The targets of the new model include economic growth, structural adjustment, social services development, carbon mitigation and environmental protection, and transparency and governance reforms.
Calls for the transformation of China’s economic development model are actually not new. China has aimed to improve efficiency and move from a GDP and export-oriented economy to a ‘wellbeing’ and home-market-oriented model of growth since the early 1980s and Asian crisis in 1997, respectively. Nonetheless, previous calls for the transformation were not so successful since a self-enforcing mechanism for the transformation has failed to be established through reforms, and vested interests have formed a major obstacle to change. Now, new momentum is needed in the reform process to make the new Chinese development model a reality.
Three sets of reforms need to top the new development agenda.
First, and most fundamentally, are governance reforms. Without transformations in governance, the shift to a new development model will be impossible. Horizontal reforms will have to clearly define the border between government and the market by limiting government power and improving the functioning of the market. Vertical reforms will have to establish a balanced relationship between different levels of government to prevent intergovernmental opportunism.
Second are reforms to establish fair market competition. As long as state owned enterprises (SOEs) monopolise competition, it will be impossible to have fair markets in China. The fundamental reason why SOEs should be restructured is not, as many argue, their inefficiency, but the need to build fair, competitive markets. The American Chamber of Commerce recently stated, ‘The United States should focus less on China’s currency practices and more on the threat to US companies posed by Beijing’s support for state owned enterprises’. According to them, support includes ‘regulatory and other barriers to promote ‘domestic champions’ in high-tech areas such as electric cars, green energy and high-speed rail’.
Third are sector-specific policy reforms. These include the need to reform the distorted pricing systems for factors of production, and the tax, investment, and fiscal policy systems.
These reforms will not be easy to achieve while two main impediments persist. Firstly, during early reforms, benefits were spread widely throughout the community. After decades of reforms, the ‘cake’ is much bigger, stakeholders have become diversified, and the privileges of vested interest groups have been largely institutionalised. Reforms that benefit the majority but not vested interest groups will be opposed. Secondly, easier low-level reforms have been mostly completed. What remains on the reform agenda are deeper, more difficult reforms that face even stronger resistance from vested interests.
New momentum is needed to overcome these obstacles. The pressure for reform that China needs is currently coming from four principal directions.
The first is the fear of economic crisis. The high-export, high-investment economy is unbalanced and unstable, and the accumulation of existing risks will become dangerous in time. Another risk is from the potential slow-down of growth. Existing risks are masked by high growth. For instance, huge local government debt is underwritten by sale of government land, the high revenue of which is based on high growth. Once growth slows down, this arrangement will be unsustainable.
Second is the need to enhance the ruling party’s legitimacy. As China’s economy grows rapidly the needs of its people are changing. Economic success will not be enough to guarantee the legitimacy of party rule. Korea and Taiwan are both examples in which the ruling parties were unable to sustain their legitimacy on the basis of economic success. As we can see in China, the regions with more social conflicts are not the poor regions, but the regions with a relatively more advanced economy. Reforms directed to build democratic processes and the rule of law are needed to deepen the legitimacy of the CCP.
Third, China needs to integrate with the international community. Although China is on its way to becoming the world’s economic powerhouse, this will not be enough to convince the world to embrace its success. Its values and institutions need to be acceptable to the rest of the world as well. The boycott of the Olympic torch relay and some rejections of attempted overseas acquisitions by China’s SOEs exemplify the difficulties faced.
The fourth driver for momentum is regional competition. Baechler argues that competition by political units with the same cultural background in Western Europe led to the development of modern growth and constitutional rule. Some analysts see competition among ambitious regional leaders in China as potentially providing a similar impetus for economic growth and institutional evolution.
Regional institutional experiments have been emerging throughout China in the last few years. These include land reform in Chengdu, grassroots elections in Jiangsu and Yunnan, crackdowns on organised crime and the promotion of ‘red’ (revolutionary) songs in Chongqing, free medicare in Shenmu, official property openings in Aletai. The successes and failures of these pilot reforms are valuable learning experiences for other regions, and for national institutions.
Despite the good intentions behind these projects, the success of reform schemes will continue to be haphazard in the absence of strong rule of law, and checks and balances on government power. Regional experiments tend to be initiated, controlled, and dominated by strong regional leaders, so there is probability that some initiatives might lead to bad outcomes and high social costs if these strong leaders make poor decisions or simply pursue populism. Government economic opportunism presents another serious challenge, but without the kind of civil society that can flourish under strong rule of law, it will be difficult to curb government power.
China’s economic miracle is the result of three decades of reform. As its economy grows, it is reaching a crossroads with its development model. Whether China will continue its modernisation through transforming its development agenda depends on whether it can overcome the challenges presented by vested interests. New sources of momentum will therefore be needed to overcome these challenges and continue reform.
Yongsheng Zhang is senior research fellow at the Development Research Centre of the State Council, China.
This article was published in the most recent edition of the East Asia Forum Quarterly, ‘Governing China’.