brief?) period of sub-normal growth – though probably not outright contraction.
These observations come from a decade of working with the financial regulators and legal reformers of the PRC and from on-going research into the banking system of China. I welcome collaboration from other members of the EABER.
Marshall Mays
Hong Kong
11 May 2010